Incorporation of token-issuing entity
Caution: this is not legal or financial advice!
Before selling tokens, it's crucial to establish a legal entity in a jurisdiction with clear and favorable regulations. This entity will be responsible for issuing the tokens, ensuring compliance with relevant financial and regulatory laws. Choosing the right jurisdiction can significantly impact your project's success, particularly in the complex regulatory environment surrounding digital assets.
The jurisdiction of your token-issuing entity does not need to be in the same as the jurisdiction of your development team. There are some caveats to that, but that's something you may wish to seek from a legal professional.
Choosing a Jurisdiction
When selecting a jurisdiction, it’s important to find one with a supportive legal framework and clear guidelines for token issuance. Many blockchain teams opt for regions like:
Switzerland: Known for its clear regulatory stance and the presence of "Crypto Valley," Switzerland has been a preferred destination for blockchain projects seeking a friendly environment. Switzerland is towards the top end of costs compared to other jurisdictions.
Singapore: Singapore is another popular jurisdiction, with its regulatory clarity around digital assets and a strong focus on financial technology. Costs can be comparable with Switzerland.
Cayman Islands or British Virgin Islands (BVI): These jurisdictions are often chosen for their favorable regulatory and tax environments, making them an attractive choice for token-issuing entities. The costs will likely be cheaper in either jurisdiction compared to Switzerland.
Choosing the right jurisdiction is a strategic decision that can help in establishing credibility with investors, avoiding regulatory scrutiny, and ensuring smoother operations. These are not the only jurisdictions, but rather some of the most popular choices. Others include Gibraltar, Malta, Liechtenstein although they never quite reached the same popularity.
Note that in some cases, lawyers may suggest a double structure where an entity in Caymans owns an entity in BVI. It is hard to know if this is truly necessary or just a fee structure for lawyers, although they may argue that the additional structure will offer better protection from lawsuits.
Consulting Legal Experts
Navigating the legal aspects of token issuance can be complex, and consulting with experienced legal advisors is highly recommended. Start by finding a lawyer within your own jurisdiction who has knowledge of blockchain and token regulations. They may also help you identify the best international jurisdiction for your specific needs.
It is also possible that other founders or investors can point you in the right direction to find a suitable lawyer.
Specialized Legal Advisors: Look for advisors who have experience in working with token issuances and have knowledge of cross-border regulations. These experts can help you avoid pitfalls and navigate compliance issues.
Local vs. International Lawyers: A local lawyer can provide initial guidance, but international expertise may be required when it comes to incorporation in another jurisdiction.
Setting Up the Entity
Once you’ve selected a jurisdiction and legal advisors, you will need to establish the token-issuing entity. This often involves several steps:
Entity Formation: Register the entity in the chosen jurisdiction. Depending on the location, this could be a foundation, a company limited by shares, or another type of legal structure.
Regulatory Compliance: Make sure your entity complies with local financial and regulatory requirements. This could include filing with regulators, adhering to anti-money laundering (AML) policies, and Know Your Customer (KYC) requirements. For token sales, it is possible to outsource these third party service providers (e.g. Onfido).
Challenges and Considerations
Changing Regulations: The regulatory environment around digital assets is constantly evolving. It’s crucial to keep abreast of changes and work with advisors who can help you adapt.
Costs: Incorporating a token-issuing entity in a favorable jurisdiction can be costly. Be prepared for legal fees, registration costs, and ongoing compliance requirements. Costs are quite likely going to be a minimum of $25,000 to get set up, if not more. There are also on-going costs associated with keeping the entities active. There are known cases where law firms offer a package of legal help for $100,000. These are chunky costs for teams just getting started and not feasible pre-raise.
Liabilities: Understand the liabilities involved in issuing tokens. An incorrectly set-up entity could leave you personally liable for legal or financial consequences, so it’s important to do it right from the beginning.
Taxes: While it is common to set up a token-issuing entity in a low-tax jurisdiction, it doesn't necessarily mean complications won't arise regarding taxes. The tax authority in your local jurisdiction (where your development team is located) may wish to tax you regardless, depending on several factors. These could include the presence of intellectual property in your jurisdiction, whether the local authority considers the token-issuing entity to be a genuine, independent entity, and whether there are substantial operations or personnel in your local jurisdiction. Consulting with tax advisors who understand cross-border regulations is crucial to avoid unexpected tax liabilities.
Practical Advice
Start Early: The incorporation process and regulatory approval can take time, so start early to avoid delays in launching your token sale.
Seek Referrals: If you're unsure where to start, seek referrals from other founders who have successfully incorporated in favorable jurisdictions. Recommendations can often lead you to reliable legal advisors.
No One-Size-Fits-All: Remember, there is no one-size-fits-all solution. The best jurisdiction and structure depend on your project's specific needs, your goals, and your audience.
Establishing a token-issuing entity is a critical part of preparing for a token sale. By choosing the right jurisdiction, consulting with experienced advisors, and ensuring compliance with regulatory standards, you can mitigate risks and lay the foundation for a successful token issuance.
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