Tag Archive for: Initial Coin Offering

Offshore Security Tokens in 2018
Christian Reeves

Offshore Security Tokens in 2018

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I expect the offshore security token to be the hot investment for 2018. As smaller ICOs are pushed out of the United States, the best of the best will restructure and issue their security tokens offshore. Here’s what you need to know about offshore security tokens in 2018.

First, allow me to define what I mean by an offshore security token. There are two types of tokens, a security token, and a use token.

A security token is a token issued by a company that acts like a share of stock. It gives you some level of ownership in the company and/or a right to the future earnings and profits of the business. Whether a token is a security or not is defined by the Howie Test.

A use token is a coin that doesn’t give the holder a right to the profits of the company and doesn’t act like a share of stock. A use token is meant to be used on the network.

A popular example of a utility token is the BON Token, issued during Bonpay Token Sale. The BON utility token is designed to work only in Bonpay ecosystem and product line. You use BON to pay for services on the network and it does not have any qualities usually attributed to a share of stock.

Another example of a utility token would be if UBER had issued an ICO. The UBER token would give the buyer the right to a certain number of rides or miles on the network. It would not be linked to the profits of the company.

This is all to say, a security token gives the holder an ownership right in the company while a utility token offers only certain functions inside the company’s platform. Security tokens are regulated by most governments while utility tokens are not.

When a security token is sold in the United States, it must follow all the same rules as when a stock is sold. All ICOs of security tokens in the United States must go through the same process as Initial Public Offerings.

As a result, the cost of issuing an ICO in the US has gone up exponentially. You now must spend hundreds of thousands of dollars, or even millions of dollars, to issue an ICO or IPO in the land of the free.

This cost is usually paid by early rounds of fundraising. Angel investors, venture capitalists and other early stage investors invest in the company, taking the best shares and getting the best deals. What’s left is the picked over carcass of a company which is then sold to the general public.

The purpose of the ICO was to give the people access to new and early stage companies. To allow you and I to be the venture capitalists and get in on the best deals at a very early stage. This has been taken away, and returned to the old guard by the SEC.

For more, see What SEC Regulation Means to ICOs in the United States

When a US firm doesn’t want to issue a full IPO type security token, they can do what is called a Reg D offering. This allows them to sell their tokens to “accredited investors” only. An accredited investor is someone worth at least $1,000,000, excluding the value of their primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount going forward.

However, a Reg D offering has a major downside to US investors. The accredited investor can’t sell their token for at least 1 year. While non-US investors can trade and sell as they wish, US investors must HODL. This is a huge program for multinational ICOs.

This lockup period puts US investors at a major disadvantage to foreign buyers. This is such a big problem as to make issuing a security token in the United States under Reg D nearly worthless.

As a result, most security tokens are moving offshore. They’re setting up in Cayman Islands and elsewhere. They’re being sold to non-US persons and offshore structures only. We Americans are being locked out of the ICO market.

You can still get in on these ICOs by forming an offshore structure. Most ICOs allow foreign companies owned by US persons, so long as you sign the subscription documents while out of the country.

To get in on these offerings, you can form a company in Belize, Cook Islands, or Nevis. You can also move your IRA offshore, and into an offshore IRA LLC, to buy foreign security tokens in your retirement account.

For more on IRAs, see Best IRA Investments for 2018 and Here’s how to take your IRA offshore in 6 steps.

You’ll need to do some work to find quality international ICOs. These foreign companies are prohibited from marketing in the United States. Thus, you will need to attend international conferences or get an introduction from a foreign investment advisor with whom you have a relationship.

I hope you’ve found this article on offshore security tokens for 2018 to be helpful. For more information on forming an international company or on moving your retirement account offshore, please contact us at info@premieroffshore.com or call us at (619) 483-1708.

Where to Start a Cryptocurrency Exchange
Christian Reeves

Where to Start a Cryptocurrency Exchange – Crypto Friendly Countries

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In this article, I will focus on where to start a cryptocurrency exchange in 2018. That is, where to incorporate a new cryptocurrency exchange. Which countries are friendly to startup cryptocurrency exchanges and why you should consider each based on your business model.

Countries are not listed in any particular order. You should select your jurisdiction of operation based on your long-term objectives, business model, and target markets. You should also consider whether you wish to have a formal license or not.

I’m starting from the position that regulation is good for cryptocurrency in 2018. Banks are pushing out crypto exchanges and crypto investors because of concerns about compliance. If a bank is confident that an exchange is will run a clean and compliant business, and follow the same AML and KYC procedures as an FX or brokerage firm, they are more likely to open accounts for you.

It may be possible to start a crypto exchange in 2018 without a license. But, by 2019 or 2020, I expect everyone will be licensed and regulated. Some software vendors include licensing in their turnkey package. I suggest you buy your core software from a company that can provide this service if and when it becomes necessary.

Some of my comments below are speculative. They come from meeting with experts in various countries and with regulators around the world. But, in some cases, no licenses have been issued and thus the government’s resolve has not been tested.

For example, the lowest cost jurisdiction for a licensed exchange appears to be Belize. However, no licenses have yet been issued. I am hopeful that these will be made available. But, until one is approved, I’m just speculating.

Estonia is also low cost. Plus, this country is a very tech savvy with their e-residency program. The problem is that the banks in Estonia won’t open an account for an Estonia licensed exchange if that exchange is owned by foreigners. So, how valuable is the license?

For more information on how to start an international or offshore cryptocurrency exchange, please see: How to Build an International Cryptocurrency Exchange.

Without any more adieu, here are my thoughts on where to start a cryptocurrency exchange and the best countries from which to operate that exchange.

Mexico

Mexico is one of the more interesting jurisdictions to start a cryptocurrency exchange in 2018. This country of 140,000 million has a few exchanges in operation and is just beginning to regulate.

The exchanges in Mexico are currently self-regulating with reasonable KYC and AML procedures in place. The more a client deposits into their account, the more the exchange will want to know about them.

A client can play around with the system with a few dollars. This usually required a Mexican phone number. Once they connect to a local bank account or begin making sizable withdrawals, they will need to prove their identity.

And Mexico has the most efficient cash transaction system in the world for cryptocurrency… yes, in the world!

