Zürich, 21 March 2018 — Back in 2014, the Ethereum Foundation truly pioneered the Initial Coin Offering. At that time, it had to hatch its way through a dense jungle of jurisdictional uncertainty. Since, many ICO or TGE (Token Generation Event) sponsor teams have followed in its footsteps, using the Swiss Foundation as their vehicle of choice. In this post, we briefly examine whether there are good alternatives to the Swiss Foundation and why.
Our new Swiss node
Otonomos has recently moved to Switzerland from Singapore, with the bulk of its development work done out of Toronto and its legal engineering centred in the U.S. and London.
Privacy was the main reason why Switzerland proved attractive as a base, as it offers clients a higher degree of protection than some other jurisdictions.
However, despite its new Zürich base, Otonomos does not offer Swiss Foundations as part of its online “companies-à-la-carte” menu, as in our analysis a Swiss foundation may not be so suitable for an ICO.
Precedent: The Ethereum Foundation ETH ICO
In earlier disclosures about its finances, the Ethereum Foundation indicated it spent over half a million dollars in legal advice before settling on the Swiss Foundation for its token sale.
The resulting structure has since been relied on by many in the crypto community to structure their offering in a similar way.
As a result, the Swiss Foundation, and to a lesser extent its neighbouring Liechtenstein Stiftung, became the default template for many of the ICOs.
However, many who set up a Swiss Foundation, including the Ethereum Foundation itself, now seem to have a degree of buyer remorse.
What they gained in legal certainty, they may have lost in flexibility.
Governance of the Swiss Foundation is very Swiss-centric, with strict requirements to appoint local representatives and hold physical Board meetings.
Whilst visiting Switzerland for the occasional Board meeting may seem harmless, it does add to the cost of a Swiss Foundation, which is already very expensive to set up and maintain.
More harmful is the lack of flexibility, or as US attorney Stephen Palley puts it in a recent article:
“It turns out that creating a Swiss foundation to raise hundreds of millions of dollars in an ICO doesn’t mean you can actually use the money.”
The founders of Tezos are finding this out the hard way: they can’t directly access the $1.3 billion controlled by the Foundation they created. It seems an “autonomous legal entity” means exactly that:
“The trend of U.S. blockchain startups creating Swiss foundations is over. It makes no more sense than a Swiss startup incorporating a U.S. non-profit in Hackensack, N.J.”
More teams now seem to come round to this view, some only on the morning after, and we have received anecdotical evidence that the doyen of Swiss ICO work, the legal firm MME, is now seeing incorporations of Swiss Foundations taper off.
Is there a good alternative?
Singapore is often mentioned as an alternative to Switzerland, with its “Foundation” used by a fair number of sponsor teams for their token offering.
In addition, arguably as a result of the vagaries of its securities laws, Singapore is perceived as a good jurisdiction to offer coins or generate tokens.
However, here too some misunderstandings need to be cleared out of the way.
First and foremost, Singapore does not have a Foundation. It has what is called a “Company Limited by Guarantee” (CLG) which is traditionally set up for charitable purposes, hence its similarity with the non-profit Swiss Foundation.
A legal memorandum from one a major English lawfirm obtained by Otonomos highlights some shortcomings of the Singapore CLGs:
- First, a CLG is a public company in Singapore. This has a number of consequences, including ensuring compliance with additional requirements on the maintenance of a register and index of members, company administration and accounts, extra requirements regarding the qualifications of a company secretary, and a longer notice period for holding a general meeting.
- A CLG, as a public company, is subject to more stringent audit requirements. Whilst this may be perceived as a benefit to having a CLG as a vehicle for token offerings compared to the more common Singapore-incorporated private limited company (Pte. Ltd.), an audit is expensive and often painful as legacy auditing firms use rather antiquated techniques and have no reference framework when dealing with tokens as assets of a company.
- Finally, there is the perception that CLGs are non-profit. However, as a legal matter, there is in fact no requirement that CLGs are not for profit entities: Using a CLG as a vehicle for a token offering would not address token holders’ concerns on restrictions on distribution of capital to members (shareholders) of the CLG, as a CLG may still distribute profits to its members. If CLGs would wish to become a “registered charity” in Singapore to come closer to a Swiss Foundation, it would add significantly to its governance burden. Most prohibitively, according to the Charity Act, its purpose would have to “wholly or substantially to the community in Singapore”…
In summary, it seems that setting up a Singapore CLG, which has been quite fashionable especially amongst many mainland Chinese ICO teams forced to conduct their token sale outside of China following its recent ban, may be doing so on the basis of misguided advice.
