The GET Protocol Foundations legal standing to the ICO. Complying to Dutch & EU law.
“Lawyers are like beavers: They get in the mainstream and dam it up”
John Naisbitt.
Being a lawyer myself, I have some understanding of the implications when legal issues are not addressed the right way. In the case of an ICO it could mean that a regulator comes knocking on our door after a couple of years with a huge fine and tells us we’re an illegal bank or the GET-token could be deemed a security, in which case we had to inform investors with a prospectus and face a measurable fine as well. For these reasons and many more, the importance of the legal issues is not lost on this team.
After countless meetings, calls and what not it’s time to bring you all up to speed on how the GET-foundation addresses all the legal uncertainties that are imminent when executing an ICO in this day and age.
I fully understand that this is not the kind of blogpost that will bring you in a state of ecstacy, but I urge you to take the time to read it nonetheless if you’re planning on participating in the ICO. Really, this kind of stuff is important.
The GET-approach
As you hopefully all have noticed, we’re trying to do the ICO in the most correct way as possible. With GET-protocol, we strive to set an example for everybody who has anything to do with crypto. We want the tokens to be evenly distributed among as many ‘believers’ as possible. This means, a small pre-sale (12%), a maximum participation per tier and a reasonable hardcap to fund development for the most part. Furthermore, we are as transparent as can be. We do not shy away from questions, so whatever’s on your mind. Let us know, because there is always room for improvement.
We love the cryptospace and all of its quirks, but let’s be honest; there are some bizarre things going on and it’s not a bad thing that governments and financial regulators want to protect the interests of their inhabitants. That’s the whole reason for their existence after all. That’s why we’re trying to set an example to show how much potential blockchain & crypto has. So that perhaps even governments & regulators come to embrace this beautiful movement and see it as a huge opportunity instead of the xenophobic approach most governments and regulators are taking now.
Jurisdiction
When preparing the ICO we’ve been thorough, so we investigated all the available options for a jurisdiction. This was perhaps one of the more complex choices because the choice for a jurisdiction touches every legal aspect of the ICO. The most important element during this choice was certainty.
We were looking for a place where we would be 100% certain the GET-foundation wouldn’t be deemed a bank, the GET-token wouldn’t be deemed a security and hey, if the tax environment was good as well, that would be pretty sweet too.
Unfortunately, there is no such place as of yet. The Zug Kanton in Switzerland which is smartly rebranded as the “Cryptovalley” makes promises to becoming such a place, but for now it’s not. Not even by a long shot. Zug is also hugely expensive, and we would have to use a fair deal of creativity to run the company from Amsterdam, but still reside in Zug. Just renting a room there for an office is not nearly enough to convince the tax collectors. This alone poses risks and it would also feel we would be hiding or running from responsibilities and discussions. This is absolutely not the case. We’re going to eliminate ticket fraud and disgraceful secondary ticket prices with a blockchain application on a global scale. That’s all.
So, uncertainty is eminent no matter which jurisdiction we choose. That being the case, we chose the devil we know rather than the devil we don’t. The Netherlands became the jurisdiction of choice for the GET-foundation.
The Netherlands is known for its consensus model in politics, which makes it a very trustworthy and stable government to deal with. Being the oldest trade nation in the world, the laws are known to be creditor friendly. This meaning that the interests of foreign investors are well protected and fairly easy to get enforced by them.
The Netherlands has its fair amount of red tape, but the upside is that, there is almost no corruption. Oh yeah, our company is actually in the Netherlands, if that still counts for something ;-)
Legal entity
Choosing a legal entity on the other hand was fairly simple. The main objective in this case was to make sure the participants in the ICO know that the raised money is actually going to be used for the further development of the protocol. In the Netherlands there is only one kind of entity which ensures that money can’t be taken out of the organisation easily, the foundation, or “stichting” as it’s called in Holland.
If the existing legal entity of GUTS was to issue the GET-token, the proceeds would have ended up on the balance sheet and could be used for everything the board of directors see fit. Decisions could include paying out massive dividends to shareholders because there is a substantial reserve, or let everybody drive a Mercedes. I myself would be restrained to participate in the ICO if such was the case.
The GET-protocol is initiated by GUTS tickets, but the protocol will be managed by a separate entity. In short, the GET-foundation will continue building a blockchain back-end ticketing engine for all ticketing companies to use. GUTS is the first client of the GET-protocol and will only be responsible for the front-end part of their product. The raised funds of the ICO are therefore managed by a separate non-profit legal entity, the GET-foundation.
Funds in a foundation are often referred to as ‘dead capital’ in the Netherlands because it’s not possible to pay out funds to the founders or board members of the foundation. There is a strict — and often ideological — description of the goal the foundation tries to achieve. Funds can only be spent if this serves this purpose. In the case of the GET-foundation this goal is further development of the GET-protocol and achieve market adaptation of the protocol. So, rest assured; it’s legally impossible for the founders to extract funds for their own benefit. Another important advantage with choosing the foundation as legal entity is that the Dutch policy “Wet Financieel toezicht” or “Wft” exempts non-profit organisations from the regulatory scope. The foundation became the legal entity of choice for our ICO.
Financial regulation and supervisors
So far there is no clear view by any government how to label cryptocurrencies, let alone altcoins and its hugely diverse applications. In the Netherlands, this is also the case.
Financial supervisors are hesitant to provide certainty and it looks like they would prefer using existing laws to define what a cryptocurrency is. Lawmakers are often the slowest to adapt to new situations, and this time is no exception. Since there is no custom-made law, we have no other choice than to follow this strategy as well. We had to make decisions on how to legally structure the ICO based on case law, and there wasn’t that much around.
