Legal Nodes Helps Investors Get Back $1,5 million in a Cross-Border ETH Investment Refund

Legal Nodes Helps Investors Get Back $1,5 million in a Cross-Border ETH Investment Refund

In recent months, Legal Nodes experts have been working hard on the return of blockchain funds case for a group of Chinese blockchain investors for a total amount of approx. 1,5 million U.S. dollars. Having faced multiple legal issues, we have decided to share our experience with you, which might help you navigate similar legal situations in the future.

Brief Fact Summary

Five Chinese investors have entered into Simple Agreement for Future Tokens (the SAFTs) with “X” company, purchasing future rights to the units of tokens from “X”, which have not been distributed after a whole year from signing SAFTs. After multiple requests to “X” to clarify the situation, investors have been notified that it is currently engaged in a discussion with the U.S. Securities and Exchange Commission (the SEC) about certain issues with the Private Placement conducted by the company.

After a lengthy pause in communication between the company, the SEC and investors, the investors have turned to experts at Legal Nodes, who have managed to find out that there has been a substantial list of breaches of the U.S. securities legislation during the Private Placement. As a result, “X” has issued the Return of Funds Notice.

Return of Funds Procedure

Return of funds procedure is a rather simple process that comprises the following steps:

1. The company issues a Return of Funds Notice that sets forth the refund procedure terms and approximate timings;
2. Finding a lawyer who shall oversee your refund procedure;
3. Negotiations with the company on the matter of disagreement with some of the terms;
4. Filling and filing the Return of Funds Form;
5. Sending the Form and supplementary documents (ID) to the company;
6. The company sends back the funds.

Legal Issues

Although the procedure itself is quite simple, there are a few peculiarities from a legal standpoint that are important to remember.

First of all, if a company has initiated the return of funds voluntarily (meaning, it was not compelled to do so by the SEC or other governmental authority), it does not mean that the procedure rules will be as investor-oriented as of Paragon Coin and Airfox, meaning it might not be obliged to return investments in cryptocurrency with adjustments to the exchange rate to fiat, as it will be free to set forth its own refund terms.

It is important to also take into consideration and communicate to your client that the company that is carrying out refunds will only refund the funds that linger on their accounts/smart contracts, not the initial investments amounts. Thereby, it is very important to carefully analyze the Refund Notices for all potential deductions. 

Secondly, it is very important to carefully read through the text of the Return of Funds Notice. It is vital not to miss the timeframe in which you have to send the Form, attach all necessary documents and fill the Form correctly. Even more so – if refunds are to be carried out in cryptocurrencies: in this situation, all KYC-related documents have to be filled with caution, as the refund will inevitably be done to the cryptocurrency wallet address of an investment.

Please note, the submission of such Forms would generally be associated with a waiver to the right to any further complaints.

Investing via SAFTs: Handful Tips

If you are thinking of investing in the company by the way of entering into a SAFT, we`ve got some more “lifehacks” for you.

If you know that the company is planning to carry out a sale of security tokens to the U.S. accredited investors, it is likely it will be doing so under Regulation D, meaning that it will be obliged to file Form D in the EDGAR system within 15 days of the first offering. This can be easily checked on the SEC`s website.

Speaking of compliance, do not forget to check if the company carries out investors` verification. A negative answer to this question should definitely make you cautious, as it might lead to serious legal issues later.

In addition, remember to carefully read through the entire SAFT and a Private Placement Memorandum (PPM), especially the parts with jurisdictions where the sale of tokens is prohibited. If you are a citizen of such a country and are about to enter into the SAFT – proceed with caution. 

Another useful tip is that after investing you can actually monitor the company`s transaction history. “Any operation that affects a cryptographic asset can be spotted by browsing through a history of transactions inside the network. Even when some smart contract calls another smart contract - these operations (“internal transactions”) are still the result of some normal transactions and thus are easily traceable as well”, said Max Maliuk, CTO of Legal Nodes.

Cryptocurrency-related dispute resolutions are probably among those with the most pitfalls for lawyers, as they are often held in an environment of legal uncertainty due to lack of their clear regulation.

“For investors, it has been a long and complicated process of time-consuming communications and document preparation. We have managed to return the substantial amount of the invested ETH, although some of the procedures are not over yet. We are very thankful to Legal Nodes for their professional and competent legal support”, said Dmitri Prokopenko, CMO at MEET.ONE, who has managed the communication between Legal Nodes and Chinese investors, represented by him.

Legal Nodes Team is beyond grateful for trusting us with this exciting legal challenge and hopes our experience with the return of funds of 1,5 million U.S. dollars might be a good informative case for everyone else who faces similar issues.

“When choosing between signing a refund form and going straight to the court of law, we would advise carefully analyzing the legality of the investment procedures and consult with relevant governmental authorities. This will surely help you evaluate time and money resources required to return the funds with either of the scenarios and make the most efficient decision”, said Nestor Dubnevych, Co-Founder of Legal Nodes.

Previously Legal Nodes has helped an AI startup to prepare for due diligence in a 3,75-million acquisition deal.

Disclaimer: the information in this article is provided for informational purposes only. You should not construe any such information as legal, tax, investment, trading, financial, or other advice.

Legal Nodes Team