cayman islands offshore company banking residency
This article is relevant to:
singapore set up a company open a bank account residency citizenship Singapore
Reading Mode

Flag Theory Weekly Letter – Friday, September 14th, 2018

Post-ICO Company Structuring, Banking, Asset Protection, and Team Tokens Distribution

When performing an ICO, the main focus of the team is marketing and business development. These efforts are the cornerstone of a successful ICO, no doubt, but sometimes other key aspects are left out.

Many ICO entrepreneurs do not give enough importance to structuring – and are more concerned with speed, and end up with poor structures leading to headaches post-ICO.

Post-ICO Issues

Even some of the most successful ICOs have been in a sea of operational and legal issues that are preventing them from carrying out their business normally and develop their project accordingly. We talked about them a few weeks ago in an article: ‘What successful ICOs get wrong, and end up suffering the consequences‘.

We see this as irresponsible to ICO buyers. They are giving you money, trusting that you are capable of running a venture and preserving its financial health to be able to develop and finally commercialize the expected product or technology. If you are not able to complete the project, you will have some angry purchasers on your hands.

In post-ICO, is when you have the pressure of being able to build an enterprise capable to stand out in an uncertain and increasingly competitive market. You must meet promised deadlines and deliver.

There is when poor planning and structuring becomes a constant headache which could prevent from concentrating on what you should really focus on – meeting the expectations and trust placed by those who participated in an ICO.

Some may end up totally sunk in operational nightmares, continuous capital loss and trying to solve corporate and personal financial planning issues, among others, derived from a poor ICO structure.

Post-ICO Company Structuring

Often we find ICO and post-ICO companies all-in-one structuring type.

These ICOs are usually incorporated in Cayman, US or Singapore. They use the same legal entity to conduct the ICO, manage the assets post-ICO, convert crypto to fiat, contract and pay employees and develop and market the product.

Other just add a few layers, typically a holding company which will conduct the business and a subsidiary to carry out the ICO.

We have even seen three and four layers supposedly to add more protection, entities incorporated without any kind of purpose or fundamental function.

Others incorporate two orphan entities, one issuer and an operating company, usually using the ICO Issuer to transfer funds to the operating entity without any kind of real business substance between them – this has some drawbacks. Usually, both entities have the same directors (if nominees are not used) and ultimate beneficial owners.

This type of corporate structures, although they may work for some, contains several holes and can have serious consequences in terms of business operations, liability, taxes, banking, asset protection, among others.

Realize that launching an ICO is a high-risk/high reward business.

An ICO requires a well thought out and executed corporate structure that covers risk and  protects the business. This is especially important if prior to ICO you already have an existing money making business. Other important goals include the need to protect the post-ICO assets, an optimal corporate and personal financial planning, minimize liability, and overall minimize the downsides of operating in a high-risk space. There are myriad issues at play!

Each business will have a unique structure, all successful ICO’s should have a legal entity suitable for each of the fundamental functions and purposes that an ICO and its post-ICO business involves.

These legal vehicles must provide you with enough flexibility to be able to structure your business according to your requirements over time. Business requirements change and your structure should be able to accommodate them accordingly. A big enough ICO might have several legal entities both onshore and offshore, to avail themselves of the best banking and tax optimization strategies.

Laws, taxation, reputation, banking options, legal entity types vary among jurisdictions. Your business has also its requirements and you would like to set up an office in a country and with a legal entity which could not be the best to manage the bulk of the proceeds.

Jurisdictional arbitrage in a global business is powerful and can have a significant positive impact on the development and preservation of the business and its assets.

The proper structure will allow you to leverage the best of both the offshore and onshore world.

Each entity making part of this structure must be related correctly, there must be a substance, reason for said structure. Everything must make sense.

When a group structure lacks sense and substance – then issues may arise.

If you are post-ICO and you are not properly set up, although there are certain limitations – and that’s why we suggest ICOs get it right since the beginning – you are still able to restructure your post-ICO business and overcome certain hurdles and optimize your business and finance operations and protect your assets.

Post-ICO Banking and Treasury Management

This is one of the main dramas for post-ICO companies. You have raised several million dollars in ether or bitcoin, but it is very complicated, if not impossible, to operate entirely in cryptocurrencies.

Most companies post-ICOs struggle to find banking options.

Crypto businesses and especially ICOs are one of the riskiest businesses from the bank’s perspective. The potential money laundering risk perceived and the profitability they could get from an account simply makes it not worth it for the bank.

However, you have to pay employees, suppliers, office space, utilities and a whole series of business expenses that require fiat currency – you need solid transactional banking to run a business.

Not only to carry out the business but also to preserve the capital and hedge risks. For better or worse crypto is highly volatile – you would not want to have the resources of your business, and therefore its success, tied to the forces of a volatile market.

In addition, you need several banking options, you should diversify and minimize banking risks.

