With the raging success of Bitcoin and Ethereum new Cryptocurrencies seem to be hitting the market every other day. This Article examines how you might launch an Initial Coin Offering (“ICO”) Offshore and bank the profits free from tax.
There are several ways you could launch an ICO from Offshore. Ideally you would either:
(a) Form a tax free Offshore Company and have that Company enter into an Agreement/Contract with first up investors; or
(b) Set up a tax free Collective Investment Company Offshore (ie a non-licensed Closed End Fund) whereby investors receive shares in the Company in proportion to the amount of money they invest.
The first option is the most commonly used. How it usually works is:
- The creators of the new Cryptocurrency form a tax free Offshore Company (“OC”)
- This Offshore Company develops the new Coin/Cryptocurrency (or holds the rights, under license from a 2nd tax free Offshore IP Holding Company, to promote/market the new Coin/Cryptocurrency)
- The initial Investors and the OC enter into an Agreement whereby the OC, in consideration of a payment made by the investor to the OC, agrees to issue a certain number of Redeemable Tokens to the Investor
- Each Token entitles the Token holder to certain rights and can be traded on the open market.
- In the perfect investor model, the Token would entitle the Investor to a certain number of the ICO’s Cryptocoins when the Coin goes to the open market and/or to receive a share of the Company’s profits
- When the Coin goes to market the profits can be banked and or reinvested Offshore potentially tax free (and away from the prying eyes of Onshore Regulators)
A variation on the above is to set up a Foundation (which owns a/the Coin Issuing Company) and have investors make donations to the Foundation. The Foundation passes on all monies so collected to the Company which develops the coin. In return for a/the donation to the Foundation the Company issues a Token to the investor/donor.
Another similar way for a Start Up Cryptocoin Company/Business to raise venture capital is via Crowd Funding (https://www.fundable.com/learn/resources/guides/crowdfunding-guide/what-is-crowdfunding )
Closed End Fund
In this model a tax free Offshore Company is set up and shares in the Company are issued to the investors in proportion to the amount of monies invested. Usually how it works is:
- The Promoters/Creators of the new Cryptocurrency form a tax free Offshore Company (“OC”)
- The Company has a specially tailored Articles of Association which enable it to issue 2 classes of shares ie Class A Shares (also known as management shares) and Class B shares (also known as equity shares)
- The Promoters/Creators of the new Cryptocurrency decide how much capital they want/need to raise and, how many shares they are prepared to/wish to issue and the price of each such share
- The Investors sign off on an Information Memorandum (ie in effect a Prospectus) that stipulates, amongst other things, a/the minimum amount of time the investor has to commit his funds before being able to cash in his shares (eg it could be a month, or 3 months, or 6 months or 12 months or 2 years or etc).
- The investor pays his money to the OC and receives shares in the Company in proportion to the amount of money contributed. These shares entitle the investor to a share of the profit that has been realized by the Company as at the end of the agreed investment period but carry no voting rights.
- The Promoters/Creators of the new Cryptocurrency receive shares that have both equity rights and voting rights Once the desired amount of Capital is raised the Company goes to market and starts selling the Cryptocurrency to the general market
- At the end of the agreed investment period the investor has the right to cash in his shares and walk away or reinvest for a further period.
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