Offshore Foundation for ICO: Why Panama?
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 obtains tokens or virtual coins associated with a project or startup in exchange for an initial investment.
Although ICOs are a fairly new concept, it has been found that the traditional structure of a private foundation is an optimal vehicle through which to launch an ICO. This is due to various features which are specific to foundations, and which suit the ICO model well.
Panama is one such jurisdiction that lends itself perfectly for the formation of a foundation for the purposes of launching an ICO. In this article we explore why foundations are useful entities to launch an ICO, what to look for in a foreign jurisdiction for forming an ICO foundation, and why Panama is one of the best choices around.
Table of Contents:
- What Is A Foundation?
- Using An Offshore Foundation To Launch An ICO
- How To Choose The Right Jurisdiction For An ICO Foundation
- Panama Foundation For ICO
- How To Use A Foundation For an ICO
- Advantages Of A Panama Foundation For ICO
- Tax Advantages
- Fast And Easy To Form
- Favourable Regulations
- Asset Protection And Privacy
- Other Popular Jurisdictions For An ICO Foundation
What Is a Foundation?
A private foundation (simply referred to as a “foundation”) is a type of non-profit organisation that is established to fulfil a specific purpose, usually in accordance with the wishes of the original founder. A foundation may be a charitable organisation or non-profit organisation with certain aims. That purpose may be to simply benefit its designated beneficiaries.
Foundations generate their funds through a single, initial endowment of assets from the founder/s, which is then invested to generate ongoing income. It then distributes its income and/or initial capital to its beneficiaries, or for its specific cause, periodically.
This makes foundations ideal investment vehicles where the investment involves a single upfront commitment followed by future profits/distributions to the investors generated from the initial endowment. A perfect example is the structure of an initial coin offering (ICO).
A foundation includes some or all of the following parties in its structure:
- Founder: this is the natural person or corporate entity who initially establishes the foundation
- Council: a group of natural persons or a single corporate entity who sits on the board of the foundation and makes decisions so as to best carry out the objectives of the foundation as outlined in its Charter.
- Members: members elect the council but do not usually have rights to any of the foundation’s profits. Not all foundations require members.
- Protector/enforcer: this is the natural person who is responsible for overseeing the council and ensuring that they carry out their designated functions. The protector/enforcer is also optional in many jurisdictions.
- Beneficiaries: The existence of specific beneficiaries depends on the type of foundation in question. Some foundations’ main objective is to benefit specific persons/entities who are thus known as the beneficiaries, while other foundations exist only for a purpose without needing to name specific beneficiaries.
- Charter: the charter is the document which lays out the governing rules of the foundation, which includes its primary purpose, and the names of all the relevant parties mentioned above.
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Using an Offshore Foundation to Launch an ICO
The structure and legal classification of a foundation make it the perfect vehicle through which to launch an ICO. It is established for a specific purpose, which can be to distribute tokens/profits to its initial founding investors. ICOs involve a single upfront payment from investors in exchange for future distributions of tokens, which matches the general structure of a foundation.
In particular, the following features of a foundation make it an ideal entity to hold a token sale:
- It is a non-profit organisation. This allows it to escape the complications of being deemed a corporate entity, and the additional obligations and requirements that go along with it. It also results in more favourable tax structures.
- There are no owners/shareholders. Instead, the foundation’s beneficiaries would receive the future proceeds from the foundation. This has important tax and legal advantages.
- It is established to fulfil a specific purpose; in this case the purpose would be to launch an ICO.
- The purpose may be fulfilled in perpetuity.
How to Choose the Right Jurisdiction for an ICO Foundation
Certain jurisdictions provide better landscapes than others when it comes to actually forming and using a foundation for an ICO. Factors to consider in order to choose the right jurisdiction include:
- Reputability: This includes factors such as political and economic stability, regulatory transparency, legal system, and market freedom.
- Ease of formation: The length of time and ease with which a foundation can be formed is an important factor.
- Taxation: The way in which endowments to the foundation and profits generated by the foundation are taxed. This is one of the primary considerations for many when selecting the best jurisdiction.
- Cryptocurrency regulation: The stance towards the cryptocurrency industry in general and how blockchain/cryptocurrency activities are regulated. This includes the level of flexibility and transparency in cryptocurrency regulation.
- Foundation regulation: Each jurisdiction has its own specific foundations law which includes aspects related to its structure and how flexible it is, whether it can be formed for the benefit of individual persons or can only be for a specific purpose, the initial endowment required, etc.
- Securities laws: You need to carefully consider the securities laws in the jurisdiction of choice, specifically whether or not the token may be deemed an unlicensed security. You need to ensure that there is a clear definition of what constitutes a security in the jurisdiction and that the cryptocurrency you are planning to launch does not fall into that definition.
