Avoid ICOs to Avoid Lawsuits, Study Says

Blockchain technology has unleashed a very popular way of raising funds for projects – the initial coin offering (ICO). However, this unregulated fundraising instrument has attracted a lot of criticism along with its boom last year. In a research paper entitled “Cryptocurrency Class Action Lawsuits: A New Frontier”, the California-based law firm Polsinelli LLP explored the future prospects of ICOs based on historical trends.

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According to the study, ICOs will attract a number of lawsuits against the blockchain-based projects issuing them.

The research paper noted: “We have only likely begun to see the beginning of class action lawsuits filed relating to blockchain-related companies or companies that participated in ICOs.”

Though not the first ICO, Ethereum became the first successful ICO in 2014 after raising $18 million in 42 days. This opened the floodgates, and by the end of 2017, blockchain firms raised around $4 billion via ICOs, surpassing the capital raised from venture capitalists.

However, the market attracted a lot of criticism because of the huge number of projects seeking funds. All the developers need is an idea and a whitepaper explaining it; they don’t need to explain the business prospects to anyone, unlike the tough road of initial public offerings.

The three authors of the research paper – Michael Foster, Mark Olthoff, and Richard Levin – explained: “Because anyone with an idea for a project can gain financial backing without going through the formalities of an IPO, there are obvious chances for the public to be scammed, leading to potential lawsuits.”

The sudden flow of huge sums often led to disputes among the promoters of firms, and the research paper detailed some of the failed projects which were slapped with class action lawsuits by the end of 2017 and early 2018. For instance, Tezos, one of the highest grossing ICOs, was slapped with four class action lawsuits between October and November in different US courts. Other notable projects served with lawsuits are Centra ICO, Monkey Capital, Gigawatt, and ATB Coin.

“The thread running through many ICO models is that they are often sold in a manner that may be contrary to state and federal securities laws,” the Polsinelli paper explained.

“ICOs, therefore, may be fodder for lawsuits by investors alleging harm by being taken advantage of by the founders and the lack of regulatory oversight,” it added.

The research paper further elaborated that ICOs need to disclose a lot of other information to the public as well. Moreover, as per the terms and conditions, the most projects might not be allowed to operate in the US because of their regulatory status.

The research paper added: “We believe it is highly likely other issuers of tokens will face class action lawsuits. Any company planning to conduct a token offering using an ICO should proceed with caution. Similarly, anyone looking to invest in a token offering should make sure the offering is conducted in compliance with applicable state and federal laws.”