Seven steps for the offshoring of ICOs
How to avoid inconvenient ICO regulations while living and working in the country of choice
Most jurisdictions, that offer a perfect market climate for an Initial Coin Offering (ICO), have strict regulations and high market-entry hurdles for this type of crowdfunding with digital assets. This is no coin-cidence.
#1. The need for a cross-border structuring: To carry out the ICO onshore, that means in the local country, is disadvantageous concerning
- the local ICO regulations, which might be restrictive and burdensome,
- the local SEC regulations, if the ICO is locally qualified as securities,
- the local F/X regulations, if the transaction interacts with foreign currencies,
- the tax legislation, if the ICO results in a local tax burden, and
- the possible criminal liability locally.
To do business in such high-regulated jurisdictions requires that (i) the business is in compliance with these laws, rules and regulations, (ii) remains in size and scope below the thresholds of the regulatory guidelines or operate in a regulatory-free niche, (iii) is transferred abroad into a more crypto-friendly environment, or (iv) is not investigated by the local authorities as illegal.
The seductive offer to go offshore the cheap way
Giving the digital nature of the ICO business and the competing jurisdictions in the region as well as in a global perspective, it is an obvious consideration to move the whole or at least part of the crypto value-added chain abroad to a more crypto-friendly environment.
These considerations are the same if the crypto-business had already been started as a foreign venture in a crypto-sceptical legal environment. As long as the regulatory framework had not been in place, the choice of jurisdiction had no importance. Only the implementation of comprehensive regulations onshore makes a big difference. If the overall structure does not qualify as “abroad”, such already existing ventures have to be in compliance with local laws.
How to do it cheaply and how to do it right
Currently, the digital asset industry tends (i) to move some elements of their venture abroad, (ii) to hide remaining local aspects of the venture, and (iii) to assume, the local authorities are not capable or not willing to connect the dots.
#2. The dangers and downsides: Pretty obviously, cross-border crypto-venture should not be started cheap and naive by using an offshore company letterhead for the website and in the email correspondence, use a governing law clause, but leave core elements of the business onshore in the local jurisdiction. If the ICO business transfer fails, or the ICO set-up abroad is not or no longer accepted by the local authorities, this results in a very inconvenient situation for all assets, companies, and individuals which can be located onshore in the highly regulated country:
- Regulatory compliance requirements, including disclosing customer data, have to be fulfilled.
- The business results in local tax liability for profits earned and turn-overs accomplished, including withholding tax obligations, if any.
- Local assets can be seized and local companies closed down without compensation.
- All individuals could face draconic penalties up to jail time for being involved in a not registered crypto business at the wrong place.
In addition, the promoter and other participants outside of the regulated country can be liable abroad for any disclosure of data, seizing of assets, loss of profits and local taxes as a result of an improper structuring of the ICO venture.
Such disadvantageous consequences can arise to the whole business, or to certain parts of the value-added chain. The high complexity on the one side and the scope of possible damage on the other side make this cross-border structuring to the most cardinal aspect, to a question of do or die.
How to validly offshoring to the jurisdiction of choice
#3. The local links: Any venture abroad, which involves local residents, local citizens, local infrastructure, local assets, local customers or any local risk or value-added element, can be characterized as a cross-border business. To avoid, that local legislation, the local regulatory framework and local taxation can be applied to such business, certain red-lines should not be crossed.
To distinguish between foreign business ventures and cross-border structures is a complex multilayered task. Although the main focus might lie on the regulatory-shopping aspect, well known and well-proven elements of an international tax structuring could be a valid and robust guideline to design the cross-border structure of the crypto-business cross-border to Hong Kong, Singapore, BVI or else.
#4. The structural elements: To give a reliable and resilient answer to the question, whether the digital asset venture still underfalls whole or partly local laws, regulations and tax laws, the following considerations are necessary:
- Comprehensive analysis of the local laws and regulations with respect to international and cross-border provisions.
- Substance over form aspects as known from offshore jurisdictions.
- Allocation of the traditional principles of income allocation between related companies (allocation of the asset, key personnel, business tasks, risks).
- Utilization of the rules for BEPS (Base Erosion and Profit Shifting) as introduced by the OECD, although they might not be directly applicable in the jurisdiction
- A toolbox of crypto-related legal principles, based on previous experiences and generally accepted principles.
Given the high value of crypto-ventures and the scope of the possible damage, a detailed audit of these aspects is highly economically and therefore commercially meaningful business decision.
If is has been recommended in the past, that the use of a foreign company alone will do the trick, it is certainly not easy to change one’s mind in the light of the new insights into existing regulations. However, a fresh approach might minimize damages and avoid a clusterfxck.
#5. The offshore requirements: As a side-note, requirements in the offshore jurisdiction have to be fulfilled, especially license requirements for the crypto-venture. To argue that a local license is not required, because the business is operated abroad, and to argue same same vice-versa abroad, is a mission impossible.
Even if the offshore legislation is validly governing the ICO, the conflict of laws and jurisdictions question kicks in. Blockchains are by its inherent technological nature, carried out in a decentralized system.
#6. Onshore regulations in the offshore legislation: Also, the offshore legislation does not automatically prevent the onshore regulations to be effective and applicable. Publishing a website in a non-English language or addressing the particularities of a specific jurisdiction might be seen as the marketing of the ICO in such country and exposing of the ICO to its regulations.
The local regulatory framework has to be considered for
- each regulated activity and
- the requirements for an acting person to do regulated business.
Depending on the scope and type of the cryptbusiness, additional regulatory hurdles have to be considered.
Professional services to safeguard crypto-ventures abroad
#7. The need for professional advice: PUGNATORIUS Ltd. offers the crypto-audit as explained above for new and existing local-linked business activities. A fresh approach to sometimes careless and sloppy structured ICO businesses. Ask the law firm for a support offer. The law firm offers mainly these seven legal and tax services:
- Thai crypto-compliant company formations
- Regulatory-avoiding and tax-efficient cross-border structuring
- Digital asset and financial services licensing
- Blockchain and ICO advisory services
- Thai and cross-border tax structuring
- Cryptotransaction support services
- Legal opinions and professional statements