The Curious Case of Swiss ICO Foundations - Is the Non-Profit Foundation Structure Suitable for All ICO Projects?
This post is a part of the forthcoming publication of the legal article titled “The tale of Swiss ICO Foundations — Advantages and limitation in the choice of the adequate legal form” authored by Arnab Naskar (Founder, SICOS.io) and Bruno Pasquier (Attorney at Law, Fribourg/Berkeley). The authors are also thankful to Lars Schlichting, Partner at KPMG Switzerland, and Lennart Ante, researcher at Blockchain Research Lab, Hamburg University.
Founders considering establishing their Initial Coin Offerings (ICO) in Switzerland often encounter the question of what kind of legal entity is suitable to conduct an ICO. Many sources believe that the Swiss non-profit foundations (“Stiftungen”) are the optimal legal structures to conduct their ICOs. The Ethereum based non-profit foundation was formed to manage the funds raised through an online crowdsale (ICO) by the Ethereum Switzerland GmbH in 2014. Subsequently, many non-profit foundations were formed to conduct ICOs, for example the Tezos Stiftung which raised USD 232 million in a few weeks in 2017. Even though other circumstances might be relevant, the main reason for the choice of this legal structure lies certainly in tax optimization. Indeed, while profit oriented foundations pay taxes at a lower rate than corporations, the very common non-profit foundations are, under applicable law, relieved from the payment of most of the taxes. However, this relaxation may not last long as under a new law that will come into effect at the beginning of 2018, non-profit foundations can only claim exemption from the federal profit tax if the income of the entity is within CHF 20’000., 
Essentials to be qualified as a non-profit foundation
Can all foundations register as a non-profit foundation. No, not all foundations can be treated as a non-profit entity. Only a foundation that pursues an [altruistic way] a [general public object] within the meaning of Art. 56 lit. g of the Federal Act on Direct Federal Taxation can be termed as a non-profit foundation. The activity can only be termed to fulfil a [general public object] if it is of a charitable, humanitarian, health, ecological, educational, scientific or cultural nature and aimed at an unrestricted circle of beneficiaries and not only limited to a circle of beneficiaries. In addition to that, the founders have the responsibility to act in an [altruistic way]: i.e. they should not have any — even indirect — personal financial interest linked to the operation of the non-profit foundation. Finally, the funds must be used exclusively, but also irrevocably for the public object, and the activity must be effective.
Considering these requirements, can the non-profit foundation structure, in some instances, be a suitable legal form for conducting an ICO? The answer is of course positive, if the final goal of the ICO is to pursue in an altruistic way, a general public object. It is relevant to mention that a non-profit foundation vehicle is quite appropriate if the ICO proceeds to finance a public object and where no personal interest of the founders is involved. For example, some non-profit organizations already used blockchain technology to finance charitable objects (e. g. recently to send funds to impoverished and vulnerable families in Pakistan).
ICOs and their public objects
However, most of the ICOs are not exclusively seeking public welfare. A closer look at the commercial register or white paper shows that the development of new technologies is often declared as the “non-profit” goal of the newly established non-profit foundation vehicles. Even though the concerned projects certainly help to develop new technologies that may be an open source protocol, most of the entities consider the ICOs as part of their business model to kickstart project development or mass adoption which ultimately will give them financial benefit. Therefore, it may be hard to establish that those founders are lacking any indirect personal interest in the success of the ICOs. What we have documented from various ICOs, there are many common ways for the founders to take part in the financial success of the ICOs. It is a common trend in the ICO market that the founders, advisors or contractual partners often hold large number of tokens in personal capacity, for their personal benefit. Another example of the financial interest is that the founders often expect a percentage of the monies raised in an ICO. In a recent internet blog post regarding one major ICO project, it was claimed that the non-profit foundation which conducted the ICO, may pay 8.5% of the raised capital to the founders for their contribution to the project. If this statement is accurate, it may be hard to establish that the foundation is performing non-profit objectives as the founders have direct financial interest in the ICO vehicle.
Why the non-profit foundation structure is not suitable for all Swiss based ICOs
Taking this discussion further, we consider that the Swiss foundation, in many cases, may not be considered to be the ideal legal structure for Swiss based ICOs. First of all, as discussed above, the qualification as a non-profit foundation may not be accepted by the tax administration when the founders have a personal interest in the success of the ICOs. Even if the cantonal tax administration accepts the qualification as a non-profit foundation, the supervisory authority may ensure that the foundation’s assets are exclusively used for their declared (non-profit) purpose. Setting the tax aspects aside, the second consideration, which applies to both profit and non-profit foundations, is the lack of flexibility of this legal structure. As mentioned above, the foundations are under supervisory power of the administration which shall, for example, ensure that the board of trustees utilizes their assets for the declared purpose. In addition, the objectives of the foundation can be amended at the request of the founders only after at least ten years after the foundation (art. 86a para. 1 Civil Code) is formed. As a result, during the period of ten years, the assets cannot be used for other purpose(s), other than the one described in the foundation’s charter. The regulation is even more restrictive when the foundations are pursuing public objects, because the new objects must be of public interest (art. 86a para. 2 Civil Code). This legal rigidity may be unsuitable for blockchain based entities as the technology is fast evolving. It is easy to imagine that some ICOs will be unable to deliver their promised products within the promised framework. It is also possible that a new regulation may make the promised product impossible or very difficult to launch. In that case the ICO projects will need to change their object (documented in the non-profit foundation charter) which will be very difficult to accomplish. For all the above-mentioned reasons, we believe that foundations are often not the most adequate legal structure to conduct ICOs.
