What is an ICO? How can I use it to fund my start-up or company?
Many startups and well-established companies, both in Switzerland and worldwide, are considering ICOs as an alternative to traditional capital-raising as Venture Capital and Initial Public Offering (IPO). Initial Coin Offerings (ICOs) present a less burdensome and still largely unregulated way to raise funds, similar to crowd-souring, by issuing virtual coins (so called digital tokens) using Blockchain technology. The company issuing the token prepares a whitepaper which explains in details the project to be funded by the ICO. In general, investors participate in the fundraising by providing fiat money, such as EUROs, CHFs, USD dollars or cryptocurrencies (Bitcoin, Ether and others), to the ICO entity in exchange for digital tokens. The token may be related to the right to receive a dividend, a voting right, a property right or the right to participate in the future performance of the ICO entity. How ICOs are structured from technical, functional and business standpoints varies markedly from offering to offering. There is no catch-all definition. In general, the tokens that the investor receive might have different functions: a security token, a digital token, an asset-backed token, a utility token. Each ICO is regulated differently in Switzerland depending on its legal nature.
Is an ICO a good option to fund my business? Do I need a Swiss banking license?
Currently there does not exist a Regulation governing the ICOs in Switzerland. Swiss legislation of financial markets is the so-called principle based and one of those principles is technology neutrality.
The Swiss Financial Market Supervisory Authority (FINMA) expressed support of the incorporation of the blockchain technology in the financial sector in Switzerland. FINMA has issued a Guidance on ICOs on 29 September 2017 stating that ICOs might be a subject of regulation under certain laws:
• FINMA regulates each ICO on a case by case basis upon a request and treats each ICO on the basis of its functionality (security, attributed value for exchange, utility)
• In its Guidance FINMA specifically states that, in some circumstances due to the proximity of some ICOs to the conventional financial markets, some ICO models might fall under the regulatory law and more specifically might be regulated by the provisions of one of the following laws: Swiss Anti-Money Laundering Act, Banking Regulations, provisions on security trading, Acts and Regulations governing the Collective Investment Schemes.
For instance, in case where ICO vendor issues a payment instrument in order to create a token the provisions of the Swiss Anti-Money Laundering Act are applicable.
Under the Swiss law a banking license is required when accepting public deposits in case where an obligation towards participants arises for the ICO operator.
In addition, a license is required to operate as a securities dealer in cases when the issued tokens qualify as derivatives.
Finally, in cases where the assets collected as part of the ICO are managed externally, the provisions governing the collective investment schemes might be applicable.
Generally, tokens are divided into two main categories: intrinsic tokens and asset-backed tokens. The most used intrinsic tokens are Bitcoins and Ethers.
FINMA treats intrinsic tokens as any other currency. This means that the exchange of any currency (fiat money or intrinsic token) into a newly-issued intrinsic token during an ICO, has to comply with the Swiss Anti-Money Laundering Act (AMLA). Any Swiss company that offers currency exchange on a professional basis has to comply with Art. 2 of AMLA. In an ICO, the threshold to act on a professional basis is considered reached when the value of the accepted Bitcoins or Ethers in exchange of the issuance of new intrinsic tokens exceeds 2 million CHF. I
n this situation, the Swiss entity issuing new intrinsic tokens has two options:
(i) to join a self-regulatory organization for AML purposes, or
(ii) submit itself under the supervision of FINMA. According to the AMLA any foreign or Swiss investor investing more than CHF 5’000 of intrinsic tokens into the newly created ICO is under the obligation of due diligence “Know Your Customer” of the Swiss ICO entity.
Asset-backed tokens are not regulated by the Swiss Regulator. The problem is that asset-backed tokens might qualify as securities according to Swiss law with the implication that a Swiss entity that collects funds for an underlying company while issuing securities, generally requires a securities dealer license in Switzerland. For instance, a platform allowing for multilateral trading of securities may only be offered by the licensed banks or securities dealers. In addition, the issuance of debt or equity securities to more than 20 investors requires a prospectus. In order not to be qualified as a security, an asset based token should not show characteristics of a security (does not qualify as uncertificated securities, derivatives or intermediated securities).
