BLACKMOON CRYPTO ICO: Legal review of some main aspects of the White Paper

August 22, 2017

by Arthur Minasian,LLM in US Legal Studies, Case Western Reserve University, School of Law (

This is my 2nd review of ICO projects in the area of venture business (the first one was Starta ICO). The upcoming Blackmooncrypto ICO (September 12, 2017) is of my interest due to the following 4 points:

  • The idea;
  • Creativity in combining 2 types of tokens (non-security + security);
  • Much focus on legal compliance and Deloitte (Big 4 company) as a partner;
  • Blackmoon security measures against hackers’ attacks.

I will expand on these issues and then give some thoughts on advantages of this ICO, some concerns and lack of information which is additionally needed / desirable for decision-making process regarding participation in this ICO.

I. Advantages

1. The idea

In short, one stop solution platform in setting up and developing tokenized funds, regardless of whether such funds invest in the fiat or crypto world (tokenized funds are more cost-efficient thanks to lower infrastructure and setup costs).

This conception seems attractive to me but business part of this project (projected performance of the tokenized funds, forecasted assets, projected costs, actual amounts of proceeds for contributors etc.) is outside of my expertise so I have to rely on the description provided by the founders or to get a special opinion, although it is doubtful that someone can foresee the future of a business project.

The same refers to the crypto assets’ future: whether it is really a “new era” or just a short / long term bubble due to US Federal Reserve System’s quantitative easing policy aiming to balloon all types of assets (“monetary madness” as some experts say). And if it is so (“quantitative easing policy”), it is good to know whether this policy will be continued or scaled down. This is equally important since my understanding is that your success in crypto world depends not only on the relevant project in this area but mostly on the overall crypto economics growth.

2. Creativity in combining 2 types of tokens (non-security plus security token)

Here is the short description of the token structure (BMC tokens and Fund’s tokens) derived from White Paper and FAQ:

а) The holding company will issue Blackmoon Crypto Platform tokens (BMCs). BMC tokens would not be deemed as securities by SEC based on the Howey test. The holders of BMC tokens will be able to (i) register as Continuous Contributors and (ii) deposit BMCs in a depository wallet linked to their account.

BMC tokens would not be deemed as securities by SEC based on the Howey test.

b) Each Continuous Contributor will receive a share of Fund tokens that operate on the Platform according to the policies specified by particular Funds.

Funds’ tokens (FTs) are going to be securities and the holding company is going to comply with all necessary regulation regarding that fact.

Taking into account the recent releases of US (SEC) and Singapore (MAS) regulators the Exchanges are now reluctant to accept security tokens for listing. However, it is very important (or even crucial) to get your ICO token listed on a well-known Exchange since it provides for liquidity and a chance for a significant number of token buyers to speculate, i.e. sell their tokens for a greater price. Therefore, the non-security nature of BMC token allows the founders of the project to collect funds and to list BMCs on a well-known Exchange.

Moreover, this 2 level token structure looks advantageous for FT holders, namely: those who opt to flock to the Blackmoon platform and get FTs as a result of their active participation in the project are supposed to receive more proceeds since many BMC buyers, as it usually happens, may prefer to immediately sell their tokens on a secondary market (instead of holding their BMCs in special depository wallets linked to their accounts).

According to White Paper, BMCs provide proceeds to Continuous Contributors who deposited BMCs in depository wallets as follows:

  • Structuring and promotion fee 0-10% from the amount of the issued FTs (on average 2.5%);
  • Maintenance fee (on average it may be equal to 0.5% per annum paid daily in FTs via a smart contract);
  • Transaction fee (occurs upon transferring FTs from one wallet to another in the amount of 0.25% from the token amount paid in FTs via the smart contract).

Those who choose to sell their BMCs following the distribution may also benefit since the number of BMC tokens for sale on a secondary market will be limited to some extent since many BMCs will be just deposited to the platform (so BMCs’ supply is lesser – BMCs’ price is higher).

Other advantages:

  • Continuous Contributors will receive a distribution of FTs from the first Fund created on the Blackmoon Crypto Platform without having to wait for the company to reach breakeven”.
  • Fixed number of BMC tokens (“the total number of BMCs to be issued will be calculated at the end of the Distribution Period according to the formula: amount of BMCs sold during the Distribution multiplied by 2”: 50% for public, 30% for Company’s reserve, 20% for team and advisors);
  • Lock up for 30% for Company’s reserve, 20% for team and advisors;
  • Downside protection (“to protect contributors from dumps the Platform will buy back BMC at $0.8 per token from anybody who is willing to sell”).

