In the ever-evolving landscape of cryptocurrencies and blockchain technology, it is crucial for crypto projects to ensure compliance with legal frameworks. In 2023, obtaining a legal opinion for your crypto project is more important than ever before.
Having spent the best part of 3 years working directly with crypto projects, including a bunch of tokens and projects derived from ICOs/IDOs, I’ve found it startling the lack of knowledge that a lot of teams have when it comes to a crypto legal opinion.
They’re an absolutely essential part of an effective compliance toolkit, and not having one could leave you exposed if a regulator (such as the SEC), ever comes knocking.
Let’s be clear. A legal opinion won’t make you immune from any form of indictment, but it at least shows you’ve taken steps (before raising capital) to gauge that what you’re doing is legal, and you aren’t embarking on what could be seen as an unregistered securities offering.
This blog post will explore the significance of legal opinions in the crypto industry, highlighting their benefits and discussing the potential repercussions of not having one. Furthermore, we will delve into notable events from crypto history where legal opinions played a pivotal role, such as the SEC vs Ripple Labs case.
Let’s dive in.
A legal opinion is a professional assessment provided by a legal expert or a team of lawyers. It offers an authoritative analysis of the legal implications and risks associated with a specific project or initiative. In the context of crypto projects, a legal opinion evaluates compliance with relevant regulations and provides guidance on potential legal hurdles.
Ultimately, it should provide some form of legal clarity (in the perspective of the lawyer who writes it), as to the likelihood of your asset being found to be a security.
Why does this make a difference? Well, as a matter of fact, it makes a huge difference.
Security is an asset that hits all four prongs of the Howey Test. The most synonymous assets associated with being securities are stocks and equities. Here is an overview as to what Howey is, and the four prongs that determine if an asset is a security.
If all four prongs are hit, then your asset could be deemed a security, and must be registered with relevant regulators, and disclosures must be made to investors. On the flip side, if even one of the prongs isn’t met, then it’s unlikely that the underlying asset will be found to be a security.
The Howey test was established by the United States Supreme Court in 1946 in the case of SEC v. W.J. Howey Co. The test was used to determine whether transactions qualified as investment contracts and, therefore, if they fell under the securities laws and regulations.
The historical significance of the Howey test lies in its establishment of a legal framework to identify securities offerings beyond traditional stocks and bonds. Prior to this case, the definition of security was relatively narrow and did not encompass certain investment schemes.
The Howey case involved the W.J. Howey Company, which offered parcels of land in Florida with citrus groves to investors. The company claimed that these land sales were not securities and therefore not subject to federal securities regulations. However, the Supreme Court ruled differently and developed the Howey test to determine whether an investment contract existed.
From there onwards, Howey has been used to assess financial assets up to the present day. There is scepticism within the crypto industry as to the relevance of Howey, as it was never initially created to assess digital assets. Nevertheless, the SEC remain staunch advocates of Howey, and unless Congress intervenes, Howey will be used to ascertain if rules have been broken, or disclosures haven’t been provided to investors.
Here are some other key reasons why your crypto project should consider obtaining a legal opinion:
Risk Mitigation: The crypto industry is not immune to legal challenges and disputes. By obtaining a legal opinion, you can proactively identify and address potential legal risks associated with your project. This helps you implement effective risk management strategies, thereby minimizing the possibility of legal disputes, financial losses, and reputational damage.
There have been a number of recent events in the crypto-sphere that underscore the necessity of possessing a legal opinion in the first instance.
There are other benefits to having a legal opinion, outside of the regulatory/enforcement argument.
The ramifications of not obtaining a legal opinion can be severe.
As has (I hope) been made abundantly clear by now, a legal opinion is fundamentally important to your crypto project. Just to be sure, let’s break it down one more time.
This basic flowchart outlines the steps you should be taking in line with your legal opinion. It’s important to note that I’m not a lawyer, and you should always seek legal counsel that pertains to your own needs and circumstances.
In the dynamic landscape of cryptocurrencies and blockchain technology, obtaining a legal opinion for your crypto project in 2023 is essential. It helps ensure regulatory compliance, builds investor confidence, mitigates legal risks, and provides a competitive advantage. By examining historical events like the SEC vs Ripple Labs case, we understand the significance of legal opinions in the crypto industry.
Neglecting a legal opinion can lead to regulatory violations, investor scepticism, and legal disputes, potentially derailing your project's success. Therefore, it is crucial for crypto projects to prioritize legal due diligence and seek professional legal opinions to thrive in the evolving crypto ecosystem.
If you’re utilizing crypto marketing strategies and spending capital on taking your project to market, best to be sure that what you’re doing is compliant.
On that note, if you or your project need support with your marketing objectives, contact Coinpresso today for a free strategy session.
For a legal opinion, you should seek an experienced crypto lawyer in your region, and regions you are looking to target.