Token Issuance: More Options Available
Disclaimer: As token issuance is strictly prohibited in mainland China, this article provides industry legal education and information exchange within the context of overseas laws and regulations.
In previous articles, Attorney Jin from Mankun Law Firm introduced the model of issuing tokens through a Singapore foundation (see"Can Registering a Singapore Foundation Legitimize Virtual Currency Issuance?"). This article continues to introduce the offshore foundation model, providing entrepreneurs with more options to choose the most suitable structure based on their specific project circumstances.
Advantages of Using a Foundation as the Token Issuance Entity
Once a project decides to issue tokens, lawyers typically recommend establishing a separate entity for token issuance. This is primarily for the following three reasons:
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To prepare legal opinions for listing tokens on exchanges; -
To isolate regulatory risks. Some countries and regions impose strict restrictions or bans on token issuance and trading,Welcomeblockchain technologybut not necessarily welcome token issuance，such asfor example, mainland China; -
For tax planning. Since token issuance generates capital gains, selecting jurisdictions with preferential tax rates to establish a separate token issuance entity can reduce tax burdens.
Theoretically, any entity can serve as the token issuer, but issuing tokens through a foundation structure offers clear legal and commercial advantages.：
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Reducing Tax Costs: Foundations help project teams achieve tax planning. Different countries and regions offer certain tax incentives to individuals or institutions participating in foundations to support charitable development. For example, foundations in the Cayman Islands and Singapore enjoy full tax exemption; Switzerland also stipulates that public benefit foundations are not required to pay income tax on grants and donations, nor on income from asset management or economic activities related to or auxiliary to the foundation's purpose. -
Risk Isolation: Since a foundation may have no shareholders, risks are entirely confined to the foundation level. -
Enhancing Credibility: Non-profit foundations generally enjoy better reputations. Additionally, when a foundation handles fundraising, fund usage, operational management, and rights management through custodial arrangements for funds and equity, it allows the project issuers to focus on the research and development of core blockchain technologies.
Characteristics of Cayman Foundation Companies
Many projects with Chinese backgrounds, such as Litecoin, have chosen Singapore foundations for token issuance. However, compared to onshore jurisdictions, offshore jurisdictions offer compelling advantages due to their unique attributes.
Mature offshore jurisdictions (such as the Cayman Islands and the British Virgin Islands) have a clear international positioning as low-regulation havens, welcoming regulatoryarbitrage. Therefore, offshore authorities consider relatively singular factors, namely attracting more capital.；In contrast, onshore authorities must consider a myriad of complex factors, with government officials constantly balancing interests and taking various actions accordingly.。
Especially in emerging industries like Web3 and blockchain, every onshore authority is alarmed by the potential significant challenges posed by these technologies. Even while proceeding cautiously, they cannot avoid occasional enforcement actions and new policy announcements. This is true for mainland China, the United States, Hong Kong, and Singapore alike.In comparison, offshore governments with singular objectives offer greater stability and certainty in regulation.，Because they are unconcerned with such challenges; significant challenges do not fall upon small offshore authorities to address. Therefore,for teams with highly innovative businesses that prioritize regulatory stability and certainty, offshore jurisdictions may be a better choice.
Regarding the establishment of a token issuance entity, under the "Cayman Islands Foundation Companies Act, 2017," the Cayman Islands offers the form of a Foundation Company.The distinct feature of a Cayman Foundation Company is that it combines characteristics of both trusts and companies,，making it particularly attractive. The main features of a Cayman Foundation Company are as follows:
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Independent Corporate Legal Person：This implies limited liability, which can be either limited by shares or limited by guarantee.
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Non-Charitable Purposes Permitted：A Cayman foundation can be established for any lawful purpose, including both charitable and non-charitable purposes. Although foundations are prohibited from distributing dividends or otherwise allocating profits or assets to their members, they can distribute relevant interests to the beneficiaries of the Cayman foundation.
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Beneficiaries Can Be Designated:Generally, foundations focus on serving society and charitable causes, unlike traditional trusts that focus on providing economic benefits to specific beneficiaries. However, a Cayman foundation allows for the designation of beneficiaries.
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No Shareholders Required:A Cayman foundation can exist as an orphan entity without any shareholders. However, in the absence of shareholders, a Cayman foundation must have a supervisor.
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High Flexibility:There is significant room for adjustment in the governance rules, structure, and functions of a Cayman foundation to meet various customization needs. Furthermore, the constitution of a Cayman foundation can be supplemented by "Bylaws," which do not need to be filed with the Registrar of Companies. This maintains confidentiality, providing a degree of privacy for the operation of the Cayman foundation, and allows for further flexibility in formulating rules related to its structure and management.
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Mitigation of Liability for Relevant Parties:Certain provisions of the "Cayman Islands Trusts Act" apply mutatis mutandis to Cayman foundations, including Section 48 of the Trusts Act, which allows trustees to apply to the Cayman Court for directions. This serves as a remedial measure, offering protection when trustees make significant decisions (such as major distributions or commitments).
Requirements for Establishing a Cayman Foundation Company
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Application Documents: Standard forms provided by the official authorities. -
Articles of Association: The articles of association of a Cayman Foundation Company are one of the incorporation documents, comprising the Memorandum and Articles. The articles must directly specify, or refer to provisions specifying, the disposal of residual assets upon the liquidation of the company. -
Eligible Company Secretary: Appointment of a company secretary licensed or authorized under the Companies Management Act (2003 Revision). The company secretary is responsible for ensuring the company's compliance with relevant regulations and maintaining necessary corporate records. -
Unless there are special requirements, the registered office, nominee shareholders, directors, etc., can be handled comprehensively by an agency service provider.
Conclusion
In summary, both offshore and onshore jurisdictions have their respective advantages and disadvantages. If entrepreneurs wish to learn more about Cayman Foundation Companies and related services, please contact the Mankun Law Firm legal team.
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