1. CROWDFUNDING/CRYPTO/ICOS 2018
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,
including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties
under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
Roger Royse
Royse Law Firm, PC
rroyse@rroyselaw.com
www.rroyselaw.com
Skype: roger.royse
Twitter @rroyse00
ICO’S, CRYPTOCURRENCY AND TOKENIZATION:
LEGAL ISSUES

2. Disclaimer
No information contained in this presentation is to be construed as legal advice. No
information contained in this presentation is intended or related to any particular factual
situation. Nothing herein forms an attorney-client relationship. If legal advice or other
expert assistance is required, the services of a competent professional should be sought.

3. • Crypto currency
• SEC – Must register “securities” with SEC pursuant to Section 5 of Securities
Act unless exemption under 4(a)(2) or Regulation D
• IRS – Convertible Virtual Currency,
• “Virtual currency is a digital representation of value that functions as a
medium of exchange, a unit of account, and/or a store of value.” Notice
2014-21
• CFTC – Virtual currencies are “’goods’ exchanged in a market for a uniform
quality and values” CFTC v. McDonnell.
• Virtual currencies are within common definition of commodities, as well
as the CEA’s broad definition which includes “all other goods and
articles… and services, rights, and interest… in which contracts for
future delivery are presently or in the future dealt in.
• FinCEN – Virtual currency exchangers and administrators are money
transmitters and must comply with Bank Secrecy Act and its implementing
regulations, Amendments to Bank Secrecy Act Regulations; Definitions and
Other Regulations Relating to Money Services Business, 76 FR No. 140
Crypto Currency

4. • Coinbase Action: The IRS sought to collect the personal information of individuals trading on
the Coinbase Platform to investigate whether individuals were not reporting, under-reporting,
or self-reporting their taxable gains through the trading of Bitcoin on the Coinbase Platform.
• The Court allowed in part the IRS’s request for information for those accounts “with at least the equivalent of
$20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013-2015 period”
• Voluntary Compliance for individuals who did not report
• Domestic Voluntary Disclosure
• Offshore Voluntary Disclosure Program
Internal Revenue Service

5. • “Tokens” or “coins” are, in essence, digital coupons used by new cryptocurrency startups to
raise funds for their operations.
• Depending on the company or platform distributing the Token, a Token could have numerous
different purposes.
1. Utility on Platform
2. Licensing Rights
3. Voting Power
4. Ownership
• Tokens call themselves “Utility tokens”
• SEC chairman Jay Clayton during U.S. Senate hearing “I believe every ICO I’ve seen is a security”
• “Merely calling a token a “utility” token or structuring it provide some utility does not prevent the token from
being a security.”
What is a “Token”?

6. • SEC Chairman and CFTC Chairman’s February Testimony before the Committee of Banking, Housing, and Urban Affairs:
“…structures of ICOs that I have seen involve the offer and sale of securities and directly implicate the securities
registration requirements and other investor protection provisions of our federal securities laws.”
• SEC Chairman Clayton: Market professionals and gatekeepers must act responsibly and hold themselves to high standards.
In the ICO space "they can do better”.
• SEC warned against ICO Sponsors not making adequate disclosures and cautioned market participants against promoting or
touting the offer and sale of coins without first determining whether the securities laws apply to those actions.
• Family Resemblance test (Reeves)
• Multi factor test applied to notes
• Howey Test
• An investment of money, in a common enterprise, with a reasonable expectation of profits, and to be derived from
the entrepreneurial or managerial efforts of others.
• The Risk Capital Test
• The sale of membership to a country club was a security; substance over form
• Investors were risking their capital in expectation of receiving the benefits of club membership, which was in the
control of the issuers of the membership
Is my token a security?

7. • The SEC’s Cyber Unit - Division of Enforcement
• focused on misconduct involving distributed ledger technology and ICOs, the spread of false
information through electronic and social media, brokerage account takeovers, hacking to obtain
nonpublic information and threats to trading platforms and works closely with the SEC’s cross-
divisional Distributed Ledger Technology Working Group
• DAO Token – model described by one of the DAO founders as similar to “buying shares in a company
and getting…dividends”
• Holders of DAO Token had an expectation of profits derived from managerial efforts of others
• Munchee - restaurant meal reviews
• SEC halted cease and desist – unregistered securities
• ICO targeted investors, who had an expectation of future profits, rather than users of the products,
with intention to use proceeds to develop application and future “ecosystem”, which would
increase the value the MUN token
• Marketing materials stated additional development and ecosystem would increase the price of the
MUN token and could trade on secondary market within 30 day after ICO
Enforcement Actions

8. o 506(b): No general solicitation/advertising
o 506(c): solicitation/general advertising
o Reg A+
o Reg S
o Non-US Offering
o Registration Statement
How is it regulated as a security?