Second thought- why not a for-profit entity
In contrast, we consider that corporations, either the company limited by shares (“Aktiengesellschaft”) or the limited liability company (“Gesellschaft mit beschränkter Haftung”) can be an adequate legal structure for conducting an ICO, subject to other regulatory requirements. Projects like Santiment and Jelurida (Ignis ICO) have used this form of legal structure to conduct their ICOs from Switzerland. Even though the Swiss corporations [JG1] are not as advantageous, in terms of taxation aspects, as compared to the foundation structure; profit and capital taxes are low compared to other jurisdictions. Especially considering that the profit tax burden can be reduced, when the money raised with the ICO is invested internally in the development of the tokens or the project. In addition, international companies with foreign-related activity and administration in Switzerland can have an advantageous tax treatment by the Swiss cantons (Art. 28 par. 4 of the Federal Act on tax harmonization). Furthermore, these legal structures have higher degrees of flexibility as compared to the non-profit foundations. The founders can take part in the benefit of the corporations or share profits with higher flexibility. The shareholders can also change the objectives of the entity or accept new shareholders to deliver the promises made to the ICOs contributors, subject to proper disclosure mechanism.
ICOs are here to stay as a new way of corporate fundraising. However, the projects conducting the ICOs must be very careful when selecting the legal structure. The global regulatory environment is maturing to deal with ICO projects. Considering all the above-mentioned reasons, we can conclude that the non-profit foundation vehicle is not suitable for most of the ICOs from conducted from Switzerland. The ICO projects must carefully consider their business model and choose the legal structure based upon the same.
The Ethereum Foundation is a non-profit organization registered in Switzerland, and has the purpose of managing the funds that were raised from the ether sale in order to best serve the Ethereum and decentralized technology ecosystem, see Internet: http://ethdocs.org/en/latest/introduction/
foundation.html (22.11.2017). It is however not clear if the non-profit foundation was conducting the ICO itself, because the legal and financial complexities of raising funds through a pre-sale led to the creation of several legal entities, see Internet: http://ethdocs.org/en/latest/introduction/history-of-ethereum.html#the-ethereum-foundation-and-the-ether-presale (22.11.2017).
According to Aline Darbellay/Michel José Reymond (Fn. 3), 883, the choice in favour of the non-profit foundation can also be influenced by the fact that banking regulations do not apply to this kind of entities.
The federal income tax rate for corporations or cooperatives is 8.5 percent of net income (Art. 71 Federal Act on Direct Federal Taxation), whereas the federal income tax rate for foundations is 4,25 percent of net income (Art. 71 Federal Act on Direct Federal Taxation).
 The new legal norm will be in Art. 66a of the Federal Act on Direct Federal Taxation. See BBl 2014, 5378 ss.
 Regarding the fiscal attractiveness of Liechtenstein based non-profit foundations see Matthias Langer, Liechtenstein:Elysium für Krypto und Blockchain basierte Unternehmen?, 846 ss.
 See Administration fédérale des contributions, circulaire no 12, 8.7.1994, 2 s.; Peter Agner/Beat Jung/Gotthard Steinmann, Commentaire de la loi sur l’impôt fédéral direct, Zurich 2001, art. 56 N 12 ss.
 Administration fédérale des contributions (FN 30), 2.
 BGer, 2C_484/2015, 10.10.2015, c. 5.3, 5.5.
 BGer, 2C_484/2015, 10.10.2015, c. 5.3, 5.5; BGer, 2C_143/2013, 16.8.2013, c. 3.3; BGer, 2C_251/2012, 17.8.2012, c. 2.1.
 Internet: https://dappdaily.com/the-charitable-powers-of-ethereum-13d50e4561b1 (22.11.2017).
 Tezos foundation: https://www.zefix.ch/de/search/entity/list/firm/1303506?name=tezos&searchType=exact
Bancor Protocol Foundation: https://www.zefix.ch/de/search/entity/list/firm/1301840?name=Bprotocol%2520Stiftung&searchType=exact.
 In the Lisk ICO, 8,000,000 LISK tokens were reserved for the Lisk team members (Internet: https://blog.lisk.io/lisk-ico-terms-25ca3ecd5a4d [22.11.2017]). 10% of Bancor tokens are reserved for to founders, team members, advisors and early contributors (Internet: https://medium.com/@bancor/bancor-network-token-bnt-contribution-token-creation-terms-48cc85a63812 [22.11.2017]).
 Internet: https://www.finews.ch/news/banken/28337-kryptowaehrungen-zug-tezos-bitcoin-breitman-initial-coin-offering-ico (22.11.2017).
 See Parisima Vez, La fondation: lacunes et droit desirable, Une analyse critique et systématique des articles 80 à 89 CC, Berne 2004, N 956 ff. The supervisory authority has a large discretionary power in the choice of the measure to enforce its supervisory power over the non-profit foundation.
 This rule is a concretization of the principle of the separation between the founder(s) and the foundation (“Trennungsprinzip”, see BSK ZGB I-Grüninger, art. 86a N 1, in: Heinrich Honsell/Nedim Peter Vogt/Thomas Geiser [editors], Zivilgesetzbuch I, Basler Kommentar, 5th edition, Basel 2014 [cited BSK ZGB I-author]; Parisima Vez [Fn. 36], N 964 ff.). It is interesting to note that the change in the foundation’s goal(s) is more difficult when the foundation is created by many founders, as the consent from all is required in that case (art. 86a para. 4 Civile Code). Thus, for example in case of conflicts, one founder has the power to veto/block any proposed change. Moreover, the goal(s) cannot be changed any more after the death of at least one founder (see BSK ZGB I-Grüninger, art. 86a N 8). Therefore, even after the ten years’ time it may be difficult for the founders to change the goal(s) of the non-profit foundation.