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21 July 2017, 16:29

ІТ Industry in Ukraine: Less Legalese, More Legal Tech

Dima Gadomsky
Dima Gadomsky СЕО Axon Partners
Bogdan Duchak
Bogdan Duchak Partner Axon Partners

Today, you cannot surprise anyone with words like quadrocopter, Blockchain, or smart contract. Technology is all around us, so we don’t even notice it, except as someone takes it from us, like you take a tablet from a kid. Believe it or not, things Ray Bradbury has described in his science fiction are still to come - ask Elon Musk.

Although Elon Musk has half-jokingly and half-officially refused to invest in Ukraine, we do not trail far behind the global IT market. Lately, Ukrainian IT industry has been successfully developing. As a result, it’s going through tough times right now, since the law enforcement is holding IT companies at gunpoint. In spite of the ban on server seizures, searches and seizures in IT companies still continue.

When providing legal services in IT, we are facing a number of real challenges. Now we are going to discuss the most significant of them.

SOMETHING WE KNOW

1. Ukraine says ‘Goodbye’ to certificates of services rendered in the export of services

The law intended to revoke these certificates has a funny title: on removing administrative obstacles for the export of services. This wonderful initiative has been implemented with the support from USAID, together with Ukraine’s Ministry of Economic Development and Trade, the Association “Information Technologies of Ukraine”, Uprowk freelance website, and EasyBUsiness, the center for economic strategy and organization.

Ukraine has made a gigantic step forward towards the liberalization of business operations with foreign customers, which influences the local IT industry. For example, now freelancers can execute agreements for export of services by issuing an invoice and accepting a public offer, or by e-mail. Besides, invoice may be deemed an accounting source document, provided that its contents and form falls within the requirements of the law, and banks may not require that documents be translated into Ukrainian to credit currency to freelancers’ accounts. Probably, after the Parliament had adopted the said law, some guys responsible for currency control shot themselves dead.

2. IT industry will only exists if there are individual entrepreneur

It’s Ukrainian modern folklore. According to statistics, 37% of Ukrainians make the same wish on Christmas Even, and it’s “Please, let individual entrepreneurs be”. Since “tax reform” is underway in Ukraine, next year you can find yourself in a strange situation by realizing that you’re not an individual entrepreneur anymore, but a criminal.

Frankly speaking, Ukraine’s economy is currently having hard times, so we do need tax reliefs for certain industries and special legal statuses for certain business entities. Otherwise, we will continue taking loans from the IMF and trying to climb out from the never-ending dept pit. If you’re not among those 37% of Ukrainians – welcome aboard!

Quite the same goes for VAT exemption in software supply transactions. The is a paragraph about VAT exemption in the Transitional Provisions of the Tax Code of Ukraine, and the market is actively using it, although the Revenue Service has been long trying to confuse people with its ambiguous interpretations on the matter. As they say, celebrate diversity. These incentives will last until January 1, 2023, and the situation is unlikely to change. So, supply responsibly!

3. Sanctions affected well-known IT companies, their service and products

Economic sanctions affected Yandex, Mail.ru, Vkontakte, Odnoklassniki, 1C, ABBYY and others, their business partners, let alone the users. We needed to make this sacrifice to ensure our national security and protect Ukraine’s interests in a hybrid war. Some people ask why no such sanctions have been introduced earlier, while others say that this is way too much, and finally, there are lots of people who find fault with the president, elections, and life (although all this stuff has nothing to do with sanctions). Facebook and Google are now rubbing their hands. However, there is no escaping the fact that economic sanctions have been imposed, and now we have to adjust to new realities. While some people will be complaining  about the lack of thrash memes in Facebook, others will use the situation in their favor – they will provide substitute services and goods and will make a pretty penny out of it. If you’re cynical about it, try to listen to music on Facebook using Spotify, a new made-in-Ukraine plug-in.

4.  M&A transactions in ІТ industry

Ukrainian IT industry is mostly outsourcing, and its assets are limited to laptops, tables, and chairs. Companies hire IT engineers as individual contractors, and if it’s outstaffing, engineers do not even have supervisors, since it’s customers who quarterback the whole process here. So, all mergers and acquisitions in outsourcing companies are usually quite informal. When it comes to due diligence, it’s only high-level, where clients want to see only the executive summary instead of any detailed description of all business components. As a rule, they don’t make SPAs and SHAs, or use any template they find on the web.