We have seen some post-ICOs play cat and mouse games. Opening accounts for satellite companies to convert crypto to fiat – this is not the soundest solution.

Mainly, because as soon as proceeds are converted to fiat and sent to the bank, it is likely that the account will get closed sooner rather than later. And the bank has a good reason for doing that.

There is a way to do it right.

It’s possible to convert the crypto proceeds to fiat and deposit them in an ICO-friendly bank.

It’s also possible to obtain solid transactional banking to operate your post-ICO business.

We assume that your ICO has been compliant with existing laws and has not breached any, and have conducted the appropriate KYC / AML with the highest compliance standards – these are the most important things.

Assuming the above, that’s when a well thought out and optimal corporate structure can make a difference.

We have commented that cryptos are high-risk businesses. Therefore, it makes sense to separate said risk using the optimal vehicle for carrying it – ideally not the ICO issuer and not the operating entity.

For instance, establishing an entity with the purpose of managing the assets, including the conversion to fiat and any investment to preserve and profit the capital. Choosing the most suitable jurisdiction, entity type and governance structure for that purpose so that the funds are destined for the development of the project and substance is in line with the business requirements.

Opening several accounts in banks willing to onboard crypto companies. These accounts do not necessarily have to be the best for transactional banking, but neither is the purpose.

It is possible to structure and restructure it in such a way that the entity that the entity conducting the day to day business, has access to transactional bank accounts in sound onshore banks and that banks are comfortable in onboarding this entity with this group structure.

Doing so will empower you to conduct business smoothly and be able to execute the proper financial planning to preserve and profit company capital for future developments. The right structure will allow you to do it.

Post-ICO Asset Protection

The importance of asset protection is commonly undervalued by many entrepreneurs.

It happens that your startup has raised several million dollars through a high-risk event, and the successful development of your project depends entirely on it.

Thousands of people have entrusted significant amounts to you to effectively develop and deliver a product or technology. Protecting these assets is to protect the interests of your business and its stakeholders.

The non-current capital of the company must be protected – you have taken some risks raising it.

There are certain legal structures that will allow creating a shield so that the assets are effectively invested in growing the business. The group structure plays a fundamental role here.

It can even be structured so that these resources are distributed only for certain purposes – in line with your project.

There are also legal structures more suitable than others, for instance, irrevocable asset protection trusts are much more protective than a company limited by shares. Liability laws also vary, in a certain jurisdiction are more favorable to debtors as opposed to creditors. 

Team Tokens Distribution

Leaving aside whether it is a good practice or not, the reality is that commonly between 10% and 20% of the token supply is allocated to the Token Sale team.

There is usually a vesting period of one or two years until these tokens are made available and distributed.

Often, there are many concerns among team members on the tax implications that such distributions can imply both at the corporate and personal levels.

For instance, in many countries, remuneration in-kind is taxable and subject to social security contributions and labor and personal income taxes. In some countries, the tax burden could exceed even 60%.

Distributing assets of a company to individuals implies remuneration and this could trigger tax liabilities – even if the tokens have not been converted to fiat.

The group structure should be designed in a way to legally avoid tax at the corporate level, either on the raised funds, profits or in distributions to employees and management team.

Certain legal structures that may allow team members to defer taxes until they optimize their situation. For instance, private foundations or foreign trusts.

Foreign trusts have been traditionally used for employee benefits, including share schemes, and retirement benefit plans. They can also be effectively used to structure founding team tokens distributions. Private foundations can be also used for this purpose.

This can provide the required flexibility and time for team members to legally optimize their personal tax situation. For instance, obtaining tax residency in a low and/or territorial tax jurisdiction.

Tax residency rules vary among jurisdictions. Usually spending more than half a year in a jurisdiction qualifies you for tax residency. There are low tax jurisdictions where you can qualify for tax residency by simply living 30 days per year there.

In some countries you could easily avoid taxes on income accrued abroad by not spending more than half year there, others will require you do not have any tie to the country and others will tax you for a few years after you left.

As we see, there is no size fits all solution, and your nationality, the class of assets that you own and your personal situation could have an impact on seeking new tax residency – you should also look at the existence of double tax treaties (DTA), which can bring more clarity to your tax affairs.

The Bottom Line

If you are planning to launch a successful ICO, get the structure right since the beginning – it will save you from operational headaches, will protect your business and its assets, and empower you to execute an optimal financial strategy for your project.

If you have launched an ICO and are experiencing issues due to a non-optimal corporate structure, although there are certain limitations, you can restructure it to be able to conduct business smoothly and hassle-free, and ensure its feasibility in the long-term.

Whether you are going to launch an ICO, or have conducted a successful one, Flag Theory can help you design and implement the proper structure and obtain banking to make sure you can focus on what you do best: grow your business.

Contact us today, it will be a pleasure to learn more about your venture and explore structuring options and solutions.

Would you like to receive the Flag Theory Weekly Letter in your email?

Subscribe to the Weekly Letter