Panama Foundation for ICO
Panama foundations have long functioned as ideal asset protection tools. They have been defined in the Panama law in 1995 which has been further updated and revised since. A Panama foundation is seen as a separate entity from its owners/founders. Panama foundations do not require members and only need the following three parties to function:
- The founder (you, the one forming the foundation and endowing it with assets)
- The foundation council (usually consists of at least three natural persons or one company appointed by you, the founder). The council manages the foundation assets in the event that the founder becomes unable to do so.
- Beneficiary/ies who receive the ultimate benefits and profits from the foundation.
How to Use A foundation in an ICO?
In order to use a Panamanian foundation to launch an ICO, it is common to establish a Panamanian corporation (S.A.) first, which will conduct the day-to-day operations. In turn, the Panamanian private foundation will be designated as the owner of the Panamanian S.A. shares. It will also be the holder of the S.A.’s by-law document and oversee its operations.
It is recommended that the Panamanian S.A. obtains a crypto exchange license in Panama which authorises it to operate a virtual currency exchange. This will allow it to accept payments for the purchase and sale of cryptocurrencies, which will be needed for launching an ICO.
In conducting the launch of the ICO, all investment collection from investors, and subsequent distribution of tokens to investors will be managed via the Panamanian S.A. In turn, the foundation will remain the owner of all the S.A. shares and serve as a legal vehicle through which the ICO process is managed and overseen, with the aforementioned advantages.
The following restrictions apply to the Panamanian S.A.:
- It may not operate as a debt collection agency.
- It may not operate as a fiduciary firm or exercise fiduciary activity, as these activities require an additional financial services license and a minimum capitalisation of USD 250,000.
- The S.A. is not a bank and therefore may not accept deposits or engage in other typical banking services without an official license, and being subjected to strict regulation and supervision.
- The crypto exchange license does not allow the S.A. to act as a securities stockbroker.
- The S.A. is not allowed to offer accounting and/or bookkeeping services.
Advantages of a Panama Foundation for ICO
Panama private interest foundations are exempt from income taxes if they satisfy the conditions that no Panama residents benefit from the foundation and the foundation does not hold any physical assets within Panama. In other words, Panama Foundations that are deemed to be entirely “offshore” are exempt from income taxes.
Panama is a highly reputable offshore financial centre, with one of the most stable economic and political environments in Central America. It is seen as the trade and financial hub of Latin America, thanks mostly to the Panama Canal, which is at the epicentre of world trade passing through the region.
It is also renowned as a hotspot for offshore financial services, and has a booming international finance sector as a result. Its reputation was somewhat marred by the Panama Papers, but it has since regained much of its reputation and improved its regulatory transparency and compliance.
Fast and Easy to Form
It takes only about 2 – 3 weeks to incorporate a Panamanian S.A. and setup a foundation in Panama. Furthermore, the process is as easy and straightforward as it gets. There are no physical presence requirements for owners/founders, and they may be of any nationality. There are minimal initial capital requirements, and the ongoing maintenance and compliance costs are very low.
Panama has a friendly stance towards cryptocurrencies and the regulatory environment is supportive towards the industry. In fact, there is little in the way of specialised blockchain/cryptocurrency regulation in Panama, meaning that the industry is mostly unregulated.
Cryptocurrency companies and foundations have plenty of freedom and flexibility as a result. Furthermore, Panama foundation law is highly favourable towards offshore foundations, and upholds the principles of financial privacy and asset protection, as well as providing many tax benefits and exemptions.
Asset Protection and Privacy
Panama foundations are known to be ideal offshore vehicles for general asset protection and privacy. They have been used with success in various situations by individuals and companies who wish to protect their assets from local court cases, creditors, and other threats.
There is a high level of privacy in that Panamanian foundation law supports confidentiality and the protection of personal data of founders and beneficiaries alike. There are minimal accounting, auditing, and reporting requirements.
Other Popular Jurisdictions for an ICO Foundation
Panama is not the only ideal offshore jurisdiction in which to form a foundation to launch an ICO. Three more excellent options include:
It is up to you to do further research and due diligence on the other available options to determine which is best suited for your needs. Whilst doing so, it is good to keep in mind the factors which make an offshore jurisdiction ideal, as discussed above.
Cryptocurrency companies and startups looking to make use of the innovative new funding model of an initial coin offering need to carefully consider the best legal structure for launching their ICO.
In doing so, they need to consider various factors relating to taxation, asset protection, regulatory implications, costs, etc. It has been shown that a private foundation is an ideal entity for launching an ICO, and a Panamanian foundation is particularly well suited.
Before making a final decision about where and how to launch an ICO though, it is best to thoroughly research all available options and to consult with an expert in the field.
They can help you ascertain whether Panama is indeed the best jurisdiction for your specific situation and objectives, and if not, help to find the optimum structure for you.