How to set up an ICO – Part 3: The ICO Issuer
How to set up an ICO – Part 3: The Token Issuer
Flag Theory Weekly Letter – Tuesday, June 5th, 2018
In previous chapters of How to set up an ICO we talked about the fundamentals and key aspects to take into account when launching an ICO and how necessary it is to establish the proper corporate structure and the potential downsides of not doing so.
As we discussed last week, when structuring an ICO, you must limit your liability and separate the Token Issuance event from the management of its proceeds and post-ICO operations.
With that in mind, we will go into detail on the first part of the corporate structure: The Token Issuer.
The Token Issuer or Raise Co
When we talk about the Token Issuer, we’re talking about the legal entity who will deploy the smart contract, generate the tokens, conduct the token sale and carry out all of the related efforts to make it successful such as marketing and communications.
The Token Issuer will be the vehicle used to raise funds, write and publish the Terms and Conditions of the sale and make purchase agreements with participants through information memorandums.
An issuer is incorporated solely for the purpose of conducting the sale. Once the sale is complete, there might no longer be a reason for the existence of this entity.
An ICO is an innovative and powerful tool that provides the liquidity needed for a project to take off and is a real breakthrough in how tech start-ups are financed. However, the current regulatory uncertainty makes it a very risky event.
The Token Issuer is the entity that faces the greatest liability and risks. So by separating it from the token and proceeds administration we manage to limit the liability and provide greater protection to the project as a whole.
At Flag Theory, we empower entrepreneurs with global businesses to make the right decisions when choosing the right entities and jurisdictions according to their business and their unique and specific circumstances.
Separating the Token Issuer from the Operating Company not only provides you with more protection but you also enjoy more flexibility when choosing jurisdictions and the type of entities most suitable to carry out the sale. This jurisdiction does not have to coincide with the most optimal jurisdiction and entity for your Op Co that will manage the funds and carry out the day to day operations of the project.
Token Issuer Corporate Structure
The sale of a utility token is a commercial relationship between the company that issues it and the buyer. It is expected that the buyer can and/or will use the purchased token in a specific ecosystem or redeem it for a service in the future.
As we discussed last week, many Token sales have been carried out by Foundations, although this is not an ideal entity for it.
This is because Foundations are not meant to be profit-making entities or engage in commerce directly with consumers. So to carry out a “sale” through a Foundation means treating purchasers as donors, which is inaccurate and far from reality.
The Token Issuer will engage in a specific commercial activity for a certain period of time so you need to look for an entity type that you can be set up easily and does not have any unnecessary legal, tax and compliance burden for this purpose.
An LLC is better positioned to carry out this purpose than a Company Limited by Shares or a Foundation, as it is a much more legally flexible entity.
An LLC can be structured according to its own rules and it is governed by its own Operating Agreement which can be tailored to your exact business specifications.
Incorporated in the right jurisdiction, an LLC can be one of the most protective legal entities.
In addition, LLCs are fiscally transparent entities so the entity itself is not subject to corporation tax. This means that all profits received by the LLC are considered transferred to its members for tax purposes, whether or not they are actually transferred.
And who will be the members of the LLC?
As we have seen, LLCs are powerful instruments for protection and limitation of liability. However, we can combine it with a Foundation or a Trust for even more protection.
A Trust is a legal relationship established by means of a private document (not a separate legal entity) by which a person or entity, settlor (or grantor), transfers its assets to another person, the Trustee, giving the Trustee legal ownership of the Trust assets.
The Trustee must administer said assets in accordance with the Deed of the Trust. They can not use the Trust for their own benefit. The Deed of Trust must be followed for the benefit of the other natural persons or entities (the Beneficiaries) or for the benefit of a specific purpose.
The Trust could establish the LLC as the only member and at the same time, it would be its sole manager. The trust would have a single beneficiary of the funds (and tokens) and will be the entity in charge of the administration of the tokens as we will see in following letters.
Instead of or in addition to the Trust, we could use a Foundation. A Foundation has common characteristics of a Trust and can be established for a purpose or for the benefit of persons but it is also a legal entity just like Corporations.
But unlike Corporations, Foundations do not have owners or shareholders and it is the Council Members that administer it in a fiduciary manner in accordance with the Foundation’s Charter.
Both the Trust and the Foundation can provide a layer of protection to the Token issuer and each one has certain advantages and/or disadvantages which will depend on the specific circumstances of each Project.
Where to incorporate the ICO Issuer
There are several factors to consider when choosing the jurisdiction for your ICO issuer vehicle.
Some of them we reviewed in the previous letter, you can read it here if you haven’t already.
The right jurisdiction to incorporate will depend on your specific type of project and its unique characteristics, circumstances, priorities, and objectives.
There are also jurisdictions prone to attract blockchain projects and ICOs. We reviewed some of them a few weeks ago.
But, generally, from a protection standpoint, liability laws vary between jurisdictions.
Some are more favorable to creditors than to debtors.
For instance, Nevis has one of the most protective legislation, especially for single-member LLCs. Saint Vincent and The Grenadines or Belize are also two highly protective jurisdictions.
On the other hand, some ICOs choose the Cayman Islands. Cayman is a highly reputable jurisdiction and leading offshore financial center. It is the traditional venue for fundraising events and has been quite open to attract these type of projects.
Or maybe Gibraltar. This British Overseas Territory is one of the pioneering jurisdictions in regulating Fintech and blockchain startups with the introduction of the DLT regulatory framework for companies involved in cryptocurrencies.
In addition, the financial authority of the Rock, Gibraltar Finance, has already announced that they plan to launch the first Token regulations, creating a fully-regulated market for token sales for projects launching utility tokens, which will be considered commercial products, and not securities.
There is no one size fits all. At Flag theory, we provide ICOs with a robust corporate structure and compare and select the right places to implement it, according to the unique complexities and number of options available to their specific situation.
In the next article How to set up an ICO, we will deal with the key aspects of the token issuance. Stay tuned.
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