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How to set up an ICO – Part 6: Ongoing Business, Bank Accounts & Conclusions

 

set up ico banking ongoing business

How to set up an ICO – Part 6: Ongoing Business, Bank Accounts & Conclusions

Flag Theory Weekly Letter – Friday June 15th, 2018

After 5 articles reviewing the whole process of how to structure an ICO today we get to the final chapter: how to structure the ongoing operations post-ICO, open bank accounts and the final conclusions you must consider when structuring your ICO.

If you have missed any of the previous parts you can check them at the following link.

Ongoing Business post-ICO

In the previous chapter we commented that due to its specific legal characteristics, a Foundation could be a powerful tool to manage the funds obtained in a token sale and to optimize for tax purposes while limiting the liability derived from them.

However, Foundations are usually not ideal entities to carry out the day-to-day business as they are not designed primarily to carry out commercial transactions.

Your business may have specific needs which may not be aligned with your proceeds management structure such as physical location of employees, offices, markets, customers, suppliers, etc.

Incorporating one or more operating companies to develop your project and to carry out the day-to-day business provides you flexibility and a series of benefits.

To begin with, you separate the liability arising of both the issuance and the management of the funds.

It may also allow you to further optimize your tax obligations. For example, the country where it is convenient for you to carry out operations has a high tax burden but it may not be the ideal jurisdiction to administer the proceeds of the token sale.

Also, keep in mind that depending on your tax residency, if you are the ultimate beneficial owner, token sale proceeds may be attributable to your personal income tax return due to CFC (controlled foreign companies) and corporate tax residency rules.

By separating vehicles and structuring them properly, it may be possible to legally optimize this situation. Remember from last chapters: divide and rule.

Having multiple entities will also give you more flexibility. You may need different OPCOs in various countries to support fiat payments to your employees or contractors for instance.

You can even seek to be regulated for specific business activities that you carry out in specific jurisdictions.

Finally, having an operating company may make it easier for you to access a full range of corporate banking services. If the operating company does not deal directly with cryptocurrencies you will have access to better banks.

Top-tier banks are not willing to work with ICOs or crypto projects due to the associated risks and corporate banking services of some ICO-friendly banks may be limited. Using a separate operating entity may solve this issue. More on ICO banking soon.

In short, properly structuring your proceeds management vehicle and your ongoing operating company(s), with the appropriate legal and operational agreements between them may minimize risks, limit liability, optimize taxes and ensure a hassle-free and smooth business operations post-ICO.

By not doing so, you may end up with millions of dollars in ETH but not being able to carry out your business and develop your project, which is happening to many ICOs that were not properly advised and structured.

Bank Accounts for ICOs

We have commented several times on the difficulty that projects related to cryptocurrencies, and ICOs in particular, are facing in order to obtain banking.

You need bank accounts. Operating entirely in cryptocurrencies is not possible today, or very improbable.

There are expenses that require fiat and then you need to take in to account some inherent cryptocurrency volatility, which adds a considerable financial uncertainty and risk.

The banking sector is still reluctant to onboard crypto clients due to regulatory uncertainty, particularly related to KYC, proof of source of funds and the potential for money laundering.

Fortunately, there are a number of banks that are open to working with cryptocurrency companies so obtaining a bank account for ICOs is possible.

At Flag Theory, we have several ICO-friendly bank partners and have helped dozens of ICOs obtain banking. However, in order to do that, you must have in place a robust KYC/AML & CTF process.

The bank will want to see that you have a proper policy in place and that you maintained compliance with this policy. They want to make sure that you have set up the proper procedures to identify your clients and that your funds do not come from sanctioned individuals or entities or have been used for money laundering.

In previous chapters, we talked in more detail about the KYC/AML and CTF processes that you must implement in your token sale.

Doing so will not only allow you to get banking but also to avoid serious legal issues, fines and even jail time which you might incur if you accepted funds from a sanctioned person.

But having your proceeds management company with a bank account to convert your funds to fiat may not be enough.

You probably will have to open accounts in the countries where your business actually operates, preferably with top-tier corporate banks. A viable way to do so effectively is by using a multi-national structure.

Conclusions

During these last three weeks we have been reviewing the whole process of how to structure an ICO from a legal standpoint.

Some final tips:

  • Make sure your Token Sale is transparent and a legitimate and achievable project or you could have problems and you might be committing fraud.
  • Know that if you claim to be selling a utility token, make sure it really is a utility token and not a security (in the eyes of the regulators in any country you sell into)
  • Design and execute your marketing strategy wisely.
  • Amongst other things – if you are selling a token that yields returns, dividends, or any kind of profit or voting rights, you may be selling a financial product, so you must register it as security in the relevant jurisdictions.
  • Give importance to your corporate structure, analyze all the pros and cons of each option and plan out a cohesive strategy before you perform your token sale.
  • Design a corporate structure that allows you to legally minimize risks and allows you to develop your project without issues.

Beware, we have seen real atrocities, as some corporate services providers are selling “ideal” ICO-entities, which are totally useless and strongly inadvisable. These could make it impossible to carry out your business normally and you may even end up with legal and tax issues.

Be well-advised by legal and tax experts who have experience and understand ICOs, blockchain and the crypto space, and have gone through the process before.

A wrong decision when structuring your ICO can have disastrous consequences for your project and for you personally. The structure of your ICO will have a considerable impact in the long term.

Do not leave anything to chance and define every contingency in your Terms and Conditions. This is the document that governs your relationship with your ICO participants. Also make sure that your communications are in line with your T&Cs.

Perform the appropriate KYC/AML & CTF processes. This is fundamental and is NOT an option.

And above all, surround yourself from a strong qualified legal team that can advise on absolutely everything involved in your token sale from the whitepaper to the Terms and Conditions to the ongoing communications.

Although token sales are currently non-regulated events, depending on the token, they may fall into different existing laws. You will want the proper legal advice to not break any of them.

Remember that these articles are for illustrative purposes and are not specific advice for your specific situation. It does not pretend to be legal or tax advice, you should always consult with a specific qualified advisor in the jurisdictions where you operate.

If you missed a chapter, or want to reread it again:

We hope you enjoyed the How to structure your ICO article series. If you are planning to launch an ICO, we can help you. We are expert in cryptocurrencies and besides having structured dozens of projects, our officers have launched their own successful Token Sale.

We are happy to share our experience and knowledge to make sure you have the right tools to launch a successful token issuance.

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NOTICE: The contents of this article are not to be considered as a legal opinion or tax advice and should not be relied upon as such. Far Horizon Capital Inc does not hold itself out as a legal or tax advisor. If you wish to receive a legal opinion or tax advice on the matter(s) in this article please contact our offices and we will refer you to an appropriate legal practitioner. Use of our website FlagTheory.com is subject to our terms and conditions.

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