Understanding and Creating Risk Disclosures for Crypto and AI Investments

Creating proper risk disclosures for cryptocurrency and artificial intelligence investment offerings has become increasingly important in today’s complex regulatory landscape. As emerging technologies continue to reshape investment options, the need for thorough, tailored risk disclosures has never been more critical for legal compliance and investor protection.

Why Comprehensive Risk Disclosures Matter

When offering investment opportunities in cryptocurrency or AI-focused ventures, proper risk disclosures serve multiple essential purposes. They protect your business from potential liability, help investors make informed decisions, and demonstrate regulatory compliance in a rapidly evolving legal environment.

Inadequate risk disclosures can lead to serious consequences, including:

• Securities law violations and regulatory enforcement actions
• Investor lawsuits claiming misrepresentation or omission of material facts
• Reputational damage affecting future fundraising efforts
• Personal liability for directors and officers

The Investor Risk Disclosure Generator I’ve developed addresses these challenges by creating customized risk disclosures specific to your particular investment offering.

How to Use the Risk Disclosure Generator

The generator is straightforward to use and produces comprehensive risk disclosure documents tailored to your specific investment product. Here’s how to create an effective disclosure:

Step 1: Enter Company and Product Information

Start by entering basic information about your company and investment product:

• Company name (the legal entity offering the investment)
• Product/fund name (what investors will recognize your offering as)
• Product type (select the option that best describes your offering)
• Target investor type (determines specific legal disclosures)
• Primary jurisdiction (establishes which regulatory framework applies)

The product type selection is particularly important as it affects the specific risks that will be incorporated into your disclosure. Whether you’re offering a cryptocurrency fund, AI investment vehicle, token offering, or combined product, selecting the appropriate category ensures relevant risk factors are included.

Step 2: Define Your Investment Structure

Next, specify your investment structure and key parameters:

• Structure type (private fund/partnership, token offering, managed account, or subscription service)
• Lockup period (if applicable)
• Minimum investment amount (if any)

The investment structure significantly impacts both the legal requirements and specific risks that must be disclosed. For instance, a private fund structure triggers different disclosure obligations than a token offering or subscription service.

Step 3: Select Applicable Risk Factors

The generator presents common risk factors categorized into:

• Market risks (volatility, liquidity concerns, concentration risks)
• Technology risks (security vulnerabilities, technical failures, smart contract risks)
• Regulatory and legal risks (regulatory changes, securities laws, tax uncertainty)
• Operational risks (key person dependencies, custody issues, service provider risks)

Select all risk factors that apply to your specific offering. Being comprehensive here is important—it’s better to include a risk factor that may not materialize than to omit one that does and face liability later.

You can also add custom risk factors specific to your offering that aren’t covered by the standard options.

Step 4: Choose Appropriate Disclaimers

Select the disclaimers and additional terms that should be included in your disclosure:

• No guarantee of returns
• Past performance disclaimers
• Investment suitability statements
• Forward-looking statement caveats
• Conflicts of interest disclosures
• Insurance status (e.g., not FDIC insured)
• Advisory relationship clarifications

These disclaimers form an essential part of your legal protection and help set appropriate expectations for investors.

Step 5: Generate and Use Your Disclosure

Once you’ve completed all sections, you can:

• Copy the disclosure to your clipboard for immediate use
• Download it as a text file for your records or further editing

The generated disclosure should be incorporated into your offering documents, subscription agreements, or wherever investors will be presented with information about the investment opportunity.

Important Legal Considerations for Crypto and AI Investment Disclosures

Securities Law Implications

Most investment offerings in the cryptocurrency and AI space implicate securities laws, regardless of how they’re marketed. The SEC has been clear that simply calling something a “token” or “utility token” doesn’t exempt it from securities regulation if it meets the criteria of an investment contract under the Howey test.

Your risk disclosure should always address:

1. The potential classification of your offering as a security
2. The registration status of your offering (typically relying on an exemption)
3. Resale restrictions applicable to investors
4. The specific exemption you’re relying on (e.g., Regulation D, Regulation S)

For offerings to accredited investors under Regulation D, the disclosure should explicitly mention this limitation and the verification procedures you employ.

Jurisdiction-Specific Requirements

Different jurisdictions have unique requirements for risk disclosures:

United States: Disclosures must address federal securities laws as well as state “blue sky” laws. If your offering involves digital assets, you’ll need to address SEC, CFTC, and FinCEN considerations, as these agencies have overlapping jurisdiction in the crypto space.

European Union: The Markets in Crypto-Assets (MiCA) regulation establishes specific disclosure requirements for crypto-asset offerings. Your disclosure should address these requirements when targeting EU investors.

United Kingdom: FCA regulations for crypto investments have distinct requirements, particularly following Brexit changes that differentiated UK rules from EU frameworks.

Singapore and Hong Kong: These jurisdictions have established specific regulatory frameworks for digital asset offerings with their own disclosure standards.

The generator incorporates jurisdiction-specific disclosures based on your selection, but remember that cross-border offerings may require multiple compliance approaches.

