Stage 2: Setting Up the Token Issuer Entity / Token SPV (US-Teams)

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Intro

The second step of incorporation for US teams is the set up of the Token SPV. The reason why it is an important step to set up such an entity for US projects is the following: Due to the regulatory uncertainty and risks in regards to securities, it is advised that US companies should avoid being associated with any token sale or token distribution as much as possible. For this reason it is advisable for US teams to conduct their fundraising rounds via SAFEs + Token Warrant. Due to the nature of the Token Warrant and it being a purchase agreement for tokens that *might* be issued in the future, the warrant can be assigned to a different company, taking the US DevCo that signed the SAFE + Token Warrant out of the responsibilities in regards to the token purchase and token distribution. This is where the Token Issuer / Token SPV comes in.

Also read the following: When to use a SAFE + Token Side Letter or Token Warrant

When is the Token SPV Set up

The Token SPV needs to be set up and ready for mainnet launch as it will receive the tokens that will then be distributed through “off-chain” agreements such as Warrants or Token Options to investors, advisors, team members and early contributors.

Ideally the preparation of the set up is done several weeks prior to launch. Teams will usually have to work with service providers in the jurisdiction where the Token SPV is set up and it requires several documents for the Token SPV to be able to conduct a compliant token sale to the investors. We recommend taking at least 2 months into account for the entire process.

Purpose & Responsibilities

Let's get to the “why” and “what” the Token SPV does. First of all, as the name suggests “Special Purpose Vehicle” the Token SPV is only set up for a purpose and will not be needed after. This being said, a Token SPV can usually be resolved within 6 months as it has fulfilled its purpose. As mentioned above, the main purpose of the Token SPV is to sell and distribute the tokens which the investors are eligible to buy for a certain price or discount (preferably discount) as agreed upon on the SAFE + Token Warrant agreement that the DevCo signed with the investors.

Let’s go through it step by step:

Step 1 - Setup and required Documents:

Define Jurisdiction, typically BVI or Cayman Islands

Define nominee services in the jurisdiction

Obtain a Token Legal Opinion

Prepare Token Incentive Plan (Token Options) for team members and early contributors

Step 2 - Before Launch:

Token Warrants that the DevCo signed with investors are assigned to the Token SPV prior to the network’s launch for future conversion

Token Options with team members and contributors are assigned to the Token SPV prior to the network’s launch for future conversion

Receive payments from VCs, typically in the form of stable coins

Step 3 - Network Launch:

Receives “team & investors token pool” at the moment of token launch

Converts Token Warrants / Options for token distribution to the team and investors

Distributes tokens to the team and investors

Jurisdictions

There are two main approaches to establishing the Token SPV:

Offshore Registration: Typically, the Token Issuer is registered in an offshore, tax, and crypto-friendly jurisdiction with special regulations regarding token issuance. Favorable jurisdictions have the following attributes:

VASP regime: A specific regulatory regime in a country designed for virtual asset-related activities, such as exchanging one virtual asset for another, processing virtual asset transactions, storing virtual assets, and providing DeFi or NFT marketplaces with virtual assets

Token Regulation Guides: Jurisdictions that provide guides explaining the list of requirements that a company planning to issue tokens must follow in terms of community and token sales

Investor Recognition: Countries where the company registration is well-known among investors and they are comfortable with local laws

Some popular crypto-friendly jurisdictions that meet the above criteria include the Cayman Islands, British Virgin Islands (BVI), and Panama. Note that the offshore entity doesn't own a bank account; it only has a multisig wallet for funds.

Onshore Registration: Alternatively, projects that prefer the onshore route can establish the Token Issuer Entity in countries like Switzerland or Liechtenstein.

Additionally, projects with sufficient funds and resources may opt for Swiss or Liechtenstein entities for better optics and an enhanced external reputation.

Shareholders and Beneficiaries

Ownership and directorship of the Token Issuer Entity vary by jurisdiction.

Offshore: The setup usually involves one team member as a director and one local director. This arrangement requires partnerships with consultancies and local service agencies to set up and maintain the entity locally. A local director, office, or secretary may make decisions on your behalf within the jurisdiction of the entity. It is recommended that the team member that sets up the entity will be the beneficiary and therefore might have obligations regarding taxes if they are located in the US or Europe. If possible it is therefore recommended that the team member is located outside the US and Europe.

Onshore: Jurisdictions such as Switzerland and Liechtenstein require a local director who is based in Switzerland / Liechtenstein.

Cost

Estimated costs cover setup, maintenance, Token License, Token Legal Opinion, audit, director, and renewal fees for the entity setup and the first year.

Offshore:

Cayman Island: starting from $40,500

BVI (British Virgin Islands): starting from $12,000

Onshore:

Switzerland / Liechtenstein: starting from $60,000

Examples (Offshore)

Cayman Island LLC

Entity Type:

The entity type commonly used for a token issuer in the Cayman Islands is an exempted company. An exempted company in the Cayman Islands is a popular choice for international business and investment activities due to its flexibility, ease of administration, and tax advantages. It offers a separate legal entity that can engage in various business activities, including token issuance and management. The exempted company is governed by the Cayman Islands Companies Law and can be tailored to meet the specific needs and objectives of the token issuer.

Set up time: The set-up time for a Cayman Islands Token Issuer/SPV is relatively efficient. It typically takes around 2 to 4 weeks, depending on various factors such as the complexity of the structure, legal and regulatory requirements, and administrative efficiency.

Set up cost: The set-up cost for a Cayman Islands Token Issuer/SPV can vary depending on the specific requirements of the project, legal and advisory services engaged, and other factors. However, as a general estimate, the set-up cost can range from approximately $10,000 to $20,000 USD or more.

Taxation: One of the advantages of setting up a Token Issuer/SPV in the Cayman Islands is its favorable tax environment. The Cayman Islands does not impose corporate income tax, capital gains tax, or withholding tax on entities. This tax-efficient environment can be beneficial for crypto projects seeking to optimize their tax position. However, it's important to note that tax regulations and obligations can be subject to change, and consulting with tax professionals is essential to understand the specific tax implications based on the project's circumstances.

Ownership/Directorship: In the Cayman Islands, a Token Issuer/SPV typically follows a corporate structure. It can be set up as an exempted company or a limited liability company (LLC). The ownership structure can include shareholders who hold ownership interests in the company. The directorship of the company is responsible for managing and overseeing the activities of the Token Issuer/SPV. The directors can be individuals or corporate entities, and there may be specific requirements regarding their qualifications and residency.

It is common to work with local service partners in the Cayman Islands can provide valuable support and expertise for setting up and operating a Token Issuer/SPV. They possess in-depth knowledge of local laws and regulations, streamline processes, and have networks and connections within the financial and business community. They assist with legal and regulatory compliance, facilitate relationships with banks and stakeholders, and handle ongoing administration. Engaging reputable service providers ensures a smooth and compliant operation of the Token Issuer/SPV, benefiting from their local presence and representation.

BVI Company

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