WePower: legal overview
WePower is a blockchain-based green energy trading platform. It enables green energy project financing as well as green energy investment and trade at scale. To finance roll out of WePower platform to its first markets, WePower organizes its token sale. WePower will issue WPR tokens to every early contributor.
Since WePower is a socially responsible business, the team has been structuring its token sale very carefully. To achieve the best results, WePower has been working with the best legal specialists in Lithuania and Gibraltar, where it has established its companies. WePower has obtained an official written position from the financial supervisory authority in the home country and a legal opinion from the financial law advisors, who closely work with the regulator, in the host country that WePower token model does not fall under securities regulation.
This will be a very technical article for those who want to get deeper understanding about token qualification.
WePower tokens (WPR)
The core service of WePower is to allow renewable energy producers to finance the set up cost of renewable energy sources by selling energy to be produced in the future. The producer will be obliged to donate part of the energy to be created in the future to the community — WPR token holders.
This energy will be donated by the producers to the WePower token holders based on a concluded smart contract. As a proof of the donated energy and concluded smart contract, the WePower token holders will receive internal energy tokens representing the ownership of specific donated amount of energy. With the received energy that was donated by the producer the WePower token holder can do whatever he/she wants:
1. use it for the own benefit (if WePower is working in a specific market);
2. do nothing (produced green energy would just be transferred to the energy grid and sold under the market price);
3. sell it to any other person that needs green energy.
WPR does not constitute either shares in a company or securities equivalent to shares in a company as they do not confer on the token holder any form of equity interest in, or any right to future participation in the equity of Wepower.
Although WPR holders are entitled to claim energy tokens donated by energy producers, there is no guarantee that WePower will be successful and no guarantee that energy generation projects will list their energy production on the platform. Additionally, donated energy tokens are not distributed equally to WPR token holders in the way that a distribution in respect of shares in a company would be — WePower team will not get part of donated energy.
Furthermore, WPR do not confer any (i) voting rights or (ii) rights to repayment of the contribution. The absence of these features, together with the above analysis support the notion that WPR are unlikely to constitute shares in a company or some other security equivalent to shares in a company.
Similarly, WPR do not constitute a bond or other form of securitised debt as they do not create, nor do they represent, any form of indebtedness which entitles the token holder to repayment of a specified or calculable amount by WePower. There can be no claim made on WePower in relation to payment of energy tokens, reimbursement of contributions or any other type of claim which may constitute a debt owing from WePower to the token holder. The functionality of WPR is exclusively limited to claim accumulated energy tokens which have been donated by energy producers.
WPR do not confer on the token holder “the right to acquire any such transferable securities”, either by subscription or exchange, nor do they give rise to a cash settlement. Although there is an expectation that WPR will entitle holders to claim tokenised energy in the form of energy tokens, there are no assurances that such an expectation will ever materialise as the availability of donated energy tokens is dependent on various unknown future events including (without limitation): the successful development, deployment and operation of the WePower platform and the uptake by energy producers to list their projects on the platform.
Although a secondary market or exchange could develop for trading WPR, any such secondary market or exchange would not be run or operated by WePower. Given the position set out in this part, we and the regulators consider WPR to be outside the scope of the definition of “securities” set out in the applicable laws.
Instruments entitling to shares and securities
WPR do not confer on their holders any right to future participation in the equity of WePower. Similarly, WPR do not entitle the token holder to subscribe for any type of instrument which creates or acknowledges indebtedness.
Although WPR can be used to claim rewards on the WePower platform, this feature does not enable or facilitate trading activity in respect of shares, debentures or securities. WPR do not confer any rights to subscribe for an underlying investment product as there is no guarantee that any rewards mechanism will be available for WPR holders, and consequently, there is a risk that WPR holders may not be able to claim any underlying product, let alone an “investment product”.
WPR holders are not able to exercise a right to purchase or sell an underlying asset. WPR confer an expectation on holders that they will be able to claim an underlying asset (i.e. donated renewable energy) but it is not known if or when such claim may be made or exercised. The availability, timing, quantity and supply of donated energy tokens that can be claimed by WPR holders are all uncertain and may never materialise as they depend on unpredictable future events including (without limitation) the successful development, deployment and operation of the WePower platform, the adoption of the WePower platform by developers of renewable energy projects and the successful build and operation of projects listed on the platform. On that basis, it is unlikely that WPR could be regarded as conferring on the token holder an “option to acquire or dispose of an investment. It naturally follows therefore that it WPR will not be caught by limb of the definition of “option”.
