Are Whitepapers Legally Binding?

Disclaimers can come in handy but they are not a free pass to do whatever you want.

by Kevin Koo, Legal Advisor of Celebrus Advisory

Introduction – The Restaurant Menu

Imagine if you brought a friend for a lunch meeting. You both enter a restaurant and sit in a corner. Scanning the menu, you select your dishes, and inform the waiter. As the waiter leaves, you notice the fine print. “Photographs are for illustration purposes only.” So the question might arise in your mind, is the menu a legally binding document?

What if you ordered the dish, and it arrives looking different? You would be upset if the dish arrives looking too different from the photo in the menu. And, if the dish doesn’t arrive at all, you would demand your money back. In that way, the menu is legally binding.

Restaurant menus often describe dishes with photos, and diners quickly form an expectation. Food photography creates expectations, which diners expect the restaurant to meet. Dishes that arrive looking too different, or don’t arrive at all, are grounds for complaint. Failure of consideration, misrepresentation, fraud, cheating.

ICO White Papers as Legally Binding Documents

Many ICO white papers contain a legal disclaimer. “No part of this white paper is intended to be legally binding.” Some of the most successful ICOs which raised huge amounts of funds have this line. The question is, why?

Some ICO projects teams lack technical skill. All they have is a white paper. A document that contains a pipe dream that is pleading to come to life. It might be a good project, giving hope to many a sleepy eyed cynic.

But it may be that the ICO team is trying to limit their risk exposure. They face risks that could lead to the failure of the ICO project. Funds may be insufficient. There may be technical, or legal, challenges. A key team member could drop out. Their best efforts may be insufficient.

Because of those, an ICO team may disclaim the legally binding nature of their white paper. But what are they doing throughout the ICO?

Here’s what an ICO team does during its ICO…

  • They make presentations about their project.
  • They speak on stage to crowds that clap for them.
  • They make the case for their project through YouTube videos.
  • They plead for funds so that they can raise enough to meet their soft cap.
  • They launch airdrops and bounty campaigns.
  • They launch social media campaigns and hire social media managers. Telegram, SEO, Twitter, etc.
  • They get interviewed by the media, and talk about their beautiful project.

During the ICO, everything they do says, “This is what we will do if you buy our token.” But then, the white paper has a line that says, “This white paper is not intended to be legally binding.”

What a question mark that raises.

The FLiK Token Case

The rapper, T.I., was sued by ICO token buyers of his “FLiK token” who claimed that the FLiK tokens were “worthless”. This case illustrates the problem when ICO project owners fail to live up to their promises.

ICO promoters have to fulfill their promises in to create value for token holders. The raison d’etre for the ICO tokens are the ICO platform. The ICO tokens are unusable, even if transferred to the token buyers. The ICO tokens can’t be used elsewhere. They are useless, and worthless.

But, if ICO promoters create the platforms that they promised to create, the ICO tokens have a use and a purpose. They will have value, because the platforms will be operational. The ICO token can be used on the platform. ICO token holders can cash out by selling their tokens to whoever wants to use the token…

Token buyers will be happy, and maybe…. They might buy more. (To use on the platform, of course.) This can only happen if the white paper is brought to life.

An ICO project team may think, “We raised the money, and we can make an exit to enjoy our wealth.” They might tell themselves that the white paper is not a legally binding document…. and that is a mistake!

Contract law and the things that bind

Like many other things, contracts come to life unannounced, in the most quiet of ways. The relationship of the ICO project owner and ICO token buyer can influence the contract. A court can consider everything the ICO project owner says or does to influence the ICO token buyer’s decisions. Even conversations can be material representations. After all, a promise made should be a promise kept.

  • Verbal representations can considered by the court, as evidence.
  • And an ICO white paper is a written representation, not a mere verbal representation.
  • Pundits and reviewers will review it and sing its praises based on its contents.
  • Potential token buyers will read it time and time again, to figure out if it meets their ideals.
  • Regulators would read the white paper to see if it infringes security rules.
  • Bounty hunters will quote from it as if from a holy book, spamming multiple Telegram groups.

In the end, some people who believe in the project will buy the ICO token. Those guys will want the white paper to be legally binding. A non-binding white paper is inconsistent with other representations made during the ICO.

But sometimes the white paper must be qualified.

Because the project may be a real moonshot. The current state of technology may make it impossible to create the project. That means that the technology has to be created, before the project can come to life.

And maybe, there may be difficulties in obtaining a licence for the project to do what they want to do. Some pipe dreams rub the authorities the wrong way. Rather than disclaiming the entire paper, it may be better to qualify parts of the white paper. It may be better to describe the anticipated difficulties, one by one. (It’s called adequate disclosure.) That would be much more genuine, and more considerate to the token buyers. Imagine if the white paper said, “This project may face difficulties in the following: ……” That might help.

In tort law, we have something called informed consent.

A doctor may be liable for failing to adequately disclose potential risks in a procedure. To discharge their duty of care, doctors must counsel the patient of potential risks. Risks that arise from the medicine. Risks that arise from the surgery. Blindness. Flatulence. Drowsiness. Loss of physical control. And so on and so forth.

This informed consent must be consistent with everything else the doctor is doing. The doctor cannot say, “This is a great serum, it can heal you, so sign on this contract and its disclaimer if you want to buy it.” That’s not consistent behaviour. And a patient may later raise a complaint against the said doctor for lack of disclosure, or lack of consent.

To ICO project teams: You don’t want those type of complaints. So you need to have adequate disclosure, and a proper disclaimer.

But is it safe to disclaim legal liability?

Actually, no.

It seems unsafe for ICO project teams to leave out legal disclaimers. After all, there are always inherent risks. But the issue of adequate disclosure also needs looking into. ICO projects need to provide adequate disclosure while limiting their risks. By now, the technology is sufficiently developed for many things to be possible.

Evolving legal frameworks mean that, licensing blockchain-related businesses will become easier. But some risks cannot be predicted, like the ones described above. Even as you disclaim this and that, your white paper can be a piece of evidence in a court action.

A blind date is not consent for a no-show. And white papers, even with a disclaimer, can be legally binding.

 Legal Notice

This article is for informational purposes only. It is not intended to serve as legal advice. For any queries, please consult with a legal professional.


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