What Is the Difference Between a Fund and a Foundation? Essential Reading for Compliant Operations of Web3 Projects

A single character difference, yet a vast distinction!

When asked how to launch a Web3 project, lawyers at Mankun Law Firm typically advise considering the establishment of a "fund" or a "foundation" as the first step toward compliance. However, these two organizational forms, which differ by only one character in Chinese, often cause confusion: When should one choose a fund? When should one choose a foundation? What different regulatory rules must be addressed when establishing them?

In fact, whether in traditional industries or the crypto industry, although "funds" and "foundations" are similar in name, they are fundamentally very different. Meanwhile, for Web3 projects, choosing between a fund and a foundation not only affects daily operational models but also relates to compliance in jurisdictions such as Hong Kong. Therefore, lawyers at Mankun Law Firm have specially compiled this article to clarify the differences between these two organizations from three aspects: function, application scenarios, and regulatory requirements, helping you find the optimal path to support the long-term development of your project while achieving compliance.

What Is a Crypto Fund?

Simply put, a crypto fund is a collective investment vehicle oriented toward profit and focused on investing in crypto assets. Its core objective is to raise capital and invest in high-growth potential areas such as digital assets and blockchain projects to achieve capital appreciation, thereby meeting the needs of investors seeking high returns from the crypto market. Compared to traditional funds, crypto funds offer greater flexibility in management strategies, allowing them to rapidly adapt to the high volatility and global nature of crypto assets, while also bringing new compliance and risk management challenges.

Typically, crypto funds allocate investor capital to crypto assets and projects with significant potential, such as investing in blockchain startups in popular sectors, participating in diversified cryptocurrency trading strategies, or engaging in staking, lending, or liquidity mining in DeFi projects. These highly flexible operational methods are well-suited for investors requiring rapid capital turnover and allow them to profit from volatility opportunities in the crypto market.

However, the high volatility and cross-border nature of the crypto market mean that while investors pursue high returns, they also face greater uncertainty. Although market risks cannot be completely avoided, compliant operations can effectively control them. For many Chinese-funded funds, Hong Kong’s policy environment provides a relatively stable compliance path. Specifically, what are the regulatory requirements for crypto funds in Hong Kong?

1. Obtaining a Type 9 License

Establishing a crypto fund in Hong Kong usually requires applying for a Type 9 (Asset Management) license, especially when the investment portfolio involves securities, futures contracts, or virtual assets (such as Bitcoin and Ethereum). This license is not only the basis for lawful operation but also demonstrates the professional qualifications of the fund management team in investment strategy, compliance, and risk management, in accordance with the regulations of the Securities and Futures Commission (SFC) of Hong Kong.

The SFC also focuses on the company’s operational processes in portfolio management, asset custody, valuation procedures, and other aspects, ensuring that the fund meets compliance standards in information technology and security controls. The processes and transparency of asset management are also key areas reviewed by the SFC to protect investors’ rights and interests.

2. Fund Structure and Compliance

When establishing a crypto fund in Hong Kong, choosing the appropriate fund structure not only affects the operational model but is also directly linked to compliance and regulatory requirements. Generally, fund organizational structures in Hong Kong are divided into:

Unit Trust

Fund assets are held in trust by a trustee company, and investors obtain indirect ownership of the fund assets by purchasing unit shares. This structure is particularly suitable for capital-intensive fund operations. To establish a unit trust, it is necessary to ensure that fund assets are held by an independent trustee company, that the fund is offered to qualified investors who meet the requirements of the Hong Kong SFC (such as high-net-worth individuals or institutions), and that transparency requirements are followed, including regular disclosure to investors of financial status, fund performance, and risk management strategies.

Open-Ended Fund Company (OFC)

An OFC is a corporate structure that allows for the flexible issuance and redemption of shares. It is an independent legal entity, with its board of directors responsible for the daily management and compliance oversight of the fund. Regulatory requirements for OFCs in Hong Kong include: the establishment of a board of directors, whose members must possess fund management experience and meet the SFC’s qualification requirements; the option to operate in either an open-ended or closed-ended mode, with open-ended OFCs required to have redemption arrangements; the appointment of an independent auditor to conduct annual audits of the OFC’s financial statements; and meeting minimum capital requirements and submitting proof of capital adequacy to the SFC.

