February 13, 2018 - On February 12th, Joshua Klayman, Geoff Peck, and Steven Bleiberg of Morrison & Foerster LLP presented on Cryptocurrencies, Digital Tokens, Initial Coin Offerings, and Token Sales: Is This Virtual Currency Thing for Real?“ Cryptocurrency has many synonyms, including digital token, digital currency, and virtual currency. In essence, a digital token is simply a string of numbers on a digital distributed ledger. Bitcoin is most likely the most well-known digital currency but by no means the only one. During the first 9 months of 2017, there were 235 initial coin offerings (ICOs), and their cumulative value far exceeded the total value of the 2016 ICOs.
With more and more business entities engaging in digital token sales as a way to raise funds and build a following, there are interesting opportunities for some traditional capital markets players, but they should be alert to the laws and regulations that may be applicable to such sales. Indeed, token sales may still be considered securities and without a brightline test that determines when a digital token would not be a security, parties should tread carefully. One notable and recent situation involved the Munchee Cease and Desist Order where the SEC required the seller of a utility token to stop half way through the sale and return the funds to the purchasers because the manner of the sale tipped the scale in favor of the token becoming a security. The legal landscape must be carefully reviewed before proceeding with any such ICO.
The emergence of token sales has the potential to impact the loan market, including the drafting of credit agreement provisions. Lenders seeking to lend to borrowers active in cryptocurrency will likely need to hardwire certain language into the terms of their agreement. For example, a token sale that comes with voting rights could be considered equity and thus could trigger a change of control. The financial covenants must also be considered, for a borrower’s EBITDA may be increased if token sale proceeds are paid in digital tokens. The LSTA will be working with the MoFo team and the LSTA’s Primary Market Committee to develop credit agreement language which reflects these issues.
Please click here for the presentation.
