Introduction – Scam ICOs
Nobody could guess that it was another case of scam ICOs. Prodeum would, in not so many words, put fruits and vegetables on the blockchain.
The premise was that, PLU’s (price look-ups) were outdated. Prodeum would use Ethereum and IPFS to revolutionize PLU coding.
The funds came in. The exact amount raised was unknown.
And then the website disappeared, leaving only one word for its visitors: “Penis”.
We imagine that the Prodeum investors were upset with the exit scam.
But Prodeum wasn’t the only scam ICO in town.
The Benebit ICO, for example, raised $2.7 million in funds, before exiting. The ICO scammers spent $500,000 in marketing and made it one of the highest rated ICOs.
The Confido ICO raised $375,000 in funds before disappearing. TokenLot, which hosted the ICO, said it would work with the FBI in catching the perpetrators.
These are just two examples. There could be more, out there.
Scam ICOs: Who is legally liable?
The question of legal liability must be examined from the angle of who did what, and therefore is or is not liable.
If you look at any other crime, the main persons who commit a crime are most guilty. They will bear the most severe punishments.
Those who abet the crime, are punished less severely, but punished nevertheless.
This is true in cases of murder, robbery, rape, theft, and even scams.
So why should it be any different in a scam ICO?
Legal liability of team members in scam ICOs
The core team members are the primary suspects in any scam ICO.
The team members are the ones who are running the ICO. They are actively involved in making representations, promises and promoting the ICO.
So if the team members, who manage the ICO, disappear with the funds, a deep suspicion immediate arises that they had perpetrated a fraud.
It may be a case of fraudulent misrepresentation.
“But wait!” you may say. “Some team members are hired. They don’t own the project and the funds don’t go into their pocket.”
You might be right to raise this point. In that situation, the team members should co-operate with the police to uncover the real perpetrators.
“And how about team members who weren’t team members, but named as team members?” we hear you ask.
That’s another interesting situation. Some years back a Malaysian politician said, “It looks like me, sounds like me, but it’s not me.” This is essentially what these guys are saying.
The unfortunate soul who was dragged into a scam ICO like that needs to come out and tell the police that it wasn’t him — and prove his innocence.
Incidentally, the “team members” in the Prodeum scam said that their names and LinkedIn profiles were borrowed without their permission.
Legal liability of advisors and partners in scam ICOs
Nearly every ICO today has a board of advisors. Their role could range from heavy involvement right up to window dressing.
So what happens when the ICO advisor finds that he has been suckered into a scam ICO?
If the ICO advisor was hired for a certain scope that does not involve marketing, promoting, or making representations about the ICO, but only for technical advice, it’s possible that the ICO advisor is not bound by any legal liability.
That’s because people won’t say, “Your statement caused me to invest in this scam ICO.”
But imagine when an ICO advisor says, “This ICO is rock-solid and I back it 100%.”
And then a few days later the ICO team does an exit scam. (Poof!)
That ICO advisor should co-operate with the authorities as much as possible.
He could have helped spread fraudulent misrepresentations.
And spreading fraudulent misrepresentations, even if you did not know that they were fraudulent, could be criminal.
That’s why TokenLot panicked when Confido pulled an exit scam.
TokenLot had been hosting Confido’s ICO.
In TokenLot’s terms and conditions, it writes:
TokenLot is in no way affiliated with any initial coin offering (“ICO”) that we offer in either or pre-sale or post-sale offerings and is merely a conduit that gives users the ability to participate in the respective ICO’s.
As an intermediary, TokenLot bears no responsibility for any loss of funds resulting from issues that arise with the entity behind any ICO that TokenLot offers for sale. This includes, but is not limited to: technical/ protocol issues, legal issues, loss of funds due to fraud or theft, distribution issues, distribution delays, insolvency of the entity offering the ICO, or regulatory issues stemming from the ICO.
As you can see, they had disclaimed liability for any losses sustained by ICO investors.
But they still elected to work with the FBI to identify the perpetrators. Smart move.
Partners, advisors and paid celebrities who give endorsements to scam ICOs face potential liability.
Legal liability of paid shills in scam ICOs
Paid shills are people who are paid to give credibility to the ICO team, without disclosing that fact to potential ICO investors.
Let’s be clear here. Shills are common in other situations, not just scam ICOs.
For example, an auctioneer may hire a paid shill to bid on an auction item, to drive up its price.
The famous Milgram experiment from social psychology shows that when you have a crowd of people doing something, an observer will follow the crowd behaviour. Even if they don’t really agree with the crowd.
Shills create FOMO (fear of missing out). When was the last time you heard, “One hundred raving fans can’t be wrong?!”
But a hundred raving fans could be paid shills. Paid to say things and attract new token buyers.
A paid shill would have some contract or agreement with the ICO project operators.
But contractual obligation does not vitiate the obligation to use good sense, and alert the authorities of frauds.
So if the paid shill gets a whiff of a scam, he’s obliged to alert the authorities.
So far, nobody has been sued for being a paid shill.
Legal liability of affiliates in scam ICOs
Affiliate marketing for ICOs are common nowadays.
ICO “affiliates” help to advertise airdrops, discounts, bonuses, and other stuff.
They post their affiliate links on forums and blogs to attract the readers.
Most affiliates are probably too small a presence, so they never get pointed at when there is an exit scam.
But if the affiliate is a famous personality or blogger, his potential legal liability may be quite considerable.
People could say, “I invested because you gave this endorsement!”
So, for those ICO reviewers who put their affiliate links, they should be wary that they aren’t dealing with crooks.
Legal liability of bounty programs and bounty hunters
Bounty programs serve an important role in ICO campaigns.
Want a translation to some foreign language? Put up a translation bounty.
Want video reviews on your ICO white paper? Put up a video review bounty.
Want blog posts? Tweets? Anything else? You can put up a bounty for that, too.
The bounty hunter, who participates in ICO bounty programs, probably have similar liability to advisors, but at a much diminished scale.
If the bounty did not involve making any representations or promotion, the ICO bounty hunter will probably not incur liability.
But if it involved posting messages on social media — “This is the best ICO ever, you’ll make 500% of your investment” — it’s arguable that there was some involvement in spreading fraudulent misrepresentations.
But so far, nobody has been charged for being an ICO bounty hunter.
Limit your liability – Do your own KYC / AML
So if you are a team member, advisor, partner, paid shill, affiliate, or even bounty hunter — how can you limit your liability in scam ICOs?
More and more ICO projects carry out KYC / AML (know your customer / anti-money laundering) to ascertain the identity of their ICO investors.
KYC / AML involves obtaining proof of real identity. Passports, library cards, driving licences, et cetera.
KYC / AML is a good filter for ICOs to filter out criminals, fake identities, etc.
If you are in one of the categories of people I identified above (team member, advisor, partner, paid shill, affiliate, bounty hunter) you might want to consider doing some KYC / AML on the ICO project itself.
After all, the ICO project would be your client. (You are providing a service to the ICO project.)
And before you take on your client, you want to be sure that your client is genuine.
So check to see if the team members are real. Talk to them, contact them on LinkedIn, follow up on their CV.
Check the company organizing the ICO. See whether it exists, and check its track record. Check its statements on the ICO.
Check with other advisors who can tell whether or not a project is genuine.
And when you find a scam ICO, it’s checkmate.
Time to get out of there.
This article has been prepared to provide general information. Your case might be different, and you should seek legal advice from a qualified lawyer.
Please feel free to contact our team for a consultation.