ICO Legal Consulting Services

Types of tokens

DeFi project owners, making plans for an ICO, should first determine the type of token they would like to launch. It can be one of the following:

• a payment token
• a utility token
• a security token
• a stablecoin

Tokens, depending on their type, grant different rights to their holders. For example, a utility token could be designated to fund a startup in which the token holders would be granted premium memberships, discounts, etc. In cases where tokens have characteristics of securities and can be transferred to other persons, traded in the secondary market and organized trading venues, or their holders are granted the right to participate in the company management processes, receive a portion of the company's profit/income, receive interest for invested funds, or receive additional income through token redemption, they will most likely be considered security tokens and their offering will subject to additional provisions and stricter regulations (publishing a prospectus, approval from the Central Bank etc.). Issuing a utility token will be a much lesser legal burden for the issuing company in comparison to issuing a security token. Nevertheless, companies, especially EU-based, which are planning to issue utility tokens, should double-check with local regulators and carefully research the potential VAT liabilities.

Regulations concerning payment tokens (also known as stability tokens, or stablecoins) are the most relaxed of the three token types, however, the recently approved European Regulation on Markets in Crypto Assets (MiCa) introduces some additional requirements for stablecoins as well: for example, the authorities must acknowledge that the token is indeed a stability token before it is introduced to the market.

Legal structure for token issuance

Depending on the type of the token and other aspects the ICO project, the initial coin offering can be launched either by using one company that is responsible for everything, or under a corporate structure, composed of at least two companies, each of which would perform different functions under a joint venture agreement.

The second option, even though it requires more attention to detail, advanced expertise and elaborate corporate governance, is a better option for navigating the legal risks and achieving maximum tax efficiency. Usually, such structures include a company in jurisdictions with less-regulated environments (Seychelles, BVI, St. Vincent and Grenadines, etc.). Under such a structure, one company is responsible for the actual ICO (collection of the funds), and the second company, incorporated in a jurisdiction with stricter regulations (EU countries, Dubai), obtains all relevant licenses (for example, a license to provide custodian wallet services), is able to access payment and other banking services without trouble, and usually does not take the responsibility for the fundraising part.

There are many legal tools which can mitigate the risks related to ICOs and other projects in the cryptocurrency sector. Our team of ICO lawyers has an extensive experience in legal structuring, governance, licensing and tax optimization for initial coin offering projects. Contact us, describe your business model and we will answer any questions you might have, as well as assist in making the decisions on crucial points of your initial coin offering project and make sure that no details are missed.

See also

Company formation

International tax advisory

Licensing