Created by Brett Bunnell and Alex Yastremski, Partners at Cole-Frieman & Mallon, and Niural.
Special thanks to Alisha Parikh for her valuable research and contributions to this piece.
Setting the Context and How to Contact Us
You are a startup looking to fundraising for development of your token or product, along with trying to attract talented individuals to join your cause. Where should you set up shop with your company and planned token launch? What are your options for launching a token and fundraising? How do you hire that first key team member?
Let’s discuss further in this month’s digital asset dash, brought to you by Niural, an AI-powered global payroll and HR platform for the modern team, and Cole-Frieman & Mallon, LLP, a leading investment management law firm and pioneer in the digital asset space for emerging technology companies, startups, and investors.
If you have questions or want to further discuss the topics covered here or any other potential action items where you need help, contact Cole-Frieman & Mallon at info@colefrieman.com or Niural at sales@niural.com, or reach out to us on LinkedIn.
Structuring Options for Your Company and Eyeing a Token Launch
Generally speaking, there is a growing consensus in the market for building a corporate structure that entails both an onshore, U.S. development company and an offshore, non-U.S. Foundation, each with respective tasks and purposes. This structure, if planned and constructed properly, tends to be more of a conservative approach to help insulate and shield the onshore entity from potential enforcement actions due to the stifling nature of cryptocurrency regulation in the United States. Let’s dive into this further.
• The Offshore Foundation (“Foundation”), also referred to as the Token Foundation or Trust, issues the token to third parties. Depending on the jurisdiction (i.e., Cayman Islands, British Virgin Islands, etc.), you may also be required to set up an Offshore Private Company, which would often be wholly owned by the Foundation and act as a separate token seller entity.
• A second entity, the stand-alone private company (“Development Entity”), is the next key piece to this structure. Critically, the goal of maintaining a Development Entity separate from the Foundation is to minimize connections to the original domicile of the founders of the token project. Therefore, the Development Entity is set up in a neutral jurisdiction from the founders and the Foundation. This could be a physical relocation from a Delaware-based entity to lower income tax or no capital gains tax jurisdictions offshore like Singapore, United Arab Emirates, and Puerto Rico, for example.
The Development Entity can be incorporated in the United States, typically in Delaware, or offshore, depending on your company’s needs and tax goals. It is also possible to have both an onshore and offshore Development Entity. Again, the exact arrangement is subject to each company’s overall goals, tax considerations, geographic location, etc.
Building Your Team with the Development Company
The Development Entity typically covers all associated costs of total operations, including those of the Foundation, via service agreements and grants with the Foundation. These operation costs include contracting and sub-contracting work to various internal and external employees and other group companies.
In other words, as you begin to have a need for developers, marketing support, etc., you will need the ability, paperwork, and compliance framework to hire new teammates, bring in contractors, and manage payroll and any related HR needs. Imagine if some of your team want to be paid in digital currency rather than fiat? You will need a trusted partner to help you put together an infrastructure tailored to your needs.
Evolving Regulatory and Legal Environment and Need for Quality Advisors
• In building the right structure for you and your company, there are a lot of considerations to evaluate and plan before you execute. The above structure is one potential option, and often, the devil is in the details, especially for complex planning involved with a company structure and token launch. We strongly recommend that you work with experts like Niural and Cole-Frieman & Mallon to advise you and help you navigate the various legal, compliance, business, and technical challenges that are often interrelated to one another. Regardless of who you decide to work with, it is critical that you have advisors in key areas of legal, human resources, tax, etc., and it is not worth it to cut the corners on these fronts.
• As many of you may know, regulation in the digital asset space, especially in the United States, is in a state of flux and tends to be more crypto hostile ahead of the upcoming election (e.g., things may change, depending on the outcome). For example, there are limited, relatively ambiguous guidelines from United States regulators like the Securities Exchange Commission (“SEC”) and Commodities Future Trading Commission (“CFTC”) on whether moving the Development Entity offshore and outside the United States to support a Foundation weakens or strengthens the separation of the project’s development work from the token launch and associate governance.
Many projects divide teams between U.S. persons based in the U.S. and entity and international persons based with the offshore Development Entity. Under this structure, sensitive regulatory matters are handled outside of the U.S. with limited services provided within the U.S. However, just as many projects dispense with the complexities and expenses of maintaining such a structure in favor of handling all their Development Entity matters out of their onshore, DE incorporated entity.
The Wrap-Up and Our Legal Disclaimer
While this newsletter does not constitute legal or investment advice, we delineate a more common corporate structure for launching a token. Obviously, this is just one method, and each company should tailor their corporate structure to fit their individual goals and needs and select advisors to help them craft a customized framework and solution for their needs. Additionally, keep in mind that the regulatory landscape for cryptocurrency is in a state of flux. Therefore, it is essential to stay up-to-date on changes in the regulatory landscape. Make sure to retain a law firm and global professional employer organization (PEO) prior to launch to verify that your corporate structure adheres to the current regulatory landscape.
About Cole-Frieman & Mallon LLP:
Cole-Frieman & Mallon LLP is a leading investment management law firm headquartered in San Francisco and known for providing top-tier, innovative, and collaborative legal solutions for complex financial services matters. The firm provides a full suite of legal services to private funds and their managers, representing clients of all sizes and across a diverse range of asset classes. The firm is particularly well known for its pioneering work with digital asset funds and their managers. The firm’s corporate and intellectual property (IP) practice groups also advise early-stage startups to later staged companies valued in the billions and the business innovators and investors who run, fund, or acquire them during all stages of the corporate lifecycle across emerging industries, from formation to exit, such as fundraising rounds, mergers and acquisitions, SEC and Blue sky matters, joint ventures, corporate clean-up and due diligence, employment matters, corporate tax matters, corporate governance, etc. The firm also publishes the prominent Hedge Fund Law Blog. For more information, please add them on LinkedIn, follow on X, and visit at colefrieman.com.
