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ICO loopholes – Funny residency disclaimers

October 29, 2017

There is a very interesting loophole in ICO law.  You’ll see a lot of sites say that the tokens are not for sale in the US, Canada, China, and the UK, and if you are a resident of the US, Canada, Mainland China, or the UK, then you should absolutely not buy the tokens.  The funny thing is that if you go ahead and buy the tokens, nothing bad happens.

So let me explain what is going on legally speaking.  US, Canada, and the UK are all common law countries.  Mainland China is a civil law country, but the securities law there is largely copied from the United States.

(Note here that I’m simplifying things a lot here.  Every rule has an exception so I’m describing the general legal principles, and I’m quite aware of the exceptions.)

It turns out that its illegal in US, Canada, and the UK to offer or market securities to residents, but it’s not automatically illegal to *sell* securities to residents, as long as they make up a small fraction of your total sales. (And yes, I am aware of SEC registration rules.  Go look at Regulation S).

So if you offer or market securities to a US, Canadian, or UK resident, you may be in violation of local securities law, but if you *sell* securities without marketing or offering it to them you are not violating any law, provided that those sales are a small fraction or your total business.

So why does the US, Canada, and the UK do this stupid thing.  Well it has to do with contract law in English speaking countries.  Lets suppose you have a contract to do something illegal like selling marijuana.  You give the person your money.  They don’t give you your drugs, and then you go to court to try to get your money back.  The court will likely say “are you kidding, the contract was for an illegal act, you can’t get your money back or your drugs.”

So this is the problem with declaring sales of securities illegal.  You’ve given the company your money.  If you declare the sale illegal, you can’t get your money back or get your stocks.  So the securities law in US, Canada, and the UK don’t declare the sales illegal.  They declare the marketing and offering illegal.  Now this worked pretty well before the ICO era.  If someone runs television advertisements or puts up posters in the US selling securities, you stop that.  The trouble is that they can’t block the web, so this doesn’t work for ICO’s.  So you end up with the weird situation of all of the ICO’s insisting that they won’t sell to Americans, Canadians, or Brits, but then not minding if an occasional person signs up.

OK, things are different in German based countries because the contract law is different.  In English places like US, Canada, and the UK, if the contract is invalid, everyone keeps the money that they transferred unless there is some special situation.  In places with German law, if the contract is invalid, the both parties are required to return the money back to where things were before the contract.  This is why German based countries heavily restrict what you can sell.  Of course, you run into interesting issues when people sell into German legal systems from English legal systems, but this is why Germans did deals in London and mainland Chinese often do deals in Hong Kong.

Part of this has to do with the theory of contract.  In English systems, you can contract for basically anything, and if a contract is invalid, then the odds are that you are doing something really, really bad like selling drugs.  In German systems, you can only do contracts according to the civil code, and while the civil code is rather broad, there is a decent chance that you’ll end up with an invalid contract that wasn’t the result of you doing something really, really bad.

So you are probably looking at this and saying “but this doesn’t make any sense.”  You are right.  It’s all pretty silly.  The trouble is that things are happening very, very fast.  The laws and regulations will eventually change not to be silly, but that takes a bit of time, and so we are having to do silly things like put up disclaimers that no one cares about.


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