Since around 2015, especially startups often choose to fund their business through a so-called Initial Coin Offering (ICO). These involve the creation of crypto tokens related to the issuers business model, which are subsequently offered to interested investors. Depending on the project, the ICO issuer may choose to connect the issued tokens to additional rights for the token holders such as for example special discounts or other advantages related to the acquisition of goods or services from the ICO-funded business. ICO tokens regularly do not grant investors real company shares and only sometimes co-determination rights. ICO issuers frequently create a document for marketing purposes, which they refer to as a “Whitepaper” to the project obviously referring to the draft paper for Bitcoin released in 2008 by Satoshi Nakamoto. In this document, the issuer lays out the concept of and his vision for the project and he may also provide some additional information regarding the conditions of the planned token sale. The advertisement for investment products is however a subject which should be handled with the utmost diligence by the issuers, because of the liability risks that are associated with it. The specific legal requirements for ICO-related advertisement measures depend on the nature of the offered product and the rights that are connected to it.
PROSPECTUS LIABILITY RESULTING FROM SPECIFIC STATUTORY REGULATIONS AND FROM GERMAN PRIVATE LAW
As a rule of thumb, it can be said that every publication which is intended for the general public and which gives the impression to be a comprehensive description of the investment product may be considered a prospectus in the sense of the German prospectus liability regulations. The specific legal requirements that have to be fulfilled by such prospectuses depend on the specifically offered investment product. For tokens that qualify as transferable securities in the sense of the harmonized EU-securities regulations, the EU Prospectus Regulation determines the contents that these securities prospectuses must set out and the consequences that issuers will face that do not fulfill these requirements. There are specific regulations for the creation and prospectus liability for tokens, that e.g. are only restrictedly transferable and therefore qualify as asset investments in the sense of the German Asset Investment Act. Should tokens neither qualify as securities nor as asset investments, a prospectus liability for the users of marketing documentation may result from the principles of the so-called private law prospectus liability, which was developed by the German jurisprudence. Pursuant to these principles, every marketing documentation addressed to the public for offering investment products is a potential liability risk. The liability regulations do not make a difference between offerors that call their marketing document a prospectus, a marketing leaflet, a handout or a whitepaper.
ISSUERS, OFFERORS AND INITIATORS MAY BE LIABLE FOR ERRONEOUS PROSPECTUSES
According to the principles of the private law prospectus liability, not only the issuer but also other parties may be liable for erroneous statements made in marketing tools that qualify as a prospectus from a private law perspective. Liability claims of investors may also be directed at e.g. the publisher of the prospectus, or at initiators, founders or designers that are not the issuer, if they have a considerable amount of influence on the management of the issuer. It is also imaginable that liability claims could be directed against people that made advertising statements in the prospectus and that claim particular trust for themselves and the advertised product. Prospectus liability claims usually entitle the investor to a repayment of the invested sum in exchange for the reassignment of the investment product to the infringer. In addition to that, in some cases investors may also claim lost profits that they could have obtained if they had invested in a different investment product instead.
Attorney Lutz Auffenberg, LL.M. (London)
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