Users can walk into any of 140,000 convenience stores in Mexico and make a cash withdrawal or deposit into their cryptocurrency account. Take cash and a code to the cashier and your deposit will show on your account in minutes. Buy a debit card from the store, convert your BTC to Pesos, and transfer those pesos into your card. You can then take a cash withdrawal or use the card just about anywhere.

We expect this period of self-regulation of cryptocurrency exchanges to last 6 to 12 months. It might be longer depending on what happens in the Presidential elections this year. Legislation to regulate exchanges has been passed but not implemented yet.

Like many countries, the Mexican Central Bank announced that bitcoin and cryptocurrencies are not considered currencies and are not backed by the government nor laws. However, the government also said that crypto is not illegal and that they’ll allow self-regulated exchanges to operate while laws are being implemented.

The government also said they won’t step in to regulate ICOs. They warned consumers to avoid high-risk investments, but haven’t yet taken steps to protect consumers. The government hinted that ICOs could be regulated and only available only to accredited investors in the future.

When new laws and regulations are implemented, which they will be, expect formal compliance and some level of corporate capital to be required. New firms should be working closely with local counsel to build up reserves and put AML and KYC systems in place before applying for a license.

Chile

Everyone’s been talking about Chile as a great cryptocurrency center… as the next chilecon valley. And, that was true until April of 2018. Over the last few days, all the banks in Chile have closed the accounts of exchanges, ICOs, and anyone doing business in crypto. Both commercial banks and government banks have closed the accounts of exchanges.

Most blame the loss of banking services on a lack of clear regulation of cryptocurrency exchanges in Chile. If and when regulations are passed, as they have been in Mexico, look for business to return and banking to be made available.

  • Regulations have been passed in Mexico. They have not been implemented by the regulators yet. Thus, exchanges are in a period of self-regulation.

In my opinion, much of these problems come from a lack of regulation. The banks and government regulators don’t know what to do, so they take extreme steps to reduce their risks. Banks close accounts because the risk to the bank exceeds the value of the account. Risk comes from uncertainty. So, regulation in Chile will reduce or eliminate the risk.

Cayman Islands

The Cayman Islands are the jurisdiction for cryptocurrency investment funds. Cayman has long been a leader in large sophisticated hedge funds and it continues in that reputation today. If you plan to raise a $100 million dollar fund, Cayman is the place to do it.

Cayman has also been the country of choice for some of the largest ICOs. However, this has lead to a glut of ICOs and underfunded low-quality projects hoping to take root in the islands. I suggest that only the very best funded and highest quality ICOs should consider Cayman. See: The Offshore ICO Scam and Cayman Islands Corporations.

The same can be said for anyone attempting to launch an exchange in Cayman. The licensing process will be intense and you must have a solid compliance program and a team on the island. I estimate this license will cost $150,000 and take 6 to 12 months.

Some will find it easier to operate in Cayman as a crypto brokerage rather than a crypto exchange. Exchanges exchange money from one currency to another, as in exchanging a Bitcoin for $7,000 USD. Brokerages enable traders to place long or short bets on the BTC/USD price. For an example of such a brokerage, see: www.Xenia.com.

Belize

It appears that regulators in Belize might allow an exchange to operate under a money management license. This license is issued by the International Financial Services Commission in Belize or the IFSC.  

Corporate capital for this license is $50,000 and the cost is between $18,000 and $25,000 with filing fees. Annual fees, including the local agent, are about $5,000.

You will also need a 5-year business plan, resumes and police reports for all shareholders, officers and directors, and proper KYC and AML procedural manuals. The applicant must prove to the regulators that they have the experience and expertise to run a clean and compliant cryptocurrency exchange from Belize.

No exchange has been approved in Belize yet, but this could become the path forward. Then again, regulators might shut this door in the next few months.

Costa Rica

Historically, Costa Rica has been open to new high tech businesses. For example, Costa Rica was the center of the online gaming industry in the early 2000s. Just about every sportsbook and casino was based in Costa Rica for a time.

Also, San Jose, Costa Rica has a number of Bitcoin ATM machines and vendors that accept crypto. And Costa Rica has its own cryptocurrency, Pura.

The primary exchange selling to residents of Costa Rica is SatoshiTango. They have banking Portugal and provide services throughout Latin America.

Like Mexico, the Costa Rican Central Bank issued a statement that bitcoin and cryptocurrencies are not considered currencies and are not backed by the government. However, cryptocurrencies are not illegal.

Costa Rica does not offer a cryptocurrency license and no legislation is pending. San Jose would be an interesting low-cost city from which to operate a self-regulated exchange. You might combine operations in Costa Rica with a license from Estonia and use 3rd party providers or OTC / CTC systems to fund accounts and trade currencies until you can negotiate a correspondent bank account.

Estonia

Estonia is one of the lower cost licensing jurisdictions. You should expect to pay 10,000 to 20,000 euros for a cryptocurrency exchange license from Estonia.

An application can be in English or Russian. Criminal history reports and background information must be provided by all officers, shareholders, and directors. Also, you must provide a detailed business plan, KYC documents, AML system, and financial statements.

Also, Estonia is a member of the European Union. This means that businesses incorporated and operated from Estonia are portable throughout the Union. Note that I’m talking about business operated from Estonia, not those operated abroad through the e-residency program.

If the business is to be operated from outside of Estonia, and most of the owners are foreigners, it will be impossible to get a bank account in Estonia. While you will get a license from Estonia, you won’t get a bank account.

Malta

Like Luxembourg, Malta made a splash by issuing a license to a big name, Binance. Malta has been working hard to bring stability to the industry ever since.

Malta’s government launched the Malta Digital Innovation Authority in February 2018 in order to provide legal clarity for companies developing Blockchain technologies, cryptocurrencies, and Initial Coin Offerings (ICO). Whenever the government is working to facilitate an industry, it’s a country you should consider.

That is to say, Malta’s government is reportedly developing a broad national strategy that will see the government embrace bitcoin and blockchain innovation to promote and adopt the technology.

Like Costa Rica, Malta was a leader in online gambling. They passed the first legislation in 2004 and have been a major player in Europe since then. Malta hopes to duplicate this success in crypto by offering the most efficient legal framework in the region.

