*Last update: June 18, 2020
An Initial Coin Offering or ICO is an unregulated means through which a start-up company uses to raise funds they require to start, develop, or complete its cryptocurrency or blockchain based software projects, thereby rigorous, regulated, and often difficult processes such company would have gone through if they were to raise such funds through banks or venture capital investors.
Using a new cryptocurrency, the start-up company releases tokens which investors can buy through existing digital currencies, usually Bitcoin or Ethereum, or legal tender. Therefore, having obtained the required financing needed to develop their project the investors in the start-up company expect that the tokens would increase in value with a high return on investment, ROI.
It is assumed in many quarters that the risk associated with this type of investment is considerable because there is no guarantee that would be investors will get back their money if the company could not raise enough funds much less make a profit when the project is launched.
Hence, in an ICO, investors believe that the project will not fail and the token will be successful leading to no loss of money invested. On the part of the start-up company, it is expected that it overcomes required legal hurdles like Incorporation, Terms, and Conditions, Security Laws, Commodity Laws, Tax, AML/KYC, and Consumer Protection, which are prerequisites that affirms the authenticity of their presence and genuineness of their business. If the company expects that its ICO will be allowed as well as make profit with good intentions, then
- They must know who their customers are by using a legal entity and not by selling securities to non-professional/accredited investors,
- They must treat their coin holders as participants and not just investors of an ICO,
- They must establish a known jurisdiction, and
- They must establish a legal entity to avoid being seen as a partnership with unlimited liability by default.
The Structure of a Corporate ICO
In an ICO, there are several structures that a company might want to consider. However, it is paramount that they understand that most ICO’s operate through a separate and particular issuer company (ICO-CO) and an operating entity (OPCO). There some reasons why this should be done.
It is an opportunity to separate your legal liability.
It is a method that allows such company to have many OPCO’s in various countries that will support payments to staff in fiat.
Under some circumstances, it will be difficult to acquire a bank account for the ICO-CO, although you can transfer tokens received during sales to one or more OPCO. In doing this, there must be an agreement in place between the bank and your company for tax and legal reasons.
There may be other advantageous business entities, such as foundations and trusts, which are good for the issuance of ICO and not suitable for the current business.
The importance of using two entities while building the structure of an ICO cannot be overemphasizes.
Tax – Once you are operating two entities, you can use the proper jurisdiction that presents the lowest effective rate of taxation about the activities of your company. However, although this is unlikely to happen for a new company, care must be taken not to fall into a treaty.
Securities – There are different security laws from one jurisdiction to another where some have fewer constraints as regards security laws. The important thing here is to set-up your company where your investors are and not where the entity is located.
Liability – In certain jurisdictions, liability laws favor debtors and not creditors. An example is in Wyoming where such protection is high while it is not so in Florida.
The two entities should put in place a transfer pricing agreement (TPA), prepared by lawyers and tax advisors in the chosen jurisdiction – If it’s a case of the same person handling the two entities, it would be seen as an arm’s length transaction from the standpoint of tax matters. But for trading with fair market value (FMV), the two entities should have a TPA.
Setting up an Operating Company
Having put in place the above paramount structures, another important if not by far the most important is the set-up an ICO should have. Many ICO’s including Ethereum and Bancor operates on a structure that is based on the Swiss foundation. Therefore, a new ICO should also consider this. It should be clear in your operations that purchasers are people who buy a product. They’re neither investors nor donors as there is nothing that accrues to someone who has donated. They’re rather customers who have the full right to use your product. This is to avoid presenting token holders with the privilege or right to the shares of your company, and this is why fundraising should be done through an entity that does not have shares. Suitable entities for this are foundations and companies with limited guarantee and trusts. The crucial caveats here is the need for a working structure that shows your company is not just a general partnership where the founders operate with joint liabilities; understand that although ICO’s and token sales are still unregulated activities, you must consider issues like security laws, tax, KYC, general fraud, and tort, etc., which has regulations and jurisdictional laws; your ICO should provide a product or a service and deliver on its promises. It should not be used to defraud people.
In conclusion, make sure that people need your token about the problem it will solve for them. The rationale behind such issuance should be genuine and tangible. Risking other people’s money on an idea that is premature is a sign of greed and lack of due diligence. Of course, there is money to be made based on the breakthroughs in the world of cryptocurrency. But remember that your reputation is on the line, and once it is lost, it is hard to regain. You must also diligently and judiciously consider the economic design and implications of your platform to prevent participants from suffering many losses due to your negligence. Every aspect of the project must, therefore, be well planned and structured for effective and profitable business.
Alessandro Rocco Pietrocola is an entrepreneur and investor based in London and operating mainly in Europe, Asia and Oceania with main focus on UK, Baltic Countries, Russia, China, Hong Kong, Malaysia, Singapore, Middle East and New Zealand as area of interest! At the moment is the CEO of Astorts Group. He is an UK FCA (Financial Conduct Authority) Approved Person and is has great experience as director of regulated companies. He uses to dedicate part of his life to inspire others and help them achieve the most out of their life. Since he was 20, he had successfully founded and managed several companies operating in the field of management consulting, wealth management and fintech. He loves travelling, he is a cigars lover, an amateur golfer and a dapper man.