What is an ICO?

Recently, a friend consulted us regarding a blockchain project in which he had previously participated. The project issuer issued tokens before September 4, 2017. At that time, he obtained an allocation through a referral and invested approximately USD 300,000 (calculated at the prevailing prices). After the September 4 regulatory action, the project issuer moved its operations overseas but did not carry out a token refund or buyback. He now asks whether the invested funds can still be recovered.
Situations like this are quite common in China’s crypto community. Following the September 4 Announcement, token issuance platforms either ceased operations or expanded overseas, with very few continuing to operate within mainland China. Upon consultation with professionals, we found that some token issuance projects have gone underground and continue to operate in obscurity, while others have failed to implement refunds and have ignored users’ requests. Below, we discuss the legal issues involved.

 

01

What is an ICO?

 

ICO (Initial Coin Offering), or initial token offering, originally derived from the concept of an initial public offering (IPO) in the stock market. Unlike an IPO, an ICO involves the issuance of tokens rather than shares and pertains to blockchain projects. In simple terms, an initial token offering is similar to subscribing for new shares: investors use mainstream cryptocurrencies (such as Bitcoin) to purchase newly issued tokens and then engage in investment and trading activities.

ICOs have created many stories of sudden wealth, attracting considerable interest from participants in the crypto space. However, high-quality projects are scarce, and ICOs can easily facilitate various financial and cybercrimes. Accordingly, in 2017, seven departments of the People’s Bank of China jointly issued the Notice on Preventing Risks Associated with Token Issuance and Financing (also known as the “September 4 Announcement”), which characterized the nature of ICOs as unauthorized illegal public fundraising activities. Such activities may also involve illegal sales of token vouchers, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes, and other criminal offenses. As a result, parties involved in token issuance within China were widely affected, with none escaping scrutiny.

 

02

What are the legal risks for projects that have not implemented refunds?

The September 4 Announcement not only ordered the immediate cessation of all token issuance and financing activities, but alsorequired organizations and individuals that had completed token issuance and financing to make arrangements for refunds and other remedial measures.In response, major project issuers in Beijing, Shanghai, and Shenzhen promptly initiated token refunds, achieving a completion rate of 90% in a short period. Project issuers that failed to implement refunds facevarying degrees of legal sanctions.。

First, the September 4 Announcement explicitly provides that relevant authorities will seriously investigate and deal with, in accordance with law, token issuance and financing activities that refuse to cease, as well as illegal and irregular conduct in token issuance and financing projects that have already been completed. This has intensified administrative regulatoryThere is a legal basis.” The Office of the Shanghai Municipal Leading Group for Special Rectification of Internet Finance Risks once required relevant ICO issuance platforms to immediately cease related business activities and, in accordance with the law, promptly organize wind-down procedures while reasonably safeguarding user rights and interests. It emphasized supervising trading platforms to ensure that investors could smoothly withdraw their tokens and fiat funds.In principle, senior executives and other relevant personnel of the concerned platforms were required to remain in Shanghai to assist and cooperate with the wind-down work.。

Secondly, under existing laws,if there is a refusal to refund tokens, it may potentially constitute a criminal offense.If token-issuing project teams not only fail to carry out wind-down procedures as required but instead engage in various improper maneuvers, they are highly likely to face criminal liability: Where project teams promise various returns to defraud users into investing, such conduct may constitute the crime of illegally absorbing public deposits; where platform operators abscond with funds, misappropriate them, or convert them to their own use, such conduct may constitute the crime of fundraising fraud or financial fraud; even if a trading platform (exchange) continues operations underground by quietly providing matching services and on-exchange trading for both parties, such conduct may constitute the crime of illegal business operations. Of course, the foregoing represents only potential liabilities; specific criminal constitutions must be determined in accordance with the law. Nevertheless, once under regulatory scrutiny, the outcome is effectively predetermined, is it not?

03
What should users do if project teams fail to implement wind-down procedures?

The September 4 Announcement proposed project wind-downs. For tokens trading at a premium, investors are evidently unwilling to return their tokens, because exiting at the issuance price would render losses from buying at higher prices unacceptable and crystallize those losses. Therefore, these investors insist on not returning their tokens and await opportunities to trade on overseas trading platforms. Meanwhile, most investors have experienced price declines after holding their tokens, making wind-down an opportune time to unwind positions; however, project teams are unwilling to proceed with wind-downs.

For users facing project teams (companies) that are uncommunicative, how can losses be recovered? Based on Mankun Law Firm’s experience and numerous practical cases, there are two distinct paths for rights protection.

First,file a civil lawsuit with the courtInvestors (users) may file a civil lawsuit with the court, often on the grounds of unjust enrichment, seeking restitution. However, according to current judicial adjudication standards, courts generally deem the underlying contracts void and order the return of the “property” involved in accordance with the legal consequences of contract invalidity, butCourts rarely issue judgments ordering full restitution.Instead, they typically order the discretionary return of a certain amount of virtual assets based on the specific circumstances. However, some courts simply refuse to accept such cases, which creates significant obstacles for investors seeking to enforce their rights.

Second,filing criminal complaints with public security organsThis is the approach more strongly recommended by Mankun Law Firm. Investors may file criminal complaints with public security organs based on the aforementioned charges and provide corresponding evidence to increase the likelihood of success. Generally, after accepting a case, public security organs will conduct a preliminary investigation. Upon contacting the project operators, the latter may voluntarily initiate refunds due to pressure from judicial authorities. If the conditions for criminal case filing are met, the public security organs will formally open a case, subjecting the project operators to thorough investigation by state authorities. Where necessary, assets may be liquidated or sold off to provide discounted restitution to investors, thereby enabling investors to successfully recover their property. In short, criminal proceedings are always the most direct and thorough means of rights enforcement.

04

Summary by Mankun Law Firm

Given existing state regulations, parties should comply with them: project operators and exchanges must wind down their mainland China operations; if they wish to continue operating, they must relocate overseas. Failure to wind down or going underground carries substantial criminal risk. Users should avoid investing in underground projects. If encountering projects that have not been wound down, users should employ legal remedies to protect their rights. For any legal questions, please feel free to consult Mankun Law Firm.