What successful ICOs get wrong, and end up suffering the consequences
Flag Theory Weekly Letter – Thursday June 28th, 2018
During these last weeks we have talked at length about how to structure an ICO and what you must consider from a legal standpoint to ensure the greatest protection, liability minimization, tax optimization and a smooth and hassle-free post-ICO business operations, opening bank accounts, etc.
We even published a series of articles where we explained step by step how to structure your ICO. If you missed it, you can read it here.
During the last year and a half we here at Flag Theory have worked with dozens of ICOs, in fact, members of the Flag Theory team conducted a successful ICO a few months ago reaching a US$22M hard cap in just a few minutes.
This experience has given us a unique approach when it comes to ICOs, since unlike other corporate service providers we know firsthand what works and the issues and setbacks that arise when structuring and conducting Token Sales.
The number one mistake
In our experience advising ICOs often times we find entrepreneurs who do not give the necessary importance to the legal structure. They know that a corporate veil is necessary but they try to save as much as they can with the structure to allocate more resources to other items, such as marketing. They rush the structure or KYC and they cannot get a bank open.
It is true that marketing makes the difference in a Token Sale and in addition to having a solid project, good marketing is what will allow you to cross the line that separates failure from success.
But a poor corporate structure could end up completely erasing your ICO success.
We’ve heard rumors and seen first hand massively ‘ successful ICOs ‘ who have had:
- failed to open any bank accounts
- bank accounts frozen
- paid huge amount of taxes
- been subpoenaed
- been sued
The bottom line is that: ICOs can be structured successfully. You can get a bank account opened (if you do certain things). You can avoid costly lawsuits and litigation. It’s possible.
An optimal corporate structure may not only protect you personally from the uncertainty of the space but may also allow you to save millions of dollars in the future. Next, we’ll discuss what exactly projects get wrong, and how to do it right.
How to do an ICO in the wrong way
At Flag Theory we frequently receive inquiries from successful ICOs, raising millions of dollars, but due to a poor corporate structure they currently need help because they are facing a series of issues. The most common issues being the tax liability derived from the ICO and their struggle to get banking. Although we can certainly help them to optimize this situation this highlights the importance of having the proper setup from the beginning.
Most of these ICOs established their structure through corporate service providers offering cheap & easy ICO set up packages, either being poorly advised or not following the appropriate advice provided to save just a few thousand dollars.
The result, serious compliance issues, a potential million-dollar tax bill and the inability to obtain bank accounts to operate the business normally. The associated expenses/losses can end up being of millions of dollars.
Another common issue is that they select a jurisdiction based on what the lawyers say. You 100% need lawyers for your sale, but it’s more important to select a jurisdiction that is favorable. Lawyers tend to have deep expertise in a specific country, and will only be able to advise you on that one country.
What’s the Perfect Setup?
To begin with, there is no single universal solution for all ICOs. Each ICO, like all businesses, has a different situation, circumstances and a series of unique complexities, including the personal ones of the ICO promoters.
What works for another project may not work for you. There is no one size fits all ICO setup and you should be reluctant to hire those who offer it.
Offshore companies incorporated in jurisdictions with advantageous tax regimes and business friendly policies are powerful tools for conducting business and also for ICOs. At Flag Theory we have been helping entrepreneurs to optimize their business using these vehicles for more than 7 years.
That being said, incorporating offshore is not a magic trick with which you can avoid all compliance, legal and tax issues, etc. To do it right you need to properly structure your business.
Incorporating your offshore ICO without the proper corporate structure can end up causing you more problems than anything else and basically not let you enjoy any of the benefits which it could provide you, both in the tax and legal areas.
Commonly, certain service providers and entrepreneurs overlook a series of complex topics that may have an impact on the post-ICO business.
Note that the following is not tax or legal advice and it is just for illustrative purposes. You should always seek tax and legal advice from a qualified advisor of both your jurisdiction of residence and the jurisdictions where your company is operating.
Although it varies depending on the jurisdictions, normally the corporate tax residency is not determined where the company is incorporated, but where the mind & management is located.
This is especially important in the case of the traditional exempted or international business companies, which by default, are not tax residents in the jurisdiction of incorporation. This means that they can easily be considered as a tax resident in the jurisdiction where their management team is located.