While it could potentially be argued that WPR are a form of currency (i.e. a form of virtual currency or cryptocurrency), their use is limited to a single platform that will be built and will operate on distributed ledger technology. There is no reference to crypto-currencies and WPR are not legal tender in any particular country or territory.
WPR to be issued under the token launch represent a form of digitally stored property. However, the mere fact that WePower performance of delivery obligations may be deferred to a future date will not automatically imply that there is a futures contract. The reason for the deferral is to enable WePower to carry out appropriate technical and verification checks in respect of the activities related to the token launch. The deferred delivery does not relate to any price lock-in, risk hedging or other investment strategy that is associated with trading in futures contracts.
Participants in the token launch commit to purchase WPR at a specified price and will make a contribution on that basis. The contribution is made contemporaneously when the participant commits to acquiring WPR (i.e. at the time that the contribution agreement is entered into), as opposed to being made on a future date that is linked to the delivery obligation (as would typically be the case under a futures contract).
Additionally, WPR creates the potential ability to claim rewards on the WePower platform at an unspecified future date. There could therefore be an argument that WPR is in itself a futures contract for the delivery of energy. However, although rewards (in the form of energy tokens) constitute a commodity, the contract made between WePower and the token holder does not relate to the delivery of energy tokens. The contract between WePower and contributor for the purchase of WPR creates an expectation that energy producers will make rewards available on the platform to be claimed by WPR token holders at some unspecified future time and in an unknown quantity. There is no pre-agreed delivery date, price or quantity relating to the donated energy tokens and accordingly, there is a strong rationale for arguing that the purchase of WPR should not be regarded as futures contract for the sale/purchase of energy.
Furthermore, the energy tokens that will comprise the reward pool shall be donated by developers of renewable energy projects (if the platform is successfully developed and deployed and developers register their projects thereon). Therefore, there is a compelling argument that at the time of token launch, no rights or obligations are created, as between the parties do the WPR contribution agreement, to buy or sell energy.
Financial Instruments: transferable securities and derivatives
It appears unlikely that WPR would be caught by the definition of “transferable securities”. WPR are not negotiable on the capital market. Although a secondary market or exchange could develop for trading WPR in return for other crypto-currencies or fiat currencies, the creation or operation of any such secondary market or exchange would not involve WePower.
Additionally, WPR do not constitute shares or another form of equity interest in any entity. Therefore, WPR cannot be said to represent either “shares” or “other securities equivalent to shares”. Similarly, WPR do not represent bonds or another form of securitised debt (including depositary receipts) since WPR are not an acknowledgement of indebtedness in respect of which the token holder is entitled to repayment. Finally, WPR do not carry any rights of acquisition or disposal of a transferable security, nor can they give rise to a cash settlement by reference to external factors. The only benefits conferred on a tokenholder at the time of the token launch would be the expectation that a functionality in WPR will materialise for the consumption of donated energy tokens within a closed system.
Given that WPR (i) cannot be settled in cash; (ii) will not be tradable on a regulated market and/or or an MTF; and (iii) do not involve the transfer of credit risk, we can eliminate the possibility of WPR falling within the scope such derivative contracts. We note the conclusions reached by the home Financial Supervision Authority in its letter dated 30 August 2017, where it is stated:
“… if there is a real possibility that after finalising the ICO the renewable energy producers would not donate any green energy and/or tokens would not assure their holders’ right to receive a fixed amount of green energy and such investment might thus be compared to donation, this information should be clearly and prominently disclosed to investors. In case all above-mentioned requirements are met, including proper and clear, not misleading disclosure of information to the investors, tokens shall not be considered as financial instruments under the Law on Markets in Financial Instruments (LFMI) and ICO of such tokens would not fall under the scope of the LMFI and the Law on Securities, meaning that neither authorisation nor prospectus for carrying out ICO would be required”.
Collective Investment Scheme and AIF
It should be quite clear that the primary purpose of the token launch is not to generate a pooled return. For there to be a pooled return it must be the return generated by the pooled risk of acquiring, holding or selling investment assets. In this case, the token launch is not a mechanism for pooling risk arising from the acquisition, holding or sale of investment assets by WePower. It will not apply the proceeds of the token launch for the purposes of investing in one or more asset classes; the proceeds will be applied towards software development and ongoing business operating costs. One clear example of why rewards are not ‘pooled’ is that the only rewards available to token holders are in respect of renewable energy that is donated to the platform. It is only the token holders who participate in the rewards scheme that will be rewarded for submitting a claim.
