IEO is an alternative approach to crowdfunding, developing as an answer to all the problems ICOs are faced with.
All the Help to Launch Your Next IEO – Initial Exchange Offering
The new Hype in the Market are IEOs. But what is an IEO?
In 2017 ICOs were taking the market by storm, considered to be the most popular fundraising method. The amounts of capital raised in these projects were extraordinary, it is estimated that they reached billions of dollars. Since then, the ambiguity surrounding the regulation of ICOs and the great number of projects that turned out to be scams, failures or technically ill-equipped against hacks, caused a huge decrease in their popularity, giving place for new trends in the cryptocurrency market. In the last year, there was much talk about the STOs, but now the latest blockchain-based projects running are the IEOs.
IEOs (Initial Exchange Offering) are essentially similar to ICOs, the basic difference is that the tokens are offered through an exchange partner, instead of being distributed to the contributors’ wallets directly through the project. This means that the project runners must submit their plan to the exchange and convince them about the project’s viability to gain their approval. As soon as the IEO finishes, token holders can instantly trade on the exchange platform.
IEOs are gaining the trust of the cryptocurrency crowd for the following reasons:
The listing of the tokens in the exchange market, when the IEO finishes, ensures their liquidity.
The IEO’s entry to exchange, indicates that the project has gained the exchange partner’s trust, being of substance and quality.
You become the exchange platform’s customer; therefore, they must treat you with the due diligence with which they treat the rest of their customers. Exchange platforms abide to stricter rules of transparency than ICOs which are unregulated.
The exchange platforms are more secure against hacks because the stakes are higher than traditional ICOs, therefore they have strong technological infrastructure.
Cyprus continually ranks on top of lists of the most blockchain friendly nations and our Law Firm can assist you on the banking services and banking solutions which are the areas most companies struggle with.
IEO Options in Cyprus
The most feasible road to an IEO in Cyprus is to incorporate a Cyprus limited liability company that will launch the project.
While the Cypriot Legislation provides many types of corporate vehicles, the Cyprus limited liability company is considered as the most suitable option. The company is an independent legal personality and its shareholders have no personal liability for its debts and obligations further than the nominal value of their share participation. There are minimum requirements to set up a Cyprus company such as having a registered office in the Republic of Cyprus and the incorporation process is quick and can become even faster by paying an additional fee.
ICO/IEO & STO Regulations in Cyprus
- Cyprus is one of the most Crypto friendly jurisdictions in the world.
- Such is the popularity of blockchain on the island that the University of Nicosia became the first university in the world to accept the tuition fees in a Cryptocurrency.
- There are specialized education programs being taught on blockchain and crypto management in the country making it a global leader on the subject. It also produces skilled experts on the topic as a result.
- At 12.5% Cyprus has one of the lowest corporate tax rates in Europe and in the world.
- It provides for highly skilled human resource in all areas like legal, accountancy, marketing etc.
- Cyprus, while maintaining low tax rates is also an EU member and in the EUCD white list making it highly reputable for transparency and stability, especially when the IEO will require the approval of the Exchanges.
- There is no withholding tax on dividends accrued from subsidiaries or on payment of dividends to non-resident shareholders.
- Cyprus has Double Tax Treaties with more than 55 countries thus, protecting against double taxation. This includes major economies like the USA, UK, India, China etc.
- The government is acutely business friendly and all procedures and formalities are time-efficient and straightforward.
- Most people speak functional English.
IEO Regulations in Cyprus
As IEOs are a new trend, there is no formal legislation dealing with them on paper, the crucial factor becomes the types of the token issued. In the absence of any formal legislation dealing with ‘crypto-assets’, the crucial factor becomes the type of the token in question. Any tokens which qualify as securities would necessarily be subject to all the legislation applicable on securities and financial assets. However, only utility tokens like cryptocurrencies would be treated differently and free from such regulations. It is wise to request for an Opinion Letter from a reputable law firm regarding the legal structure of your token and the regulations applying to it to avoid any penalties or liabilities in the future, even if the penalization of IEOs is extremely rare in Cyprus.
The Cyprus Securities and Exchange Commission follows the guidance of the European Securities and Markets Authority. ESMA released a statement in late 2017 stressing the importance of ICOs to adhere to regulations when their Tokens are Securities/financial instruments. This position is affirmed in ESMA’s latest advisory report in early 2019, stressing the gap in the legislation regarding the regulation of utility tokens.
