Opinions are the author’s own and are for discussion purposes only. This does not represent the views of Decentral Park Capital or its affiliates. Furthermore, this does not constitute legal, accounting, or tax advice of any kind and should not be relied upon as such.
A CRYPTO LAWYER, IN A QUIET WHISPER ESPOUSING A UBIQUITOUS DISCLAIMER: Caveat, most if not all legal structures and frameworks as applied to crypto and decentralized protocols are generally untested at scale…Shhh…don’t tell anyone.
In other words, buyers beware of the limitations of legal structure and the level of conviction, experience, and insight you are paying for. If you want to live stateless on-chain and you are in a jurisdiction and have users that make this viable, do so out of the gate and don’t look back.
This ranks as one of, if not the, largest corporate law fee grabs in modern times, and we are just getting started.
In the ranks of top law firms there are global firms that play well in every space, that can bring to bear resources on the front end – corporate structuring, tokenomics, product features – and best in class resources in the next breath on the back end – former regulators and renown defense counsel ad nauseum there to defend you against any flavor of enforcement action.
There are also small and mid-sized shops that do not suffer from the long line of well funded protocols knocking at their door who can afford $1M per month (not joking) in legal fees without any imminent or looming litigation.
There are of course automated crypto project structuring platforms out there, but we all know that juice is not worth its squeeze, and unfortunately often finds founders realizing they are part of a series LLC with inappropriate liability segregation, or worse yet, have to start over and restructure altogether.
Nowadays, it’s still an island hopping party, meaning founders are constantly on the quest for the lightest compliance oriented jurisdiction that provides a modicum of liability protection and the ability to raise capital and launch a token.
However, heading into this year, FATF guidance was pushing the last remaining bastions of traditional tax and financial havens towards a regulatory mean (i.e. adopting VASP legislation), and recent geopolitical events will all but accelerate global regulatory parity.
Switzerland and Singapore were first movers with regulatory clarity and pro-crypto regimes, then came the Cayman Islands with the Cayman Foundation concept, and as the British Virgin Islands adopted pending VASP standards, Panama, St. Lucia, Gibraltar, and now a novel concept in Guernsey are the flavors of the month.
Decentral Park continues to receive a lot of questions from founders regarding jurisdiction, and this will not change. However, financial instrument type is often just as important as jurisdiction.
We partner with best in class law firms onshore (global structure and path to decentralization) and offshore (local issuing jurisdiction), but there are a slew of ambitious lawyers riding high on market froth pushing founders to dictate terms based on current dislocated market dynamics, without a true vision for future market cycles and impact on valuations that always seem to get their claws in founders early.
We are also seeing smart advisors push for SAFE or convertible equity instruments plus warrants for token rights, as an effort to punt token issuing into the future and preserve optionality as the regulatory environment normalizes this year and next.
All this to say, smart, patient, and strategically minded counsel can help founders shape appropriate legal structures, fundraising processes, and a path to sufficient decentralization, compliance, and tokenization in any environment. Below are a few market based concepts for thought and discussion.
Fundraising Instruments
Premier global law firm Cooley offers a free document production site CooleyGo. Start there.
There are several instrument types available for founders, some more friendly than others, but all effective and vanilla in terms. The straight Purchase Agreement continues to be prevalent where issuing jurisdictions support it.
SAFTs have fallen out of favor over time, and the SAFE + Warrant is increasingly used as a way to preserve optionality where there is regulatory uncertainty.
The SAFE and KISS will battle it out more so (prediction) if/as the market cools off, where the primary difference between these two is forced conversion where the SAFE is more founder friendly when the conversion mechanism makes the KISS investor friendly, and both make funding fairly frictionless until subsequent rounds.
- Purchase Agreement (Tokens)
- SAFE - Simple Agreement for Future Equity
- SAFT - Simple Agreement for Future Tokens
- SAFE + Warrant - Simple Agreement for Future Equity plus a Warrant to Purchase Tokens
- SAFET - Simple Agreement for Future Equity and Tokens
- KISS - Keep it Simple Security
Legal Structures and Decentralization Roadmaps
Tax on fundraising, existence of regulatory framework, liability protection are key considerations.
There is still a generally held belief that the road to decentralization negates the ‘efforts of others’ component of the Howey Test.
The legal roadmap towards decentralization implies a strong and distributed community in the form of a Decentralized Autonomous Organization (DAO). There are multitude of issues to include general liability to all members in a pure stateless DAO construct.
For those founders and protocols that do not want to live purely on chain, there are various approaches to wrapping the DAO with a legal structure. For example, in the US, a16z recently introduced the domestic US approach of an Unincorporated Nonprofit Association as a means for wrapping a DAO, providing a minimal tax effect and creating a legal entity that can act as a recognized counterparty with service providers, while minimizing general liability to members.
Even more recently, dYdX proposed using the Purpose Trust, a non-US trust, for decentralization purposes, as an effort further evolve a legal entity type that sustains all of the key features of a wrapper, but rather requires little if no oversight or interaction with a central regulator or government agency.
Two concepts for decentralization, or paths to it, are laid out below – the Cayman Foundation concept and the Panama Private Interest Foundation.
Additional Points
When jurisdiction is not a key issue, setting up offshore in the British Virgin Islands or Seychelles are often used because of the minimal time it takes to file these entities with little to no due diligence (week to form), these are no tax jurisdictions (if income is derived outside of the country), there are not regulatory frameworks in place in either jurisdiction covering crypto-related business activities (at this point in time, although this is changing).
These are bankable jurisdictions that reference the USD and are heavily used by US and UK nationals.
Perhaps the OG non-profit foundation model is offered by Switzerland. The likes of Ethereum Foundation, the Web3 Foundation, and the MakerDAO Foundation (before it was dissolved) set up shop in Switzerland due to strong clarity and concentration for and of blockchain based businesses. Compared to the Cayman Foundation mapped out above where you do not necessarily need beneficiaries in leading to the eventual DAO transition.
When it comes to DevCos, setting up onshore or where there is economic substance is usually the driver. Switzerland is an option where there is also a strong labor market for blockchain based businesses. The US, UK, Cyprus and others with strong IP regimes are also worth considering.
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