At this time, and because Bitcoin is not deemed to be a regulated instrument under MiFID, companies dealing in Bitcoin are not required to apply for a license with the Malta Financial Services Authority (MFSA). However, the rapid growth of the industry will likely to necessitate greater regulatory oversight in the mid to near term. Expect Malta to issue licensing procedures soon.

For pending and planned legislation in Malta, see Malta Becoming a Crypto Hub.

Switzerland

The bottom line is that Switzerland is the best cryptocurrency jurisdiction in Europe. If you have an unlimited budget, and you don’t mind paying about 12 to 18% in corporate tax, you want to be in Switzerland. If you want to run a top tier exchange that markets into the European Union, you should be in Switzerland or Malta.

Switzerland and the United States dominated ICOs in 2017. Swiss ICOs raised $550 million vs the United States at $580 million from January to October of 2017. The next largest was Singapore at $184 million.

Switzerland has two popular coins. The Swisscoin, which is a token focused on Swiss investors and SwissRealCoin, which is a token based on Swiss real estate. There have also been crypto banks and crypto wealth management firms opening in Switzerland.

Bottom line, Switzerland is dominating financial services in and around cryptocurrencies and blockchain.

If you wish to set up in Switzerland, I suggest you open in Crypto Valley, which is in the city of Zug. This canton has the lowest taxes in the country and has been a bastion for offshore corporations for decades.

The Crypto Valley Association is an independent, government-supported association much like LHoFT in Luxembourg. It was “established to take full advantage of Switzerland’s strengths to build the world’s leading blockchain and cryptographic technologies ecosystem.”

As a general rule, all companies in Switzerland performing financial activities are required to receive an authorization for their operations from the Swiss Financial Market Supervisory Authority (FINMA). However, cryptocurrency businesses are not currently required to register with FINMA because crypto is not seen as a “currency.” We expect companies to be required to register soon.

Companies performing bitcoin transactions must still comply with specific regulations provided by the Swiss Anti-Money Laundering Act. Therefore, exchanges in Switzerland are self-regulating much like those in Mexico awaiting formal regulation, but failure to follow AML rules can result in major penalties.

Most exchanges are seeking banking relationships in Europe these days. Even those focused on Latin America and Asia are banking in the EU. In order to get a quality bank account, crypto exchanges are forming Swiss corporations in Zug, setting up an office there, complying with Swiss rules, and then applying for banking in Europe.

Keep in mind that these Swiss companies will need to continue to comply with Swiss laws to keep their bank accounts. This means they’ll need to keep up with new laws and secure a license if one becomes available.

Some ICOs are regulated in Switzerland and must register. Those  who sell an asset token, and not a utility or payment token, are regulated. This is because an asset token is considered a security in Switzerland. See: Guidelines for initial coin offerings (ICOs) Published 16 February 2018, a PDF download from the Swiss regulator finma.

For more on Switzerland, see Switzerland embraces cryptocurrency culture from the Financial Times.

We’ll be happy to assist you with an ICO or to set up a cryptocurrency exchange in Switzerland with banking in Europe. For a quote and more information, please contact us at info@premieroffshore.com or call us at (619) 550-2743.

Luxembourg

The two international top-tier crypto jurisdictions in Europe are Switzerland and Luxembourg. Exchanges in Luxembourg are governed by the CSSF and must follow the same strict rules as other non-bank financial institutions. Cryptocurrency exchanges in Luxembourg are referred to as electronic money institutions.

With Bitstamp moving to Luxembourg back in 2016, this country cemented its place as a top crypto nation in the European Union. Since then, a number of high profile exchanges, such as BitFlyer, have moved to Luxembourg.

Cryptocurrency exchanges in Luxembourg operate under the payments institutions license and report under the electronic money institutions statutes. In most cases, your minimum capital will be 350,000 euros.

“Electronic money” is defined in Luxembourg as something of monetary value representing a claim against the issuer which is:

  • stored in electronic format, including on magnetic media, and
  • issued against the remittance of funds with the goal of making payments, and
  • accepted by an individual or organization other than the issuer of the electronic money.

In addition to issuing electronic money, these companies may supply payment services, grant loans (under certain conditions) linked to payment services, supply operational services, and other services closely linked to the issuing of electronic money or to the supply of payment services, manage payment systems, and undertake commercial activity.

In our experience, setting up a licensed exchange in Luxembourg is an expensive endeavor requiring many months. Typical legal costs are $150,000, including your promotor / project lead, an attorney in Luxembourg, and securing the support of LHoFT.

Japan

Japan has the most advanced crypto laws on the planet. If you want to operate from a top tier country with a strong demand for bitcoin, and the most advanced laws, then consider Japan.

As I said above, I consider regulation a positive force in the industry. It gives crypto exchanges and, possibly, more importantly, banks, confidence in how to deal with the industry. It creates a level playing field on which everyone can compete. It ensures only compliant and well-run cryptocurrency exchanges are allowed to operate in the country.

The Revised Payment Services Act took effect on April 1, 2017. Since that time, Japan has had the most complete regulations for cryptocurrency transactions. These laws are administered by the Financial Services Authority (FSA).

The minimal capital amount is JPY 10 million ($93,500 USD), but more than JPY 50 million (about $500,000 USD) is recommended. Strict KYC and AML policies must be in place, you must have an external auditor, and a physical office is required.

And, keep in mind that these regulations apply to anyone running an exchange from Japan and anyone selling into Japan. Firms selling into Japan without a license have been shut down and sanctioned. For example, Binance secured a license in Malta after being warned by Japan for operating without a license.

Expect Japan to be used as a model by major markets as compliance and regulation rolls through the industry.

Australia

Australia licensed three cryptocurrency exchanges since new regulations came into effect April 3, 2018. All exchanges operating in the country have until May 14, 2018, to get in compliance and be approved for a license.

After spending several years battling a confusing and at times contradictory regulatory landscape, exchanges doing business in Australia can now take advantage of an official program like those available in Japan and South Korea. A formal licensing scheme should make banking easier and eliminates the risk of inadvertently running afoul of government KYC and AML policies.

