Last update: June 22, 2020
Working as CEO of Astorts Group, my team and I have received many inquiries about a cost effective way to structure an ICO quickly and successfully, so I decide to write this bootstrapper's guide that can be useful for many of you.
An Initial Coin Offering or ICO is an unregulated means through which a start-up company uses to raise funds required to start, develop, or complete its cryptocurrency or blockchain based software projects.
Using a new cryptocurrency, the start-up company releases tokens which investors can buy through existing digital currencies, usually BTC or ETH, or legal tender. Therefore, having the start-up obtained the required financing needed to develop its project the investors in the start-up company expect that the tokens would increase in value with a high return on investment. It is assumed that the risk associated with this type of investment is considerable because there is no guarantee that investors would get back their money if the company would not raise enough funds or something will not go as planned. The investors are expected that start-up company 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.
The Corporate Structure of an 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.
The main reasons to separate the issuer company from the operating one are:
- OPCO can be set up in various countries that will support payments to staff in fiat that will develop the project.
- Under some circumstances, it will be difficult to acquire a bank account for the ICO-CO, while it will be much easier for the OPCO, although you can transfer tokens received during sales from ICO-CO to OPCO by an agreement in place 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 overemphasized.
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 favour debtors and not creditors.
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.
Setting up an Issuer Company
Having put in place the above paramount structures, another important if not by far the most important is the set-up an ICO-CO should have. Many ICO-CO operate on a structure that is based on the Swiss, Panama or Estonian Foundation. Therefore, a new ICO-CO should also consider this. It should be clear in operations that purchasers are people who buy a product. They’re neither investors not 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 have been done through an entity that does not have shares. Suitable entities for this are foundations, companies with limited guarantee (Singapore) 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-CO 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 for 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.