For instance, an IBC incorporated in Saint Vincent but managed from South Korea may be taxed as any other company incorporated in Korea.
Then we have the Controlled Foreign Companies (CFC) rules, which mean that depending on your country of residence, income retained in your foreign entity may be subject to taxation.
Implications of CFC rules vary. In some countries they only apply to the corporate level (holding company) or both corporate and personal level, and others on passive income (with different thresholds and passive income tests) and others on both trading and passive income. Other jurisdictions only tax controlled foreign entities located in low-tax jurisdictions, among other cases.
This means that in certain cases and depending on your tax residency, the annual net cash flow and therefore profits generated by your token sale may be reportable and could be attributable to your income tax return, even if this income has not been distributed.
Related to the previous point, some believe that using nominee shareholders is the quick and easy solution to neutralize these issues. Using nominees gives you a degree of privacy but they should NOT be used to try to avoid potential tax liabilities. This is illegal and you could run into tax evasion, which is a crime in certain countries.
And, actually, it won’t work.
For instance, when opening your bank account to deposit the proceeds of your ICO, the bank is obliged to perform due diligence on the ultimate beneficial owners (UBO) of the company in question.
We are going towards an increasingly globalized and transparent world where jurisdictions exchange account information for tax purposes regularly.
There are already more than 100 jurisdictions (and another 40 committed) that are participating in the OECD’s Automatic Exchange of Information (AEOI) through Common Reporting Standard (CRS) which obliges banks to disclose their non-resident accounts, including UBOs (ultimate beneficial owner) with their respective governments that in turn will share it with jurisdiction authorities where the beneficiaries are tax residents.
For American citizens here is also the US FACTA, where banks are required to disclose their US customers’ accounts to the IRS and face burdensome compliance requirements.
This means that the bank can and will share information about you, the ultimate beneficial owner of your ICO millions, with your country of tax residency, with all the legal issues that this may entail if you have not properly reported them in your tax return.
However, there are ways to legally overcome these issues with the proper ICO set up.
How to do an ICO in the right way
With a robust corporate structure and the appropriate tax and legal advice, one can overcome the aforementioned hurdles and optimize his ICO.
That is why we advise our clients to take the corporate structure seriously in order to minimize legal and tax liabilities in a completely legal manner.
Each project is unique, this is why we take into account all the variables related to your project to provide a solution adjusted to the business and personal circumstances of the project and its promoters. We introduce you to experienced cryptocurrency tax lawyers in the relevant jurisdictions who can help you.
Although the cost of the appropriate corporate structure may be higher than the cheap & easy ICO set up package offered throughout the net, it can save you from several post-ICO headaches, and most importantly, legal liabilities and millions of dollars.
Remember the old saying: you get what you pay for.
If you unfortunately did not structure your ICO properly at the time and are now facing a series of post-ICO challenges, to distribute your team tokens, issues with potential liabilities that can undermine the funds raised, struggles to carry out your day-to-day business operations or access banking services, etc. Depending on your situation, your circumstances and a series of factors we can help you to find a solution and optimize this situation.
If you are planning to launch your ICO do not underestimate the importance of the corporate structure, it can save you millions and empower you to develop your project smoothly and hassle-free.
Optimizing your ICO costs
Now, if you are looking to optimize costs, you might be better planning and executing your marketing efforts wisely.
The marketing budget of an ICO can become a black hole, a cash-eating machine. There are many overpriced services which are shiny but are of dubious effectiveness.
You must surround yourself with a strong team of experienced advisors who can advise you on where to allocate the resources to make cost-effective decisions.
At Flag Theory, we can not only help you design and implement a powerful ICO structure, we can also put at your disposal the experience of our officers leading the marketing of a successful ICO. We will advise you on what works and what does not, and where you should concentrate your efforts and resources to make the right decisions at the right time.
In addition, you can leverage our vast network of contacts that will empower your ICO and our experience to solve crises quickly and effectively. Things at certain times will go wrong, they always do, and the secret of success is knowing how to properly react and make quick and informed decisions when these crisis arise.
In short, at Flag Theory we accompany you throughout the ICO process, providing you with the necessary experience and tools to empower you to conduct a successful Initial Coin Offering.
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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.