Considering launching a Swiss ICO? Here are a few points to bear in mind
New developments in the field of distributed ledger technology have led to more and more initial coin offerings (ICOs), also known as token generating events, which are based in blockchain technology. Switzerland is one of the most popular places in the world for such launches, in part because its regulatory and tax environment is flexible and makes it possible to carry out a launch with a good measure of legal certainty.
That said, there are a number of regulatory and other legal factors to consider in order to make sure that any launch is successful.
An opportunity that calls for caution
The issuance of crypto tokens has become more and more popular over the past few months, and has allowed companies to raise huge sums in just minutes. Many issuers have chosen to launch their products in Switzerland, especially in the municipality of Zug, which has been known Crypto Valley.
Even though Swiss law is rather favourable to ICOs, it is important to consider the full range of regulatory and other legal factors in planning an ICO in Switzerland. The brief overview that follows offers a number of pointers—though of course it is no substitute for the thorough legal analysis of, and advice on, an actual project. In particular, it is highly advisable to obtain a no-action letter from the Swiss Financial Market Supervisory Authority with regard to the particular form of ICO being contemplated before actually launching, in order to ensure that any launch complies fully with the relevant Swiss regulations.
Corporate law: legal form for ICO launch
A foundation is often chosen as the legal form for the launch of an ICO. While it does offer some advantages, such as the independence of activities from ownership, and restrictions on the ability to distribute funds, this latter feature may also turn out to be a disadvantage in certain constellations. Therefore, a limited liability company (Gesellschaft mit beschänkter Haftung, GmbH) or a corporation (Aktiengesellschaft, AG) may be the best option in some cases, depending on what specific features a given ICO is to have.
While the establishment of a limited-liability company requires a minimum capital of CHF 20,000, for the corporation a minimum capital of CHF 100,000 is required. The identities of the shareholders of a corporation are generally not known to the public, whereas those of the quotaholders of a limited liability company are published in the commercial register.
Swiss law provides for a broad range of legal forms that meet one and another set of needs and preferences, so it makes sense to determine in advance what these are.
Regulatory ICO questions
The tokens to be generated in an ICO can have various characteristics, and these can bring different regulatory provisions into play. FINMA indicated, in the written guidance on 29 September 2017, that it will follow a principle-based, technology-neutral approach. Accordingly, when it comes to setting up a project and drafting the white paper, the following are among the factors that should be considered:
- A banking or securities-dealer license: The taking of deposits in the context of an ICO may trigger the requirement of a banking license. If tokens are regarded as securities, a securities dealer license may be required.
- Regulation of collective investment schemes: Depending on the features of an ICO, compliance with certain provisions of the Swiss Collective Investment Scheme Act may be required. This applies in particular to cases where the proceeds of an ICO are managed externally.
- Prospectus requirements: Especially if ownership of tokens is linked with financial rewards, if they are designed as equity or debt instruments, or if they are going to be distributed to the public at large, a detailed determination must be made about whether a prospectus is required in advance. With the entry into force, around the middle of 2019, of the new Financial Services Act, the prospectus regulations will be amended, and this will also influence the requirements for prospectuses in the context of ICOs.
- Anti-money laundering requirements: If tokens qualify as a payment instrument, compliance with anti-money laundering rules may be mandatory for certain parties. This holds mainly for brokers and platforms.
- Cross-border regulations: Depending on the structure of the ICO, the domicile of the company, and the markets the offering will be targeting, other countries’ cross-border financial regulations may also be applicable. Which foreign regulations actually apply will vary considerably based on what business set-up is involved.
Swiss tax law aspects of ICO
Up to this point, a few Swiss tax authorities have, at least, issued official guidance on the Swiss tax aspects of cryptocurrencies. All of this guidance has been on how cryptocurrencies should be treated when it comes to personal income tax. For instance, any type of cryptocurrency must be declared in the personal income tax return for both income and wealth-tax purposes. Most importantly, the mining of Bitcoins is generally regarded as a self-employed activity, and thus requires the payment not only of income taxes but of social security contributions.
With respect to ICOs themselves, Swiss tax authorities have yet to issue specific guidance. In principle, the proceeds from an ICO are regarded as taxable income for the purposes of corporate income tax. Stakeholders would thus be well advised to address the corporate-income-tax aspects in advance to reduce their tax exposure. Similarly, depending on the specific features of the tokens that are being issued, the ICO may be exempt from, or out of scope for, Swiss VAT—or it may be regarded as a supply of services that are subject to Swiss VAT. The ICO generally also poses new challenges having to do with how the proceeds are to be treated from an accounting standpoint, because the company in question will have to record the proceeds (e.g., Bitcoin or Ethereum) on its books in some form or other.
As we mentioned above, Swiss tax residents must generally declare tokens received from an ICO in their personal-income-tax returns. Whether the tokens they have received will actually require the payment of income and wealth taxes depends, of course, on how much they are worth. However, in order to forestall any issues, Swiss residents would be well advised to check in advance how the tokens generated in an ICO are regarded for income-tax purposes.
Switzerland: a highly attractive location for ICOs
Even though the Swiss Federal Council is currently considering introducing a legal framework for crypto currencies, Switzerland is and will likely remain a highly attractive location for ICOs—not only because the legal, regulatory and tax environment is very welcoming to new market participants, but also because the infrastructure in what is, after all, one of the world’s leading financial centres is outstanding. In addition, the workforce is well educated, and the authorities are generally favourably disposed towards blockchain technology. Finally, the economic and political environment is stable and decentralised—and decentralization is a feature that mirrors a key underlying principle of blockchain.
LeaHungerbühlerAttorney at law Associate
Lea Hungerbühler is an associate of our office in Zurich. Lea is a member of the banking & finance and Corporate / M&A practice group. She specialises in Swiss and European Union financial services regulation and in banking and investment law.T: +41 43 434 67 18 M: +41 79 478 35 53 E: firstname.lastname@example.org