Exchanges operating in Australia now must comply with the following:=

  • customer identification and due diligence
  • adopting and maintaining an AML/CTF program—this includes identifying, managing and lessening money laundering and terrorism financing risk
  • suspicious matter reporting
  • reporting of cash transactions of $10,000 or more.
  • record keeping

In order to apply for a license, applicants must have an office in Australia, an auditor, business plan, and complete compliance systems in place. Only those with a solid team and expert compliance systems will be granted a cryptocurrency license in Australia.

The license required to operate a crypto exchange in Australia is the Financial Services License. In most cases, capital required will be $50,000 plus a 5% reserve based on the size of your exchange. Various ratios apply after $100 million in assets and capital reserves shall not exceed $100 million. It appears that most applicants should have $10 million before they file an application. See Pro Forma PF 209 (a PDF file).

Philippines

The Philippines issued two cryptocurrency exchange licenses in August of 2017 and has been active in the industry since that time. Exchanges wanting to offer services throughout Southeast Asia are usually setting up shop in the Philippines or Thailand. The more advanced regulations are in the Philippines.

Cryptocurrency exchanges in the Philippines are governed by Circular 944, 2017. There are currently 29 applications pending with the central bank. How many actually want to sell into the Philippines is unclear.

BSP Governor Nestor Espenilla, Jr. suggested they “have an open-minded approach to fintech (financial technology). This means that we take a very active role in ensuring that our policies provide opportunities for innovation.”

“Today, there are two virtual currency exchangers registered with the BSP and several more are under evaluation,” the central banker emphasized.

Many of the exchanges moving to the Philippines are from China. They’re not focused on the local market, which is only about $8.8 million per month. They’re looking at the region, possibly including Chinese clients who have found a way to get around the great firewall.

Thailand

Bangkok was shaping up to be a cryptocurrency center of Southeast Asia. Exchanges were opening there and being welcomed by the banks.

Then it all went south. Banks turned against cryptocurrency and began stuttering accounts. This began with the government bank and the rest followed suit.

My guess is that the fragile government of Thailand saw risk in allowing a means of exchange which they didn’t control. For this reason, I expect the exchanges to be forced out of Thailand.

Singapore

Singapore is one of the last major banking centers that allow for unregulated or self-regulated cryptocurrency exchanges. As of February 2018, the government warned of the risks of cryptocurrency but said it would not regulate the industry.

Then, in March, the government indicated they might take steps to protect investors. Experts think that Singapore will go the way of Switzerland and require KYC, AML and compliance standards for cryptocurrency exchanges. They might not require a license, but they will require record keeping and standards of care.

Of the exchanges opening in Asia, those looking for a low cost and low overhead solution are focusing on the Philippines. Those looking for better banking and to be within a major financial center, are opening in Singapore.

Gibraltar

Gibraltar is hoping to become the headquarters of all things blockchain. It appears that most legislation is aimed at the technology behind cryptocurrency and ICOs and not the tokens or currencies themselves. Thus, you might say that Gibraltar is taking a longer-term view by focusing on the underlying technology and using its portability into the EU to add value.=

A notification on the regulator’s website states that as from January 1, 2018, any use of distributed ledger technology for storing or transmitting value belonging to others will need to be authorized by the Commission. By the way, the following entries: “Initial Application Assessment Fee”, “Application Fee”, “Supplementary Fees”, “Annual Fees”, “Further Fees”, populate a list tucked in between the “Principles” and the “Frequently Asked Questions” sections.

Gibraltar hopes to take some ICO business away from Switzerland and offers lower cost and more definitive regulation that its much larger neighbor. For more, see it’s Statement on Initial Coin Offerings.

Belarus

Belarus issued regulations on December 8, 2017 and this law took effect on March 28, 2018. See: Questions and answers on Decree No. 8. This law creates a tax holiday and a FinTech campus called High Technology Park (HTP) for blockchain and crypto businesses.

Any member of the park may run an ICO without restriction. In addition, they may issue ICOs on behalf of others. Most of these ICOs are intended for offshore and EU investors.

A cryptocurrency exchange registered at HTP should have capital of $100,000 to $500,000 in a local bank. The amount will depend on the size of your operation.

Most interesting and unique, HTP companies can act as investment funds and perform cryptocurrency investing legally and with banking support. No need to incorporate your fund in a high-cost jurisdiction such as Cayman if you’re operating from Belarus.

The negative with Belarus compared to Malta is that Belarus is not a member of the European Union. Malta is a member state and its businesses may be “ported” throughout the EU.

The benefit of Belarus over Estonia is that banks in Belarus accept cryptocurrency exchanges. You’ll get an exchange license in Estonia, but not a bank account.  

See also Belarus To Become World’s Best Jurisdiction For Cryptocurrencies, ICOs And Smart Contracts.

Conclusion

I hope you’ve found this article on where to start a cryptocurrency exchange to be helpful. For assistance building a new international exchange, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist with licensing, compliance, software, and a turnkey solution for your cryptocurrency exchange.

Crowdfunding a Cryptocurrency Exchange
Christian Reeves

Crowdfunding a Cryptocurrency Exchange

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Cryptocurrency exchanges are now starting to raise money under the SEC’s crowdfunding rules. The US crowdfunding rules allow a cryptocurrency exchange to raise up to $50 million with various disclosures. Also, the solicitation rules for a crowdfunding campaign offer a lot more room to maneuver than a Reg D offering. In this post, I will explain how to raise money for a cryptocurrency exchange through a crowdfunding offering.

There are two types of crowdfunding permitted under the SEC rules. The first is limited to $1 million and focused and small businesses. The second allows you to raise up to $50 million and is being used by cryptocurrency exchanges in 2018.

In 2016 and 2017, cryptocurrency exchanges were self-funding through ICOs. Those days are gone and the SEC is targeting those who raised money without sufficient consumer protections and without registering their offerings with the agency.

In 2018, cryptocurrency exchanges are focusing on the $50 million crowdfunding exemption, sometimes referred to as a “mini IPO.” Here are the basic rules for a $1 million crowdfunding campaign and a $50 million crowdfunding campaign for a cryptocurrency exchange.

