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8 Legal Challenges of Blockchain-Based Fundraising for Your NZ Start Up 

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Blockchain technology has changed the face of fundraising for start-ups. This is because the blockchain offers innovative ways to raise funds. However, you must understand the legalities regarding blockchain-based fundraising. As a startup owner, you must understand the unique challenges that accompany blockchain-based fundraising. This article will take you through eight of these legal challenges. 

1. Regulatory Uncertainty 

Regulatory uncertainty is one of the main challenges your start-up will face working with blockchain-based fundraising. The legal framework surrounding blockchain-related tools is new and, therefore, still evolving. This includes:

As such, you and your startup are likely to encounter ambiguity regarding the applicable regulations. In turn, your startup is likely to face compliance risks. 

2. Compliance With Securities Law 

Your NZ start-up also needs to comply with NZ securities law when conducting blockchain-based fundraising. The relevant securities law in NZ is the Financial Markets Conduct Act. You must carefully evaluate if your start-up’s offerings are classified as securities. If so, you need to comply with the relevant regulatory requirements. For example, this might include:

  • disclosure obligations; 
  • investor protections; or
  • registration. 

If you fail to comply with the relevant securities laws, you may face major consequences. This potentially includes:

  • hefty fines; 
  • reputational damage; or
  • other legal penalties.

The complexities of regulatory compliance are such that New Zealand’s start-ups utilising the blockchain for fundraising must seek legal advice.

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3. Anti-Money Laundering Measures 

Your start-up, should it conduct blockchain-based fundraising activities, will likely incur obligations under New Zealand’s anti-money laundering laws. If your start-up conducts token sales, your business must implement procedures to verify the identity of your investors. The purpose behind this obligation is to ensure your business is not inadvertently supporting money laundering or funding terrorist activities.

Such procedures usually involve thorough ‘Know Your Customer’ checks. For example, you may need to collect government-issued identification documents and other information. In collecting this information, you are looking to determine the legitimacy of your investors’ funds and source of wealth. 

If you fail to comply with these laws, this can result in significant legal and financial repercussions for your start-up. This might include criminal charges.

Ultimately, anti-money laundering compliance should be treated as an integral part of your start-up’s regulatory obligations when utilising blockchain-based funding.  

4. Tax Implications

Transactions involving cryptocurrencies and other tokens require unique tax treatment. This represents another legal challenge for your start-up in utilising the blockchain for capital raising. New Zealand’s Inland Revenue Department (IRD) has published guidance on taxing cryptocurrencies. This includes guidance on:

  • income tax; 
  • Goods and Services Tax (GST); and 
  • Fringe Benefit Tax (FBT). 

It is essential that you understand the tax implications of your start-up’s blockchain-based fundraising activities. Additionally, it is imperative that you comply with the appropriate tax laws. Again, advice from a legal or taxation professional is an important component of this.

5. Consumer Protection

Consumer protection is a major concern in blockchain-based fundraising. This is particularly the case as it relates to the risk of fraud and other scans. As such, your start-up must take measures to educate your investors about the risks associated with token sales. Your startup must also ensure transparency in your fundraising activities to protect your investors’ interests. In a worst-case scenario, your start-up must be prepared to take accountability for any issues that arise.

6. Intellectual Property Protection

Further complex legal issues arise regarding intellectual property rights and data privacy in a blockchain context. As a start-up owner, you need to consider the intellectual property related to blockchain-based solutions. In turn, you need to ensure your blockchain-based fundraising activities comply with data privacy laws. For example, the Privacy Act has specific requirements to protect users’ personal information. 

7. Contract Risks

As a digital asset, with the blockchain comes smart contracts. Smart contracts are self-executing contracts where the terms of the agreement are written into code directly. These smart contracts come with risks, especially due to:

  • coding errors; 
  • vulnerabilities; and 
  • enforceability issues. 

Your start-up must carefully consider these smart contracts to reduce the likelihood of any such risks materialising. As a start-up owner, you need to ensure your smart contract agreements are enforceable and comply with the relevant laws.

8. Jurisdictional Issues

A key component of blockchain technology is that it operates in a decentralised environment. As such, your start-up will likely face jurisdictional challenges when conducting token sales.

Your start-up needs to consider the legal implications of such transactions. This includes cross-border differences in regulatory frameworks and tax laws. As a start-up owner, you are best advised to seek legal advice to navigate these jurisdictional challenges effectively.

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Key Takeaways 

The blockchain offers innovative ways to raise funds. However, understanding the legalities of blockchain-based fundraising presents unique challenges for start-ups. Some key legal challenges that you and your senior team should consider include:

  • regulatory uncertainty;
  • compliance with securities law;
  • anti-money laundering measures;
  • tax implications;
  • consumer protection
  • intellectual property protection;
  • contract risks; and
  • jurisdictional issues.

If you need help understanding and addressing the challenges start-ups face when it comes to blockchain-based fundraising, contact our experienced start-up lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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Emily Young

Emily Young

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