Disclaimer: This blog post is for general information purposes only and does not constitute legal, tax, or investment advice. Always consult qualified professionals regarding your specific situation.
The rise of blockchain-based startups and the advent of various digital assets have ushered in new ways for companies to raise funds and build communities. Among these emerging frameworks, the Token Purchase Agreement (TPA) stands out as a pivotal instrument for both issuers and investors. From the perspective of a founder seeking financing and a purchaser looking for well-structured investments, the TPA acts as a contract that sets forth the critical terms of a future token sale. Because the underlying laws that govern tokens can be complex, understanding the nuances of a TPA is essential for navigating the regulatory, financial, and operational aspects of a token-based venture.
This guide offers a comprehensive look at TPAs—what they are, how they work, and why they matter. We’ll cover key legal elements (especially under U.S. securities law), compliance requirements (like know-your-customer or KYC protocols), and strategic insights for founders and investors alike. Think of this article as a friendly conversation that breaks down complicated contractual language into plain, accessible terms. Let’s dive in.
1. What Is a Token Purchase Agreement?
At its core, a Token Purchase Agreement is a legal contract between the issuing entity—often referred to as a “Foundation,” “Company,” or “Project”—and an investor (sometimes called a “Purchaser”). The agreement specifies:
- The number of tokens being sold.
- The price per token or the formula used to derive the price.
- The rights and restrictions associated with holding or transferring those tokens.
- The delivery schedule of tokens—often a lock-up period or vesting schedule applies.
- Any compliance obligations, such as only selling to accredited investors under Regulation D.
Unlike direct token sales that might take place publicly via an Initial Coin Offering (ICO) or a Token Generation Event (TGE), a TPA is typically a private contract. Because the TPA often involves an exemption from registration (for example, a Regulation D exemption under the Securities Act of 1933 in the U.S.), it is usually targeted at “accredited investors” (i.e., sophisticated purchasers who meet certain income, net worth, or other criteria).
The TPA, as we discuss here, does not publicly disclose all the business details of a project in the same way a prospectus or public filing might. Instead, it focuses on essential terms of the sale, disclaimers about regulatory risks, and responsibilities or obligations of each party. This structure helps a token issuer raise capital while ensuring compliance with relevant securities laws.
2. Why Use a TPA? Key Advantages
Before we break down the actual terms, you might wonder: Why not just issue tokens outright? Below are a few reasons why founders turn to TPAs:
- Regulatory Compliance: The TPA ensures that both the issuer and the investor remain compliant with U.S. securities laws (like Regulation D) or similar statutes in other jurisdictions. This helps reduce legal exposure if the tokens are later deemed securities.
- Structured Fundraising: TPAs often allow you to run a phased approach to raising capital. You can issue tokens in multiple closings or separate tranches, as laid out in standardized agreements.
- Investment Clarity: The TPA clarifies the timing of token delivery, total supply of tokens for that round, and any lock-ups or vesting schedules. This is beneficial for investors who want reassurance about how tokens will come into circulation.
- Protection of Proprietary Information: A TPA may reduce the risk of publicly disclosing confidential business data. Instead, relevant details are shared only with qualified investors who agree to maintain confidentiality.
As a founder, you get a straightforward method to secure funding without necessarily performing an immediate public token release. As an investor, you obtain clarity on the terms of your purchase and a formal commitment about future token allocation.
3. Common Elements of a TPA
Though Token Purchase Agreements can vary from one project to the next, certain provisions and sections tend to appear consistently. Let’s break down these common areas in more detail.
3.1 Purchase Mechanics
This section covers how many tokens you’re buying and at what price. For instance, the agreement might specify a token price in U.S. dollars or stablecoins (e.g., USDC). Alternatively, it might base the final price on a formula referencing an exchange rate at the time of the transaction. In general, the TPA will also explain how an investor sends funds to the project, whether via wire transfer, credit card, or a specific type of cryptocurrency.
3.2 Delivery of Tokens
Few issues are as important to investors as when they’ll actually receive their tokens. Most TPAs set out a delivery schedule, which might be immediate upon closing, or after a lock-up period. Some tokens could be vested over months or even years, reflecting the issuer’s desire to foster a stable token economy. Others might have a one-year restriction, consistent with Rule 144 holding periods in the U.S.
