Want to do an ICO? 5 Things You Need to Know Before You Do

Since the beginning of 2017, more than US$1.5 billion dollars have been raised via Initial Coin Offerings (ICOs). Thinking of following suit? Well, here are 5 things you shouldn’t forget:

1.     Legal and Regulatory

There are serious regulatory considerations to bear in mind before undertaking any ICO. In most jurisdictions, if your tokens are securities, then you need to follow the relevant securities laws.

In addition, there are numerous regulations governing marketing to either the public or to professional investors. Violating these regulations would have serious consequences, so you need to seek professional advice to ensure that you are compliant.

Furthermore, the various legal documents relating to the ICO – from the white paper to the token sales agreement – need to be reviewed to ensure they are compliant as well.

2.     Tax and Accounting

ICOs also raise various tax considerations – not only in terms of the optimal jurisdiction for the issuing entity but also the most appropriate legal structure. For example, in most jurisdictions that adopt IFRS or an accounting framework based on IFRS, the proceeds of the ICO are likely to be considered as income in nature, so it is important to obtain the relevant advice not only from a tax, but also from an accounting perspective as this may influence the timing of when the ICO proceeds should be taxable in jurisdictions where tax consequences are highly dependent on the accounting treatment.

Seemingly lesser considerations, such as where senior management are based or where the intellectual property resides, are important as the location of management may cause certain entities to be taxable outside their places of incorporation. From a personal tax perspective, remuneration received other than in cash may also be taxable before being converted into cash.

On the plus side, many jurisdictions have tax reliefs – for instance, permissible software or R&D deductions – that should be beneficial. However, it will be important to consider which entity incurs such expenditure and what tax year such expenditure relates to - particularly for jurisdictions which do not have tax consolidation or cannot carry back tax losses for offset against prior period income.

3.     Transfer Pricing

Transfer pricing is a particular tax topic to consider. For most ICOs, part of the R&D or software spend will be done by other – often related – entities in different countries. This may require careful transfer pricing to ensure that these associated transactions are conducted at arm’s length - and thus accepted by all relevant tax authorities - and you may need proper policies to be in place.

A transfer pricing benchmarking study, as well as a review of the various intra group legal agreements should be considered as well.

4.     Governance

You wouldn't launch a multi-million dollar business or foundation in the normal world without putting in place proper governance frameworks. Well, the same applies in the ICO and crypto space.

Certain basic governance and control items – from the appointment and removal of directors to the use of proceeds and the decision-making process – need to be carefully thought through and put in place. Cybersecurity and risk management are other important areas as well.

5.     Know Your Client (KYC) and Anti-Money Laundering (AML)

Each ICO should consider having in place an appropriate KYC and AML framework. This will help ensure that not only individuals from certain prohibited jurisdictions are not able to participate but also that proceeds from criminal activities are not being invested in the ICO.

The process does not stop there, however. Ongoing monitoring of sanction lists and negative news could be equally as important. Whilst you can outsource some of these functions, you are still responsible and it is important that you have a solid KYC and AML control framework in place.

Every ICO is different, but having an institutional mindset of building a business for the long term is essential.

Henri Arslanian ([email protected])

The author would like to thank his PwC colleagues for their valuable inputs for this article including Duncan Fitzgerald, Gwenda Ho, Anuj Puri, and Nigel Hobler.

?About the Author

Henri Arslanian

Henri Arslanian is PwC’s FinTech & RegTech Lead for China/HK. A lawyer and banker by background, Henri is a published author, a TEDx speaker and an Adjunct Associate Professor at the University of Hong Kong, where he teaches courses on FinTech and Entrepreneurship in Finance.

A member of the Milken Institute’s Young Leaders Circle and with over 300,000 LinkedIn followers, Henri sits on several finance, academic, government, civil society and FinTech-related boards and advisory boards. He has been awarded many industry and academic awards over the years, from being named one of the Most Influential Individuals in FinTech in Asia to being awarded the Governor General of Canada Gold Medal for Academic Excellence.

www.henriarslanian.com

Other related articles from the author include:

• 10 FinTech Predictions for Asia in 2017
• 5 Ways FinTech Will Change the Hedge Fund Industry