Tokenized Crypto Company Formation: A Detailed Overview

Tokenization has surged in the crypto space, and regulatory developments related to tokenization projects are rapidly evolving. It is for this reason that Licensium, with its expert team, is the right legal partner.

Optimal Crypto-Friendly Jurisdictions for Token Issuance

The best jurisdiction for issuing a token depends on various factors. Regulatory environments, tax considerations, ease of business, and access to investors are all very important considerations. Based on experience, certain jurisdictions are preferred for token issuance. Estonia, for instance, was favored because of its favorable business environment and a simplified e-residency program. Now entrepreneurs are moving to other places, as the requirements have become stricter. Other locations that are used are the British Virgin Islands, Saint Vincent and the Grenadines, and Switzerland. Each one has their own merits and things to consider.

Defining a Crypto Token: Utility vs. Security

Distinguishing between a utility and a security token is fundamental to understanding the regulatory implications. Generally speaking, utility tokens are digital assets crafted for use within a specific platform or ecosystem. They are not meant as investments, but rather as means of exchange. Security tokens are designed to reflect ownership in real-world assets, and as a consequence are regulated. Hence, the function is central: if the token is built to work in a platform and is not meant for investment, it’s a utility. However, if it represents ownership or investment, it is a security token. A legal opinion on the nature of your token helps ensure compliance. The way the token is marketed is also a factor. A token marketed as an investment, or promising a return, is considered a security token.

If a token is advertised as a gateway to a platform or ecosystem, it will most likely be classified as a utility token.

What is a Legal Opinion in the context of an ICO?

A Legal Opinion (often referred to as a Legal Memorandum) for an ICO is a formal, documented assessment provided by a legal professional. It evaluates an Initial Coin Offering’s adherence to applicable laws and regulations, with a primary focus on the token’s inherent nature.

The Howey Test (https://www.investopedia.com/terms/h/howey-test.asp) is often employed in this evaluation. Its objective is to determine, under relevant crypto laws and regulations, whether the underlying token is categorized as a security or a utility token.

A Legal Opinion generally addresses aspects such as securities laws, anti-money laundering (AML) protocols, and know-your-customer (KYC) regulations, along with any other pertinent laws and regulations within the jurisdiction where the ICO is offered.

Initial Coin Offering / Security Token Offering

When initiating, selling, or issuing a cryptocurrency, various questions arise. To ensure the project’s integrity, it’s beneficial to address specific questions during the planning phase.

Is a Crypto License Necessary for an ICO?

The necessity of a crypto license for an initial coin offering (ICO) hinges on the specific jurisdiction and its associated regulations. In some scenarios, a VASP (Virtual Asset Service Provider) registration might be a requirement for token issuance, whereas in others, it may not be needed.

Nevertheless, regardless of whether a license is mandatory, it’s consistently recommended for crypto and token issuers to obtain legal crypto counsel and guarantee compliance with all relevant regulations. This includes registering the ICO with pertinent regulatory bodies, adhering to know-your-customer (KYC) and anti-money laundering (AML) guidelines, and ensuring transparency in the utilization of funds raised through the ICO.

The regulatory environment surrounding ICOs is dynamic. It’s vital for businesses to remain informed about any alterations to regulations or crypto licensing requisites within their operational jurisdiction.

By maintaining this vigilance, they can mitigate potential legal and financial risks, ultimately aiming for a successful ICO launch.

Why is Crypto Company Registration Important for an ICO?

A legal entity offers liability protection to the founders and team involved in the ICO project. This safeguards these individuals from personal liability in the event of legal disputes or claims made against the ICO project.

Without a registered legal entity, the individuals driving the ICO may bear personal responsibility for any legal or financial complications that emerge.

Why is a Legal Opinion Crucial for an ICO?

A legal opinion serves to validate the legitimacy of an ICO to potential investors, by providing an official confirmation that it is compliant with applicable laws and regulations. This builds investor trust and heightens the prospects of a successful ICO.

Moreover, a legal opinion aids the ICO issuer in identifying and addressing potential legal vulnerabilities prior to the launch, thus mitigating the likelihood of expensive legal challenges in the future.

NFT Company Registration

Non-fungible tokens (NFTs) are recognized as cryptocurrencies worldwide and are therefore subject to similar regulatory frameworks. One must acknowledge the legal implications associated with starting an NFT project, thus considering proper company registration is important.

How to Establish an NFT Company?

A fundamental step in establishing an NFT company is to establish a legal structure, such as a corporation or a limited liability company (LLC). This setup offers liability protection to the company’s owners and facilitates the company’s ability to engage in contracts, employ staff, and hold assets. It’s essential to select the appropriate legal structure and the jurisdiction most suitable for the company’s operations.

How to Safeguard Personal Liability When Launching an NFT Venture?

In certain scenarios, Non-Fungible Tokens (NFTs) may fall under the definition of securities. As such, they are subject to stringent federal and state (or global equivalent) regulations governing securities.

The classification of an NFT as a security hinges on the specific facts and circumstances surrounding the offering.