3.3 Lock-Up Periods and Restricted Transfers
A TPA usually contains a lock-up, meaning you cannot freely sell or transfer tokens for a specified time (e.g., 12 months). This restriction helps preserve market stability and ensures that large blocks of tokens don’t flood the market prematurely. After the lock-up, you may still need to follow securities law requirements before transferring or reselling the token.
3.4 Warranties and Risk Factors
Often, the TPA features disclaimers that highlight the risky nature of blockchain assets. These disclaimers let investors know that digital assets can be highly volatile, that the technology may fail, or that regulatory action could impact the token’s viability. Generally, the TPA clarifies that the tokens are being sold on an “as is” basis, and sets out that the issuer is not promising specific returns, utility, or future profitability.
3.5 Compliance and KYC
A TPA also defines how an issuer ensures that all investors have passed anti-money-laundering (AML) and know-your-customer (KYC) checks. Investors must typically submit identification documents, business information, or other compliance materials. If someone fails these checks, or if an issuer finds an investor is in a jurisdiction that restricts or prohibits participating in token offerings, the TPA will usually permit the issuer to cancel that purchase.
3.6 Dispute Resolution
Should a conflict arise, the TPA normally includes an arbitration clause or a statement that disputes will be settled under a particular jurisdiction’s law. This method prevents protracted legal battles in court and provides clarity on where and how disputes are resolved. Arbitration can be more private and faster than going to court, which benefits both founders and investors.
4. Accredited Investor Requirements
Under U.S. law, issuers of tokens often rely on a Regulation D exemption when selling digital assets they consider to be securities. Regulation D requires that these sales be made only to “accredited investors.” That concept includes:
- Individuals with an income over $200,000 (or $300,000 joint income if married) in each of the last two years and an expectation of the same for the current year.
- Individuals with a net worth over $1 million (excluding primary residence).
- Entities such as banks, insurance companies, business development companies, or trusts with over $5 million in assets, under certain conditions.
- Certain professional certifications or designations recognized by the SEC.
For founders, verifying accredited status is critical. You may use third-party verification services or require self-attestation with backup documents. A TPA might note that if it’s discovered an investor isn’t accredited or has otherwise violated securities laws, the purchase can be voided.
This accreditation step is both a compliance measure and a risk management tool. By ensuring your investors meet these legal thresholds, you mitigate potential regulatory blowback and help confirm that participants understand the inherent risks in early-stage or experimental technology ventures.
5. Payment Processes in a TPA
With a TPA, investors frequently pay the agreed-upon purchase amount in stablecoins like USDC, or in fiat currency (U.S. dollars, for instance). The agreement might also specify acceptance of other cryptocurrencies such as ETH, but many prefer USDC for its simpler 1:1 peg to the dollar.
However, because token values can fluctuate rapidly, the TPA will often define an “Applicable Exchange Rate” to lock in the USD price. If you pay with cryptocurrency, the TPA might provide for a certain window of time to ensure exchange rate stability. In some setups, an external payment processor or brokerage service is used to facilitate the purchase, particularly if the issuer does not want direct responsibility for storing or converting the crypto itself.
Should a payment fail or be deemed suspicious, the TPA typically requires the issuer to reject the transaction and, if necessary, issue a refund, minus fees. This process is often subject to gas costs for on-chain transactions. The concept of “refund in stablecoins” appears in many TPAs—this ensures the final returned amount mirrors the original dollar value, independent of how the cryptocurrency fluctuated in the interim.
6. Token Delivery & Lock-Ups
6.1 Delivery Mechanics
Once an investor’s funds clear, the TPA typically stipulates the timeline for the issuer to deliver tokens to a wallet address that the investor provides. Some arrangements hold tokens in escrow until certain conditions are met, such as specific deadlines or the completion of the project’s network or platform. Others deliver tokens immediately but mark them as restricted for a set time.
6.2 Transfer Restrictions and Lock-Up Schedules
A standard TPA approach is to put tokens into an investor’s wallet but prevent any outward transfers until the lock-up period expires. Technically, the project might implement “smart contract lock-ups” or “tagging” that disables certain blockchain addresses from transferring tokens. Sometimes, physical or off-chain escrow arrangements exist. The objective is the same: stabilize the early-stage token economy and adhere to securities law requirements.