Limited Partnership

A limited partnership structure typically consists of one General Partner (GP) and several Limited Partners (LPs). The GP is responsible for the daily operations and decision-making of the fund, while LPs act as passive investors with limited liability. The limited partnership structure is widely used for investments in private equity and illiquid assets. Establishing a limited partnership requires a detailed partnership agreement clarifying the rights and obligations of the GP and LPs, profit distribution, and exit mechanisms; providing financial reports, investment performance, and risk assessment information to LPs on a quarterly or annual basis; and establishing risk control mechanisms, clearly listed in the partnership agreement, especially for cross-border investments and crypto asset operations.

3. Fund Management Team and Service Providers

The Hong Kong SFC requires crypto fund management teams to possess professional experience in crypto asset management, particularly ensuring that personnel in key positions, such as department heads, team leaders, and key investment staff, have the capability for compliance and risk control. During review, emphasis is placed on whether these members possess more than three years of experience in crypto asset management (particularly within the last six years). Additionally, crypto funds need to engage multiple service providers, including custodians, fund administrators, and auditors, to ensure the legality and compliance of fund operations.

4. Compliance in Fundraising and Promotion

Fundraising for crypto funds must be conducted through non-public methods, such as promotion via private communications or industry conferences, to avoid the legal risks of illegal fundraising associated with public advertising. Furthermore, investors in the fund must meet Hong Kong’s qualified investor standards. This not only helps avoid the legal risk of illegally absorbing public deposits but also further ensures the professionalism of the investors. To enhance transparency, crypto fund managers must regularly disclose key information to investors, including financial statements, risk warnings, and adjustments to investment strategies, to safeguard investors’ right to know and their decision-making information.

5. Other Regulatory Requirements

Anti-Money Laundering (AML) and Know Your Customer (KYC): To prevent illicit funds from entering the crypto market, crypto funds must comply with Hong Kong’s AML and KYC regulations. Management companies must conduct strict identity verification and risk assessments of investors to ensure the legitimacy of the source of funds. These compliance measures typically include hiring dedicated compliance officers, establishing internal review procedures, and using technical means to monitor fund flows, in order to meet the SFC’s compliance requirements.

Tax Compliance: Hong Kong’s tax policy for crypto funds is relatively favorable; offshore funds may enjoy tax exemption status, but specific applicability depends on the fund’s investment type and location of operations.

What Is a Crypto Foundation?

A crypto foundation represents a completely different operational model. As the core support for Web3 projects, a crypto foundation is a non-profit-oriented organization, typically initiated by blockchain projects, aiming to help blockchain projects and their ecosystems achieve long-term, healthy growth through ecosystem grants, community building, education and promotion, and the establishment of industry standards.

For example, the recently released Ethereum Foundation 2024 Annual Report details its organizational structure and operational model. Lawyers at Mankun Law Firm have also written an analysis of the foundation’s compliance model in the article "Web3 Lawyer: Understanding the Ethereum Foundation 2024 Report to Meet Compliance Challenges in the Trump Era," which interested readers may consult. This non-profit characteristic not only determines how the foundation utilizes its funds but also creates clear distinctions from crypto funds in terms of compliance and regulation.

So, what regulatory requirements should be considered when establishing a crypto foundation in Hong Kong?

1. Foundation Registration

In Hong Kong, crypto foundations are typically registered as Companies Limited by Guarantee, clearly defining their non-profit status. Therefore, during registration, the foundation must submit proof of its non-profit nature, detailing the sources, uses, and management methods of its funds to ensure alignment with non-profit objectives and regulatory requirements.

2. Board of Directors and Governance Structure

Hong Kong’s Companies Ordinance requires foundations to establish a board of directors with independence and transparency, composed of qualified directors responsible for the daily management and compliance oversight of the foundation. Board members must possess relevant legal, financial, or management experience and integrity, enabling them to strictly fulfill their duties, effectively manage the foundation’s operations, and ensure fund transparency. Directors must also bear fiduciary responsibilities, ensuring compliant use of funds and accountability for the foundation’s operational decisions.

3. Fund Management and Anti-Money Laundering (AML) Requirements

Although foundations are non-profit-oriented, they must still comply with Hong Kong’s Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements. For instance, foundations must strictly scrutinize large donations and cross-border fund transfers to prevent the inflow of illicit funds. Meanwhile, foundation funds must be used exclusively for non-profit activities such as ecosystem building, community grants, and industry promotion. Income or surplus must not be distributed for the personal benefit of shareholders or members. To this end, foundations must establish dedicated compliance departments and hire professionals to audit the sources and uses of funds.

