Businesses pondering undertaking ICOs are facing 2 important questions:
- Which jurisdiction should they pick?
- How should an ICO be structured?
When it comes to answering the 1st question, they should not look long and hard. Due to its investor-friendly tax regimen, the Cayman Islands have recently become a popular ICO destination. It is the 2nd question that causes companies to spend a considerable amount of time looking for its answer.
This article will be looking into how ICOs undertaken in the Cayman Islands should be structured.
Seeking to register an ICO company? We can help you with that! Our lawyers are always on standby to give you legal advice on all ICO-related matters.
Prior to undertaking an ICO in the Cayman Islands, one should get legal aid concerning taxation & establishment of a commercial entity. Therefore, they should start by seeking advice of legal advisers concerning themselves with onshore and offshore taxation, as well as jurisdiction-related matters.
They should bear in mind that transactions involving ICOs are still something of a novelty these days, which is why all matters pertaining to it, such as legislation and taxation, are constantly evolving.
Types of ICOs
There are 2 kinds of ICOs. The first one is all about launching a decentralized and ownerless product. Because of its decentralized nature, companies seek to come up with some kind of vehicle that will be very flexible and capable of operating as a trust.
Because they have no owners and can be self-contained, such entities have certain limitations in terms of dividends. Revenue generated through ICOs is paid to the providers of services that are entrusted with accomplishing the company’s goals.
Though certain blockchain projects prefer to be structured like tax-exempted companies, establishing a fund-structured entity will probably be the best way to register an ICO company in the Cayman Islands.
The 2nd kind of project centers around developing tokens obtained from 3rd party blockchains. Tokens received this way are subsequently utilized for utilitarian objectives on platforms. Since the ownership structure of platform-based projects is pretty much traditional, businesses tend to opt for a tax-exempted company which they feel suit their interests best.
This type of vehicle is generally known to be tax neutral, which is why it is the preferred choice of a large number of companies striving to get ‘a token-generating entity’.
A token-generating entity is a central element of any type of an ICO. Quite a few business cannot resist the temptation to use it as an all-in-one vehicle.
However, they should keep in mind that what they the business they are involved in is similar to crowdfunding and takes place in a constantly evolving legislative environment.
That is precisely why they should shield themselves against any future risks by separating their token-generating entities from a platform’s developer. Hence, their ICO should be comprised of a minimum of 2 entities: an entity generating tokens and a platform’s developer.
The question that arises next is where a platform developer is to be located. Many tax advisers suggest incorporating them onshore. However, quite a few companies prefer to incorporate developers in the Cayman Islands. It makes sense for many reasons but the two most important ones include investor-friendly tax regimen and the Caymanese lifestyle.
Today, ICOs have multiple vehicles in their structure, which include offshore and onshore ones. Oftentimes, developers play the role of parents for entities generating tokens.
Once an ICO is completed, entities generating tokens provide developers with monetary resources necessary for developing their platform.
Entities generating tokens do not normally play the role of parents or developers. Therefore, they play the role of affiliated entities or totally separate themselves from one another.
Under certain circumstances, entities generating tokens may act as holders of intellectual property. However, to be able to do that, it should:
- ensure that the said property is licensed to a developer
- transmit money generated through an ICO to a developer
- hire developers for the purpose of developing a platform
Under different scenarios, platform developers acts as an intellectual property holder, employing an entity generating tokens for the purpose of raising funds.
Companies pondering registering ICO companies in the Cayman Islands or incorporating a holding in the Cayman Islands should keep in mind that it is becoming a generally accepted practice there. Recently, certain trends have emerged on how a venture like that can be structured. However, irrespective of that, companies are highly recommended to seek legal aid pertaining to taxation in this jurisdiction.