Section 4(a)(6) of the Securities Act, the “crowdfunding exemption”

Offers of securities to the public (which includes offers made over the internet) must be registered with the SEC under the Securities Act of 1933, unless an exemption from registration is available. In 2018, basically all ICOs are considered security offerings by the SEC.

The JOBS Act added a new exemption to the Securities Act, Section 4(a)(6), commonly referred to as the $1 million crowdfunding exemption.

This small crowdfunding exemption allows you to raise up to $1 million over a 12 month period without registration. As you will see below, this exemption is meant to allow you to raise small amounts from many different investors.

The $ million exemption can be combined with any other available exemption or offering. So, you could raise a seed round of $1 million under the crowdfunding exemption and then a traditional Reg D offering of any size.

An investor is limited in the amount he or she may invest in a crowdfunding offering in any 12-month period:

  • If either the annual income or the net worth of the investor is less than $100,000, the investor is limited to the greater of $2,000 or 5% of the lesser of his or her annual income or net worth.
  • If the annual income and net worth of the investor are both greater than $100,000, the investor is limited to 10% of the lesser of his or her annual income or net worth, to a maximum of $100,000.

That is to say, anyone, no matter their net worth, is allowed to invest in these offerings. What is limited is the amount that they can invest. But, you can market to everyone, not just accredited investors.

These small crowdfunding offerings may be made by any business corporation organized in the United States or a US territory. Thus, the offering can be made by a corporation in Puerto Rico using one of this islands tax incentive programs.

Regulation A Crowdfunding or Mini IPO

Regulation A is broken into two tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $50 million in a 12-month period. An issuer of $20 million or less can elect to proceed under either Tier 1 or Tier 2.

Tier 2 issuers are required to include audited financial statements in their offering documents and to file annual, semiannual, and current reports with the Commission on an ongoing basis.

And investor protections are more strict under the Mini IPO than the small crowdfunding exemption. Regulation A+ only allows investors to invest 10 percent of the greater of their annual income or net worth in these securities. The SEC has also implemented other strong investor protections such as background checks on the companies offering the securities, and disclosure of the company’s financial information as part of the offering.

That is to say, purchasers in Tier 2 offerings must either be accredited investors, as that term is defined in Rule 501(a) of Regulation D, or they are limited to the 10% limit above.

You are allowed to “test the waters” under Reg A. You may solicit interest in a potential offering from the general public either before or after the filing of the offering statement with the SEC, so long as your materials include the appropriate disclosures and statements.

Tier 1 issuers usually file once with the SEC after the sale. Tier 2 issuers must file annual and semiannual reports, as well as current reports and, in certain circumstances, an exit report on Form 1-Z, with the Commission.

Conclusion

I hope you’ve found this article on crowdfunding for a cryptocurrency exchange to be helpful. To read the SEC’s statements on these exemptions, see: Jumpstart Our Business Startups (JOBS) Act. Get ready, these laws are hundreds of pages long!

For more information on building, licensing, and funding a cryptocurrency exchange, please contact us at info@premieroffshore.com or call (619) 483-1708.  We’ll be happy to assist you to build a cryptocurrency exchange.

ICOs are abandoning US investors
Christian Reeves

ICOs are abandoning US investors

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FinTech companies are abandoning US investors. As the US government moves to eliminate ICOs to protect the financial status quo, companies that would issue an ICO in the US are falling in line. The vast majority of quality ICOs have moved offshore in 2018.

Issuers are now filing their initial coin offerings in the Cayman Islands, Switzerland, or elsewhere. Those who want to sell to US investors, are selling to accredited investors only under Reg D.

Reg D is an SEC regulation governing private placement exemptions. Reg D allows smaller companies to raise capital through the sale of equity or debt securities without having to register their securities with the SEC. As of 2018, nearly all ICOs are considered a security under US law.

To be an accredited investor, a person must demonstrate an annual income of $200,000 single or $300,000 married for the last three years with expectation of earning the same or higher income in the future.

The purpose of the US accredited investor system is to prevent the sale of high risk securities to those who can’t afford the loss should things go badly. Considering all the scams out there, this is a worthy goal.

However, Reg D also comes with a holding period. When a US accredited investor buys into an ICO, they must hold the token for at least one year before they sell. This puts them at a great disadvantage to foreign investors who don’t have such a limitation.

What’s an ICO issuer to do? Tell everyone they must hold for a year? That won’t sell. Non-US persons will never agree to such a lock up period.

For these reasons, plus the fact that legal and compliance costs for a Reg D offering can be very high, most ICO issuers are abandoning US investors. It’s neither cost-effective nor fair to combine US and non-US investors in an ICO.

These actions by the United States have chilled the ICO market. The amount of money raised by ICO fell by 43% to $726 million in January and February of 2018 compared to November and December of 2017.

Examples of companies blocking US investors include Estonia-based iOlite, Scotland-based CaskCoin, UK-based Celsius Network and Auctus. Even US companies like portfolio platform CoinSeed are blocking US investors.

And the SEC is taking these limits on US investors very seriously. The government has initiated “dozens” of investigations of previous ICOs and is targeting anyone doing business in the United States.

As a result, foreign ICO issuers must actively screen out US investors. It’s not sufficient to have a form and check the box saying you’re not a US person. Investors must affirmatively prove that they are not living in the United States and money must be sent from an international bank account.

The takeaways from this are:

  1. Any company wanting to issue and ICO should do so offshore.
  2. Any US citizen that wants to invest in a foreign ICO should set up a foreign company.

The most popular jurisdictions for large ICOs are Caymans and Switzerland. While compliance (KYC, AML, etc.) are strict in these countries, they are the top choices for quality offerings. While expensive, these are the most respectable options for 2018.

However, you’ll find a lot of junk on the internet about issuing an offshore ICO. For more, see: The Offshore ICO Scam and Cayman Islands Corporations.

As for US citizens, some ICOs will accept your money if it’s sent from an offshore company and an offshore account. Their logic is that the foreign company is making the investment and not you, the ultimate beneficial owner.

These international ICOs won’t be marketing in the United States. So, if you want to find them, you will need to do your homework. For this reason, many ICO conferences are now being held offshore.

You can set up an offshore company for your personal savings or for your US retirement account. If you have a vested IRA or 401-K, you can move that into an offshore IRA LLC and invest in crypto. For more, see: Take your IRA offshore to invest in ICOs and Bitcoin.

