As part of our continuing mission to serve as the data layer of the crypto community, we are presenting this legal review and rating of the Nauticus ICO, provided by Brian Konradi, Co-Founder and Director of Legal, Decentra Group.
REVIEW AND RATING
OF
NAUTICUS ICO
FROM LEGAL PERSPECTIVE
Important Note:
The summary of legal issues below has been prepared based on a review of the Nauticus ICO Agreement and Whitepaper available at www.nauticus.io as of June 26, 2018 and does not constitute legal advice in respect of the Nauticus ICO, nor does it provide any advice as to the legality and regulatory compliance of the Nauticus ICO in any specific jurisdiction. This summary does not address and is not based upon the laws of a particular jurisdiction.
The purpose of this summary is to provide, from a legal perspective and based on the Nauticus ICO Agreement and Whitepaper, an overview of high-level risks arising in connection with the purchase of Nauticus Coins. As this report is a summary all legal risks associated with Nauticus ICO are not described herein. Purchasers should consult independent legal counsel and conduct a thorough legal analysis before making purchase decisions.
Unless otherwise specifically defined herein, all terms have meanings set out in Nauticus Whitepaper and ICO Agreement.
EXECUTIVE SUMMARY:
From a legal perspective, the most fundamental issue is that Nauticus does not have any contractual obligation to purchasers of Nauticus Coins to develop and implement the project as described in the Whitepaper. The key obligation of Nauticus under the ICO Agreement is to issue Nauticus Coins, but the rights associated with Nauticus Coins are not defined. Nauticus’s commitment to the purchasers of Nauticus Coins is further undermined by provisions in the ICO Agreement and Whitepaper giving Nauticus the right to amend the ICO Agreement and Whitepaper any time at its sole discretion.
| Criteria | Whitepaper (non-binding) |
ICO Agreement (binding) |
Score (0 – 10) |
How Score Could be Improved |
| Commitment in Whitepaper and ICO Agreement to the terms described therein | Nauticus has the right to amend the Whitepaper any time (according to paragraph 1 of Overview in the Whitepaper). This creates uncertainty for purchasers of Nauticus Coins as to how Nauticus might further develop and implement Nauticus Platform and other Nauticus’ products (described in the Whitepaper) and what, eventually, the value of Nauticus Coins might be. |
Nauticus has the right to amend the ICO Agreement at any time (according to paragraph 2 of the ICO Agreement). |
0 | Restrict the right to amendment so that key elements of the Whitepaper cannot be changed. |
| Conclusion: Ultimately, Nauticus’ amendment rights with respect to Whitepaper and ICO Agreement mean that purchasers of Nauticus Coins have no guarantee as to what they receive in exchange for the price paid. | ||||
| Issuer’s obligations to accomplish the proposed business model | As is typical in ICOs, the Whitepaper is not a legally binding document and intended for the purchasers’ informational purposes only. The Whitepaper contains a clear disclaimer that information in the Whitepaper “may be not exhaustive and does not imply any elements of a contractual relationship” (paragraph 2 of Overview of Whitepaper). |
The ICO Agreement does not incorporate any portion of the Whitepaper and does not contain any provisions covering even key business elements described in the Whitepaper. | 0 | The ICO Agreement could incorporate the Whitepaper by reference or describe the key business undertakings as covenants to buyers. |
| Conclusion: Nauticus does not have any contractual obligation to purchasers of Nauticus Coins to develop and implement the Nauticus Platform and other products as described in the Whitepaper. | ||||
| Organizational structure and founder commitment | Whitepaper provides no information as to the ownership structure of Nauticus nor does it set out any assurances for purchasers as to the commitment of Nauticus’ owners/founders for the duration of the proposed business projects. |
The ICO Agreement contains no provisions that would indicate commitment of Nauticus’ owners/founders to the project. |
0 | Warranties regarding the ownership structure, the ownership of the founders, and non-compete obligations from the founders. |
| Conclusion: Commitment of Nauticus’ owners/founders to the project may not be considered secure. | ||||
| Nauticus Coins attributes and benefits | The Whitepaper provides significant information on allocation, distribution and other attributes of Nauticus Coins. The Whitepaper provides that the users of Nauticus Coins will receive a 50% discount on trading fees in the first year (section 2.0 Executive Summary of Whitepaper). |
The ICO Agreement does not mirror the provisions of Whitepaper regarding allocation, distribution and other attributes of Nauticus Coins. The ICO Agreement does not specify what benefits that Nauticus Coins will have. It provides in general for “reduced fees for transactions conducted using Nauticus Coin” (section 1 of ICO Agreement). |
3 | The ICO Agreement should include relating to token allocation, distribution and other attributes of Nauticus Coins. |