4. Information Disclosure and Transparency

To maintain public trust in non-profit institutions, crypto foundations must regularly disclose financial information to the public or regulatory authorities in accordance with the Companies Ordinance, such as annual reports. These reports should include details on fund sources, usage, project progress, and summaries of annual activities to enhance organizational transparency. It is important to note that financial reports must undergo professional auditing and comply with Hong Kong’s accounting standards to facilitate public oversight.

5. Tax Compliance

As non-profit organizations, crypto foundations may apply for exemption from profits tax in Hong Kong, provided that income is used solely for foundation projects and not distributed to individuals. Foundations must strictly adhere to non-profit regulations and avoid engaging in profit-making activities such as fundraising, thereby meeting tax exemption requirements and reducing costs for the project.

Choosing Between a Fund and a Foundation?

Depending on different project stages and development needs, choosing to establish a crypto fund or a crypto foundation will yield different results. Both have their respective advantages in Hong Kong regarding compliance paths, organizational forms, and fund utilization. Therefore, it is crucial to make a selection based on the actual goals of the project. The preliminary advice from lawyers at Mankun Law Firm is as follows:

1. Scenarios Suitable for Crypto Funds

For Web3 projects where investment return is the core objective and rapid growth is desired in the short term, a crypto fund is undoubtedly the more suitable choice. Typically, such projects have several characteristics: first, a clear profit orientation; second, high requirements for fund liquidity; and third, suitability for employing diversified investment strategies. Such projects often focus on capturing profit opportunities amidst market volatility or driving rapid expansion of project scale through capital.

For example, many DeFi platforms, crypto asset management projects, and high-frequency trading platforms require efficient fund management to maintain market competitiveness. Particularly, DeFi projects focused on liquidity mining and decentralized lending rely on flexible capital allocation in their operational models to quickly adjust strategies in response to market changes. Through the crypto fund structure, these projects can attract professional investors, achieve higher capital input, and thus gain an advantage in dynamic markets.

Additionally, those who focus on and are optimistic about innovative Web3 projects (such as Layer 2 solutions) often choose to invest through crypto funds. Due to the high-risk and innovative nature of such projects, crypto funds can attract investors seeking high returns, providing flexible financial support that allows projects to secure greater funding for expansion and technical research and development, while offering investors diversified investment opportunities, achieving a win-win situation for both capital and projects.

2. Scenarios Suitable for Crypto Foundations

For Web3 projects whose core objectives lie in ecosystem development, long-term community support, and the establishment of industry standards, a crypto foundation is clearly the more appropriate choice. Such projects typically emphasize community governance, knowledge sharing, and industry development, aiming to create an open, transparent, and sustainably developing ecosystem. The non-profit nature of foundations allows them to focus on these goals with greater social and industry value, avoiding excessive interference from profit-driven motives.

For example, many Layer 1 public chain projects choose to establish foundations to promote the prosperity of their ecosystems, such as the Ethereum Foundation and the Polkadot Foundation. The goal of such projects is not short-term profit but rather strengthening the technical foundation and application scenarios by funding developers, supporting research projects, and promoting educational activities. The structure of crypto foundations can attract long-term investors who value community governance and industry prospects, enabling projects to obtain broader resource support when building their ecosystems.

Furthermore, DAO projects oriented toward decentralized governance are also very suitable for operating in the form of a foundation.Here, the foundation is not merely a fund manager but also an important promoter of community development. They can provide support to DAO members through reward programs, technical grants, and industry events, helping their communities develop steadily in an environment without centralized control.

As a global financial center, Hong Kong’s open policies toward the crypto industry provide unprecedented opportunities for Web3 projects. For Web3 projects hoping to operate compliantly in Hong Kong, crypto funds and crypto foundations are undoubtedly ideal starting points for compliance. Based on this article, lawyers at Mankun Law Firm hope to provide some hints and assistance to all Web3 projects planning for compliant development in Hong Kong, while also contributing modestly to the compliance of the entire industry.

Of course, we also welcome project teams to contact us. Lawyers at Mankun Law Firm have long supported the establishment of crypto funds and foundations and have developed a mature set of solutions. If needed, please feel free to add us for consultation: Mankunlaw.

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What Is the Difference Between a Fund and a Foundation? Essential Reading for Compliant Operations of Web3 Projects | Mankun Legal Education