Furthermore, a token shall not equal one or more shares or a percentage of a share in the company.
In addition, in order not to fall under the Swiss banking legislation, the asset-backed token should not resemble a structured product or other derivative. A structured product is an investment instrument where the redemption value is linked to the performance of one or more underlying shares, interests, foreign currencies or commodities. Instead, such asset-backed tokens should be option rights in the participation or use of a yet to be developed platform. In order to avoid the qualification as a deposit token, an asset-based token should lack a right to request repayment of the underlying asset to the investor. The acceptance of deposits by the from the public makes the ICO fall under the scope of the Swiss banking legislation. According to Swiss Law, a Swiss company or a foundation is not permitted to accept intrinsic tokens from investors in exchange of a token which gives the right of the token holder to request pay-out of the underlying assets.
The following rule has five exemptions according to the Banking act.
First, payments from investors that are based on a prospectus should not qualify as a deposit accord to the Swiss Banking Act. In order to profit from this exemption, the white paper where the function of the token is described should comply with the requirements of a prospectus.
Second, investors payments made to a foundation with a charity purpose are not considered as a deposit.
Third, according to the Sandbox Regulatory principle, the acceptance of deposits from an unlimited number of third parties up to the value of CHF 1 million does not require a baking license.
Forth, the acceptance by a company of virtual or fiat money up to the value of CHF 3’000 by a payment system for future services or goods is outside the scope of the Banking Act and is not qualified as a deposit. However, this rule applies provided that no interest is being paid to the investor. According to Art. 5 para 3 lit. C of the Banking Ordonnance deposits in settlement accounts of securities dealers or precious metal traders, asset managers or any similar market participants, do NOT qualify as deposits from the public if they are interest-free and exclusively used to handle client transactions. To make use of this exception, the client transaction must already be arranged and about to occur. The Federal Council extended this period from seven to sixty days. For securities dealers, however, it remains crucial that the planned transaction is not only organized but directly foreseeable.
Crowdfunding platforms that accept funds from investors and allocate these funds to a project will benefit from this amendment as they will have up to 60 days to allocate the funds to the project after accepting the funds from the investors. They will be exempt requirement to obtain a banking license. The provisions of the collective investment scheme legislation have to be considered in the case when the assets raised from the investors during the ICO are for the purpose of collective management and the assets are managed on account of those investors on an equal basis.
How do I go practically about launching an ICO in Switzerland?
In order to launch an ICO, a company seeking to raise funds has to prepare a Whitepaper (equivalent to a light Business Plan) and publish it on its own website and certain dedicated virtual platforms. In the Whitepaper, the issuing company typically describes the purpose of its business, its business operations and the structure and functionalities of the tokens it intends to issue. The ICO documentation may also include a Token Purchase Agreement stipulating the terms and conditions pursuant to which potential investors can acquire Tokens. ICOs are generally accessible to investors in certain “ICO-friendly” jurisdictions like Switzerland, Singapore and Hong Kong. In Switzerland, business owners should choose a suitable “canton” (the equivalent of a “state” in the Swiss Federation) with respect to ICO-friendly local jurisdiction, tax regime and maturity of the token or Blockchain ecosystem. Currently, the canton of Zug is a hot spot for launching Swiss ICOs but other cantons with favourable ICO climate are fast emerging (e.g. the canton of Vaud in the French speaking part of Switzerland).
If a foreign company wants to register and fund an ICO in Switzerland, the following steps must be performed:
– Setting up a foundation (Art. 80 of the Swiss Civil Code) which will be under the supervision on FINMA.
– Or a special purpose vehicle in the form of a limited liability company or a public limited company.
– Drafting of a White paper describing in detail the project and the way the tokens will be utilized.
– Collection of cryptofunds (Bitcoins, Ethers, etc.) from investors by the foundation or the company launching the ICO.
– Issuance of tokens for the investors.
Final remarks: The case for launching your ICO in Switzerland
If you have any questions regarding cryptocurrencies and ICOs, don’t hesitate contact us, here.
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