Most of the readers of this way too long — and boring — blog have heard about the Howey test. This test determines if the token that is issued would be deemed a security or a utility by the SEC. This classification is very important because this ‘label’ determines the kind of regulation which would be applicable. This is no different in Europe; the way a token is labelled determines almost everything. Only thing is that this labelling consists of more than a ‘simple’ security / utility discussion. Under Dutch law there are more factors to take into account. The “Wet Financieel Toezicht” or “Wft” uses certain definitions that are relevant, so I’ll go by them one by one.
Security
The GET-token is no security. In the Wft definition a security should be a transferable share or another similar transferable certificate. So we need to determine if the GET-token is a share or a similar certificate.
Share or similar certificate?
The GET-token is not a share because:
· A token holder has no right to dividend or other sorts of profit distribution. GET is to be exchanged on the open market and a token holder cannot enforce the protocol to buy the token back. The protocol will buy the tokens from the open market if an event is created, but only then. As long as the protocol processes events, tokens will be bought from the open market, but there is no legal obligation for the GET-foundation to buy the tokens back.
· For the aforementioned reason, there is also no obligation for the foundation to pay out yield to the token holders.
· GET -tokens do not represent (partial) ownership of the foundation what so ever, and there are no special control rights for token holders to influence the foundation.
· A foundation under Dutch law is prohibited to issue shares or to pay out profits.
Bond, debt instrument or transferable certificate
Apart from being a security, if the GET token would be deemed one of the above we’d still have to comply with the regulatory framework of the Wft. The common denominator with bonds, debt instruments or transferable certificates is that there must be some kind of debt.
The reason why the GET token is no bond, debt instrument or transferable certificate:
· The GET-foundation, as issuer of the GET-token, has no debt to the token holders because there is no enforceable or legal obligation to buy the tokens back. Again; the contract code ensures that if events are being processed within the protocol it will buy tokens from the open market at a minimum exchange rate of € 0,50 per GET, but there is no legal obligation of the foundation to buy back no matter what. The protocol acts as a matchmaker for supply and demand between the event organiser and the token holders, the GET-foundation has little to do with the actual buying of the tokens at that point.
Investment object
An investment object in the sense of the Wtf must have an element of management of the invested funds. With the GET-token this is not the case because:
· Ether is exchanged for GET. The actual owner of the GET does his own management of the token. The GET-foundation is not involved in the personal management of the GET-token.
Collectable funds from others
If an organisation holds collectable or recoverable funds for others, the Wft dictates that such an organisation is obligated to have a banking licence. There are a few reasons why the GET-foundation holds no such funds for others and therefore a banking licence is no necessity:
· Ether is exchanged for GET. Ether is not deemed money, so therefor no actual monies are being obtained.
· There is an exchange agreement and the foundation is not legally obligated to pay back the token holders in any case.
Electronic money
Electronic money represents a monetary value that is stored electronically or magnetically. If the GET-token were to be deemed electronic money, the foundation should have a licence from the central bank to issue the tokens. GET-tokens do not qualify as electronic money because:
· A GET-token holder has no legal claim on the foundation to buy back the token.
· GET is not being distributed in exchange for actual money, but in exchange for Ether which is not classified as money.
· In the first phases, it’s not possible to pay anything in GET other than ‘fuel’ the protocol for processing ticket sales. If or when GET is used to buy drinks and such at the events this changes, but we’ll be sure to have the proper licenses in place by then.
KYC / AML
Let’s first start of what KYC is — We understand KYC to be procedures aiming at preventing bribery, corruption, terrorism financing and money laundering by identifying customers, the customer’s risk in terms of propensity to commit aforementioned acts and by monitoring their transactions. Why the GET-foundation has no obligation to ‘know your customer’:
· The GET-foundation is incorporated in the Netherlands. We are therefore subject to Dutch law. The Law for prevention of money laundering and financing of terrorism (Wet ter voorkoming van witwassen en financiering van terrorisme) sets out when KYC as defined above needs to be performed. Our activities do not fall within the scope of that law. Accordingly, we are not obliged to perform KYC. Because financial law is mostly harmonised through EU-directives and regulations this legal point of view is also applicable for all other EU-member states. If we have reason to believe that there is a KYC-risk because of your country, you’ll be contacted by our team.
Loose ends & essential takeaways
So after thoroughly researching the possible legal issues myself and with the help of the very talented team at De Roos advocatuur in Amsterdam we came to the conclusion that there are very little legal risks for our particular ICO.
There are two essential takeaways from this blogpost;
First and foremost is to understand that the GET-foundation has no legal obligation to buy back the tokens and can therefore not be deemed a security, Bond, debt instrument or transferable certificate.
The protocol will buy tokens from the open market as soon as a ticketing company creates a new event within the protocol but no sooner or later. Therefore, your risk as a participant in the ICO is exactly this;
If there are no new events created within the protocol, the token will be worthless. In that case the GET-foundation is not obligated to buy your tokens.
So, if you believe GUTS or another ticketing company will use the protocol to sell event tickets, it’s all good. In this perspective, it’s useful to point out we’ve signed a deal to sell all tickets for the theatre powerhouse in the Netherlands ;-)But also in international respect the interest in our company is huge. At this moment we’re talking to interested parties in the UK, Italy, Canada, Australia and the USA. Check out our blogposts in the coming days for some great announcements.
The second takeaway from this post:
We’re exchanging Ether for GET-tokens. Ether is not classified as legal tender and therefor GET cannot be deemed as electronic money, collectable funds from others or an investment object.
You can find the terms of exchange here.
