How to Launch an Initial Coin Offering (ICO) Offshore
Initial Coin Offerings (ICOs) have gained massive popularity and adoption over the last decade due to their practical uses and advantages over other traditional ways of raising capital.
That being said, they are still a relatively new concept in the world of investing and venture capital. This has resulted in major differences in how they are viewed and regulated across different countries, with some taking a significantly more or less friendly approach than others.
As a result, crypto startups looking to raise capital through an ICO have tended to prefer doing so in a more favourable offshore environment.
In this article, we take you through the basics of what an ICO is before discussing why it makes sense to specifically launch an ICO in an offshore jurisdiction. We also guide you through the practical steps of how to launch an ICO offshore, and briefly mention some of the best countries in which to do so.
Table of Contents:
- What Is An Initial Coin Offering (ICO)?
- Why Launch An ICO Offshore?
- Advantages Of Taking An ICO Offshore
- Regulatory Ease
- Asset Protection
- Easy Way To Raise Seed Capital
- Tax Benefits
- How To Launch An ICO Offshore To Make Tax-Free Profit
- Option 1: Offshore Company
- Option 2: Closed-Ended Fund
- Best Offshore Jurisdictions To Launch An ICO
What Is an Initial Coin Offering (ICO)?
An Initial Coin Offering provides a way for cryptocurrency startups to gain direct funds from investors and venture capitalists for the launch of a new cryptocurrency. ICOs are a process by which the investor / purchaser obtains tokens or virtual coins associated with a project or startup. These tokens often have their own uses and utility, and can be used to take part in future products or services which are created by the underlying project.
The main ways that an ICO can be used by those who launch one include:
- As a means to start a new cryptocurrency,
- As a way to raise capital for a new technology or blockchain start-up,
- To efficiently generate capital for existing businesses to finance new activities.
Why Launch an ICO Offshore?
Due to the largely unregulated nature of ICOs, along with past issues such as scams/frauds, some countries have taken an unfavourable attitude towards them. Countries such as China and South Korea have completely banned ICOs, while other nations such as the US and Canada have adopted strict (often restrictive) regulations surrounding their use.
Due to the significant disparities in how ICOs are viewed and regulated in different countries, in most cases it is advisable to launch an ICO in an offshore jurisdiction that has a favourable stance and friendly regulations for ICOs. Choosing a country with favourable or minimal regulatory interference can naturally result in a far smoother and more successful ICO.
Advantages of Taking an ICO Offshore
Some of the main advantages of launching an ICO offshore compared to in your own country of residence include:
Each jurisdiction has its own particular way of approaching and regulating ICOs and the cryptocurrency industry in general. This can vary greatly in different parts of the world. The way in which these activities are regulated will have a direct impact on the scope of allowable activities you can engage in, how easy and cost effective it will be to launch an ICO, and its associated risks. Choosing an offshore jurisdiction that has clear and friendly ICO regulations can be a significant advantage.
Due to the regulatory risks and sometimes negative attitude towards ICOs by authorities in some countries, there is always a chance that local regulators may argue that your ICO is in fact an illegal fund or an unregistered financial product. Setting up an offshore company or fund through which to launch an ICO in an offshore jurisdiction can protect these assets from being frozen or claimed in a court of law in your local country of residence.
Using an offshore vehicle to launch an ICO provides a much-needed layer of privacy. The combination of being based in a favourable offshore jurisdiction with better confidentiality practices, along with the loosely regulated nature of ICOs means that all the principles of financial privacy are upheld.
Easy way to raise seed capital
The relatively lenient / non-existent regulation of ICOs in many offshore jurisdictions make them an ideal way for blockchain or technology startups to raise capital quickly and efficiently.
Offshore tax havens where it is most popular to launch an ICO offer much more advantageous tax treatment than onshore jurisdictions. There are a number of countries which have taken a friendly stance towards the crypto industry and offer favourable tax rates for crypto startups. The standard income and capital gains tax rates are also preferable in these jurisdictions which applies equally to crypto related business activities.
The environment for launching an ICO in a crypto-friendly offshore jurisdiction can offer advantages in a range of areas, such as better tax structures, lower formation costs, greater access to skilled labour and infrastructure, etc.
How to Launch an ICO Offshore to Make Tax-Free Profit
There are two main ways to launch an ICO offshore that is free from tax. These are:
- Form an offshore company in a low tax / tax free jurisdiction and use that company to enter into a contract or agreement with seed investors; or
- Establish a collective investment company offshore (also known as a non-licensed “closed-ended fund”), in which investors would receive “shares” in the company/fund in proportion to the amount they invest.