I hope you’ve found this article on how ICOs are abandoning US investors to be helpful. For more information on setting up your company offshore, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you with all aspects of structuring your business or your investments offshore.

The Offshore ICO Scam and Cayman Islands Corporations
Christian Reeves

The Offshore ICO Scam and Cayman Islands Corporations

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There’s an offshore ICO scam going on and it’s focused on Cayman Islands Corporations. If you’re planning an ICO, here’s what you need to know to avoid the offshore ICO scam and Cayman Islands Corporations.

First, note that I use the term “scam” very carefully and intentionally here. I truly believe there is an offshore ICO scam going on and it’s being perpetrated by lawyers and incorporation agents, many of them in the Cayman Islands.

Second, this article is about an offshore ICO scam that affects those issuing ICOs out of the Cayman Islands and most other offshore jurisdictions. I’ve seen this ICO scam in Belize, Nevis, Cook Islands, and in a number of offshore countries.

Third, this article is for those who are looking to fund their businesses with an “offshore” ICO. I’m not talking about ICOs in regulated jurisdictions such as the United States. Also, this scam does not generally affect ICO investors. I’m speaking only to those who wish to issue an ICO.

With all of that said, here’s the offshore ICO scam often found in the Cayman Islands:

Those hoping to issue an ICO call up a lawyer or an incorporator and say, “hey, I need an offshore corporation in the Cayman Islands to issue an ICO for my new business.”

The sales agent say, “sure, no problem. Send us $9,500 and we’ll set up your corporation.”

Buyer pays and gets his or her Cayman Islands corporation. Scam complete.

Now, you’re thinking, what the heck? The buyer got exactly what they paid for. How is this an ICO scam perpetrated by the lawyer or incorporator?

This is an ICO scam because the agent knows full well that the buyer won’t be able to get a bank account. They know that the buyer doesn’t have the legal structure or documents necessary to issue an ICO. They know that it will be a cold day in hell before this client gets a bank account opened for his ICO.

They know the Cayman Islands corporation can’t be used as intended. These lawyers are intentionally selling a useless structure to make a buck. They’re taking advantage of a buyer who has no idea what they’re doing and doesn’t have the financial backing to issue a proper ICO.

Even if the buyer could get a bank account opened, it would be closed after the first few deposits… and the ICO would probably be blacklisted by the industry.

The only way to open an account would be to lie to the bank about how you intend to use that Cayman Islands corporation. You say that the company will sell a service such as internet marketing or whatever. You won’t get an account in the Cayman Islands, but you’ll get one in a smaller offshore jurisdiction.

Now you issue the token and deposits start coming in. You’re converting bitcoin into FIAT and transferring that to your offshore account to fund your business.

Do this a few times and the bank will get suspicious. Send a large transfer, and the bank will get suspicious. They’ll want to know the source of funds and to see your sales agreements if you’re saying these are business transfers.

Let’s say you skirt past the bank’s KYC, AML and compliance systems (this won’t happen), what are the Cayman regulators going to say? If in some alternate universe, you somehow manage to raise a few million bucks, regulators will be all over you.

The bottom line is that these Cayman Islands corporations are useless for an ICO. At least, they’re useless without all of the legal and planning work that goes into a proper ICO.  

Sure, Cayman Islands is a top-tier jurisdiction for offshore ICOs and crypto funds. I recommend Cayman to clients all the time… clients who can afford the high costs associated with issuing a proper ICO from the Cayman Islands.

Back in the early days if ICOs, you might have been able to start in Cayman for $10,000. Today, you can’t get anywhere spending less than $50,000 on the front-end, and with most spending $100,000 on the back-end (success fees). Even low cost lesser jurisdictions are $35,000 in 2018.

The typical components of an offshore corporation in Caymans that will issue an ICO are as follows:

  1. Corporate entity,
  2. Financial Services Entity,
  3. Anti Money Laundering Manual (AML),
  4. Know Your Customers (KYC) procedures and systems,
  5. Dedicated Money Laundering Reporting Officer or Chief Compliance Officer with several years experience, and
  6. Sufficient capital to entice a correspondent bank to take you on as a client.

Setting up an ICO in 2018 is not cheap and any shortcuts will likely wind up causing massive headaches down the line.

Unfortunately, there are a lot of folks offering services in this area who haven’t got a clue or who know that what they’re selling is worthless. Sure, I can set up an offshore corporation for you in Cayman for less than $10,000, but it won’t be good for anything.

The choke points are the banks and international correspondent banks. They simply won’t accept anything that is not whiter than white in‎ the crypto arena.  That means proper licensing, approvals, and conformity with laws and regulations, especially US Securities laws if US persons are involved.

You’ll need to also address issues such as utility token or security coin right from the start. If a security, we’ll need to start as an exempt offering under 506(D) if any US persons are involved. Otherwise, we will still need a proper offering document wherever you want to set up shop that’s compliant with whichever countries you plan to sell into.

If you’re currently speaking with a promoter offering to form a cheap Cayman Islands company for your ICO, here’s what to do. Simply ask them to guarantee in writing that they’ll open a bank account in Caymans that will be allowed to receive ICO funds. Also, let them know you plan to visit the bank to discuss your ICO. This will shut them down very quickly.

I hope you’ve found this article on the offshore ICO scam and the Cayman Islands corporations. If you would like assistance with a proper and legal ICO out of Cayman, please contact me at info@premieroffshore.com or call me at (619) 483-1708  for a consultation.

We can also help you clean up your legal structure if you’ve already done some pre-sales. The only thing we can’t fix is sales of tokens or deposits accepted from non-accredited US investors. The only option there is to refund these buyers or face the ire of regulators.

And no, we can’t form an offshore corporation in the Cayman Islands for an ICO, allow you to do some pre-sales, and then get you into compliance. There’s way to much risk in that for you and us. Plus, the costs to fix a mess always outweigh the costs of doing it right the first time. If you’re already in trouble, we can help you get back on track, but we can’t go down that road with you.

