2(C) LLC Holding Company Structure

Disclaimer 

Where the initial intellectual property underlying a novel Block Chain is owned by individuals (or possibly by a corporation with significant current year losses where the IP is in its infancy), the best solution may be to set up an LLC as a holding company.

Outline of Structure:
  •  Step 1. Form LLC Holding Company
    •  Founders form NewLLC, a Delaware LLC
    • Founders contribute all IP, business plan, etc. to NewLLC
    • NewLLC issues Common Units to founders, advisors and people who will contribute to the development of IP.

      Participants can stop here until the financing if they want to minimize current expenses and develop the IP to a point where they can attract investors.  In that event, NewLLC would sign "Confidentiality and Inventions Assignment Agreements" ("CIAAs") with all contributors and wait on Step 2 until it's ready to introduce investors.  (Note, if the Participants hope to layer in the participation of a foreign subsidiary (see  2(A) Potential International Structures) in the future, then the following steps should not be delayed).
  • Step 2. Form Operating Company
    • NewLLC creates Genesis Block and reflects therein ownership of XX Tokens (the Founders’ Share) by NewLLC. 
    • NewLLC forms NewCo, a Delaware corporation 
    • NewLLC then contributes all IP other than XX Tokens to NewCo.
    • NewCo becomes the employer of all service providers and contributors who all sign CIAAs with Newco. 
       
  • Step 3.   Initial Financing
    • NewLLC sells preferred equity to investors, 
    • NewLLC contributes the proceeds from the equity sale
  • Step 4     Subsequent Financings
    • If more money is needed (or wanted) there are at least 2 financing structures possible.
      • NewLLC sells equity and contributes the proceeds to NewCo
      • NewLLC contributes Tokens to NewCo and NewCo issues SAFTs / sells Tokens.
      • If proceeds are going to be greater than 1 year's expenses, NewCo could issue a "Laddered SAFT" (Net Operating Losses from years after the sale can no longer be carried back to offset income from a prior year)
  • Step 5    Token Distribution
    • After Network Launch, NewLLC would distribute the Tokens it still owns to its Members over a period of months (e.g., 24 months)
    • Once all Tokens have been distributed, NewLLC would liquidate and distribute shares of NewCo stock to its Members.
  • Step 3(a)
  • International Variation  (Note the new tax bill virtually eliminates any foreign benefits)
    • If the Participants conclude that a foreign vehicle may provide additional benefits, then they would need to set up that up immediately after the creation of NewCo in Step 3.
    • NewCo forms CaymanCo, a Cayman Islands corporation ("CaymanCo");
    • NewCo and CaymanCo enter into a “Cost Sharing Agreement” whereby NewCo and CaymanCo promise to jointly fund IP development, in proportion to projected foreign/domestic revenue from that IP.
    • NewCo funds a portion of its share of the costs under the Cost Sharing Agreement by transferring foreign rights to its IP to CaymanCo.  
      • Participants may want to have CaymanCo be issued YY Tokens at this point as well (presumably a percentage of all tokens corresponding to the percentage of total revenue projected to be from outside the US.)
      • NewCo takes a portion of funds raised from each financing and contributes/lends them to CaymanCo (possibly with up to a 4 to 1 debt to equity ratio).
      • CaymanCo pays NewCo pursuant to the Cost Sharing Agreement a portion of the costs NewCo incurs in developing the IP (presumably both Token IP and related business IP).
  • Form Term Sheet 
    •  A form Term Sheet for this transaction can be found here.
  • Benefits:
    • The amount raised through sales of NewLLC equity should never be taxable income to NewLP or NewCo;
    • Leaving the Tokens in NewLLC allows the group, effectively, to distribute its excess profit free of corporate level tax;
    • Investors in NewLP should not have any UBTI or "Effectively Connected Income" because NewLLC will not be engaged in any business:
      • NewLLC will never be a trader in Tokens (all Token sales will by by NewCo after contribution of Tokens to it by NewLLC or by Investors after distribution of Tokens to them by NewLLC)
      • NewLLC's only assets will be stock in NewCo and Tokens
    • Investors in NewLLP can use crypto currency to purchase their equity without having to pay tax on any appreciation (because they will be making a tax free contribution to the capital of a partnership under IRC Section 721) -- which is different than what happens when they purchase SAFTs (where they are deemed to sell the crypto currency they use and have to recognize any gain on those tokens)
    • If CaymanCo is set up, then income from the business (in addition to income from the Token sales) will not be subject to US tax until distributed by CaymanCo to NewCo.

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