Still, when it comes to product development business, traditional tax, legal, and financial checks are usually carried out. Except that there aren’t so many mergers and acquisitions in Ukrainian product development companies and they usually expand their businesses through portfolio or venture capital investments.

Again, venture investors usually avoid full-scale legal due diligence. However, this year, as compared to the last year, and especially the year before last, the market has become significantly mature. Now startups not only give their investors a signed acknowledgement that they’ve got the money, but use all traditional instruments, including term sheets, convertible notes, SHAs, and option stock (depending on the stage of investment).

Quite possibly, in a few years, IT industry will have a demand for traditional legal services with regular hourly rates.

NO MAN’S LAND OR SOMETHING WE DON’T KNOW

1. Artificial Intelligence, Big Data, Internet of Things

In this article, we’re slowly shifting from reality to science fiction. In real life, it’s the other way around: our favorite science fiction is becoming real: self-driving cars, where you don’t have to watch the road anymore, smart advertising, mirrors that tell you what to wear, depending on the weather and your wardrobe.

All these complicated mechanisms do exist, and lawyers have to work hard to deal with them. How to guarantee the security of loads of information, most part of which is private? Who’s going to be responsible for information leakages? How to ensure that your services meet the requirements of the US and the EU personal data regulations? Who is responsible for the false conclusions made by artificial intelligence if they have led to people’s deaths? It’s only a small part of the list of issues IT lawyers are currently dealing with

2. Legal Tech

This year, a new direction in the legal industry has emerged - it’s legal tech. OpeDataBot had been the first one to come. Later it was followed by young teams emerging from nowhere with interesting IT products.

Market participants have been working for a while to make internal processes automatic. By now, the greatest legal tech achievement is the creation of internal CRM or ERP systems. No other innovations have been created, or they have been used only for marketing.

Lawyers have never thought that legal tech is a business, but things are changing rapidly. A number of last summer activities helped us understand that law firms can make money not only by selling hourly rates of their lawyers, but also by creating products and services with a real capacity to develop.

However, there is one significant obstacle that stands on the way of legal tech development - inability and unwillingness of lawyers to join hands and work together to achieve the common goal. You can’t build a spacecraft on a desert island. You need intelligence, money, hands, materials, and lots of skills. Ukrainian market of legal services is hardly a desert island. We have enough ingredients to build our legal tech ecosystem: a lot of English-speaking lawyers who have worked in foreign jurisdictions, developed IT outsourcing market, and more or less developed startup ecosystem. However, it’s not enough, since we have no experience in building legal tech companies (experience means dozens of successful companies and hundreds of companies that went bankrupt), and we don’t have enough venture capital investments: apart from a few legal companies, no one is willing to invest in Ukrainian legal tech projects.

A number of law firms together with a bunch of activists are doing crush tests and holding hackathon competitions for legal tech projects. So, it seems that we’re moving in the right direction. All we have to do is make our lawyers join forces and build the world’s legal tech center in Ukraine.

Ukraine has never been among the world’s legal industry leaders. In this context, people know more about India because of its legal services outsourcing. However, today we can build a strong ecosystem that will be able to compete for legal talents with Berlin, Tel Aviv, Amsterdam, London, and Moscow (instead of Kathmandu, Bujumbura, and Pyongyang).

3. ICO and Blockchain-based projects

For afters, let’s talk about the industry where Ukraine has taken the leading position (thanks to the well-developed Bitcoin community). Sure thing, it’s not about regulation, but at least, here we can make favorable forecasts.

While a couple of years ago, government officials, to put it lightly, took Bitcoin with a grain of salt, now they are trying to actively use this incredible technology in public management. Auction 3.0 is among the most outstanding examples – it’s a decentralized state property auction officially recognized in Ukrainian towns of Bila Tserkva and Kherson. Another remarkable thing is the memorandum on cooperation between Ukraine and BitFury. Blockchain-based solutions will deal with the state registration of property rights, public services, public security, health services, and energy industry.

Initial Coin Offering is becoming more and more popular – it’s a hybrid of IPO and crowd funding, where in exchange for their money, investors get digital tokens instead of company shares. Tokens certify that an investor is a part of the future company or product (provided that it will be incorporated or created). Investors can later sell these tokens for higher price (again, provided that a project will succeed). Such projects are mainly implemented on Blockchain.

Currently, we are searching for the most favorable jurisdictions for ICOs, so that we would be able to take into account both the interests of organizers and investors whose money can turn from investments into charitable contributions.

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