Technology-Specific Risks

Cryptocurrency and AI investments face unique technological risks that must be disclosed. These include:

For Cryptocurrency Offerings:

• Blockchain security vulnerabilities and potential exploits
• Smart contract bugs and audit limitations
• Fork risks and governance uncertainties
• Custody and private key management challenges
• Exchange delisting possibilities

For AI Investments:

• Algorithm limitations and failure modes
• Data quality and bias concerns
• Rapid technological obsolescence
• Intellectual property uncertainties
• Model drift and performance degradation

The generator includes these specialized risk factors, which are often overlooked in generic disclosure templates but are essential for technology-focused offerings.

Tips for Creating Effective Risk Disclosures

Beyond using the generator, here are some practical tips for creating effective risk disclosures:

1. Make Disclosures Specific and Concrete

Generic risk disclosures provide less legal protection than specific ones tailored to your offering. The generator produces customized language, but you should further personalize it with details unique to your product, team, and structure.

For example, instead of simply stating “regulatory uncertainty,” specify which particular regulations are unclear and how they might impact your offering.

2. Update Disclosures Regularly

The regulatory landscape for cryptocurrency and AI investments changes rapidly. A disclosure that was adequate six months ago may no longer address current risks. I recommend reviewing and updating your risk disclosures at least quarterly or whenever significant developments occur in your business or the regulatory environment.

3. Use Plain Language

While comprehensive disclosures are necessary, they should be understandable to your target investors. Technical and legal jargon should be explained clearly. The generator produces readable language, but you may need to adjust the complexity based on your investor base.

4. Document Delivery and Acknowledgment

Creating a strong disclosure is only the first step—you must also ensure investors actually receive and acknowledge it. Implement a system that:

• Delivers the disclosure before investment decisions are made
• Records when investors receive disclosures
• Obtains explicit acknowledgment of risks
• Maintains these records securely

This documentation can be crucial if disputes arise later.

5. Align Marketing Materials with Disclosures

Ensure all marketing materials are consistent with your risk disclosures. Courts and regulators look unfavorably on situations where marketing materials make optimistic claims while the “fine print” disclosures present a different picture.

Frequently Asked Questions

Do I need a custom risk disclosure if I’m only raising money from friends and family?

Yes, absolutely. The application of securities laws doesn’t depend on your relationship with investors but on the nature of the offering itself. In fact, offerings to non-professional investors (like friends and family) often require more robust disclosures because these investors may have less sophistication and ability to assess risks themselves. Additionally, personal relationships can make legal disputes particularly damaging, so clear written risk disclosures are essential protection.

How does the risk disclosure differ if my offering involves both cryptocurrency and AI components?

Combined offerings face a broader spectrum of risks and potentially more complex regulatory considerations. The disclosure should address both the cryptocurrency-specific risks (such as volatility, security vulnerabilities, and uncertain regulatory status) and AI-specific risks (like algorithm limitations, data dependencies, and intellectual property concerns). The generator includes a specific product type for combined offerings that incorporates these dual risk categories, which you can further customize with details specific to your integration of these technologies.

Can a good risk disclosure help me avoid registering my offering with the SEC or other regulators?

No. A risk disclosure is not a substitute for registration when registration is required. However, proper risk disclosure is often a requirement for qualifying for exemptions from registration (such as under Regulation D). Rather than viewing disclosure as a way to avoid registration, think of it as a component of proper compliance with the exemption you’re utilizing. Even the most detailed risk disclosure doesn’t transform a non-compliant offering into a compliant one.

Should I include projected returns alongside risk disclosures?

Including projected returns creates significant additional legal exposure and heightened disclosure requirements. If you choose to include projections, they must be reasonable, based on documented assumptions, and accompanied by prominent disclaimers about their hypothetical nature. The risk disclosure should explicitly state that projections are not guarantees and explain all assumptions underlying the projections. Generally, I advise clients to avoid specific return projections entirely, especially for novel investment categories like cryptocurrency and AI where historical data is limited.

How much detail should I include about past security incidents or vulnerabilities?

This requires careful balancing. Material past incidents that would influence an investor’s decision must be disclosed, particularly if they resulted in losses or revealed systemic weaknesses. However, disclosing current unpatched vulnerabilities could create additional security risks. The best approach is to disclose historical incidents with a focus on the remediation measures implemented, and to frame security as an ongoing concern requiring continuous monitoring and improvement rather than a fixed state of being “secure” or “insecure.”

If my investment is only available to accredited investors, do I still need comprehensive risk disclosures?

Yes. The accredited investor status of your clients provides certain exemptions from registration requirements, but it doesn’t eliminate the need for full and fair disclosure of all material risks. The anti-fraud provisions of securities laws apply regardless of investor accreditation status. In fact, the SEC and courts have repeatedly emphasized that verification of accredited investor status and proper risk disclosure are separate obligations, both of which must be satisfied.

How should I handle risk disclosures for international investors?

International offerings require careful attention to the regulations of each jurisdiction where investors are located. The generator includes jurisdiction-specific sections for major markets, but cross-border offerings often require layered compliance addressing multiple regulatory frameworks simultaneously. For international offerings, I typically recommend creating a base disclosure that satisfies the most stringent requirements among all target jurisdictions, then adding jurisdiction-specific supplements as needed. Always consult with local counsel in each target jurisdiction, as some regions require disclosures in local languages or specific formats.

If you’re dealing with a particularly complex offering or have questions specific to your situation, feel free to schedule a consultation using the button in the generator. Investment regulations for emerging technologies require specialized knowledge, and I’m here to help navigate these complexities.