9. o 506(b): No general solicitation/advertising; accredited and 35 sophisticated
unaccredited investors; preempt state law regulations
o 506(c): Broad solicitation/general advertising; all accredited investors; issuer takes
“reasonable steps” to verify accredited status; preempt state law regulations
o Reg A
o Tier 1: $20M in 12-month period; unlimited accredited and unaccredited investors;
state laws not preempted (Blue Sky laws); unlimited accredited and unaccredited
investors
o Tier 2: $50M in 12-month period; unlimited accredited and unaccredited investors;
solicitation okay for testing interest; all investors; state law regulations preempted
o Reg S
o Foreign Targeted
o Non-US Offering
o Registration Statement
How is it regulated as a security?

10. • Community supported crowd sale of cryptocurrency tokens issued by startups based on private
Blockchain technology
• In 2017, 200 ICOs raised $3.9 billion (Coinschedule)
• Status: $90 million; Bancor: $153 million; Filecoin: $257 million
• Kik: $100 million (failed to raise revenue through advertising)
• Creates liquidity and growth equity without giving up equity in a company
• Tokens are sold in exchange for Bitcoin, Ether, or government fiat
• No clear tax guidance
• Regulatory Guidance: Canada, UK, Hong Kong, Thailand, Switzerland, Australia, Gibraltar, Singapore
• Bans: China, South Korea, Macau
Initial Coin Offering (“ICO”)

11. • SEC: tokens are usually securities
• IRS: crypto is property
• FinCEN: convertible virtual currency
• CFTC: may be a commodity
ICOs (cont.)

12. Issuer
Law
• Securities Law
• Tax
• AML/KYC
• Anti Fraud
• FINCEN
• CFTC
• FTC
• Investment Company Act
• Exchange Act
$
Step 2: Build
Platform
Step 1:
Pre-Sale
$orCrypto
SAFT
Investors
Step 3: ICO
Tokens
Investors
The ICO: Crowdfunding on Steroids
Team
• Legal US
• Tax US
• Foreign Legal
• Compliance
• Marketing
• KYC/AML
• ICO Economies
• Blockchain
Technical
Utility
• Use of Token
• Secondary Trading
• Scarcity
• Voting + Democratized

13. US Platform Co. Cayman ICO Co. Singapore ICO
Foundation
$
$
SAFT
$
tokens
Token Securities Compliance
Step 1
Step 3: Cash to
US Co.
$
Step 2: ICO
Issuance
1) 506 – All accredited
2) 506/Reg S foreign targeted offering
3) Non US offering
4) Foreign Utility Tokens – not a security
5) Reg A+
6) Register with SEC
7) Sec 4(a)(2) private offering
Resale
Rule 144 (12 month holding)
Section 12(g)
Rule 12g3-2(b)

14. • Two kinds of Reg. A offerings, called “tiers”, with different qualities:
Issue Tier 1 Tier 2
State law regulations? Not preempted;
multistate
coordinated review
program to help
Preempted
Maximum amount raised? $20 M in 12 months,
up to $6M of which
from current holders
$50 M in 12 months, up to $15M
of which from current holders
Per investor maximums? None Up to 10% of greater of non-
accredited investor’s net worth or
net income; unlimited for
accredited
Investor limitations Accredited and non-accredited okay
Issuer limitations Cannot be public, shell company, bad actor, those failing
certain SEC compliance rules
Reg. A – Two Options (“Tiers”)

15. Issue Tier 1 Tier 2
Solicitation, advertising Testing for interest, soliciting OK, though notices needed
and materials may be exhibits on SEC filing; potential to
keep confidential SEC filings during this time
Initial disclosures Financial statements
for past two years,
plus offering circular
Same as tier 1, plus audited
financials
Disclosure to buyers? Circular or most recent Tier 2 report due to buyers by
specific time before sale
Ongoing disclosures File exit report at
end of offering
Yes, if 300+ holders; annual,
semiannual, and current events.
Limitation on need for full
Exchange Act registration
Securities restriction Unrestricted; affiliates have some limitations
Allowed securities? Asset backed-securities banned
Integration safe harbor Exists; allows non-US and crowd-funding to be separate
Reg. A – Continued