3. Much focus on compliance with existing laws and regulations

The fact that, according to White Paper, lots of attention is paid to the legal side of the project provides for some assurance that many of the concerns mentioned below will be somehow addressed, namely:

  • Funds’ legal structure will be reviewed and approved by our legal advisors to ensure they are compliant with existing laws and regulations”;
  • Blackmoon Crypto has vetted the proposed structure with several financial institutions and has received an indicative approval that it will pass internal procedures”;
  • We understand the importance of compliance with regulation and are committed to ensuring that our work is done correctly”;
  • By sorting out these risks from the beginning, Blackmoon Crypto will improve investor confidence and provide necessary sustainability of the investment process”.

Blackmoon promises to

  • perform in-house research as well as contract with reputable legal firms to set up a fully transparent, licensed where necessary and auditable investment structure, making sure that the envisioned structure is fully compliant with regulations,
  • put emphasis on licensing and structuring for the selling of tokens in the US as the US is the biggest financial market.

4. Blackmoon security measures against hackers’ attacks.

According to Blackmoon CTO Ilya Remizov:

  • they use industry-grade high-performance Amazon DNS servers,
  • the access to the administrative tool is well protected (limited and complicated acces),
  • their servers are placed to dedicated and isolated VPCs (virtual private cloud) and have no direct access from the Internet,
  • they have contingency plan for unlikely scenario of such an attack that brings down Amazon security,
  • the backups are securely stored in bank vaults

 II. Concerns

  1. The main issue regarding this 2 level token structure is whether BMC tokens would not be deemed as securities by SEC based on the Howey test.

There is no need to dissect the whole Howey test since it is not a legal opinion but the potential BMC buyers have to keep in mind the key element applicable here: “expectation of profits predominantly from the efforts of others”.

In other words, if BMC token holders have rights to validate transactions in the BMC network, to perform certain other useful tasks for the benefit of the network, to act as individual investment advisors, and to generally actively participate in network operations and derive active income from their efforts, then there is no expectation of profits predominantly from the efforts of others (potential appreciation in the value of BMC tokens after issuance, due to secondary trading, does not matter).

White Paper addresses this issue:

  • Continuous Contributors will have the right to participate in “members-only” discussions regarding the platform strategy and development plan;
  • at least once a year or as needed, the Platform will initiate a vote among the Continuous Contributors to gather opinions of the contributing community on strategic development matters (the results of such voting won’t be binding but will be strongly considered by the operational management);
  • Continuous Contributors shall from time to time confirm the execution of their roles on the Platform to keep their status and depository wallets active (the process of the status confirmation will be specified for each role);
  • to register as a Continuous Contributor the holder of BMC tokens shall choose the role that she/he is willing to execute as a contributor to the Platform;
  • the list of available roles (platform promoters, investment analysts, legal advisors, public auditors, GR advisors, etc.) will be publicly available on the website and updated as needed to reflect the current needs of the Platform’s continuous development.

Based on the above White Paper wording, I am inclined to agree that BMC is very close to the notion of a digital token and is not likely to be deemed a security under applicable US laws. Nevertheless, it is necessary to keep in mind that

  • when interpreting the reach of the “securities” definition, US courts often start by observing that the purpose of the securities laws is to regulate investments, in whatever form and by whatever name,
  • since the list of available roles will be publicly available on the website and updated as needed it is still difficult to make a 100 % conclusion in the absence of full information.
  1. My other concern in this regard is voting rights of Continuous Contributors (“the results of such voting won’t be binding but will be strongly considered by the operational management”) and its correspondence with the existence of voting rights through the Howey test meaning that the instrument is less likely to be considered a security if:
  • the holder is provided with significant managerial control — the ability to participate in decisions that will affect the success of the enterprise;
  • the holder has the resources and expertise to make a meaningful contribution; and
  • the holder does, in fact, participate in management decisions.

The important issue here is how the non-binding voting (what does strong consideration of the voting by the operational management exactly mean?) will be viewed as significant managerial control and participation in management decisions. Thus, the roles of platform promoters, investment analysts, legal advisors, public auditors, GR advisors, etc. as well as their rights to participate, voting rights system and criteria for the compensation linked to the degree of participation (to be yet publicly available) shall closely meet the Howey test requirements in this regard.

Should these requirements will not be finally met, then the US market will not be available for this project and this fact will certainly diminish its value to some extent. However, there is a firm understanding of this risk by the founders since the US persons are excluded at the moment (as a precautionary move) and as a result of this awareness plan B exists:

  • When it comes to the US market, tokens of several first funds will be either prohibited for distribution in the US or will be sold only via licensed brokerage firms and only to authorized investors”;
  • So, even without the US, there is a huge market for the investment managers that will choose our platform. Our team has partners and makes deals in 9 countries including the US”.

