Monday, November 06,
2017 07.54PM / Contributed by Harney
Westwood & Riegels LLP
seems that 2017 will be remembered as the year of the initial coin offering
(ICO). Although still not mainstream, the pool of people in the financial
services sector who have never heard of Bitcoin, cryptocurrencies, the
blockchain or an ICO is quickly diminishing. For lawyers, this has meant first
trying to understand a rapidly evolving technology and second establishing how
this technology fits within laws and regulations that were drafted without
thought or reference to it.
This update outlines the primary legal and regulatory considerations for
structuring an ICO through the Cayman Islands. An 'ICO' is defined as an
alternative method of fund raising for a project on a blockchain network
through the acceptance of fiat or cryptocurrency in exchange for tokens
associated with the project. These tokens may themselves be tradable.
alluded to, there is an element of legal and regulatory drag in the Cayman
Islands. ICO-related guidance is yet to be issued by the government or the regulator.
This is not due to complacency or a lack of will. Rather, in seeking to retain
the reputation of the Cayman Islands as a leading international finance centre,
the government and the regulator – in consultation with the private sector –
wish to ensure that any initiatives aimed at blockchain technology and the
associated industry are well thought out, effective and business friendly,
while safeguarding the reputation of the jurisdiction by meeting international
standards. As such, clarification of existing legal and regulatory
uncertainties is expected imminently.
an ICO is structured through the Cayman Islands, the choice of vehicle is
presently a Cayman-exempted company. However, the Cayman Islands will soon
bring into force the foundation company regime, introducing foundation
companies which will be orphan vehicles. Ownership and autonomy concerns can be
addressed by having a Cayman Islands charitable trust or Special Trusts
(Alternative Regime) (STAR) trust hold all of the relevant shares in the ICO
company. A STAR trust is a non-charitable purpose trust that can hold assets
for a specific purpose.
Legal and regulatory considerations
following statutory and regulatory regimes must be considered when structuring
an ICO through the Cayman Islands:
- The Securities Investment Business Law;
- The Proceeds of Crime Law, Anti-money Laundering
Regulations and existing guidance notes;
- The Foreign Account Tax Compliance Act (FATCA) and the
Common Reporting Standards;
- The Beneficial Ownership Regime; and
- The Electronic Transactions Law.
correct analysis will be fact specific for each ICO.
Money Services Law
The Money Services Law regulates money services businesses in the Cayman
Islands. These include businesses providing (as a principal business) money
transmission and currency exchange. The applicability of the law will depend on
the specifics of the ICO. While any ICO may, by its nature, fall within the
remit of the Money Services Law, it is unlikely to apply to most ICOs.
Securities Investment Business Law
Under the Securities Investment Business Law, a person cannot carry on or
purport to carry on securities investment business unless he or she holds – or
is exempt from holding – a licence granted under the law. The Securities
Investment Business Law defines 'securities' through a list of instruments that
are common in financial markets, with no specific mention of digital tokens or
cryptocurrencies. It defines 'securities investment business' through a list of
activities, including dealing in, arranging deals in, managing and advising on
Securities Investment Business Law contains a list of 'excluded persons' who are
exempt from the requirement to hold a licence and a list of activities that do
not constitute securities investment business for the purposes of the law.
Taking these into consideration, an ICO can be classified as a security without
the ICO company falling within the scope of the Securities Investment Business
ICO should be evaluated on its merits and for many (eg, ICOs involving
so-called 'usage' or 'utility' tokens), the Securities Investment Business Law
will not be applicable.
Proceeds of Crime Law, Anti-money Laundering Regulations and
existing guidance notes
The anti-money laundering laws need careful consideration with respect to all
Cayman-domiciled ICOs. The Proceeds of Crime Law generally applies to all
Cayman-domiciled entities. The Anti-money Laundering Regulations 2017 and
existing guidance notes focus primarily on the regulated sector in the Cayman
Islands and prescribe the policies and procedures to be put in place by
Cayman-regulated entities (ie, those undertaking relevant financial business,
the definition of which is fairly broad) with respect to money laundering.
the general application of the Proceeds of Crime Law, ICO companies should not
assume that if their intended ICO falls outside the ambit of the Anti-money Laundering
Regulations, they need not concern themselves with anti-money laundering
issues. Irrespective of the final determination, solutions are available in the
market to mitigate against ICO companies falling foul of the anti-money
Mutual Funds Law
The Mutual Funds Law should be of no concern where an ICO is not intended to be
an investment fund or engage in investment fund activity. If the ICO relates to
an investment fund or investment fund activity, the proposed structure should
be considered in the context of the Mutual Funds Law. Given the law's
definition of equity interests (a key determining factor as to whether an
entity qualifies as a mutual fund), most ICO companies – distinct from any
blockchain or cryptocurrency asset class-focused fund – should be unaffected by
the Mutual Funds Law.
FATCA and Common Reporting Standards
Beneficial Ownership Regime
Considerations around share ownership, voting rights, the right to remove a
majority of the board of directors and the exercise of significant influence
and control over an ICO company will play a part in determining who should be
recorded on the beneficial ownership register (for further information please
ownership regime – an overview"). It is therefore relatively straight
forward to ensure that the identities of ICO token holders are not maintained
on the beneficial ownership register of an ICO company.
Electronic Transactions Law
The Electronic Transactions Law should be considered when preparing and
accepting the terms and conditions or purchase agreement relating to an ICO.
Cayman Islands is witnessing an upsurge in ICO-related business and structuring
an ICO through the territory should remain an attractive proposition,
particularly where the ICO is well thought out and the ICO team is properly
further information on this topic please contact Patrick
Colegrave at Harneys by telephone (+44 20 7842 6080) or email (email@example.com).
The Harneys website can be accessed at www.harneys.com.