16. Issue 506(b) 506(c) Reg. A Tier 2
State law
regulations?
Preempted Preempted Preempted
Maximum amount
raised?
Unlimited Unlimited $50 M in 12 months, up to
$15M of which from
current holders
Per investor
maximums?
Unlimited Unlimited Up to 10% of greater of
unaccredited investor’s
net worth or net income;
unlimited for accredited
Investor limitations Unlimited
accredited, and
35 sophisticated
non-accredited;
self-certification
standard
Accredited
only, and issuer
must take
steps to certify
they are
accredited
Unlimited accredited (self-
certified), unlimited non-
accredited
506(b), 506(c), and Reg. A Tier 2

17. Issue 506(b) 506(c) Reg. A Tier 2
Issuer limitations No bad actors No bad
actors
Cannot be public,
shell company, bad
actor, those failing
certain SEC
compliance rules
Solicitation,
advertising
Banned Soliciting of
anyone is
allowed
Testing for interest,
soliciting OK
Initial disclosures Non-accredited:
Equivalents of what they
get in registered offering,
plus anything accredited
investor can get
For accredited, see 506(c)
Optional;
must be
available to
answer
questions
Financial statements
for past two years
disclosed, plus
offering circular
with audited
financials
506(b), 506(c), and Reg. A Tier 2 (cont.)

18. Issue 506(b) 506(c) Tier 2
Ongoing disclosures Form Ds Form Ds Yes, if 300+ holders;
annual, semiannual, and
current events. But special
exemption from Exchange
Act registration until over
$75M float.
Share restriction Restricted for a
year
Restricted for a
year
Unrestricted; affiliates still
have some limits
Allowed securities? ABS not
specifically
banned
ABS not
specifically
banned
Asset backed-securities
banned
506(b), 506(c), and Reg. A Tier 2 (cont.)

19. EXCHANGES
Statement on Potentially Unlawful Online Platforms for Trading Digital Assets
Divisions of Enforcement and Trading and Markets
March 7, 2018
Online trading platforms have become a popular way investors can buy and sell digital assets,
including coins and tokens offered and sold in so-called Initial Coin Offerings ("ICOs").
If a platform offers trading of digital assets that are securities and operates as an "exchange,"
as defined by the federal securities laws, then the platform must register with the SEC as a
national securities exchange or be exempt from registration
Exemptions from registration include Alternative Trading Systems

20. ALTERNATIVE TRADING SYSTEMS (“ATS”)
A platform that trades securities and operates as an “exchange” must be
registered as a national securities exchange or operate under an exemption from
registration, such as the exemption provided for ATS.
• An ATS must have rules designed to prevent fraudulent and manipulative acts
and practices
• Entity operating ATS must register as a broker-dealer and comply with
additional requirements
• Caution against using term “Exchange”

21. CFTC
Commodities Futures Trading Commission
The CFTC regulates transactions in commodities interests and aims to protect
market users and their funds, and the public from fraud, manipulation, and
abusive practice related to derivatives and other products that are subject to the
CEA. 7 U.S.C. §1(a)(9) (2012).
The CFTC’s jurisdiction flows from the definition of a “commodity” under §1(a) of
the CEA. In September of 2015, the CFTC issued a determination that “Bitcoin
and other virtual currencies are encompassed in the definition and property
defined as commodities.” In re Coinflip Inc., CFTC No. 15-29 WL 5535736 (Sept.
17, 2015).

22. FINCEN
Financial Crimes and Enforcement Network
• The purpose of FinCEN is to “safeguard the financial system from illicit use and
combat money laundering and promote national security through the
collection, analysis, and dissemination of financial intelligence and strategic use
of financial authorities”
• In the event the above-detailed analysis leads a person to determine they are in
fact a Money Services Business, MSBs are required to
a) register with FinCEN,
b) conduct a comprehensive assessment of its exposure to money laundering,
c) implement an Anti-Money Laundering Program based on such risk assessment, and
d) comply with the recordkeeping, reporting and transaction monitoring obligations set
down in parts 1010 and 1022 of 31 CFR Chapter X