That said, Singapore should definitively be considered by ICO teams as a base for their operational entity: A simple limited company can be set up within two days and then funded with token sales proceeds to start doing work in the real world, like paying invoices and hiring people.
Bear in mind however that the local talent pool in Singapore remains relatively shallow for quality blockchain-related work and foreign hiring is not so easy: The Government maintains an unarticulated but nonetheless quite strictly observed rule that for every non-local you hire, you will need to hire a local to balance your employee pool.
Also, there are some tax caveats when it comes to token sale proceeds.
Finally, despite Singapore’ apparent regulatory embrace, on the ground, banks are increasingly reluctant to open fiat accounts for companies funded by ICO proceeds working on crypto-related projects.
All in all, after closer analysis Singapore may be less suitable for an ICO or TGE issuance than often believed.
An unusual suspect: The US (and Canada)
Who else is out there? Perhaps unexpectedly, the United States is less bad than often painted, at least if you are clearly intent on offering tokenised securities and want to structure your ICO unambiguously as a securities offering.
Whilst US securities laws are not always clearly articulated, they have been amply illuminated by established legal precedent and centuries of case-law.
In addition, some major law firms and also smaller boutique legal practices have now developed rather formidable legal expertise in how securities laws may apply to the crypto space.
Finally (and we may now be pelted with tomatoes) the regulators have actually been more accommodating and pragmatic than initially feared (though that can change if more scams emerge or competing agencies continue to elbow for regulatory competence).
Meanwhile, in Canada
Then there is of course Canada, which people (read: Canadians) like to say has all of the good of the States without any of the bad!
The same may apply to their securities laws and the foresight of their regulators. Admittedly, the fact that Canadian law enforcement seems to have a shorter arm than their draconian US colleagues may add comfort.
Irrespective, few places beat the US and Canada if you want to structure your token sale properly and attract the right type of investors.
We will be reporting from Toronto on the pros and cons of Canada in a next issue of our Otonomist newsletter, highlighting Mike Novogratz’ move to float his new “blockchain merchant bank” via a reverse listing on the Toronto Stock Exchange, which could set an interesting precedent.
A genuine multi-purpose ICO/TGE vehicle
A relatively new vehicle which since its inception has been very popular as an entity for asset protection by individuals and family offices is the Curaçao Private Foundation (“SPF”).
Think of the SPF as a civil law version of the Anglo-Saxon trust, with a crucial difference that the SPF is a body corporate separate from its founders, something the trust lacks.
This allows you to issue tokens via an issuing vehicle that is an entity in its own right.
The Swiss Foundation achieves that, however as sponsor of the ICO, you will also want direct say over the sales proceeds. In contrast with the Swiss Foundation, the Curaçao SPF leaves governance rights squarely in the hands of the founder(s), who can be given full discretion over who is appointed to the SPF’s Board, and who the beneficiaries of the SPF are.
This flexibility also extends to the purpose of the SPF. This purpose can be defined significantly more broadly than that of the Swiss Foundation.
Furthermore, its purpose can be changed along the way in case you decide to use the token proceeds for a different purpose, and such purpose does not have to be limited to charitable work and can even include actively managing and investing the token proceeds.
Finally, a Foundation in Curaçao is significantly less expensive to setup and maintain and can be managed entirely from abroad.
At Otonomos, we have spent significant time examining the ins and outs of the SPF and based on advice from our Curaçao counsel, we believe it is may tick all the boxes for a ICO or TGE, in addition to its traditional use as a privacy and wealth preservation tool.
The long arm of securities laws
Finally, with the risk of patronising readers, one give-away observation: lots of clients come to us in the rather naïve belief that by setting up an entity in a specific jurisdiction, only the laws of that jurisdiction apply.
However, specifically when it comes to securities laws, irrespective of where you base your token issuing vehicle, issuing tokens from say a Swiss or Curaçao entity does not alter the analysis under U.S. laws, and you want to make sure you talk to advisors who know their way around the patchwork of regs in the U.S. and beyond.
In this context, we particularly want to caveat about the Europe Union: In our analysis, sponsor teams may actually be more at risk from offering tokens that can be regarded as securities in Europe, with its patchwork of discordant Member States regulations, than in places like the US and Canada that offer greater legal certainty.
2018 may be the year many ICOs will fess up as securities offerings, and getting it right will help break the monopoly of centralised financialdom in how worthy projects get funded. As a community, it is important we get this right together and Otonomos looks forward to continuing to help.
Use this link to schedule a FREE 30 minutes introductory call with one of our specialists to talk about your past our planned ICO/TGE and how to optimise your structure.