How to start an offshore bank with an ICO
Christian Reeves

How to start an offshore bank with an ICO

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Many FinTech startups are seeking offshore banking licenses in 2018. A banking license from a crypto friendly (and hopefully low tax) country is key to many of the initial coin offerings being floated this year. Here’s how to start an offshore bank with an ICO.

Note that this article is focused on those who have not yet raised the capital necessary to launch an offshore bank. It’s intended for pre-ICO firms that are starting out on a budget. If you’ve already raised between $10 and $100 million for this phase of your project, you can purchase an existing bank. For more on this see: Cryptocurrency Banks for Sale.

When you’re pre-ICO, you’ll need to negotiate a permit to organize in a crypto friendly banking jurisdiction before you can market your ICO. Only after you have your permit can you represent to investors that you are in the process of forming an international financial entity.

Countries refer to this license as a permit to organize, preliminary international banking license, permit to incorporate a bank, or something similar. They all mean the same thing – you’ve been approved to form a bank and can begin building your business. No matter the country, the permit to organize is the foundation on which you build an offshore bank with an ICO.

A permit to organize an offshore bank is a license from the government giving you the authorization to incorporate a bank and to begin setting up operations in their country. It’s granted after regulators have reviewed your business plan, financials, and the bios of the founders. When the government is satisfied that your business model is sound and that the people behind the bank have the requisite experience, they’ll grant you a permit to organize.

Once you have this permit, you can incorporate your bank and issue an ICO in the name of that bank. Prior to the permit being issued, you are not allowed to use the word “bank” in any of your marketing materials, white paper, website, or other promotional and sales documents.

After the permit is issued, you have 6 months to raise capital and begin operations. In most countries, you’re allowed to extend the permit for another 6 or 12 months. That means you have 1 or 1.5 years to launch the bank once you have a permit to incorporate in hand.

For a detailed list of the steps to form and launch an international bank, see: The 8 Components of an Offshore Bank License.

The typical cost for legal and other fees to negotiate a permit to organize are $110,000 to $250,000 depending on the jurisdiction. In most cases, this is the only money required to get over the first hurdle and prepare the way for your ICO.

All banks require some amount of corporate capital. For example, a bank in Puerto Rico requires $550,000 ($200,000 paid-in and a CD or bond for $350,000). A bank chartered in Dominica requires $1 million in corporate capital. For more banking jurisdictions, see: Top 5 Offshore Bank License Jurisdictions for 2017.

However, these amounts need not be put up until you file for your permit to operate. That is to say, you can receive your permit to organize without depositing the required corporate capital. You can then use your permit to organize to raise all of the capital necessary to launch and operate the bank. You can use the permit to organize to start an offshore bank with an ICO.

In order to receive the permit to organize, you’ll need to prepare a detailed business plan with financial projections. This plan, and the related compliance documents will be used to convince the regulators that your business model is solid and that you’ll run a clean business.

You will also need to show that your key employees and your board of directors have the necessary experience to launch and run a bank. The plan should include resumes of directors and employees with significant banking experience. We recommend a minimum of 3 directors and 5 is more common. We also recommend that at least one director and one key employee has banking compliance experience (KYC, AML, etc.).

There’s no requirement that you have these employees under contract. Just that they agree to work for the bank once your permit to organize is issued. Thus, it’s possible to build a quality team and business plan without depleting your resources. When you start an offshore bank with an ICO, capital is often at a premium in the early days.

In addition to your compliance personnel, regulators will look closely at your core banking system and your Chief Technology Officer. This person should have the experience necessary to build out the bank’s IT and ensure the security of the data.

The quality of your people and of your business plan are 90% of the work that goes into an application for a permit to organize. If you’ve put in the effort upfront, negotiating the license should be easy for someone with the right connections.

For more on the steps to build out an offshore bank, see: Four Steps to Build an Offshore Bank.

For more on this topic, please see my 300-page book on Amazon Kindle, Offshore Bank License Guide.

I hope you’ve found this article on how to start an offshore bank with an ICO to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to assist you to draft the business plan, build a team, issue an ICO, and launch the international bank.

Best ICO for 2018
Christian Reeves

The Best ICOs for 2018

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The ICO market went on a wild ride for 2017. Over 75% of the ICOs that were funded blew up and hundreds of millions were lost. Here’s where I see the ICO market going and which will be the best ICOs for 2018.

Nearly $2.5 billion has been raised through October in ICOs worldwide, with the majority of that coming in the first half of 2017. Then the US government stepped in to take it’s cut and regulate ICOs. This put most US ICOs on hold and is pushing the market offshore.

There are now 3 ways for US investors to get in on ICOs:

  1. Anyone can buy utility tokens,
  2. Accredited investors can buy equity tokens in the US, and
  3. Anyone can buy in to offshore ICOs.

The SEC has said it will not regulate utility tokens. Thus, anyone can buy these investments and the business need not incur all kinds of legal fees to put the token forward.

A utility or use token is one that gives you a right to use a service or receive a product. For example, if Lyft were to issue a use token, you would receive the right to a certain number of rides in exchange for your cryptocurrency.

The same applies to those selling a product. You give the company cryptocurrency and they promise to give you a product when it becomes available. Invest in a new  high tech suitcase company, they use the crypto to finish and produce their first product, and you get a suitcase at a discount if and when it becomes available.

Use tokens are basically the crowdfunding sites like Kickstarter and Indiegogo. The only difference is that you’re exchanging cryptocurrency for a token. That token entitles you to use the service or receive a product in the future.

Equity tokens differ from use tokens in that they give you a right to some of the company’s future earnings. Equity tokens act like a share of stock in that they give you some level of ownership and control over the company. Rather than a right to use a service or receive a product, you get a right to ownership and a share of the profits.

The US SEC says that, if you issue an equity token, the US government can regulate and control the transaction. As a result, the costs of most ICOs in the United States have increased by hundreds of thousands of dollars to millions of dollars in some cases. Only the largest companies can now issue ICOs in America.

Finally, the US government says it’s a crime to sell bitcoin outside of a licensed and regulated exchange. If you sell your coins without an exchange and in such a way that the IRS can’t track and tax the transaction, you’ve committed a crime and can be put in jail.

As a result, Americans are moving their coins offshore and true startups will be forced to issue their ICOs offshore. If American investors want to get in on the ICOs with the most potential, those truly in the beginning stages, then we will need to look abroad from here on out.

