How and where do I set up a company to run an ICO?
ICO’s operate through both an
issuer company (ICO-CO) and an operating entity (OPCO). Why? To separate out legal liability and to have multiple OPCO’s in
various countries to eventually support payments to staff in fiat. Also, it can
very hard to get a bank account for the ICO-CO but you can transfer tokens
received in the sale to one or more OPCO’s in various ways.
There are business entities such as foundations and trusts that allow for more effective ICO offerings but are not suitable for conducting ongoing business. Also, utilizing two entities makes it easier to find the right jurisdiction with the lowest rate of taxation. Securities laws vary by jurisdiction and you may find an especially friendly jurisdiction for what constitutes a security. But note that what matters is where the purchasers live, not where the issuing entity is located. It makes little sense to set up off shore if your primary purchasers are in the USA.
There should be a transfer pricing agreement (TPA) between the two entities so that tokens trade at fair market value.
What If my token offers some kind of residual income, dividend, or percentage yield?
The purchasers are buying a product. They are not investors and should never be called investors. They are also not donors. They are customers who are buying a right to use your product. Avoid giving the token purchasers any privileges or rights in the business. Fund raise through an entity that does not have any shares so a purchaser cannot even make a claim to own shares. LLC’s and corporations are not suitable. Foundations and companies limited by guarantee and trusts are more suitable.
Where do we form the entity?
There are a number of issues to consider including securities laws, taxes, commodities laws, and other topics in multiple jurisdictions.
ICO’s are inherently international and it is impossible to receive a legal opinion in every country. Furthermore, legal opinions do not, by themselves, prevent regulatory action.
Bottom line hard questions:
Is there a reason for the token? How is it used? Do you really need to have your own token or could you ride on top of another already more established token?
As smart contracts are public and open source, it is possible for others to simply steal your code and “race you to the bottom” using ethereum, for instance. One should not be over-exuberant to push a premature idea out the door.
At Private Placement Advisors LLC we are experts in cryptocurrencies and understand the legal structures and processes that underpin ICOs. We will help you set up an ICO in the most favorable jurisdiction and design the best corporate structure.
Join the State Securities Regulation LinkedIn discussion group and go down the crypto rabbit hole with us to learn 1) what will constitute securities in the eyes of state regulators and 2) what will constitute best practices for exempt offerings.