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What is an Initial Coin Offering?

ICO (abbreviation of Initial Coin Offering) is an offer to
someone to invest in some units of a new cryptocurrency or
crypto-token in exchange against already established
cryptocurrencies such as Bitcoin or Ethereum. ICOs have become an
increasingly popular method of fundraising for start-ups and other
companies with the intention to fund innovative projects based on
the blockchain technology. 

 In other words, when a start-up firm wants to raise funds
through an ICO, it usually creates a plan stating out the
project’s goals, requirements, how much funds to raise, how
much of the virtual tokens will be kept by the founders, what type
of money are accepted and for how long the ICO campaign will run
for. Just like an Initial Public Offering (IPO) where an
investor buys shares to a company in exchange for money, ICO
investors buy some of the distributed crypto-tokens in exchange for
already established virtual currencies such as Bitcoin or fiat
money (legal tenders). If the funds raised do not correspond to the
start-up firm’s initial minimum requirement plan the ICO
is deemed to have failed and the money is returned to the

In a nutshell, the issuer company, initiating the ICO, transfers
to potential investors Tokens issued, in exchange of already
established Cryptocurrencies which can be used, once the threshold
is reached, to finance its operations for which the ICO has been
set up.


Tokens, depending on the type of a token issued, are in essence,
digital contacts granting rights to the investor. In order to
create a token, firstly, a company writes the basic rules (tokens
amount and value and special conditions). Once created, the
platform will act as an executor for all future transactions in
order to make sure that all the conditions are met and carried out.
Further on, each interested party may buy tokens, upon
availability, in exchange for money. Money, may be in the form of
another cryptocurrency, i.e. Bitcoin or fiat currency.

There are several types of Token, such as credit tokens (type of
loan), asset tokens, payment tokens or a combination of several
tokens, commonly known as hybrid tokens, however the most common
types are: 

Utility Tokens: Which give access to services provided by the
project. Investors purchasing utility tokens are doing so for
future use on the platform. It does not give its holders any right
of ownership or equity in the company or the project

Stock (or Equity Tokens): This category of tokens
represents assets such as participation in the company’s
earnings or an entitlement to dividends and interest payments. In
simple terms, equity tokens are analogous to shares in a company
from which a shareholder may receive dividends. Equity tokens offer
the investor some form of equity in the company they are being
purchased from. Hence, holding equity tokens may even give the
investor voting rights, exactly like a share of common stock in a

Legality of ICOs  

Yet, no specific legislation regulates the framework for ICOs,
however, this does not mean that the market for ICOs is completely
unregulated. Various laws and existing securities and financial
market legislations to ICOs as well as circulars have been
published as to the risks involved and the applicability of those
laws on ICOs. For instance, EU Legislation, provides that for an
offer of securities, whose total consideration for such offer is
less than five million euro (€5,000.000) over a twelve-month
period, there is no obligation to publish a prospectus nor request
a permission from CySec (Cyprus Securities and Exchange
Commission). ICOs may fall within the scope of this legislation in
the case of security tokens.

In Cyprus, the regulator (CySec) follows the guidelines of the
European Securities and Markets Authority (ESMA) and issues
circulars to the public as to the dealings in virtual currencies.
Although there is no specific regulatory framework, there is no
expressed prohibition either.

Setting up of a Legal Structure in Cyprus  

Company limited by shares

A company in Cyprus must be incorporated which will undertake
the issue of the Tokens. It is advised to set up the company in a
trustworthy and solid jurisdiction as to reflect the competency and
severity of the ICO and the project itself. Cyprus, falls within
the prementioned options.

It is a common practise to establish a second company which will
act as an escrow, for transparency purposes which will accept the
funds and will release the said funds once certain conditions are

Alternative Investment Fund

According to ESMA an ICO may qualify as an Alternative
Investment Fund with Limited Number of Investors (AIFLNP), to the
extend that it is used to raise capital from a number of investors
according to its investment policy. CySec may accept the setup of
an ICO though a Cyprus Alternative Investment Fund, provided that
the AIFMD rules are followed. 


Cyprus being an EU Member and with a favourable tax system as
well as an extensive network of double tax treaties, well-organised
and regulated regime, low setup costs, with a financial services
infrastructure and well-educated professionals can provide comfort
to prospective investors to launch an ICO.

In regards to the taxation of cryptocurrencies, to date, there
is no specific legislation, hence the general taxation rules are
applied, depending, of course on the type of token to be

In the case of utility tokens, a corporate tax of 12.5% shall
apply and may fall within the scope of VAT (19%) as well. Since,
utility tokens can be defined as a pre-payment for the right to use
the company’s goods or services, this may be simply defined as
an exchange for goods or services ultimately falling in the scope
of o VAT regulations. One may argue that during an ICO stage,
utility tokens may not be recognised as an exchange for goods or
services, since the service may not be provided in the future, if
the ICO fails. With that said, until the company’s performance
obligation is met (that is the actual service rendered) then that
revenue can be deferred and may be converted into income received
once the ICO succeeds and the service is actually performed.
Accordingly, since this type of token is treated as an exchange in
return for the provision of a good or a service, then any profits
earned by the company will be taxed at the corporate level, at

In case of security (equity) tokens, it will be considered as
capital in a company and will not be taxed, nor fall within the
scope of VAT. Equity tokens, are treated as such for the simple
reason, that from a definition perspective, they have the same
effect as shares to a traditional company limited by shares. With
that said, their tax treatment should not differ from that of the
shares or may be treated as an additional reserve of the issuing
company. Due to their nature, equity tokens being treated as
capital should not trigger any corporation tax.

Traditionally speaking, since shares in a company give rise to
dividends or interest payments, equity tokens should be treated as
such. Since, under the EU VAT Directive shares, interests in
companies, debentures and other securities, qualify as an exempt
transaction handled for VAT purposes, relatedly equity tokens
should be treated as such.

In addition, Cyprus has a very attractive Intellectual Property
(IP) Box regime whereby an effective corporate tax rate of 12.5%
may be reduced to 2.5%, on condition that certain conditions are
met. Please
click here for additional information on the IP Box in
Cyprus. Conclusively, an ICO is a modern, quick, innovative
and technological method for companies to raise their capital. For
an ICO, it is important to research well and setup robust
strategies from a legal perspective and a marketing perspective.
Many advantages can be derived from launching an ICO in Cyprus. The
absence of specific ICO legislation does not mean that ICO
launchers may not seek guidance from legal professionals nor comply
with the existing applicable regulation, which as discussed above,
ICOs may fall in. Legal Compliance must be sought at all stages
prior and during the launch of an ICO. Proper guidance and advisory
can result to a successful ICO and give a strong boost to the
issuing company.

Originally published August 24, 2020.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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