Launching a blockchain-based “coin” or token via an ICO (Initial Coin Offering) is now the primary seed capital source for most tech businesses. ICOs work well and there is a ready market of serious investors out there willing to look at all proposals.
Whilst it’s important to point out that some countries regard such tokens as being subject to securities laws, the sector is still relatively unregulated – meaning the entry barriers are low and if you have a good idea you can bring it to market quickly.
On the other hand, the whole area has become a lot more sophisticated in recent years – and be prepared for a lot of competition. For your ICO to succeed, you will need a professional white paper demonstrating not only a good idea, but also the business acumen to make it work.
The factors are just some of the challenges of obtaining funding for a new tech business. What many entrepreneurs forget, however, is the importance of “real world” legal structuring. Just because you are used to doing business pseudonymously in cyberspace, you can’t necessarily rely on that to protect you legally when larger sums of money are involved.
At Offshore Pro Group, our specialist lawyers have gained substantial experience working with ICOs in recent years. Whilst you the entrepreneur handle the technology and the marketing side, our job is to make sure the legal structure in the background is robustly structured to protect the assets you will gain. We don’t get involved in searching for investors, but we can help you set up offshore companies, trusts and foundations that are the typical legal vehicles used to interact between cyberspace and the world of traditional financial wizardry.
Planning the legal structure is something you should do early on in the project, with adequate professional advice. There are three main reasons for this:
- Credibility.
If investors know that you have properly thought out the financial and legal aspects of the business, they will have greater confidence in your skills to make a go of the business. We therefore suggest you include details in the White Paper of the company issuing the tokens. In most cases, token buyers are quite happy, even delighted, to see an offshore structure – but in other business cases, you might find it smart to form an “onshore” part of the structure in a crypto-friendly country like Malta, Portugal or Estonia. LLCs from Delaware and Wyoming, and Canadian partnerships, are also popular for this purpose. The tokenization can still take place offshore.
2. Asset Protection.
In any business, you need to have all bases covered – “expect the best, but plan for the worst” is the smart advice. Many new businesses fail in their early days. Causes may be market conditions, disputes with partners, unexpected technological happenings, or even black swan events – for example, who would have expected the Covid-19 pandemic before it happened?
Asset Protection in this context refers to protecting the funds already raised from legal or illegal attack. Blockchain technology is very transparent – once you have raised funds everybody knows about it and you can quickly become a target. You might get hit with lawsuits that cost a fortune to defend against, or people simply trying to steal your assets using legal or illegal techniques. In the worst case, you could be made personally liable, standing to lose your home, your savings and ending up in debt. The good news? All these risks can be mitigated with careful advance planning. But don’t make the mistake of trying to fix things after they start going downhill – that could be viewed as fraud and could get you into a lot of trouble.
3. Simplifying Tax and Reporting.
With development teams across national borders, and hundreds or thousands of people from all over the world funding a project, with some hoddling tokens and others just trying to make a quick buck… it is just common sense to base the project in a tax neutral jurisdiction. Imagine the burden of trying to handle withholding tax deductions or arranging certificates to enable investors to claim tax treaty benefits that traditional stock market companies have. In an ICO scenario, that kind of compliance work would be impossible.
Countries like the Cayman Islands, BVI and St Kitts and Nevis have jumped heavily on board the ICO business. They are called “tax neutral” for a reason. They won’t necessarily help you pay less tax, but they will simplify everything. Ideally, the business will pay no tax on its income, and certainly not on its seed capital. Tax compliance will simply become 100% the responsibility of the token holders, relieving you of a huge headache and letting you focus on developing your business.
In some cases, and depending on local laws, structures such as offshore trusts and foundations can help you to legally avoid certain reporting requirements in your home country. For example, you and your development partners might be able to lock future gains into a foundation – a legal structure that does not have owners. Your future wealth can be dedicated and controlled according to your needs, without being yours.
How we make Banking Easy for ICOs
Another perfect fit between the offshore world and ICOs is in terms of banking. You’re probably aware that it’s an uphill struggle these days for a traditional offshore company to open a bank account. But normally ICOs don’t need to sell their own tokens for fiat money – the token issuer just receives funds on the blockchain in stablecoins, BTC, ETH etc. That’s another headache that is solved.
In a typical structure we recommend, the company that issues the tokens has no bank account and no fiat assets whatsoever. The tokens are stand alone, so once the ICO is completed, the issuing company can be liquidated and the digital assets flow up to a trust.
Since the offshore trust is a separate legal arrangement, not directly linked to the ICO, it is relatively easy for the trust to open a bank account and cash out crypto to fiat funds if required. In many cases, however, that’s not even necessary.
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on offshore structures and jurisdictions that would best meet your asset protection goals.
Trusts: the Ultimate Smart Contracts?
For those who may understand ICOs but are not familiar with the law of trusts, here’s a very easy way of understanding how a trust works. Coins or tokens are not securities, but are smart contracts. Trusts are also contracts.
A smart contract is defined by Investopedia as “a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible.” Furthermore, smart contracts are “irreversible and unmodifiable once deployed.”
A trust is something very similar: Instead of being written into lines of code, the instructions are written into a legal document called the trust deed. Although technically you need somebody to execute a trust manually rather than it being self-executing, that person is simply hired to execute legally binding instructions. In a trust, the deed also controls the execution, and the trustee is obliged to keep accounts, making sure transactions are trackable – but private. A trust in law can be either revocable or irrevocable, depending on how the deed is written at the time it is created: if the trust is irrevocable that is the same as a smart contract being “irreversible and unmodifiable once deployed.”
A Typical Flow Chart for Offshore Asset Protection Trusts in an ICO Scenario
- A law firm sets up a Trust and a Foundation in separate jurisdictions each with an obligation as starting capital. The Foundation is the sole beneficiary of the Trust.
- The trust sets up an LLC to issue tokens or smart contracts. The LLC sells its newly-minted tokens in return for other tokens.
- The Foundation sets up a Wallet LLC.
- Once all tokens have been issued, the LLC is liquidated and the digital assets pass up to the trust.
- The trust makes a distribution of assets to its sole beneficiary, a Foundation. The trust is terminated. At this point the original issuer no longer exists and therefore has no legal liability. The tokens themselves are self-executing contracts so they continue to operate independently of the issuer.
- The Foundation invests funds in the Wallet company, invests in the development and operation of the underlying business, and creates new and independent trusts for other stakeholders such as developers. (Comparable to Employee Benefit Trusts).
Of course, as the saying goes, “the devil is in the details.” The structure is simple enough, but there is no one-size-fits-all solution so it is important to take appropriate professional advice. It’s essential to use the right language in trust deeds and LLC operating agreements, and to analyze carefully the reporting requirements.
Are you interested in protecting assets from your own LLCs? Would you like an introduction to our specialist lawyers, or a quotation for setting up a structure similar to the one above? Don’t hesitate to reach out to us by email, or using any of the contact methods shown on this page!