During this restricted period, an investor generally can’t sell, stake, or transfer tokens. If staking is allowed, the TPA might define whether restricted tokens can still earn staking rewards. This is an important consideration for investors who are factoring potential staking income into their strategies.
7. Anti-Money Laundering (AML) and KYC
Virtually every TPA includes measures to comply with AML and KYC laws. The agreement clarifies that investors must submit whatever documents or information is required by the issuer or its service providers. This could be as simple as uploading a passport or as detailed as providing corporate registration records, depending on whether the investor is an individual or entity.
Founders must pay attention to these details: Failure to comply with AML/KYC requirements can cause major legal and reputational harm. If a purchase is flagged as suspicious, the TPA empowers the issuer to refuse or revoke that investor’s subscription. The same is true if the investor is found to be from a restricted jurisdiction or appears on sanctioned lists.
8. Potential Risks & Important Disclaimers
All investments in tokens carry risk, and a good TPA provides disclaimers that highlight these dangers. While disclaimers can vary, here are some risk factors that typically appear:
- Regulatory Risk: Regulators may classify tokens as securities, commodities, or entirely banned in certain jurisdictions.
- Volatility: Digital assets are famous for price swings, and your purchased tokens may lose significant value—or skyrocket unpredictably.
- Technology Risk: Smart contract bugs, network attacks, or other forms of technological failures may result in partial or total loss of tokens.
- Liquidity Risk: There’s no guarantee of a secondary market for resale. Tokens can remain illiquid indefinitely.
- Legal and Tax Uncertainty: Laws on digital assets are evolving, and tax implications vary widely from one jurisdiction to another.
The TPA also typically includes explicit language stating that the tokens are offered “as is”, without guarantees of future value, functionality, or voting rights. This ensures that buyers cannot claim they were “promised” certain features if the project roadmap changes or if tokens do not launch as planned.
9. Dispute Resolution & Governing Law
Even well-intentioned parties can end up in conflict. Most TPAs specify the governing law (for instance, Swiss law, Delaware law, or another jurisdiction) and the method of dispute resolution (often arbitration). This clarity can help all parties avoid expensive, confusing multi-jurisdictional legal proceedings.
In many cases, a TPA also includes a “Class Action Waiver,” effectively restricting parties from joining group litigation. While this may speed up dispute resolution, it’s essential for investors to recognize how it impacts their legal remedies should significant project-wide issues arise.
10. Special Considerations for Founders
For founders drafting or negotiating a TPA, here are a few strategic considerations:
- Consistency and Transparency: If you plan multiple token sales, keep your TPA terms consistent across closings. Large discrepancies can lead to conflicts among investors.
- Jurisdictional Strategy: Decide early which jurisdictions you will (and won’t) accept investments from. Some places may have stringent securities regulations that complicate your sale. Outline these in your TPA’s “Disqualified Jurisdictions.”
- Tokenomics Alignment: Make sure the lock-up terms and vesting schedules in your TPA align with your overall tokenomics. If your marketing materials promise decentralized governance or open markets, an overly restrictive TPA might undermine those goals.
- KYC Infrastructure: Use robust third-party services or have a well-documented in-house process to handle investor verification. Lack of adequate AML/KYC checks can unravel your project later.
- Advisory & Legal Costs: Budget for legal opinions and ongoing compliance monitoring. A TPA is not a one-and-done solution; you’ll likely need updates as regulations evolve.
11. Special Considerations for Investors
If you’re an investor, here’s a short checklist before committing capital:
- Verify the Project’s Compliance: Has this issuer consulted reputable legal counsel? Do they have a track record of abiding by securities laws?
- Understand Your Lock-Up: If you need liquidity soon, a TPA with a one-year or multi-year restriction can be problematic.
- Check Accreditation Requirements: Confirm you qualify as an accredited investor, if required. The issuer may ask for proof at any point.
- Assess the Token’s Utility: Is this token purely speculative, or does it provide some form of network utility, governance, or access? This can significantly impact its long-term value.
- Run a Risk Analysis: Evaluate how comfortable you are with potential losses. Early-stage token projects are high risk.
- Research Jurisdictional Issues: Are you located in or sending funds from a restricted area? Are there local laws that might prohibit the purchase?
Keep in mind that you generally can’t rely on standard investor protections found in publicly listed equities. If something goes wrong, you may have limited legal recourse, especially given arbitration clauses and class action waivers common in these agreements.