4th and 5th Anti-Money Laundering Directives
As the name suggests the 4th AMLD was launched in June 2017 with the intention of combating money laundering and terrorist financing. The focus of the fourth directive has been on customer due diligence, background checks and risk assessments as measures to combat money laundering. The fourth directive increased its reliance on the risk-based approach mandating for the individual institutions to assess the risk of individual transactions.
The 5th AMLD has already been proposed and adopted by the EU in April 2018. It must be implemented into national law by 10 January 2020. Under the 5th AMLD entities that engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers fall within the scope of the Directive and must put in place Anti-Money laundering policies.
IEO Tax Liability in Cyprus
Just like regulation the tax liability involving IEOs is also dependent on the nature of the tokens issued and the structure of the IEO. Thus, the tax liability incurred by the different types of tokens differs significantly.
- Strictly value based tokens/Cryptocurrency –Corporation tax is applicable on the profits at the rate of 12.5%. VAT exemption is probable in this case under Article 135(1)(e) of the EU VAT Directive 2006/112/EC although there is not much legal precedent in this area.
- Utility tokens – These can be exempt from corporation tax as they are promises-in-future. However, the 12.5% rate of taxation will be applicable on the profits when the services promised via tokens are finally provided to the holder. We believe that there can be a case made for Utility token to be exempt from the VAT at the time of issuing of the tokens, however, it is not guaranteed since there is uncertainty all over the European Union regarding this topic and different treatment from each member state of the European Union.
Simon Zenios & Co specialises in IEO services
The developments in the area of IEOs have meant that firms offering IEO legal services must be educated in the area in order to be in a position to protect the interest of their clients. At Simon Zenios & Co LLC our lawyers have been closely following the developments in this area and have acquired the specialized legal knowledge in order to be able to advise and assist its clients.
Our lawyers understand that the process of launching your IEO will have legal implications stemming not only from the IEO documentation (White paper, T & C’s etc.) but also from marketing material. It is vital that clients running an IEO are advised as to the legal implications that can arise not only from the content of the documents but oftentimes from what is not included in the documents. Above all, we understand that legal certainty and clarity should govern the relationships between the IEO, the exchange platform and coin/token buyers, holders or users.
The process of running an IEO also presents legal implications regarding token design which cannot be overlooked. Depending on its design, your IEO’s token may be considered a financial instrument and as a result be rejected by exchange platforms or more importantly be subject to financial regulation. Therefore, it is vitally important to have legal advice and support throughout the process.
Our team of IEO lawyers will be able to advise and assist you throughout the process which will begin with an introductory call with our team of experts, the point of which is for our team to understand your requirements and objectives. Following this, we can then provide you with a quote for our IEO Legal services. If the quote is accepted and you decide to engage our legal services, the next step will be for us to collaborate with your team and come up with a detailed legal services plan.
IEO Legal Services (Part A)
- Legal Support during the Whitelist Period, Pre-IEO & IEO period.
- IEO Agreement with the Exchange Platform
- SAFT Agreement (for hybrids)
- Token Purchase Agreement (for hybrids)
- Legal Report for the Token (Security or Utility?) after the Reviewal of the Whitepaper (Opinion Letter from our Law Firm – Requirement for the Bank & the Exchanges).
- Legal Disclaimer for the Whitepaper.
- Security Policy.
- GDPR Compliance.
- Legal Review of the Whitepaper.
- Legal Review of the Website.
- Legal Review of all Social Media Platforms.
- Legal assessment for the IEO’s compliance with the current regulatory framework.
- Legal assessment of the application of the Token and IEO’s within the current regulatory framework for investment services.
- Extensive legal review of the Token and IEO’s compliance with other applicable legislation (Data Protection Regulations, Consumer Protection Regulations etc.).
- KYC Legal Advice and solutions for your IEO.
IEO Corporate & Accounting Services (Part B)
- Token Company Incorporation and maintenance.
- Tax and VAT Services.
- Corporate Legal Services.
- Administrative and Fiduciary Services.
- Accounting services through our Associate Accounting Firm.
Other Non-Legal IEO Services (Part C)
- Smart contract preparation and drafting.
- Creation of multi-signature wallet.
- Issuing of Tokens (ERC20 compatible).
- Listing on the Exchanges.
For any queries regarding any aspect of IEOs or blockchain companies in general, or any other legal matter under the sun, we are always available.