BITCOIN, BLOCKCHAIN, CRYPTOCURRENCIES AND ICO’S: LEGAL ENIGMAS FOR START-UP’S OPERATING ON THE FUTURE FRONTIER

BITCOIN, BLOCKCHAIN, CRYPTOCURRENCIES AND ICO’S: LEGAL ENIGMAS FOR START-UP’S OPERATING ON THE FUTURE FRONTIER

The latest buzz words shaking up the technology, business, financial and legal establishments are not to be treated lightly. These terms are uniting (hard as it might be) all the major role players in their quest to evaluate the potential far-reaching effects it might hold for the future of commerce globally. It is difficult to ignore the fast-paced development of the latest technological advances, as we find ourselves amid the fascinating transition phases nestled between the Third and Fourth Industrial Revolutions. More importantly, as the universal compatibilities envisioned for this technology have now progressed from hypothetical online discussions between “tech-developers” and futurists to functioning real-life applications, passionate debates have erupted across a variety of diverse forums. Ranging from the corridors of legislators and financial regulators to the living rooms of the Stokvel run by Joe Soap, as people are curious (and watchful) about the industries based on the Future Frontier – and rightly so.

As the terminology is complex, we will not aim to explain what the Blockchain, Cryptocurrencies (which include BitCoin) or Initial Coin Offerings (“ICO”) are. We will also not attempt to define or address the application possibilities of these initiatives in this post, as the possibilities are vast and beyond the scope of this post. (For more information on the technical aspects relating to these terms, please see the links below explaining this in more detail.[1]) We will only briefly aim to highlight some aspects start-ups and potential investors should bear in mind when investigating the opportunities created by the technology found on this Future Frontier.

For Start-Up’s

Start-ups looking to venture into the industries of the Future Frontier are advised to note that there is still a lot of uncertainty as to the regulations governing and enforcing the practical application thereof. As such, carefully considering the current legislative frameworks in existence (and more importantly, the purpose behind it) might provide a helpful understanding of the things entrepreneurs should consider when developing their business models for the market. In a South African context, start-ups should consider the following legislative and regulatory concerns which might be applicable to them:

  • FICA, Money-Laundering and Know-Your-Client (KYC) legislation: due to cryptocurrencies trading far more anonymously over various encrypted platforms entrepreneurs are encouraged to familiarise themselves with the relevant FICA, Money laundering and KYC processes. Especially in industries where payments are being made by potential payment or payment systems operators;
  • Business of a Bank and Collective Investment Schemes: Business models based around the collecting and pooling of fees and/or accepting deposits for investments into cryptocurrencies and ICO’s might be considered to be Collective Schemes or structures conducting the business of a bank, both of which are strictly regulated by the SARB and FSB, respectively;
  • Financial Advisory and Intermediary Services Act (Twin Peaks Financial Sector Regulation Bill): any current or potential services aimed at the financial advisory or intermediary industries are strictly regulated by the Financial Services Board (and will soon fall under the Twin Peak Provisions);
  • Exchange Control Regulations: Strict requirements regarding the outflow of capital and funds exist in South Africa. As a result, certain apps or services designed to facilitate transfers of this kind without prior SARB approval, tax clearance from SARS or adherence to existing policies may pose some concern to regulators;
  • Companies Act: A very popular means to raise funds for start-ups focusing on Future Frontier industries is by way of an ICO. During an ICO the start-ups issue their own crypto- tokens to participants at a discount and often raise vast amounts of capital. However, an ICO might, depending on the rights attached to these crypto-tokens, in some cases be regarded as a thinly veiled offer of securities to the public. If that is the case, the Companies Act and accordingly, the strict laws relating to the issue of securities by way of an offerings to the public will be applicable. Since the Securities Exchange Commission of the USA recently declared this position (not without criticism), other jurisdictions may follow suit; and
  • Consumer Protection Laws: The loss of virtual cryptocurrencies value, tokens issued to paying participants without any underlying value and other types of blockchain transaction issues such as erroneous payments and systems breaches, hacks or Ponzi schemes are things to consider. If not adequately managed, this may create serious liabilities, not to mention reputational damage, to any start-up involved in these types of commercial venture.

These are merely some of the myriad questions start-ups are urged to consider as a starting point into the regulatory and compliance frameworks regulating the industries on the Future Frontier.

Investors

Warren Buffet once said the following: “What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know”.

In keeping with this thought, we would therefore urge any investors considering investing into start-ups which focus on the Future Frontier industries to not stray too far from established investment principals. Especially in determining what the Investor does not know, conducting an adequate due diligence investigation (or “DD“) into the envisioned Start-up’s proof of concept, management of regulatory and compliance issues and the viability of their intended financial and business models should be considered a minimum requirement. Further to this, investors would do well to consider special escrow arrangements for any transfer of investment funds irrespective of whether these funds are done by way of crypto-funds/tokens and/or fiat currency. Also using respected and knowledgeable service providers may mitigate against any risks involved in these investments.

Conclusion

There are various levels of uncertainty regarding the practical and legal implications of these Future Frontier industries. This accordingly provides ample grey area for entrepreneurs and investors alike to either flower or flounder through. As such, we would recommend that any Start-Ups or investors contemplating to venture into these Future Frontier Industries to make sure that they have a clear view of the legal nature of the transaction at hand. If the legal nature of the transaction is clear, it enables the parties to take a measured approach to control the relative risk associated and build in the protective mechanisms that the law requires.

