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Which start-ups should think of ICO?

Elena MASOLOVA, Investor in TokenStars. Serial entrepreneur with 3 exits, founder of Groupon Russia, Pixonic, Eduson and AddVenture Fund

Is it justified for start-ups to have much expectations about ICO? Is it possible to beat or at least get the same results as Tezos and Bancor did. Why?

I'm afraid a lot of founders have inflated expectations about ICOs. Let's make a quick back-of-the-envelope calculation. There were 2 ICOs per week in May, 2 per day in June, 10 per day now (early August) and dozens of people I know are about to launch their own token sale. I expect around 200 per week in autumn, a total of at least 2000, each aiming at 10 million USD, which is an uber ambitious goal of $20 billion. As of now, all iCOs have raised $1.4 billion. The market is growing, but not at such pace. So, most founders will be disappointed and won't reach their set targets.

If start-up decides to raise funds through ICO, what should it do? How to avoid breaking the law? (what are the main mistakes made by start-up founders that may entail administrative liability or prosecution)?

There is no right or wrong jurisdiction for ICO. A combination of things matter, in order to optimize taxation and manage the founders' risks:

  • the proceeds from ICO are likely to be considered as revenue (so, in Singapore you'll pay 18% tax, 0% in BVI),

  • setting a foundation (which has a 0% income tax) will not help. This is fraud and direct violation. The tax authorities look at the nature of operations, which will be commercial,

  • time matters (it takes 3 months to notify authorities at the Isle of Man),

  • costs matter (you'll pay $8-10K per year for the local director at Singapore, plus, you'll need a second layer of companies which will serve as the second director),

  • depending on the founders' tax residency (e.g. Russia or US) they might be subject to СFС legislation (controlled foreign company). This means putting additional 20% of the ICO proceeds at risk.

The founders might consider doing a few things to minimize risks:

  • set up a separate commercial (not NGO) emitent-company and operational company (more costs, less risks),

  • not allow US residents to participate in the token sale,

  • never advertise and promise any returns, ROI, profits, dividends etc.,

  • have KYC procedures for all token holders (because the bank is very likely to require those documents at some point and freeze the account if the company is unable to demonstrate them).

Opening the bank account for the company is a larger problem at the moment. You'll receive a wire transfer from the licensed crypto-exchange which has conducted its own KYC (know-your-client) and is compliant with AML (anti-money laundering) procedures. But all Cyprus banks are reluctant as of July 2017 to work with any crypto-associated transactions.

So which start-ups should think of ICO?

From the investor’s standpoint, the best projects shall satisfy classical venture funding criteria: a launched product, good traction, a top-notch team, ideally, the first revenue. I have supported TokenStars because the team has gone an extra mile with the customers, product, proven business model before the ICO, instead of promising to solve those issues some day in Q3 2019.

Interviewed by Emilia ROMAGNA

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