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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
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.
Estimated costs cover setup, maintenance, Token License, Token Legal Opinion, audit, director, and renewal fees for the entity setup and the first year.
- Cayman Island: starting from $40,500
- BVI (British Virgin Islands): starting from $12,000
- Switzerland / Liechtenstein: starting from $60,000
Cayman Island LLC