Keep in mind that there are no laws that prevent US citizens from buying offshore ICOs. The SEC doesn’t allow foreign ICOs to market into the United States. But, if you can find the right offshore investment, you’re free to deploy your capital as you see fit.

Of course, when you invest offshore, the task of due dilligence – checking out the investment – falls to you. Uncle Sam and a swarm of lawyers have not vetted these transactions. This keeps the costs are lower, opportunities greater, and the need to research falls to you.

With all of that said, I believe the best ICOs for 2018 will be offshore. More specifically, I believe the best ICOs for 2018 will be offshore financial technology companies operating banks or proving unique blockchain services to international financial entities.

As legacy banks fight to keep cryptocurrency from taking over, they’re closing accounts and forcing customers offshore. For example, the US is waging an all out war on cryptocurrency and Hong Kong is closing accounts, putting exchanges out of business.

As in any war, there are winners and losers. The winners in this battle are offshore banks that can efficiently convert from crypto to FIAT. Those with blockchain systems and zero cost transfers are especially interesting.

  • A bank that sends international transfers over blockchain, and avoids SWIFT, can do so with zero or little cost.

Banks that can raise money through an ICO, or have an ICO platform for their clients, will be especially valuable in the near future. The bottom line is that blockchain and cryptocurrency are the future of offshore banking and early adopters are excellent investment opportunities.

If you’re an accredited investor and would like information on offshore crypto banks and FinTech opportunities, you can reach me at info@premieroffshore.com. I will be happy to introduce you to quality international banks.

If you run an offshore bank, our would like to form a new crypto focused international financial entity, you might find my 300+ page book on the topic helpful. See Offshore Bank License Guide, 2017, available on Amazon Kindle.

ICO hits the Caribbean
Christian Reeves

ICOs come to the Caribbean

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ICOs and cryptocurrencies are coming to the Caribbean. Many Caribbean islands are looking to the licensing of cryptocurrency and ICOs to boost their fledgling financial services sector. The banking, FX (Forex currency conversion), investment and brokerage industries are all moving towards blockchain. The Caribbean island who gets to a solid licensing scheme the quickest might dominate the industry for years to come.

And this move, to ICO and crypto, couldn’t come at a better time for the Caribbean. The offshore banking industry has been decimated in recent years. Puerto Rico is taking over the offshore bank licensing industry because smaller jurisdictions can’t compete with the tax deals from the US territory.

Likewise, offshore banks throughout the Caribbean are closing because it’s become impossible to find and keep correspondent banking relationships. Without the support of bigger banks, the smaller offshore entities are out of business.

I believe crypto will solve many of these issues for offshore banks, but not just yet. For more, see: Blockchain and cryptocurrency are the future of offshore banking.

What’s hot today are ICO platforms and offshore crypto exchanges.

Let’s start with ICOs. This financing method, similar to stock offers, has characteristics that make it different and unique, which is perhaps the main reason why, the regulators are slow to recognize it. The SEC, just this month, equated ICOs to IPO (Initial Public Offering) for regulatory purposes. For more on this topic, see: Crowdsale vs. ICO.

Investors receive ICOs as coins or tokens, they even are given certificates if investments made in Ethereum. ICOs could be done from the mere start of companies, or in financing phases commonly is embodied in a document that is known as “White Paper” explaining the operation and investment.

Does anyone regulate the ICOs?

As mentioned previously, the United States sector called SEC has begun regulating ICOs. Also as, Singapore has MAS, and China has PBoC regulating or banning cryptocurrency, and so forth. Essentially these agency regulate for their own nationals but their is no international regulator for digital investments made. In fact, China has closed down all ICO platforms and cryptocurrency exchanges.

So, you may ask if the investment exists in cyberspace, what is the difference of the physical location? Why do you need a license to operate a crypto exchange?

The physical location, or jurisdiction of your license and/or your investment, is key in avoiding stricter regulations. Many Caribbean jurisdictions are looking very favorably on crypto currency to support their financial services offerings.

Can you imagine your investments being tax free?

The Caribbean is one of the most approachable financial markets in the digital world, flexible and sovereign governments are abundant in these warm waters, and the ICO world is looking for offshore solutions.

The Caribbean holds 13 sovereign island nations and 12 dependent territories, each having its own financial systems and source of income (tourism, local businesses, financial services, corporate formations, etc). Many Caribbean nations are struggling with low economic growth, and feeling the battle of de-risking banks and the high cost of compliance. Digital currency issuance is a viable solution to solve a number of problems in the Caribbean. See How to Raise Money for an International Bank

Where can we avail of this wonderful opportunity?

Barbados Central Bank is working has been working with blockchain since last year with the startup called Bitt which is empowered by California startup Netki. But wait there’s more, Bitt launched a digital Barbadian dollar in a partnership, through blockchain startup Colu.  Basically demonstrates that cryptocurrency, ideally in sovereign nations, could be backed by real government currency. This concept stirred a wild fire in the Caribbean, soon to join similar platforms are Aruban Florins and Bahamian Dollars. Seeing that these hold “traditional” exchanges to the USD, transactions are simplified to tangible notion rather than a stock value if you are still insecure about investing. Your Token conversion is more or less solved and you are giving sustenance to a devastated economy (always think about the greater good).

As for tax havens Puerto Rico has opened the gates for all new companies to incorporate under new tax exemption programs, if your new company wishes to receive funds through ICO in Puerto Rico as of now there are no reasons not to – and local domiciled shareholders could receive 100% of their gains legally, through Act 22.

Then there are those Caribbean jurisdictions that don’t regulate ICOs or crypto at all. If you set up in Dominica, through an offshore corporation, you will have no government oversight. And, if you do set up in Dominica, you will have the opportunity to help shape the laws when the are finally enacted.

In my opinion, building a business and becoming part of a community in Dominica or another island that has not yet drafted crypto statutes is an amazing opportunity. So long as you select the correct political climate, you might well become a major player in the region.

I hope this article on ICOs coming to the Caribbean has been helpful. For more information on structuring an ICO platform, please contact me at info@premieroffshore.com or call us at (619) 483-1708.