Regulatory treatment of COs


#1

Hi all,

Thanks again for this great community contribution opportunity.

Please let me share some initial considerations regarding the potential regulatory implications attached to the concept of continuous organisations. As a caveat, my considerations likely follow the perspective of the Swiss regulators.

As you state in your white paper the DAT does not have any form of governance, it rather resembles the concept of an irrevocable trust (trust being anyway a legal fiction not supported by every jurisdiction). You further outline that the DAT code could be read as the trustee whereas the organisation would be the grantor and the investors the beneficiaries.

I guess there could be a certain probability that certain jurisdictions look through the DAT who issues the FAIR securities and look at it as an security offering by the organisation. Since the regulatory perspectives have been significantly improved over the last couple of months, such security token offering is still feasible. This could hold true for example as a Reg CF in the US or as a private placement offering (e.g. in Switzerland) which both benefit from simplification given the compliance with certain limitations. At a later stage, a Reg A+ or an offering supported by a proper prospectus could follow. Such approach would be certainly doable and be in compliance with the laws whilst still benefiting from the alignment of stakeholder interests induced by COs.

On a different note, I have been thinking about any potential regulatory hurdles resulting from the buy-back-functionality available to sales transactions. In case such buy-back-feature is read by the regulatory authorities as a repayment obligation to the investor, bank authorisation could become necessary. I do not necessarily believe that this ultimately holds true but I would be eager to understand whether you have already received some feedback on this note.

For your information: In Switzerland, the requirements for the classification of an activity as an acceptance of public deposits (cryptos) subject to bank authorisation are as follows:

  1. The client cannot dispose of the cryptos (paid in in exchange for FAIR securities) any time without the involvement of the bank / custodian (here DAT);
  2. The dealer or custodian (DAT) has a repayment obligation to the client; and
    3.The accepted cryptos would be included in the bankruptcy assets of the dealer or custodian (DAT).

However, the mere secure safekeeping of cryptos is not subject to a bank authorisation.

In any case, I hope the above-mentioned considerations make sense to you. I am looking forward to your feedback.

Best regards,
Kevin


#2

Hi @Kev, thanks a lot for this great contribution! We had not yet dig into the swiss regulation but we were wanting to so I am definitely interested to dig more. So far, we’ve dug into french and US regulation.

Indeed. Furthermore because from the feedback we’ve got, it seems some projects would like to base the value of their DAT on shares (instead of cash-flows) in which case we are totally in a security model. Being categorized as a security is not necessarily an issue though, it just means we need to come up with a standard documentation / procedure with the regulator to allow a DAT to legally issue FAIRs. In the US, the Reg CF exemption seem indeed the way to go even though it is pretty limited in terms of amounts (max $1M / year). Reg A+ seems impractical due to the delays imposed by the SEC to get an approval (even when there is no government shutdown :speak_no_evil:) which is between 6 and 9 months.

I am not sure how to understand this. Does it mean that a DAT would need to comply with these rules to be operate legally in Switzerland?

I am not sure to which event you refer to when you say “the buy-back-functionality available to sales transactions”, please let me know.

Sorry if my answers sound stupid, I am unfortunately not a lawyer :slight_smile: That being said, I really want to understand and answer all your questions.


#3

Hi Thibauld, thanks a lot for your feedback.

The two response boxes you have highlighted refer to my spontaneous thinking around the application of “bank authorisation rules” to the buy-back feature, i.e. the repurchase of FAIR securities by the DAT followed by the respective burning of tokens. This thinking is highly theoretical and based on potential implications from the issuance of tokens with a conversion right granted to the investors:

Example:
An investor buys 1 FAIR security from an issuer against 10 ETH incl. a conversion right into the same 10 ETH (by the same issuer). Such setup could become potentially subject to the applicable bank authorisation rules given it fulfills the three bullets I have previously mentioned (for further details, see Swiss Federal Council Report on Swiss DLT regulations on p. 86: https://www.newsd.admin.ch/newsd/message/attachments/55153.pdf).

However, such regulation is not applicable in case the ETHs are solely stored for secure safekeeping (e.g. kind of a custodian activity). Of course, the general question of the legal characterization of a DAT remains to be answered as well. I hope this clarifies the motivation behind my question.

Lastly, I believe it would be super helpful for the community to draft something like a cross-jurisdictional regulatory blueprint (non-binding though). To my very knowledge, the guys behind the coala-project have been working on such research (unfortunately, it is not available in the public domain): http://coala.global/projects.html

In any case, let me know if there is any opportunity to contribute further to a cross-jurisdictional regulatory modelling exercise for your CO concept.

Best,
Kevin


#4

Hi @Kev,

Sorry for my delayed answer (was busy finalizing v1.0 of the CO model :tada:). I would love to create such a cross-jurisdictional regulatory blueprint. Let’s talk :slight_smile:

Thibauld


#5

Hi Thibauld,

first of all, congratulations to the publication of v1.0 of the CO model :muscle:

As said, I think such open-sourced “guidance” is instrumental to the community, although it cannot be legally binding and merely provide some initial input. I would be very much up for it. Is there anyone else eager to join this discussion or anyone you know to connect to you?

Ideally, we get all this people on a call within the next weeks. What do you think?

Best,
Kevin