At the beginning there was the singularity — Bitcoin and then came the big bang. The chaos and the pace of expansion were such that gigantic organizations like governments and banks were unable to react to the rapid change. ICOs started coming from all directions and yet, legal ICOs were talked about in hushed voices, in closed rooms. Many believed that ICOs will never take, many believed Legal ICOs would never take birth and both were wrong.
Even now, when the pace of expansion for ICOs has slowed down, the authorities are still to catch up with the industry. Many blockchain startups and even many exchanges feel that they are not subject to the law and that is where the conflict with regulators sets in. Any promoter wanting to go the ICO way must insist on Legal ICO both internally as a corporate practice and with the exchange that they go with.
The fact of the matter is that you have to be extra careful and while doing anything before during and after the ICO. It is suggested that one must hire legal councel to ensure that you are going the legal ICO way.
Corporate formation
Typically when you go into public offering in the IPO scenario your company has to be structured as a public limited company. This is not the case for ICO public offerings. In order to go for Legal ICO (ISO, STO et al), the structure of the company has to be defined. This is completely in favour of the promoters. In the lack of a corporate structure and a proper business registration, the majority stock holders become personally liable for the actions and activities of the company throughout the lifecycle of the business.
Unlike ICO where there is little stress on the “Token Issuing Authority”, legal ICOs have a clear mandate — every token is a share in the company and has to be issued on the behalf of the company and not on the behalf of a trust or foundation that is separated from the actual entity carrying on the business.
Legal ICOs also have an extra mandate for the issuer — be transparent in your financial reports. This means that it would be wise to structure the company so that you can take advantage of the local tax laws accordingly.
How to choose the right jurisdiction
In order to go for Legal ICOs, it is important that you look at jurisdictions that are friendly to blockchain innovations. While there is no “real” blockchain legislation or rather a “complete” Blockchain regulation, there are countries that realize the potential of the crowdfunding through blockchain and its economic benefits.
Even in the friendliest countries, we have to work with guidelines in the lack of a legislative framework to stay legal. We will admit that even these guidelines leave a lot to be desired and coming up with a legal ICO is a tall order. That said, there is at least a sense of acceptance, which is heartening. One must not confuse these guidelines with clear runways. These guidelines have been issued more to protect the investors than to protect the promoters. However, this does legitimized the investment you bring in a big way, paving the way for legal ICO.
There are various aspects to the “ICO friendliness”. While some jurisdictions want to attract innovations and progress, some are trying to find a replacement of a traditional industry that has died out, while other look at it as a solution for issues of employment.
Some countries might be looking for more traditional industries. For instance you want to bring out an ICO for manufacturing of equipment and you plan to start a factory. Such countries will suit you. Somebody with a new disruptive idea which can be done by a team of ten from a remote location might not find such an easy acceptance in such a country.
So, before you chose a jurisdiction research a little and see if you are a good fit for their eventual goals. Will your legal ICO find a home there?
Also, study the corporate law and securities laws of the country. A look at the consumer and investor protection laws and precedents will be a good idea.
When you are opening such an organization please do not wander too far from the political or economic capital of the country. You need to be in touch with the regulators, advisors and industry bodies on a regular basis. If not those who make the law, at least be close to those who are in a position to advise you on the application of the laws and the guidelines.
While investors and consumers should feel secure at all times and even the promoters should the utmost to keep their mind at ease, it is advised that you look at the history of the nation’s consumer courts to find out if they are heavily loaded in favour of the investors and consumers. If so, you might want to be a little more cautious of the jurisdiction even if you are going the legal ICO way.
Most countries including the United States of America are still debating on the correct definition of a cryptocurrency. Chances are that even Ether might be declared to be a security because of the way their ICO was conducted and their fund used. In such a scenario what makes a good jurisdiction is their definition of a cryptocurrency and their guidelines on securities and utility tokens. These will define if your ICO will be considered a Legal ICO not just in these jurisdictions but everywhere. These definitions can also give you a fair indication of how friendly the jurisdiction is right now or will be in the future in a broad sense.
It is not an easy job to structure a company that has investors in multiple jurisdictions. This is why it is tougher to come up with a Legal ICO. While a legal ICO might be legal in one country, it might not be a legal ICO in another because of change in legal requirements for a security.
We will come up with a second article where we will talk about more legal considerations. Meanwhile you can go to https://www.oix.li and read our white papers to get more idea how we are ushering in a new era of legal ICOs.
by Sinha Santos, Founder, OiX.Global
Read more: https://goo.gl/Nhb6Pn