23. FINCEN FEB 13 LETTER
Financial Crime Enforcement Network (FinCEN), Dep’t of Treasury letter to Senator Ron
Wyden (D- Ore)
1) A developer that sells convertible virtual currency (i.e., bitcoin, ether, ripple, etc) including
in the form of ICO coins or tokens, in exchange for another type of value that substitutes for
currency is a money transmitter and must comply with AML/CFT requirements that apply to
this type if MSB ( and register as a MSB with FInCen - a form filed annually and disclosure of
some financial information).
2) An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency,
fiat, or other value that substitutes for currency, would typically also be a money transmitter.
3) FinCEN AML/CFT rules likely do not apply to ICO structures where (a) the tokens are offered
as securities - SEC jurisdiction and their AML/KYC requirements or (b) future interests in
commodities - CFTC jurisdiction and their AML/KYC requirements.

24. STATE REGULATIONS
State registration requirements
• Each State has their individual Broker-Dealer requirements and Blue Sky Laws worth
investigation for anyone engaged in Token Sales.
States are beginning to take their own approaches to regulating businesses acting within
Virtual Currencies.
New York implemented a “BitLicense”
• June 2015 New York Department of Financial Services enacted the BitLicense which
requires those engaging in “Virtual Currency Business Activity” be licensed.
• Licensing requires application and payment of fees and must maintain capital sufficient
to ensure the financial integrity of the Licensee and its ongoing operations.
• Alabama, Connecticut, New Hampshire, North Carolina, and Washington are some of other
states to have adopted legislature on regulating Virtual Currency Activity.
• California has tried to implement the Virtual Currency Act (A.B. 1123)

25. Tax Considerations
• Equity?
• Debt?
• Capital asset?
• Barter exchange?
• Prepaid goods or services?
• Subpart F Issues: CFC/PFIC?
• Deferral?
• Open - transaction?
• Forward contract ?
• Executory Agreement to Sell?
• Information Reporting
• FATCA
• FBAR
• Compensation

26. • Section 965: Transition Tax
• Section 245A: Participation Exemption
• Section 951A: Global intangible low-taxed income (“GILTI”)
• Section 250: Foreign-derived intangible income (“FDII”)
• Subpart F
• Passive Foreign Investment Companies (PFIC)
• Transfer Pricing Rules
• Tax exempt organizations vs associations
• Compensatory Issue
International Tax Rules

27. • One time inclusion of E+P of certain foreign corporations
• Effective tax rates of
• 15.5% to extent of cash
• 8% non cash assets
Section 965 – Transition Tax

28. • Deduction for certain foreign source dividends from 10% owned foreign
corporation paid to domestic corporation
• Modified territoriality
Section 245A – “Participation Exemption”

29. • Foreign minimum tax on GILTI of 10.5% until 2025
• Based on net income less deemed return on tangible assets
• Individual taxed at 37%
Global Intangible Low-taxed Income (“GILTI”)

30. • C corporations
• Foreign net income in excess of deemed return on tangible assets
• 37.5% deduction
• Effective tax rate of 13.125% (until 2025)
Foreign-derived Intangible Income (“FDII”)

31. • Certain types of mobile income (SPF income) of controlled foreign corporations
(more than 50% owned by US shareholders) taxable as deemed dividends to US
shareholders (10% owners)
Subpart F

32. • U.S. persons owning shares of a passive foreign investment company (PFIC)
have either (i) current taxation on the income of the PFIC (under a QEF
election) or (ii) a deemed tax and interest regime.
PFIC

33. • Code Sec 482 requires transactions between related parties to be at arm’s
length
Transfer Pricing

34. • Charitable
• Civic Leagues
• Clubs
• Business Leagues
• Etc.
• Not organized for profit
• No private investment
• Prohibited transaction: loss of status
• Disregarded as agent or nominee
Tax Exempts: 501(c)

35. US Platform Cayman Swiss
Foundation
$ or crypto
tokens
ICO Structure Tax Vulnerabilities
utility
$
1) Treatment of Swiss Co as agent
2) Subpart F income/ PFIC
3) Transfer price
4) GILTI tax
5) Compensation

36. • Consumer Protections
• Breach of contract, false advertising, fraudulent or negligent
inducement
• Industry Specific Regulations
• Global Regulatory Regimes
• FTC
Other Interested Agencies

37. ROYSE LAW FIRM, PC
Contact Us
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Palo Alto Office: 650-813-9700
CONTACT US
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m
@RoyseLaw
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San Francisco, CA 94105
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@RoyseLaw
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