12. Common Misconceptions
12.1 TPAs Automatically Guarantee Future Value
Not true. A TPA isn’t an IOU for guaranteed profits. It merely lays out the mechanics for acquiring tokens, with disclaimers that the value might fluctuate—or vanish altogether—based on market and regulatory forces.
12.2 Founders Don’t Need Legal Advice
Given the rapidly shifting landscape of securities and commodities regulation, failing to consult knowledgeable lawyers and compliance professionals can cause irreparable harm. A TPA must be drafted or reviewed by experienced counsel to ensure you’re fully compliant with local, state, and federal requirements.
12.3 KYC/AML Are Optional
Most jurisdictions treat anti-money laundering regulations seriously. Any omission or neglect in verifying investor identity can subject an issuer to potential fines or even criminal liability. Far from optional, KYC is now standard in most structured token sales.
13. Closing Thoughts
The popularity of Token Purchase Agreements reflects a broader trend toward more standardized, regulated frameworks for token-based fundraising. For founders, the TPA provides a clear legal channel for onboarding early stakeholders who share the vision of the project. For investors, it offers some measure of predictability—albeit with no guarantee of success—about the conditions of purchase, restrictions, and future rights.
Overall, a TPA strikes a balance between the traditional venture capital approach and the open, borderless nature of blockchain technologies. The tokens you acquire could one day enable you to vote on governance proposals, pay transaction fees on a network, or simply represent a piece of a project’s economic upside. In any event, the TPA ensures that all parties have documented expectations about how, when, and why tokens will be delivered.
As the regulatory environment continues to evolve, so will the best practices for drafting TPAs. Keep an eye on updates from agencies like the SEC, FinCEN, and international regulatory bodies. If you’re a founder, involve legal experts early. If you’re an investor, perform thorough due diligence. And always remember: The blockchain space is innovative and volatile. A well-constructed TPA offers a sturdy framework to mitigate some of the uncertainty, but it can’t eradicate all the inherent risk in emerging technologies.
Whether you’re an aspiring blockchain founder or an investor intrigued by the possibilities of tokenized assets, understanding TPAs can serve as a major advantage. You’ll be better equipped to anticipate the challenges and seize the opportunities that come with distributing or holding a stake in the next generation of decentralized projects.
For those interested in exploring Token Purchase Agreements (TPAs) further, here are some valuable resources:
1. Form of INX Token Purchase Agreement
This document provides a comprehensive example of a TPA, detailing the terms and conditions governing token sales. It’s a useful reference for understanding the structure and clauses commonly included in such agreements. SEC
2. Token Sale Agreement Template by Legal Nodes
Legal Nodes offers a free, downloadable Token Sale Agreement template tailored for founders developing decentralized projects. While it’s a helpful starting point, it’s essential to consult with a qualified legal specialist to ensure compliance with specific legal requirements. Legal Nodes
3. Writing Token Purchase Agreements for Blockchain Projects
This article discusses the importance of TPAs in providing legal clarity between investors and token-issuing entities. It emphasizes how well-drafted agreements can minimize potential disputes by clearly outlining the rights and obligations of all parties involved. Rahul Dev – Patent Attorney
4. Navigating Token Lock-Up Agreements: Legal Insights
This resource delves into the legal considerations of implementing token lock-up schedules, highlighting the necessity of clear articulation in purchase agreements to ensure enforceability and prevent disputes. Law Offices of R. Tamara de Silva
5. Token Issuance: Top 7 Legal Must-Knows for Founders
A guide that outlines critical legal aspects founders should consider when issuing tokens, including compliance with regulations, KYC/AML procedures, and the importance of proper legal structuring. Irina Heaver Law
These resources offer a solid foundation for understanding the intricacies of Token Purchase Agreements and the broader legal landscape of token-based fundraising. However, given the complexity and evolving nature of blockchain regulations, it’s crucial to consult with legal professionals to ensure that any agreements or token offerings comply with current laws and best practices.
Thank you for reading this primer on Token Purchase Agreements. By demystifying the contractual and regulatory complexities, we hope you feel more confident navigating the evolving world of token-based fundraising. Remember: Always consult professionals for advice tailored to your specific circumstances, and be prepared for the risks inherent in early-stage technology ventures.
