Legal Notes on Fundraising for Web3 Startups
Legal notes on investment rounds in the Web3 oceans from our lawyer.
Many startups want to speed their growth by attracting VC funding; Web3 startups are no exception.
Each Web3 fund has its own internal Web3 startup selection procedure, which involves reviewing legal documents and doing background checks, among other things. Furthermore, most Web3 funds have defined investment terms; for example, some solely invest in Web3 project tokens, while others invest in both tokens and Web3 company shares.
The startup has to prepare a few legal documents to negotiate with VCs successfully. Having all the critical documents will help quickly conclude an investment agreement through the negotiation process.
The process of legal due diligence of a Web3 startup by VC usually includes:
Analysis of token documentation
Analysis of authorizations/licenses to be obtained by the company that will issue such tokens
Analysis of statutory documents and intellectual property of the token issuer company (if they plan to invest in tokens and company shares).
Tokens
Another critical issue is the distribution of tokens. Certain rates in the distribution of tokens will be beneficial in the fundraising process. For this reason, these issues should be mentioned in detail in a whitepaper.
Before an investment decision, VCs want to know the following;
1. How many tokens does the project plan to release, and what will be their value
2. How do founders plan to distribute tokens, and how many tokens can an investor get for their investment
3. How many tokens do founders allocate to themselves
The Token Capitalisation Table of the project must include the abovementioned things.
Legal Opinion
One of the critical parts of getting an investment successfully is obtaining a Token Legal Opinion.
Legal opinion is also called an opinion letter. A statement from lawyers issued in letter form expressing legal conclusions about and/or legal analysis of a transaction or matter relied on by the addressee of the opinion. A qualified lawyer draws up a document on any specific question or problem.
The titles that should be included in the legal opinion, in general, are as follows; Legal status of the token, what type of token it is (utility, security, etc.), the status of the regulations in the country where the startup is located, and information about jurisdiction. Additionally, the opinion must gather essential documents, including Token Sale Agreements, Terms of Conditions of the ICO, Privacy Policy, and Anti-Money Laundering Policy (AML). The AML policy lays down the activity of the undertaking and focuses on countering money laundering and terrorist financing.
Investors don’t want to come up against the law in the future. They want to be sure about the Legal Status of the token. Token Legal Opinion is kind of a guarantee for Investors.
Know Your Customer (KYC) – Anti-Money Laundering (AML)
KYC means “know your customer.” It refers to a financial institution’s obligation to carry out specific identity and background checks on its clients before allowing them to use its product or platform.
In other words, it prevents illegal funds from hiding their source behind legitimate financial activities.
Investors do not want the name of the project they invest in to be associated with money laundering or other crimes. To avoid these risks, a startup needs to get KYC services from a professional consultancy specializing in KYC systems.
Last Words
Getting advice from lawyers specializing in Web3, Blockchain and Crypto will help your project grows with concrete steps. Until regulations are established in a well-protected manner, we must act more carefully than ever before.
There is still a long way to go in the field of Web3, but if we proceed in accordance with the laws and rules on this road, we will be the winners at the end of the road.