4 Key Steps to Doing an ICO Properly in Switzerland

4 Key Steps to Doing an ICO Properly in Switzerland

Tuesday, 2 October, 2018

Switzerland’s Crypto Valley is known all over the world as one (if not THE) place to be for blockchain companies. Many people think of it like a Mecca - and dream of being able to come and set up their startup in “the Valley.” And over the past year it has been a dream for those doing an ICO.

But if you get off the train in Zug and walk into the center of town - you won’t find a big sign that says “Crypto Valley.”

You won’t find someone waiting on the platform with a guide to doing business here.

In order to set up your operation and conduct an ICO from Switzerland, there are several concrete things that need to be done.

Here is a simple overview of what a founding team needs to do to get established and carry out a legally compliant token sale.

1. Clarify your tax situation - best case scenario obtain a tax ruling

Ah yes - taxes. Why do we start here? Because this issue is very important to the rest of the process of setting up your blockchain company. And it is especially important if your plan is to conduct a token sale.

Because you will be collecting funds and issuing tokens in particular a utility or security token, it is imperative to clarify several issues related to the type of token you are planning to issue. This, of course, needs to be clearly defined in your Whitepaper - if it isn’t, you have some work to do on your token economics.

Utility token:

If you plan to issue what unders Swiss guidelines is defined as a utility token, you will need to clarify the issue of Value Added Tax (VAT). VAT is generally assessed on the sale of goods and services and since your token may be treated as a service, it may be taxed on this basis.

Security token:

If your token falls under the category of a security token, it becomes important to assess whether there will be a dividend associated with it and how this dividend will be treated from perspective of withholding tax.

All tokens:

Regardless of what classification your token comes under, if you promised in the Whitepaper that you will invest the proceeds from the ICO in the further development of service, you will need to receive clarity from the Swiss tax authorities that not all proceeds of your ICO will be treated as taxable income; there is a also possibility to classify them as reserves. 

One key thing to bear in mind (and which should gives reason to always be optimistic) is that in general Swiss tax authorities are keen to see new businesses come into the country and establish themselves - as this leads to future, sustainable tax revenue and jobs for the local economy.

For this reason, they are likely to issue a positive ruling provided that you “tick all the boxes.”

Timeframe:

If you have a clearly-defined business model and token economics, you can usually count on a week of preparation and 2-4 weeks to receive ruling.

2. Get feedback from FINMA

After getting a tax ruling - one which hopefully makes it clear that your ICO proceeds will not be treated as income - there are more consultations which need to be done.

The next stop is to submit a request for a non-action letter to the Swiss financial authority - FINMA.

In this step, it is (again) very important that your business model be clearly defined in your Whitepaper. This will help regulators easily and (hopefully) quickly decide how to apply existing regulations to your case.

And while we’re talking about your Whitepaper, remember that it should definitely include a regulatory section - clearly defining how your project fits into the legal landscape.

Such information is not only for FINMA though. The investors who put money into your token sale (especially those contributing larger amounts) will want to have an understanding of what your project’s regulatory status is. For them, it is about assessing risk - and your job is to make it easy for them to understand and feel comfortable with your plan.

Timeframe:

Unfortunately, FINMA is a very methodical organisation. Waiting times for a ruling can be up to 4 months. But once you have a clear answer, you are good to go!

One caveat: if you are 100% sure that your token will not be subject to any financial permits or regulations, you can proceed without a ruling from FINMA. There is no legal obligation to obtain a clearance from FINMA.

3. Set up a bank account

Your blockchain company will obviously need to have money to operate and if your plan is to do an ICO, then you will need a corporate account to pay bills, collect revenue and so on.

Of course, as you may know, the subject of opening bank accounts for blockchain companies has been somewhat of a controversy, and this not only in Switzerland, but somewhere else too. Although the Swiss Banking Association recently published guidelines which should ease the burden, many larger, more established banks still do not wish to get involved with crypto projects for fear of KYC/AML burdens and the relatively unknown factors around accepting ICO funding.

Most of the time, a bank will want to see your business plan and some evidence of expected future revenue. As you can imagine, this is often a challenge for new startups just getting going!

However, since the long-term success of your project will ultimately be determined by how you build a sustainable business, this requirement isn’t all bad!

And now you may have a clearer understanding of why it is necessary to take care of steps 1 and 2 before moving to open an account. If your business model are clear and you have already obtained a tax and FINMA ruling - you are much more likely to be treated favourably by a bank.

At this stage, it is a good idea to have a number of advisors (not just legal counsel) who are supporting you in Switzerland. Often their influence will be key in helping you move forward.

4. Set up a legal entity

It goes without saying that to actually do business, you will need a legal entity to operate from. But now, since you have taken the steps above, you will have a solid basis from which to move forward.

One thing to be aware of, regardless of the legal entity chosen, at least one of the directors of the company must be a resident of Switzerland. This may not be a problem if you are planning to bring your entire team to Crypto Valley (and that is certainly preferred!).

Legal entities - different kinds

In Switzerland, you can consider two kinds of legal entities for your ICO project:

LLC (GmbH)
Ltd. (AG)

What is the difference between the two?

LLC
A GmbH or limited-liability company requires an initial capital investment of 20 000 CHF. All shareholders are publically registered in the commercial registry.

Ltd.
A Limited (known as an AG in German) company requires an upfront investment of 100 000 CHF (of which 50 000 must be deposited upon incorporation.)

One interesting point - the law in Switzerland makes it possible to establish a company using “in-kind” investments to cover the capital requirements. This makes it possible to use common cryptocurrencies such as bitcoin, ether etc to get started.

Incorporation

The process of incorporation involves a little paperwork - as can be expected. There are two choices:

You can send a power of attorney, copy of your passport and confirmation of your signature – all notarized and with apostille

You come to Zug in person to meet your lawyer and notary and sign the papers
If you choose this last option - you have an extra requirement: you must take at least one day to go for a hike in the Swiss mountains or take a boat ride around Zug Lake!

Timeframe:

Company incorporation usually takes about one week.

Conclusion

Switzerland is a definitely a great place to run an ICO. It offers stability of legal, political and economic system. No wonders, that the process of conducting a proper ICO in Switzerland takes some time.  Thanks to a good ecosystem consisting of lawyers, regulators and others supported by Crypto Valley Association it is definitely a good place to be!

Please note that this article consists very general information. If you’re looking for support in filing for a tax or FINMA ruling, or need help incorporating your blockchain company, we are here to assist you!

Lexcellence is a Supporting Partner of the Crypto Valley Association and we have extensive experience in helping crypto companies. Our entrepreneurial spirit makes us an ideal partner to startups like you!

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