ICO – Overview of Legal and Tax Implications of the sale of Tokens.
An Initial Coin Offering (ICO) is a campaign similar to the idea of crowdfunding.
Everybody thinks ICOs are an unregulated means used to raise funds for start-up ventures. Start-ups launch ICOs in order to avoid bureaucratic capital-raising processes required by venture capitalists or banks. Early investors of the project invest in tokens in exchange for legal tender or cryptocurrencies. An Initial Coin Offering Campaign, is simply the sale of the currency (Token)used for service. This is the first interesting part. The sale of the currency, to use a service, happens prior to the existence of the service. Actually, the capital raised from the sale of tokens, funds the development of the idea into a working Concept. Now who would have seen that coming? Hence why the evolution of Crypto currencies, and their relevant uses, will be very interesting to follow in the coming years.
Usually, a start-up wishing to raise funding through an ICO provides white paper. This describing the plan of the project and its relevant specifications and time frames. It will also include the target amount required, how much of the virtual tokens the pioneers of the project will keep for themselves, the type of currency accepted, how long the ICO campaign will run for, etc.
During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins, called tokens which are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction. If the funds raised do not match the target required amount, the ICO is unsuccessful and the money raised goes back to the backers. Alternatively, you can use the funds to initiate the project.
There are, however, Legal and Tax implications of launching an ICO. If overlooked, they can create huge legal headaches to Promoters. This is why E&S, and our ICO Lawyers, are an essential addition to your from the beginning.
Legal Implications of an ICO
While still unregulated, this does not mean a promoter is free to issue a token sale without consideration. Many ICO Promoters seem to rely solely on the Howey test. The Howey test bases itself on a 1946 U.S. Supreme Court case of SEC Vs W.J. Howey Co. To summarise, an instrument is only a security if it involves an investment with a reasonable expectation of profits. Such profits derive from the work of others. The form of the security is actually irrelevant. As we all know, most tokens are have no share of profit backing them. This means that token holders do not have a reasonable expectation of profits on these token. Thus, tokens are not a security and thus not regulated. Easy isn’t it? Well, simple but not quite as easy.
Other laws exist that indirectly regulate the relationship between the issuer and the person subscribing for the tokens.
Firstly, draft the white paper in a clear and concise manner. You will need to explain all the parameters going into the sale of the tokens.
Typical questions on Token sale through an ICO that need to be clearly explained (In line with the law):
- How exactly will you use the tokens?
- What are the conditions of acceptance of the tokens?
- Where will you spend the money? Make sure to include a Clear and Concise breakdown of where and when.
- What if the ICO will not hit its target? What will happen?
- Where will you hold during the ICO or Pre-ICO? on Escrow?
Not being legally correct and clear could on these and many other points will leave you exposed to huge legal risks. Also, Our ICO Lawyers have the required experience. We have several ICOs under our belts and more in the pipeline. Contact us on ([email protected]) to help you get your ICO document drafted in a concise and correct manner.
Taxation of ICOs (Token Sale)
This is the million dollar Question for every ICO. What is your tax exposure on the sale of the Tokens? What are your subscribers’ tax implications on the purchase and redemption of tokens? Also, do you have a duty to withhold tax on the sale of the token? Well, we have studied these scenarios and have come up with various solutions that can reduce the tax exposure of token sale to zero! Interested in learning more? Contact us on [email protected] or you can just chat with us below!
E&S Group can assist you in setting up of an ICO for your start-up to raise required financing quickly and efficiently. Therefore, contact us to speak to our ICO Lawyers.