In addition to this, there is no defined mechanism for winding up or distribution of WePower’s assets, or for generating any form of return from the WePower at any particular time. Moreover, there is no mechanism for the redemption of WPR for Ether, Bitcoin, Dash or otherwise. These are further hallmarks that differentiate the token sale from any collective investment scheme or undertaking. Similarly, there is no gain that may be achieved by any token holder from the realization of any underlying asset or holding by WePower.
WePower platform does not contain any of the key features of a collective investment scheme other than in respect of the pooling of the contributions (but not the returns). This is of course a hallmark of any company; whether issuing tokens that may be considered to be un-diluted ‘capital’ or issuing shares in respect of share capital of any business.
On the basis that the token launch will not constitute a collective investment undertaking, it will also, by definition, fall outside of the scope of the definition of an AIF. It should be further noted that for the purposes of the definition of an AIF, the token launch will not, in our view, meet the relevant test of constituting a scheme which raises capital with a view to investing it in accordance with a defined investment policy for the benefit of investors.
WePower will not be raising capital in the typical interpretation of the term, it is also important to note that there is no ‘defined investment policy’ which is required for the definition of an AIF to be met. For the avoidance of doubt, the Project Documentation published by WePower which establishes its commercial purpose and breaks down how the token sale proceeds will be applied on development activities, should not be interpreted as a defined investment policy. In our view a defined investment policy must be specific enough to create an obligation to an investor that is legally enforceable by them, to follow such a policy, and all changes to that policy. In addition, we would typically expect to see specific investment guidelines that reference criteria that may relate to a particular strategy, category of asset, to conform to certain restrictions, holdings, risks or other relevant criteria.
Internal Energy Tokens
Internal energy tokens circulating within WePower platform and used to evidence the sale/purchase and ownership of energy to be produced in the future, are not considered to be financial derivatives. These tokens and underlying smart contracts represent power-purchase agreements, which are moved to the digital medium. These agreements evidence how much energy must be provided to a particular buyer who has already paid the energy price. Therefore, the objective of sale/purchase is the energy that will be settled physically. Following such technicality, tokens are not financial derivatives and the platform itself does not fall under financial law regulation as a trading facility.
Definition of financial instruments in LMFI corresponds to the definition set out in the Section C of Annex I to MiFID and refers to the EC Regulation 1287/2006. Paragraph 21 of recitals of the EC Regulation 1287/2006 provides that a derivative contract should only be considered a financial instrument under Section C(7) of Annex I of the MiFID if it relates to a commodity and meets the criteria of a derivative contract having the characteristics of other derivative financial instruments and not being for commercial purposes. Moreover, in accordance with the EC Regulation 1287/2006, a derivative contract as indicated in Section C(10) of Annex I of the MiFID should only be regarded as a financial instrument if it relates to a certain underlying financial instrument and has the characteristics of other derivative financial instruments.
If the above requirements are not met, the respective derivatives contracts should not qualify as financial instruments and should not fall under the regulation of the MiFI Law (e.g. transactions whereunder the energy, emission allowances, bullion as a commodity or other commodities are delivered in the future in exchange for the consideration paid upon the delivery, i.e. the transactions on physical settlement of underlying asset, which do not meet the requirements specified in EC Regulation 1287/2006 as specified above, are not financial instruments).
Taking above into account, WePower tokens issued during the ICO and internal tokens circulating within WePower platform are not financial instruments. This was clarified with the European regulator and top class law firms.
1. WePower is not required to share its profits with the WePower token holders, it does not give any control rights to the token holders either.
2. WePower tokens do not provide any intellectual property rights and/or any right to get royalties from WePower.
3. Reward for the contribution to the WePower token holders is donated green energy, which will be produced in the future. The energy is donated directly to the token holders. WePower does not have any rights to get part of the energy donated to the contributors.
4. Reward depends on WePower expansion and ability to engage renewable energy producers to use the platform.
5. Energy is a physically settled asset which can be transferable. Once the energy is donated, a smart contract evidences donation of the energy that will be created in the future. When the energy is created, it is physically settled with the holder of this smart contract (i.e. energy is provided to the energy grid). In other words, smart contract represents power purchase agreement.
Looking at WePower token model, it can be considered to be a revolutionary token model:
It is structured as a reward based crowdfunding model.
2. It grows in real value based on WePower expansion and ability to engage renewable energy producers.
3. Token holders get a reward — green energy, which they can either use or sell.
The above legal analysis is based on the laws and court practice applicable in Europe. Legal analysis was prepared together with WePower legal counsels and taking into account obtained written confirmation from the European Regulator that WePower token model does not fall under securities laws. Interpretation of the laws might differ in different continents.