| Conclusion: There is inconsistency between the Whitepaper and ICO Agreement regarding the benefits that Nauticus Coins will carry. The token attributes are not well defined rights of purchasers. | ||||
| Soft and hard caps | Whitepaper provides sufficient information on soft and hard caps. |
ICO Agreement does not contain any soft cap provisions. However, this now a moot point, as the soft cap of USD 8,000,000 has reportedly been exceeded. The ICO Agreement provides for a maximum total public allocation of 2 billion Nauticus Coins during Presale Period and ICO Period. Unsold Nauticus Coins will be destroyed. However, ICO Agreement does not provide for a hard cap of USD 88,000,000 (provided in section 8.2 of Whitepaper) or limits in any other way a future issues of Nauticus Coins. |
2 | Specific covenants should be included in the ICO Agreement. |
| Conclusion: Nauticus does not have a restriction against the issuance of Nauticus Coins in future. If all of 2 billion Nauticus Coins are sold in the course of the ICO, the proceeds would exceed the hard cap provided in the Whitepaper (based on the current rate of BTC/USD). | ||||
| Closing mechanics | The Whitepaper does not provide for a return of funds to the purchasers in the event if the issue of Nauticus Coins does not happen. | ICO Agreement does not contain a sunset close whereby Nauticus would be bound to return to the purchasers the amounts they paid for Nauticus Coins in the event if the issue of Nauticus Coins does not happen as provided in the ICO Agreement for whatever reason. | 0 | The ICO Agreement should provide for a return of funds in the event of unreasonable delay. |
| Conclusion: The purchasers of Nauticus Coins are not protected in the event of unreasonable delay in closing. | ||||
| Disclaimers | The ICO Agreement contains provisions purporting to exclude, in substance, any liability of Nauticus to the purchasers of Nauticus Coins in relation to purchase, sale and/or use of Nauticus Coins and/or Nauticus Platform. | 3 | The disclaimers should be limited to reasonable limitations of liability. | |
| Conclusion: The disclaimers are unreasonably broad and seek to limit all responsibility of Nauticus. | ||||
| Transfer restrictions | The Whitepaper provides for certain restrictions on transfer of 8.5% of Nauticus Coins to be issued to the Nauticus team (section 9.0 of Whitepaper). |
The ICO Agreement contains nothing regarding transfer restrictions applicable to its developers, employees and advisors that would protect the market from being flooded with Nauticus Coins. |
3 | The transfer restrictions described in the Whitepaper should be included within the ICO Agreement |
| Conclusion: Nauticus is not legally bound to restrict transfer of Nauticus Coins issued to Nauticus’ team, despite assurance otherwise in the Whitepaper. This creates an additional factor that could affect the value of Nuticus Coins after the ICO. | ||||
| Regulation | While the Whitepaper does mention local Australian regulatory registrations, it does not address the risk that the Nauticus Coins may be deemed securities in certain jurisdictions, nor does it describe whether regulatory compliance is required in other jurisdictions. |
3 | A description of regulatory risks and how such risks have been address should be included. | |
| Conclusion: Regulatory risk is significant in the exchange sector and should be addressed and considered by all parties. | ||||
| Information rights | ICO Agreement contains no provisions that would guarantee the purchasers of Nauticus Coins information rights as to an update on the progress of Nauticus Platform and related products. |
0 | ||
| Conclusion: Nauticus has not obligation to keep purchasers updated as to project status. | ||||
| Termination | The ICO Agreement contains a broad provision allowing Nauticus to terminate the ICO Agreement if a purchaser breaches any term of the agreement. In such an event, Nauticus may terminate all rights of the purchaser regarding Nauticus Coins, the purchaser’s account and other rights granted in accordance with ICO Agreement. It is not specified if and how Nauticus would compensate the purchaser for the funds paid for Nauticus Coins and/or funds held on the purchaser’s account otherwise and related to Nauticus platform. |
0 | The ICO Agreement should require compensation in the event token rights are terminated. | |
| Conclusion: Nauticus may strip away the rights of purchasers for immaterial breaches of the ICO Agreement. | ||||
Conclusion
Broadly speaking from legal perspective, Nauticus’ team is not legally bound to develop and implement the Nauticus Exchange as described in Nauticus Whitepaper. In other words, the Nauticus team may not be held liable to purchasers of Nauticus Coins should it choose, for any reason (including regulatory risks): a) not to proceed with the development of Nauticus Exchange, b) to change the rights attributed to Nauticus Coins, or c) to alter in any way the business model of the project. Given the lack of regulatory framework in general and the absence of enforceable obligations on the part of Nauticus’ team, purchasers of Nauticus Coins largely rely on the integrity of Nauticus’ team.
Legal Analysis provided by Decentra Group.