What are the main legal issues that an ICO founder must to consider before launching a ICO from a EU law perspective?
First of all, a person who wants to launch a token sale should consider:
- where to incorporate;
- when to incorporate;
- in which jurisdictions the tokens will be promoted and/or sold;
- whether the tokens may qualify as “financial product” either (a) pursuant to the law of the place of incorporation, and (b) pursuant to the law of each jurisdiction in which the tokens will be promoted and/or sold; whether there might be any other set of laws (e.g. provision of investment services, consumer law, AML regulations, e-money or payment services regulations etc.), either in the (i) jurisdiction of incorporation or (ii) in each jurisdiction in which the tokens will be promoted and/or sold.
- in the event that the tokens would qualify as financial products in the jurisdiction of the place of incorporation, whether the offer may qualify for any “safe harbors” or “exemptions” (a) in the same jurisdiction and (b) in one or more jurisdictions where the token will be promoted or sold; if not, whether the founder intends to file a prospectus (a) in the jurisdiction of the place of incorporation and (b) in all other jurisdictions where the tokens will be promoted or sold;
- what would be the tax treatment of the funds raised.
With regard to the choice of the timing of incorporation, it should be noted that in most jurisdictions persons acting without the protection of a limited liability company would be considered personally liable with all their personal assets for any legal obligations and liabilities deriving from any agreements signed or economic relationship initiated before incorporation. In addition, in the event the founders have started promoting or selling the tokens (including during the pre-sale phase) before the incorporation, any sanctions from enforcement actions from regulators or any civil liability from any lawsuits started from the investors would be started only against the individuals without any corporate veil protection.
Therefore, it is advisable to incorporate, if possible, before entering into any agreement or economic relationship with any counterparty, and certainly before starting any promotion or sales of the tokens.
With regard to the choice of the place of incorporation, it should be noted that a company and its founders will be subject (a) to the laws of the place of incorporation, and virtually (b) to the laws of any jurisdictions in which the tokens are promoted or sold. However, while the laws of the place of incorporation will certainly apply, the laws of other jurisdictions may apply to the extent in which – depending on the approach of each jurisdiction – the tokens are promoted or sold to investors resident in that jurisdiction.
As a consequence, unless the company intends to file a prospectus with the relevant regulator, it is critical to incorporate in a jurisdiction in which (a) either the tokens do not qualify as financial products or (b) the offer would qualify for “exemptions”.
However, it is important to point out that if the tokens are to be marketed to investors resident in other jurisdictions that would consider those tokens as financial products, setting up a company in an “ICO friendly jurisdiction” would not prevent the company and its founders and directors against enforcement actions and liabilities. In fact, securities regulations only take into account whether financial products are promoted or sold to investors resident in their jurisdiction regardless of the place of incorporation. This means that if I incorporate in Switzerland (where for example tokens would not qualify as investment tokens) but I sell them for example to investors resident in Italy, France and Germany (where the same tokens would qualify, for example, as financial products and the offer would not qualify for any exemption) I would have breached securities regulation in Italy, France and Germany.
Thus, ICO promoters must to be very careful and should obtain legal advise certainly in the jurisdiction of incorporation but in theory also in all jurisdictions where the tokens would be promoted or sold. Of course, if tokens are to be offered virtually worldwide, it wouldn’t be feasible to obtain legal advice everywhere. In this case and in order to reduce the risks of enforcement actions, it would be important to engage a law firm that has a good understanding and knowledge of the regulatory framework for tokens sales at least in the main jurisdictions where the tokens will be offered.
Finally, with regard to tax treatment of the funds raised, it is critical that the founders, the directors of the company and any persons effectively running the business as well as the staff and headquarters are effectively (looking substance over form) located in the jurisdiction of incorporation. Otherwise, the company would be qualified as tax resident in the jurisdiction where it effectively run its operations and fund raised through the ICO would be taxed in that jurisdiction.