ICO Legal overview
An ICO is very similar to crowdfunding. There are however legal considerations that need to be taken into consideration in order to protect the founders, the company and the funds raised.
The current popular outlook (particularly in the developer community) is that ICOs are outside the remit of legal regulation and frameworks, and that this offers a carte blanche on an initial coin offering’s activities.
ICOs have risen to prominence as a method to circumvent the costly, onerous procedures required to raise capital from institutions or VCs. ICO backers contribute funds (cryptocurrencies or fiat currencies) in exchange for tokens that the issuing company creates. The token in question is generally required to utilise the company’s service. The initial coin offering (or token sale), is therefore in essence an advance sale of a service. The company running the token sale will typically use the funds generated to develop their concept into a full working product. Token holders on the other hand speculate that once the product is released the demand for tokens will increase, causing an appreciation in their investment.
The initial coin offering in practice
The first step in launching a token sale is the publishing of a white paper, which explains in detail the founder’s vision for the project, its target market, functionality, roadmap, etc. An ICO’s white paper will also cover in detail all aspects of the tokenisation model, ICO structure, token distribution ratios, lock up periods, funding options, etc.
Once the ICO goes live believers in the project contribute towards the project in exchange for tokens. In essence an initial coin offering is an informal IPO, that disintermediates banks and to a certain extent regulators, democratising venture capitalisation to retail investors and allowing start-up companies to raise funds at a much lower cost than traditional VC funding models.
Greater freedom does come with greater responsibility though, which is why legal and taxation aspects should be covered in detail to avoid potential exposure to founders down the line. ICO Launch Malta is partnered with some of the foremost ICO legal advisors in Malta, with the capacity to bring up to three independent firms to the table to ensure your ICO is reviewed and cleared at the highest professional level.
ICO Legal Implications
Whilst ICO legal frameworks are in their infancy, founders should be aware that it is not quite the free for all that they might envisage. Whist there is truth in the belief that issuing utility tokens is less legally exposing than a security one, the common litmus test to gauge this is the ‘Howey test’. In essence this test establishes that an token is considered a security if there is a reasonable expectation of profit, voting rights, dividends etc. The Howey case established that anything can be considered to be a security (even a simple orange tree as per 1946 U.S. Supreme Court case of SEC Vs W.J. Howey Co.).
Whist the common tokenomic model does not comprise a profit or voting mechanism, there are a few ICO legal factors that need to be taken into consideration. A clear and well defined white paper, as well as a watertight token sale agreement is essential, and should cover:
- Token pricing and ICO timeframe
- Minimum/target/maximum raises
- Token model and utility
- Clarification on any voting, profit share or dividend rights attributed to the token
- Project budget, allocations, timeframes etc
- Development roadmap with clear milestones
- Contingencies for missed targets, low raises etc
- Fund security (escrow, multi-sig wallets, etc)
A core question to every founder is the tax implications of running a token sale, and how can they minimise their tax obligation whilst keeping there ICO legal. A second aspect is the protection of token buyers to the maximum extent possible. Our ICO legal advisors have war-gamed all possible scenarios to create legal structures that can reduce your ICO tax bill to 0%.
Malta as an ICO Jurisdiction
Malta has established itself as the ICO jurisdiction of choice via the government’s early commitment to embrace blockchain technology from the onset. Foreigners launching their ICOs in Malta can benefit from personal tax rates of 5%, with 0% on certain token sale models. Malta boasts a highly educated, tech savvy workforce that speaks English natively, and are used to working in multinational company environments due to the large online gambling and finance sectors on the island. Malta is also a full EU and Eurozone country.
Contact us on the below form to find out how we can get the ball rolling for you ICO.