It is advisable to incorporate a company and subsequently obtain a Legal Opinion to ascertain the nature of the token. This is crucial to ensure that any NFT offering adheres to all relevant securities laws and regulatory requirements.

Legal Compliance: Selling NFTs

Even if an NFT lacks inherent functionality, and thus is unlikely to be classified as a security, adhering to securities laws is still paramount if you intend to offer NFTs for sale. The most straightforward approach to ensure compliance involves forming an NFT company, which then holds the associated intellectual property (IP) rights. Our team of experts possesses the necessary proficiency to provide comprehensive assistance throughout this process.

What Crypto Regulations Pertain to NFT Businesses?

Given that NFTs represent a relatively novel concept in the crypto landscape, there are no specific regulations solely dedicated to NFT companies. However, existing regulations may be applicable, depending on the specifics of the NFT being sold and the jurisdiction in which the company operates.

Security or Utility: Classifying NFTs

The legal classification of NFTs remains a subject of ongoing discussion; however, the designation typically depends on the unique attributes of the specific NFT.

If an NFT is primarily marketed as an investment vehicle, it is likely to be considered a security. Conversely, if an NFT is primarily marketed for its utility value (such as access to a platform or service), it may be deemed a utility token.

If NFT purchasers anticipate profiting from their purchase based on the efforts of others (like the creator or a third-party promoter), the NFT may be classified as a security. However, if purchasers acquire the NFT for its utility value or simply for the pleasure of owning it, it may be considered a utility.

Taxation of Crypto NFT Companies

Crypto NFT companies are subject to various tax regulations and must adhere to them to prevent penalties and legal complications. The taxation of NFTs varies based on the jurisdiction where the issuing company is registered. Typically, NFTs are treated as assets and taxed accordingly.

Crypto NFT companies are subject to corporate income tax on their profits. The tax rate may vary according to the specific jurisdiction.

Essential Legal Documents for an NFT Company

An NFT company must possess legally binding documents to govern the sale of NFTs to buyers.

One crucial legal document is the Terms of Sale. This document outlines the terms and conditions governing the NFT’s sale to the buyer. It specifies the buyer’s ownership rights related to the NFT, conditions for ownership transfer, and any warranties or representations made by the NFT company.

Other important legal documents should be discussed, contingent on the precise underlying project.

Necessary Contractual Agreements for an NFT Crypto Company

In general, having a comprehensive set of legal documents helps safeguard the NFT company and ensures that NFT sales to buyers are conducted lawfully and transparently.

Consult with our professionals to discover how we can support you.

How to Procure a Legal Opinion on an NFT

Acquiring a legal opinion on an NFT is a vital step towards ensuring compliance with pertinent laws and regulations. The legal opinion should address securities laws and anti-money laundering regulations, among others. A crypto legal opinion may also delve into the NFT’s specific features, such as its use cases, the type of asset it represents, and the sale terms.

When assisting clients with preparing a Legal Opinion, we require a fundamental understanding of the token in question, often in the form of a whitepaper or litepaper. We may also review this document and provide expert guidance.

DeFi Crypto License

The decentralized finance sector presents numerous hurdles, and regulatory compliance is a significant one.  DeFi ventures are diverse, differing considerably in their architecture and the services they offer.  Consequently, tailored legal counsel can determine the success or failure of a DeFi platform’s secure operations.

Does a DeFi Company need a crypto license?

Since DeFi firms frequently offer financial services, usually without conventional intermediaries, and considering the current lack of regulatory clarity, establishing a legal entity is essential to shield against personal liability.  While DeFi businesses may not handle fiat currencies directly, they can interact with cryptocurrencies. Therefore, the requirement for a crypto license must be assessed.  In many locations, current regulations and licensing stipulations do not specifically apply to DeFi entities.  Crucially, Anti-Money Laundering (AML) and Know Your Customer (KYC) duties are still in effect and fall upon the service provider.  For specific requirement specifics, please indicate your DeFi Company status and the need for corporate assistance when requesting a consultation.

What legal documents are needed for a Defi company?

Defining the required legal documentation involves some ambiguity. However, because the company provides access to the protocol via its interface (website), minimizing the personal liability of the shareholders/founders is imperative. A DeFi company should assemble a suite of documents to ensure regulatory adherence and safeguard both the business and its users.

What is DeFi KYC Regulation?

With the growth of DeFi within the crypto industry, regulatory bodies are beginning to take notice.  Despite KYC and AML’s seeming incompatibility with the open, permissionless structure of numerous DeFi protocols, where anyone can join, the implementation of KYC regulations will depend on the jurisdiction.  Certain jurisdictions have already enacted KYC and AML rules for cryptocurrencies and related businesses, and it is probable that DeFi protocols will eventually be subject to similar regulations.

Your free consultation with a legal crypto expert

Contact us now and take advantage of a free consultation.  Our legal professionals will answer your concerns and queries, offering you a roadmap and a quote to bring your crypto project to fruition. We’ll respond within 24 business hours.