Option 1: Offshore Company
The steps for the first option are as follows:
- The team wishing to launch an ICO for a new cryptocurrency incorporate an offshore company, preferably in a tax-neutral jurisdiction.
- The new cryptocurrency is developed and launched in the name of the offshore company (or alternatively the IP for the new cryptocurrency is placed in a second offshore IP holding company who licenses the right for the original company formed to market and sell the cryptocurrency).
- The offshore company enters into an agreement with seed investors which entitles them to be issued a certain number of redeemable digital tokens at set future times in exchange for the initial payment made by the investor.
- ICOs usually include what is known as a “vesting period” whereby the tokens that the investor has a right to are released to them at fixed intervals at and after the new cryptocurrency becomes officially tradeable on the open market. This is to avoid a situation where initial seed investors, who are in potentially large unrealised profits, sell their entire holdings in one go at the time the cryptocurrency becomes publicly traded, as this would immediately depress the market price of the coin at the outset.
- In this model, the profits that the company makes from the initial sales to investors as well as the profits from open market sales of the coin (as usually a portion of the tokens are reserved for the founders) can be reinvested offshore so as to avoid or defer paying domestic taxes, or withdrawn to one’s country of residence. The latter will involve paying income taxes in accordance with one’s local tax laws.
An alternative to the above is to instead setup an offshore foundation which in turn owns the company issuing the cryptocurrency. Investors then make a “donation” to the foundation, which then transfers the money to the company that is responsible for developing and launching the new cryptocurrency.
As in the previous model, investors then receive digital tokens in proportion to the “donation” (initial investment) which they made to the foundation.
It is also possible for startup crypto companies to raise ICO money through a public crowdfunding as opposed to private investors. This method has become increasingly popular in recent years, as it has a number of advantages:
- It provides an effective way to raise capital from multiple sources,
- It helps to automatically raise awareness and widespread support for the project from the public,
- It creates a more equitable and widespread distribution of tokens, which is positive for future market movements of the cryptocurrency (a greater number of holders equates to less concentrated risk, less volatility, and generally less selling pressure).
Option 2: Closed-Ended Fund
Similar to the first option, this route also involves first setting up an offshore company, which then issues a specific class of shares to ICO investors in proportion to the amount that they invest in the company. The steps are as follows:
- The offshore company is formed by the developers of the new cryptocurrency that is planned to be launched.
- The company drafts its Articles of Association in a way that allows it to issue two different classes of shares:
- Management shares (Class A)
- Equity shares (Class B)
- The owners of the company (i.e., creators of the cryptocurrency) then decide how much capital they aim to raise via the ICO, which will help determine the number of Class B shares they issue and the price of each share.
- The investors then sign a prospectus (known as an “information memorandum”) which stipulates the details of the agreement. This includes information on:
- The price of the shares,
- The amount of time before the investor is able to sell his shares (i.e., “tokens”). This is equivalent to the vesting schedule described above,
- Any additional terms and conditions of the agreement.
- Once the agreement has been made, the investor transfers his payment to the company (fund) and receives the agreed upon number of shares. These shares provide the investor with a share of the future profits dictated by the market value of the cryptocurrency in question, but have no voting rights (i.e., they are Class B shares).
- In turn, the original creators of the cryptocurrency also receive shares. These would generally be Class A shares with both equity and voting rights. Once the company has raised enough initial capital through seed and private sales, they may launch the cryptocurrency to the general public and make additional profits from selling their shares/tokens on the open market.
- The investor can decide themselves whether to sell their own tokens as they become available or hold them as an investment for a longer period.
Best Offshore Jurisdictions to Launch an ICO
There are a number of ideal offshore jurisdictions in which to launch an ICO; for reasons such as beneficial tax treatment, friendly regulations, cost effectiveness, privacy, ease of incorporation, etc.
We will not explore each of these countries in detail here, because fortunately we already have a dedicated article for exactly that. Instead, we will just list some of the best for you to do further research on. They include:
- Cayman Islands
It is clear that deciding where to launch an ICO and how to structure it is not a simple decision to be taken lightly. It can have a significant impact on the ultimate success or failure of a new blockchain business wishing to launch their own cryptocurrency.
As such, it is important to do extensive due diligence on the regulatory environment in your jurisdiction of choice, and also to plan carefully how you will structure the ICO. In doing so, it is advisable to consult with an expert who knows the landscape well and can guide you on the best course to take for your specific needs and circumstances.