We hope to see legislators work with other industry experts to create a legislative framework that promotes certainty, without smothering the revolutionary initiatives and staggering opportunities presented by Future Frontier technology.

[1] For further detailed information regarding how Cryptocurrencies and the Blockchain function and operate please make use of the following recommend sources:

 

Software-as-a-Service (SaaS) – understanding some of the aspects of this technology model

Software-as-a-Service (SaaS) – understanding some of the aspects of this technology model

As commercial law attorneys, much of our work is helping tech start-ups negotiate and draft software agreements. There is no doubt that the emergence of Software-as-a-Service (SaaS) – often referred to as “cloud computing” – has been one of the most profound technological developments in the commercial software industry.  It is shaking up traditional software vendors and it is expected to continue disrupting traditional businesses. Think “Slack”, “Trello”, “Salesforce”, “Stripe” and “Dropbox” – these are all SaaS enterprise applications delivered over the internet.

This article will provide a basic overview of SaaS and some of the legal aspects tech start-up founders need to understand when negotiating and preparing their SaaS agreements.

What is “SaaS” and SaaS Agreements?

Software-as-Service is a software distribution model with which a business hosts software applications and makes them available to customers over the internet.  The agreement or contract that governs the access and use of the software service and describes the rights and obligations of the parties is referred to as a SaaS agreement. The SaaS agreement differs from your typical software license agreement because SaaS is not a license to use the software, but rather is a subscription to software services and allows remote software access.

Benefits of SaaS

Low set-up cost: SaaS removes the need for organizations to install and run expensive software applications on their computers and data servers. It eliminates the expenses associated with hardware acquisition and maintenance, as well as software licensing, installation and support costs.

Payment flexibility: rather than purchasing software to install, or additional hardware to support it, customers subscribe to a SaaS offering. Typically, customers pay for this service on a monthly subscription or utility basis i.e. the number of users who has access or the number of online transactions.

Highly scalable: cloud services like SaaS offer high scalability. Upgrades, additional storage or services can be accessed on demand without needing to install new software and hardware.

Automatic updates:  customers can rely on a SaaS provider to automatically perform updates and software improvements and modifications, which are generally free of charge.

Accessibility:  customers aren’t restricted to one location and can access the service from any internet-enabled device and location.

Software Licencing Model vs SaaS Model

Software license agreements are used when a proprietary software is being licensed by the licensor to a licensee.  The licensee purchases the software and receives a right to install, download and use the software. The licensor owns all the intellectual property rights in the software and related documentation.  A license is a limited grant of use those rights.

With SaaS agreements, the customer does not download or install copies of the software, but remotely accesses and uses the software by logging into the software provider’s system.  The software provider hosts the software either on its server or in the cloud and provides a service to the customer which consists of hosting its software, performing services to support the hosted software and granting access to the hosted software.

Important legal aspects to consider in your SaaS Agreement

SaaS agreements can touch upon nearly every area of the law, but broadly, a SaaS agreement should include clauses regarding: the services provided; the parties who will have access to the service; user obligations and prohibited use; payment terms; data collection and personal information; termination; service levels; maintenance and support services; disclaimers and liability; and intellectual property rights.

We discuss a few of these below:

Limitation of liability

The most important provision of any SaaS agreement is the liability clause as liability presents itself in many forms. What if the SaaS service is hacked or the subject of a cyber-attack and the customer’s sensitive confidential data (including banking details) is stolen? Are you going to indemnify and hold the customer harmless for all the damages suffered as a result of the data breach? Limitation of liability explains the extent of damages your customer can seek against you and how much they can sue you for. A well-drafted limitation of liability cannot be overstated!

Service levels

An important consideration is whether the SaaS service is going to be up and running and functioning for a guaranteed minimum amount of time. Service level agreement or commitments are very common in any SaaS agreement. Generally, the SaaS provider guarantees that the service will be up and running for 365 days a year 99% of the time, for example. Your company will need to consider what type of service guarantees and commitments it will be making in terms of its service “uptime” and “downtime”.

Maintenance and support

What types of maintenance and support services will your company be providing? Will you be guaranteeing bug fixes in a timely manner, providing customer support via email and telephone or periodic software upgrades and maintenance? These are issues that need to be considered and which will affect your agreements with your customers. To this end, the contact details, extent of support and troubleshooting methods offered by the provider should be recorded in your agreement.

Upselling and upgrading

You should consider including language in your agreement that allows for future orders or “up-sales” from the customer. By specifying that “up-sales” or upgraded orders from the customer will be governed by the agreement, you avoid having the customer sign or click through another agreement if they purchase additional services, upgrades or expand their usage.

Conclusion

A SaaS agreement is designed to be a comprehensive document and as such, companies should pay careful attention to the multiple aspects of the agreement that set out their liability, responsibilities and obligations. Failing to include or properly define a crucial clause can have serious legal implications on a business’ risk, reputation and commercial relationships.

If you require any assistance in preparing any SaaS, software development or any other software related agreements don’t hesitate to contact us.