Another risk associated with the above-mentioned reasoning – some disputes may arise regarding the level of contribution of the Continuous Contributors to the project and, accordingly, the amount of FTs to be transferred to various Continuous Contributors since the number of FTs to be transferred to the Continuous Contributors depends on 2 factors: the number of BMCs deposited in the wallets and actual contribution.

  1. My serious concern is the fact that US citizens are excluded from the participation in this project as precautionary move. It sounds inconsistently for me: if the founders are sure that BMC token is not a security token, have the relevant confirmation from their advisors as White Paper states and want to persuade the potential token buyers of this fact, then the US citizens should be granted access to the project. I understand that this is just a precautionary move but then a very negative consequence shows up: based on this fact the Exchanges may become extremely cautious and will take their precautionary move – will just refuse to list BMCs fearing the recognition of BMCs as securities under US laws.

To my opinion, this is a substantial risk and I would seriously consider participating in the project only if this limitation regarding US citizens will be removed.

III. Lack of some information

(Information needed / desirable for decision-making process: depends on personal risk evaluation level).

  1. Token Terms Conditions. Token Terms Conditions is a very important legal document which provides for the description of the relevant legal risks for the token holders (legally binding obligations, if any, towards them) and dispute resolution clause. This document usually shows up closer to the date of distribution and ought to be closely reviewed.

Note that it is very useful to print, save and confirm (by an attorney or notary) all documents regarding the ICO you participate from the relevant website.

Keep in mind that “Blackmoon Crypto does not guarantee, and accepts no legal liability whatsoever arising from or connected to, the accuracy, reliability, currency, or completeness of any material contained in this white paper”. I understand that this clause is a standard for many ICOs but it irritates a lot. Those who plan to invest their money prefer to see an accurate, reliable and complete information from the founders and not an attempt to avoid any responsibility for their own words. Taking into account that this information was created by the founders themselves (and not just derived from any outside source) I would highly recommend to use at least “bona fide” wording – it will show some respect to the potential token buyers.

  1. Approximate time frames regarding the publication of the role descriptions and voting rights system and criteria for the compensation linked to the degree of participation.
  2. Presale discounts: whether discounts exist depending on the amount of tokens to be purchased or not (sometimes this info is open to the public sometimes presale discounts are subject to private negotiations).
  3. Info regarding listing of BMCs: It is preferable to know that some negotiations with some well-known Exchanges are in process and whether these Exchanges tend to list BMCs or not. This is important since some Exchanges intend to exclude security tokens (and look like security tokens), other Exchanges intend to suspend services to users from the United States (due to the burden of compliance work) or Russia (due to US sanctions).

It is not necessary to list tokens immediately after distribution but it is important to know the perspectives due to the current problems.

  1. Info on Blackmoon Crypto Pte. LTD, Singapore (“the Company”) which controls the contract and the address to which gathered ether will be sent: confirmation of registration in Singapore to be published on the website.
  2. Info on controlling beneficiaries: special tax laws will apply to the controlling beneficiaries depending on their nationalities.

For instance, should the Company is controlled by Russian tax residents, an obligation arises for such persons to declare foreign company’s income to pay 13 % personal tax. This obligation arises even despite the fact that beneficiary has not personally received money from his foreign company.

Structuring ICO project in a foreign jurisdiction by Russian founders may result in unintentionally obtaining by such foreign company a status of the Russian tax resident.           Therefore, such foreign company will acquire obligation to pay income tax in Russia (20%).

The above-mentioned tax implications may have a very serious negative impact on the Company.

Thus, it would be good to hear that the founders are fully aware of such tax risks and Deloitte (as a partner of the project) duly addressed this issue and confirmed the tax structure of the project to comply with various tax requirements that may arise in this connection. 7. Info on tax regime in Singapore regarding taxation of the proceeds from distribution of tokens. Tax regime in Singapore is quite severe and may have an adverse effect on the Blackmoon Crypto Pte. LTD. For instance, the Company may be required to pay tax on the proceeds received as a result of the token offering.

7. Lock up arrangements: how “lock ups” for Company’s reserve (30%) and for team and advisors (20%) will be guaranteed if there is no escrow agreement (access to the wallet for the limited number of team members is not an escrow).

  1. Info on KYC and AML procedures: whether implemented regarding this project or not.
  2. Change of control in the Company: how the token buyers’ interests will be preserved in case of change of control in the Company (it may happen for whatever reason).

This document is for information and illustrative purposes only. It is not, and should not be regarded as “investment advice” or as a “recommendation” regarding a course of action, including without limitation as those terms are used in any applicable law or regulation.  No advisory at all.

Read more:  What an ICO investor should be aware of buying security tokens