How to Not Get Rekt: Structuring Your Crypto Project the Right Way

Regulatory crackdowns, tax nightmares, frozen funds, lawsuits… one wrong move, and it could be game over for your project. 

Whether you're just getting started or working towards a TGE, this guide will help you choose a legal setup to prevent your project from getting rekt. 

Disclaimer: This article provides general information for educational purposes only and does not constitute legal advice.

Why Structure Matters

When it comes to setting up the legal structure for your project, there’s no one-size-fits-all solution. The setup impacts:

• Go to market: The right structure gives you flexibility with funding, tokenomics, and timing. It allows you to strategically launch tokens, raise capital, and adapt your approach to market conditions. 

• Compliance: Your structure determines (to an extent) which laws you need to follow, and it's possible to avoid unfavorable regulations in some jurisdictions by choosing the right setup.

• Taxation: A solid structure can reduce your tax burden, with taxes often paid only when profits are realized, helping you avoid taxation on illiquid assets like unsold tokens. 

The right structure sets your project up for long-term success. Mess it up, and you’ll be dealing with costly issues down the road.

Incorporation Structures

Many projects start with a single entity, typically known as the Development Company (DevCo). But as projects grow, teams often move to more complex setups to handle token issuance and compliance better.

Let’s break down the evolution, starting with the DevCo and moving to specialized offshore setups.

1. The DevCo

A DevCo is typically the first entity established. It’s a centralized entity (usually a limited liability company) driving the project and handling development, marketing, and employment. It is often set up in business-friendly jurisdictions like the UAE, Singapore, or Estonia. 

Issuing Tokens Directly from the DevCo

At first, many teams consider issuing tokens straight from the DevCo. This can keep things simple, with the DevCo handling both operations and token issuance.

Pros of Issuing Tokens from the DevCo:

• Simplicity: A single entity is responsible for all activities - issuing tokens, handling operations, and raising funds.

• Low Costs: Fewer entities mean lower legal and operational costs. 

• Quick Decision-Making: No need to coordinate between different legal entities, enabling fast decisions and greater agility to pivot as needed. 

Cons of Issuing Tokens from the DevCo:

• Regulatory Exposure: In major jurisdictions like the U.S. and the EU, issuing tokens from a DevCo could expose the project to securities laws (like the Howey Test). While many tokens are structured to avoid being classified as securities, there’s still a risk, especially if the project draws attention from regulators. Even if not classified as securities, compliance can be costly.

• Investor Scrutiny: Investors may be wary of purchasing tokens directly from the DevCo, as it links the project’s operational risks with the token’s performance. If the company faces any legal or financial challenges, it could impact token holders and reduce investor confidence.

• Limited Tax Efficiency: Without the benefits of offshore jurisdictions, the DevCo could face higher tax liabilities on token sales and profits. Offshore setups, in places like the Cayman Islands or BVI, offer tax neutrality and can be more favorable for larger fundraising or token sales.

A simple setup with DevCo may work for small projects that prioritize simplicity, but can lead to compliance issues for larger projects. If the DevCo is based in the U.S., the risks are even higher due to strict securities regulations. 

2. Offshore Entities for Token Issuance

As projects grow, depending on where the DevCo is set up, separating token issuance from the DevCo to another entity may be necessary.

Offshore entities—like foundations or SPVs (Special Purpose Vehicles)—offer benefits like tax neutrality and regulatory flexibility, but their use is not without limitations. Jurisdictions like the Cayman Islands and BVI (British Virgin Islands) are solid options, but international scrutiny (thanks to initiatives such as the OECD’s BEPS and FATF’s travel rule) can add complexity.

Why Choose to Go Offshore?

• Liability Protection: Moving token issuance and governance to an offshore entity helps shield the DevCo and founders from legal and compliance risks tied to the token. In jurisdictions with strict regulations, this separation is critical.

• Tax Neutrality: Offshore jurisdictions like the Cayman Islands or BVI offer tax-neutral environments, reducing long-term tax liabilities, especially for large-scale token sales. However, these setups can be costly to maintain, often requiring audits and regulatory filings.

• Regulatory Flexibility: Some offshore locations have a low regulatory burden for token issuance, which speeds up launches. However, global regulatory pressure may change the landscape.

a. DevCo + Foundation or SPV (Two-Entity Structure)

One common setup is to create an offshore entity, like a Cayman Islands Foundation or a BVI SPV. This additional entity handles token issuance and sometimes decentralized governance, while the DevCo continues to focus on day-to-day operations.

Advantages:

• Liability Separation: The foundation or SPV manages token issuance, minimizing the DevCo’s exposure to token-related risks.

• Decentralization: A foundation-based model can support decentralized governance, giving token holders greater influence over project decisions, similar to DAO structures.

• Investor Confidence: Investors tend to feel safer knowing that tokens are issued by an independent offshore entity, rather than the DevCo.

Disadvantages:

• Operational Complexity: Adding another entity means more moving parts, which increases complexity in corporate governance and decision-making. 

• Higher Costs: More entities mean more expenses - legal fees, tax filings, and governance costs.

b. DevCo + SPV + Foundation (Three-Entity Structure)

For larger projects, a three-entity structure is often the move:

• DevCo handles core business operations.

• SPV takes care of token issuance and distribution.

• Foundation oversees decentralized governance, acting as a wrapper for the DAO to manage voting, decision-making, and community engagement in a compliant and structured way.

This setup offers maximum separation of roles, liability, and regulatory risk, making it ideal for projects scaling globally.

Advantages:

• Role Separation: Splitting responsibilities across different entities improves risk management and compliance.

• Flexibility: The SPV can be used to manage fundraising in jurisdictions with friendlier laws, while the foundation helps decentralize the protocol.

Disadvantages:

• Increased Complexity and Cost: While this setup offers strong protection, it’s not cheap. Multiple entities across different jurisdictions demand local expertise and ongoing maintenance, driving up costs.

Fundraising Considerations

A multi-entity structure allows founders to combine a SAFE (Simple Agreement for Future Equity) with token warrant, offering key advantages for managing early fundraising and token issuance:

• Flexibility in TGE Timing, Tokenomics, and Pricing: By using a SAFE with token warrant, founders can delay key decisions—like the TGE date, tokenomics, and pricing—until market conditions are favorable. This structure offers more flexibility compared to a SAFT (Simple Agreement for Future Tokens), where tokens are priced early. However, delaying decisions can introduce risks, like valuation changes or investor conflicts.

• Optimizing Taxation and Regulatory Compliance: The multi-entity structure (using an SPV or foundation for token issuance) separates the initial sale of equity (via SAFE) from token issuance (via warrants), allowing founders to defer token issuance and optimize tax treatment. This setup is particularly useful in jurisdictions with Controlled Foreign Corporation (CFC) rules, such as the U.S., where separating equity from token issuance can minimize tax liabilities.

Need Help Structuring Your Project?

No two token projects are the same. I work closely with founders to tailor incorporation structures that align with your vision and regulatory needs. If you're unsure about the best legal structure for your project, schedule a complimentary consultation, and let’s ensure your project is set up for long-term success from day one.