Legal issues of operating a launchpad for conducting Token Sales24 May 2023
In this article we describe main legal issues you may encounter when starting a launchpad business. There are two main concepts of launchpads:
For conducting token sales of utility tokens.
For conducting token sales of security tokens (STO).
Depending on the type of launchpad concept defined above, different requirements for operation of launchpad shall be met.
Let's start with analyzing less regulated launchpad business which conducts token sales only in relation to utility tokens. In this option launchpad operator creates an opportunity for new virtual assets issuer (cryptoproject) to attract launchpad`s users to sale of such issuer`s tokens. There are many different options how such sale may be conducted:
staking of launchpad own tokens in order to obtain a right to participate in such token sale;
opportunity to purchase such issuer`s tokens with launchpad own tokens;
staking of launchpad own tokens in order to receive issuer tokens free of charge (airdrops)
staking of launchpad own tokens in order to get opportunity to participate in raffle of projects tokens
No matter what option is chosen (except for airdrops) such launchpad business may be classified as “Participating in and providing financial services related to an issuer's offer and/or sale of a virtual asset” and so on will require a virtual assets service provider license (VASP License) in each country where such launchpad promote itself.
In order to obtain such a license, the launchpad operator shall define main markets where he plans to promote the launchpad to understand what regulators shall be engaged in the process. Once launchpad operator finalizes such list of countries, it shall incorporate a company in such jurisdictions, prepare an application for the license, supporting documentation (like AML\KYC policies, risk management policy, terms of service and some other), hire appropriate persons as AML officer, risk management officer, engage auditors firm, and ensure appropriate level of either share capital or net assets of the company. Generally, the license process lasts for 4-6 months, but may be prolonged by the regulator.
Once the license is obtained, the launchpad operator may start its operation. Licensed Launchpad operator shall ensure KYC checks of its users, AML checks of their funds in order to comply with local AML legislation. Also such an operator shall conduct independent investigation of the type of issuer`s token to ensure that the operator will not be engaged in unregistered sale of securities. For such purpose, the operator shall either require a legal opinion from an independent law firm (either in jurisdiction of the launchpad (preferable) or in jurisdiction of the issuer) or conduct its own research with launchpad in-house lawyers. If the launchpad operator fails to conduct such investigation and starts token sale of security token, such launchpad operator will be liable under applicable securities/financial markets legislation.
Of course, the launchpad operator may choose to operate in a gray area by registering a company being an operator in some offshore jurisdictions where no VASP legislation is in place to avoid compliance burden. However, such a decision will lead to infringement by the operator of legislation in countries where it actively promotes the launchpad and subsequent liability like: blocking the infrastructure, fines and even imprisonment.
If the launchpad operator wants to conduct token sale of tokens being considered as securities, it may be required to obtain either VASP license or broker-dealer license (or even both) depending on the particular jurisdiction requirements. It is strictly recommended to consult with appropriate regulator before starting the licensing process in order to ensure full compliance with the law and decrease possible expenses on creation of such licensed scheme. Broker-dealer license requirements are much more stringent than VASP`s requirements and usually lead to greater expenses, however such a license grants more opportunities in operating of launchpads since many such a licenses allow not only conducting of STOs but also ensure opportunity to arrange trading in virtual assets derivatives, e.g. secondary trading of SAFTs or CFDs on virtual assets.
Another option for operating a launchpad is provision of only technical solutions for the issuer in relation to the issuance of its tokens. How it shall work? It is easy. Launchpad operator shall provide the technical opportunity to deploy a smart contract allowing distribution of issuer`s tokens. In this case all transactions shall be made solely between users from one side and the issuer from another. The launchpad operator shall not be engaged in such transactions. It may only impose a certain fee on the issuer for provision of technical solution. This option allows the launchpad operator to decrease its expenses on compliance with VASP legislation and possible risks of infringement of such legislation but limit functionality of the launchpad and possible users` interest in the platform.
This article provides only descriptive information on options of starting business of the launchpad platform. It is strictly recommended to consult with lawyers, accountants and other professionals before structuring such a business.
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