Private Foundations are increasingly being used Internationally as the preferred fund-raising vehicle for entrepreneurs looking to (a) launch ICOs or (b) to develop/sell Crypto tokens. The purpose of this Article is to examine how Foundations are typically being used in such instances (and to look at possible commercial alternatives)
So first up… What is a Foundation?
A Foundation is a legal entity set up by a person called a Founder (like a Settlor in the case of a Trust) which is managed day to day by a person called a Councillor (akin to a Trustee in the case of a Trust but more like a Company Director in terms of duties/responsibilities).
There are in essence two types of Foundation:
(a) Foundations with beneficiaries
(b) Purpose Foundations
Type (a) is the more traditional model ie where an entrepreneur or investor sets up a structure which is designed to hold/manage assets for the benefit of 3rd parties called beneficiaries. In this instance the Foundation is designed
(i) to minimize the amount of tax that would otherwise be payable by the Founder on profits made by any asset/company that the Foundation owns; &/or
(ii) to protect assets from any law suit/judgment that might be filed/lodged against the Founder; &/or
(iii) as a cross generational family wealth management vehicle
Type (b) is where a Foundation is set up to fulfil a specific purpose. That purpose might be non-Charitable (eg “to hold shares in XYZ Company”) or Charitable (eg “To promote the health and wellbeing of children, including promotion of the provision of proper health care and treatment for children & to make distributions to entities and institutions that are organized and operated exclusively for charitable purposes and which further the purposes referred to above.”)
In the case of a Crypto enterprise what often happens is that a foundation is established under the law of the jurisdiction where it is registered with a purpose which allows it to justify investing in a/the start-up that the Founder intends to launch (although, it doesn’t necessarily have to be limited to investing in a specific start-up).
The foundation is independent and controlled by a board of appointed individuals (“Councillors) who oversee its management and operations (including any grant-making). The foundation takes in the money paid by individuals (which conceptually could almost be considered a donation) in exchange for Crypto Tokens (or a promise to provide Tokens in the future), and then uses the money to support the development of platforms and technologies that can arguably deliver the foundation’s purpose (which is obviously in practice intended to mean funding the start up at the centre of the ICO/Token Launch).
Where an investor commits to donate/pay money to a Foundation and the Foundation in return promises to issue a token once same is created the question in my mind is, is this bargain enforceable at law? Certainly if I were acting as legal adviser to an investor I would take some convincing given that Foundations historically are designed to be deployed as passive asset holding vehicles. (Can a Foundation offer goods/products for services for sale in the market place? It’s a moot point..).
In my view a more certain legal structure might be:
- To set up a Foundation to act as the funding vehicle.
- The Foundation forms a Company (in a jurisdiction where Crypto Token manufacturing/issuance is neither a prohibited nor licenseable activity)
- The investor donates to the Foundation
- The Company signs off on a contract whereby, in consideration of the investor having made a donation to its parent entity, it promises to supply X tokens to said investor within Y date
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