Our guest article for the University of Malaya RegTech Project in May 2019.

by Kevin Koo

This is the unredacted version of the article that first appeared in Visio Bloc (May 2019:02) by RegTech Cube, the Centre of Excellence for Regulatory Technology (RegTech) at the Faculty of Law of the University of Malaya. It is a joint venture research project between the University of Malaya (UM), Quanta RegTech Capital (QRC) and Infinity Blockchain Holdings (IBH).

You can click on the link here to view the original article.



In July 2014, a young awkward Vitalik Buterin launched the Ethereum blockchain token sale. The sale raised $18 million in Bitcoin, funds to develop the Ethereum platform. Ethereum was described as a platform to build decentralized applications.

The Ethereum token sale launched one of today’s most popular blockchains, but it was not the first. The Mastercoin initial coin offering (ICO), in 2013, was the world’s first ICO, raising about $500,000.00 in Bitcoin. Today, it’s called the Omni layer, well known as the protocol behind Tether.

By 2017, token sales were a lucrative industry, generating millions of dollars, many with nothing more than a white paper. The EOS token sale, for example, raised more than $1 billion.

At first, token sales seemed to operate without proper regulation. Then, the hacking of The DAO occurred, and the Securities Exchange Commission in the USA expressed its opinion that the business model of the project meant that the token was potentially a security under its jurisdiction.

Everywhere, lawyers predicted that regulation would tighten up, as would compliance requirements. They advised their clients that token sale contracts should comply with the law.

A Few Types of Token Sale Agreements

To simplify things, there are a few types of token sale agreements.

First, there is the sale agreement for a token that is to be sold to the world for the first time. The token may not yet exist, or some of the tokens may have been generated, or even all of the tokens may have been generated in a pre-mine.

Second, there is the sale agreement for a spot transaction of tokens, a.k.a. “trade contract”. This type of transaction is meant to take place almost instantaneously, or in the near future, with the price following the current market pricing.

Finally, there is the sale agreement for tokens far in the future, a.k.a. “futures contract”. Here, the selling price of the token is locked in, with payment and delivery at the future date. The market price of the token at delivery could diverge greatly. What is certain is that one party will profit handsomely.

For this article, we focus on the first type of agreement, the ICO token sale agreement.

The ICO Token Sale Agreement

The ICO is also known as initial token offering (ITO), and token generation event (TGE), among others. It is a sale of a new token, in exchange for an existing token, to generate funds to fund the project.

Without further ado, here are some essential clauses, which should be included in a token sale contract.

Exclusion from Participation: It is common to exclude citizens and residents of certain countries from participating, if such countries have banned cryptocurrencies and token sales. Many contracts tend to exclude people from the USA, China, and Singapore. If the seller of the token is based in Malaysia, it may be a good idea to exclude Malaysians.

Investor Status: In some token sales, ordinary retail investors are not allowed to participate, and only accredited investors and sophisticated investors are allowed to purchase the tokens. This is true, especially if the token is a security. Proof or verification of such status must be provided.

KYC: The token purchaser must undergo KYC (know your customer) to confirm he is not a terrorist, bankrupt, politically exposed person (PEP) etc.

Caution: The token purchaser should be cautioned that purchasing the token has risks, and the purchaser agrees to bear those risks. The risks may be enumerated, e.g. the token may be worthless, development could be stalled, or the project declared illegal.

Soft Cap: The agreement should state the “soft cap”, i.e. the minimum that is required to be raised from the token sale. If this amount is not met, funds received will be returned to their contributors.

Hard Cap: There may be a need to state the “hard cap”, i.e. the maximum that a project will raise from the token sale. Once this amount is met, the token sale ends.

Jurisdiction: A contract should state under which jurisdiction it is governed. It would be expected that the law governing the token sale contract should follow the country in which the entity selling the tokens is based.

Resolution of Dispute: In case of dispute, which court or arbitration center should hear the dispute? Are there any ADR methods incorporated, such as mediation?

Trustee or Stakeholder: In some cases, a trustee or a stakeholder would hold the funds raised. The funds will be released bit by bit, as milestones in the roadmap are reached. This is good practice, as it guarantees the safety (and return) of the funds if the project fails for any reason.

Custody, Lock In and Release of Tokens: Often, the token purchaser must agree to a delayed release of the tokens. The tokens are often sold at a discount, and a lock in is required to avoid a huge dump on the market, causing the price to plummet. Ideally, the trustee or stakeholder will have custody of the tokens until they are released.

Consideration: Is the token being sold, in consideration of money being paid? Is the sale an outright sale, which is final and non-refundable? Sometimes, lawyers get creative with this part. For example, funds received may be described as donations or contributions to a project, and tokens are issued as rewards for contributions.

Role of Related Organization: In some cases, a non-profit organization is established, such as a foundation, that oversees and directs development of the project.

Mainnet Swap: Where there is a new, separate blockchain, the ERC20 tokens that a purchaser gets needs to be swapped for mainnet tokens. They need to agree to participate in the token swap or token burn.

Sole Responsibility: The token purchaser must bear responsibility for his tokens once they are transferred to him. He must keep his private keys and recover word list safe.