A Token Sponsor’s whitepaper is a critical document. A whitepaper provides an overview of a Sponsor’s token project, as well as specifics on the project’s technological application, any related products or services, and how the digital tokens will operate. If the tokens are designed to monetise the value of such products or services, it may be appropriate to explain the business model underlying the project. A whitepaper is not a business plan, offering memorandum, or prospectus – it is a factual description of how the token will operate as part of a system or within an application. The whitepaper will often form the objective basis for evaluating the regulatory implications of the projects, including the distribution of the tokens and the offer of any products, applications, and services. Hence, token sponsors should carefully consider what should and should not be included in their whitepapers.
A Token Sponsor’s whitepaper should explain the technology underlying the token and its usage and application(s). This could include a description of the underlying code, how an application interacts with the platform, why a blockchain-based product or service is critical to solving the problem(s) that the token project aims to address, and the operation of the token network. The token Sponsor should carefully separate hyper-technical or dense discussions of the technology from plain-language discussions of the technology to enable the widest possible understanding depending on the targeted token recipient.
A Token Sponsor’s whitepaper should explain the utility of the token project and include a description of how the project seeks to achieve its intended purpose as well as how the token will be used for this purpose.
- Services and Products: A whitepaper should describe system(s) or application(s) that may be acquired or utilised with the token.
- Use of Smart Contracts: The whitepaper should describe how the smart contracts are intended to be used, what purposes they are intended to serve within the application, and how they are intended to operate, including how they self-execute in the context of the application.
Explanation of Use Cases
A Token Sponsor’s whitepaper should consider providing current use cases for the project’s products and/or services and specifically the digital token. This explanation can span across descriptive or illustrative case studies of the application to provide the reader an understanding of how the application and token will work in practice, especially considering Blockchain into perspective.
Explanation of Token
A Token Sponsor’s whitepaper should provide a comprehensive description of the token that is embedded in the product and/or service. The description should include the standard form of the token (e.g. ERC-20, ERC-223, ERC-777, etc.) and any rights of, or benefits to, and obligations of, token holders.
Transparency of Material Features
A Token Sponsor should transparently disclose the material features of its digital token and of the token’s distribution, including information pertaining to pricing, structure, allocation, and utility through it’s whitepaper.
Disclosure of Risks
A token sponsor should ensure that the whitepaper discloses any foreseeable conditions that could impair use of the tokens’ application(s) or system(s). Any plans devised to mitigate certain risks should be disclosed.
Promotion of the system or application for a Token Sponsor’s digital token should not encourage interest in acquiring the token based solely on investment expectations or a fear of missing out on an investment. Depending on other facts, such promotion could affect the token’s characterisation as a security. The Token Sponsor should not link to or reference material the content of which is not in its control. Careful wording must support the narrative irrespective of whether the token is a utility or a security.
The dissemination of a Token Sponsor’s whitepaper should be focused towards the population who would most likely use or benefit from the Token Sponsor’s product, service, or token. The marketing of a whitepaper should not be targeted toward general populations with an interest in investing, particularly those who speculatively invest in digital tokens, or who buy with the sole intention of selling for increased returns.
Plans for future additional features
A Token Sponsor’s whitepaper should not discuss any plans that the Token Sponsor may have for expanding the features or scope of the project’s products, services or applications, or other proposed enhancements to the token’s use after the launch of its token. Emphasis on plans for future development by the Token Sponsor may negatively affect a digital token’s security analysis under the Howey Test.
Intentional Misrepresentations or Misleading Statements
A Token Sponsor should not make any misrepresentations, misleading statements, or omit any material facts that could be deemed important information for someone using or acquiring its digital token.
Cautionary Approach towards Promises of financial returns
A Token Sponsor should take care that materials relating to its digital token take a cautionary approach towards statements that characterise the token as a passive investment opportunity or imply that the token holders will earn financial gains as a result of business activities of the Token Sponsor. Token Sponsors should avoid making promissory statements. The materials should be targeted towards a user of the application(s) or system(s) relating to the crypto token. Quantitative statements regarding current or potential markets for such application(s) or system(s) should be carefully considered. Any information projecting the token’s future secondary market price should be avoided.