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Silly ICO disclaimers and why they exist

November 8, 2017

One thing that you are starting to find in ICO’s are silly disclaimers who everyone ignores, like “this ICO is not available to purchase by US residents” but when you actually purchase it as a US resident, nothing happens.

Let me explain the legal situation.

You’d think that securities law would make selling illegal securities, illegal, but it doesn’t for an important legal reason.

In countries with legal systems based on English law.  There’s a reason for this.  Suppose you buy cocaine.  It turns out that you get scammed, and the person takes your money and doesn’t give you your cocaine.   Well, you aren’t going to be able to sue them to get your money back.  Also suppose you get your cocaine, you aren’t going to be able to keep it.

I should point out that this is only for places based on English law like the US, Canada, UK, Hong Kong, Singapore.  This isn’t the situation with places based on German or French law, where an invalid contract requires that everyone move everything back to before the contract is signed.  The reason for this has to do with different notions of contract.  In English law, you can contract for anything in any way, and if the contract is invalid, it’s usually for some “bad” thing like you are trying to sell cocaine.  In German or French law, a contract has to follow a specific form in the civil code, and so there is a decent chance that a contract will be invalid without anyone being “bad”.

So the people that wrote the law *didn’t* want to make selling the securities illegal, because it’s not cocaine.  You want to be able to sue the people to get your money back, and if they’ve already sold you bad securities, you still want to keep them.

So what they did was to make marketing and offering securities without permission illegal as well as putting in a registration requirement that you will be committing an illegal act by non-registration.

But then you hit reality…..

The trouble with making marketing in country X illegal, is that you can put a website now outside of country X, and unless you want to filter out the internet at the border, this becomes impractical.  The trouble is that if you try to police the internet for this sort of stuff, then you run into free speech issues.  China might be able to censor offers of securities from outside of China, but the US and UK can’t.  So in order to compromise with reality, they’ve interpreted the law to say that the restrictions on marketing only apply if you are *actively targeting* people in country X.  So if you have a webpage that says you aren’t targeting X, you aren’t targeting X.

What about offering securities.  Well the issue here is that “offer” has a specific legal terms.  If I send you a contract saying “if you sign this paper, then we have a contract” then that’s an offer.  If you just put an sign saying “I have securities for sale, come and talk to me” that’s not an offer.  It’s legally an invitation to treat.  If you see a sign saying “I have securities for sale” and you come to me and say “hey, I saw your sign, I’d like to buy some securities” *you* are the one making the offer.

OK, that leaves registration.  If you try to sell unregistered securities, then you have a problem with the SEC.  The trouble is that if you apply that rule strictly, you end up with crazy situations.  If I sell a French security to someone in France, then technically speaking I have to register that security with the US, which is just crazy.  Now if someone in the US just happens to buy a French security, then at that point it would be crazy to just send people to jail.  Remember that we aren’t selling cocaine here.

So what people have ended up with is something called Regulation S.  Regulation S is this big long and complicated rule, because if you make it simple, people will find loopholes.  But basically what the rule says is that if you are a foreign issuer and you are not targeting US residents, and a few US residents happen to buy your securities, that’s fine.  So you have all of these signs saying “US residents go away!!!!”  As long as you put up those signs and a small number of US residents sign up, then you are fine.

But wait, you might be wondering why they will let you buy the ICO even after they’ve done AML/KYC proving that you are a US resident…..

Well.  It turns out that the AML/KYC people and the securities regulation people are different bureaucracies that literally don’t talk with each other.  It also turns out that Rule 902 of Regulation S will let you sell securities to a person you reasonably believe not to be a US resident *at the time the purchase was made*.  If you believe someone was not a US resident *at the time you sell them your ICO* but later find out that they are in fact a US resident, you do not have to cancel the transaction.

So why do people do this….

Well in turns out that with ICO’s, you could theoretically police people and require that people supply proof that they are not US residents before you sell the shares.  The reason the SEC doesn’t require this is that for traditional securities, this is flat out impossible.  Imagine selling shares.  It goes through a dozen brokers, and the person on the trading floor has no idea who is actually selling the shares.  If the SEC required that people supply proof of identity before the transaction happened, everything would break down, especially since these shares are being bought and sold on markets that have no reason to listen to the SEC.

And that assumes that you are dealing in securities anyway…..

At that point you get into what I call layering…..  You say “I’m good because of arguments 1, 2, and 3”.  This is not a security, and even if it was, then you’d couldn’t get me anyway.

One final thing and that involves looking at the law.  I’ve gotten into some intense arguments with people that instead on doing everything “by the book”.  What invariably happens is that those people spend tons of money on lawyers and get in trouble anyway.  The idea that people have about the law is that it’s this sleek, efficient machine, that you just following the rules exactly and everything works.  You’ll find in practice that the law doesn’t work this way.  It’s a Rube Goldberg-sque mass of rules that doesn’t make sense.

But that gets at the *real* reason for putting up silly disclaimers.  It’s the same reason that judges in Hong Kong wear wigs and judges all over the place wear funny clothes.  The real reason for doing this is “symbolic”.  It’s like saying “please and thank you”.  If I put up a legal disclaimer, it’s to say “yes I think the rules are stupid, but I’m trying to comply with them, so at least give me credit for that.”  I’m bowing before the Queen, and ignoring the fact that the Queen has no real power.

The good news is that all of the silly disclaimers can be put into one small “howto” book.  Do this, do that, do the other thing, and everything will be fine.


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