Written by: Jin Jianzhi
The development of Web3.0 industry is in full swing, and blockchain technology and cryptocurrency have brought unprecedented investment opportunities. More and more people want to seize this opportunity and hope to achieve wealth growth through investment. However, in actual operation, many people lack relevant knowledge and experience, so they hope to invest on their behalf through professionals or institutions, which has given rise to the demand for entrusted financial management and the establishment of funds.
In particular, the establishment of crypto funds has become an indispensable part of the crypto industry. Attorney Mankiw often receives such inquiries, such as how to accept funds from others in compliance with regulations, and what are the requirements and operating methods for establishing crypto funds. Therefore, this article will analyze in detail the differences and applicable scenarios of different methods, and explore how to start a crypto fund quickly and at low cost.
Why choose to set up a crypto fund?
First of all, we need to understand that the essence of a fund is collective investment - wealthy investors pool their funds together for commercial investment in order to achieve the goal of spreading risks, obtaining professional management, and obtaining higher returns. Secondly, there are many ways to achieve collective investment, and common ways include: entrusted financial management, establishing a partnership/company, and establishing a fund. Different methods have their own unique features and applicable scenarios.
In general, entrusted financial management is the lowest cost but highest risk method, which is common in small-scale entrustment between individuals. Establishing a partnership or company provides higher compliance and lower risk. After the company matures, conflicts and disputes may arise among shareholders. Funds are the most modern and civilized way of collective investment, which can protect investors very well, enable professionals to do professional things, and manage large-scale funds. This is also the key reason why the Web3.0 industry generally chooses to establish crypto funds. After all, the Web3.0 industry itself is high-risk, and because of the high threshold and professionalism, it is not friendly to traditional investors.
However, unlike traditional industries where funds can be established anywhere, in the Web3.0 industry, offshore funds are the mainstream choice.
Why choose offshore funds?
Offshore funds are highly favored by global investors due to their unique advantages, which are mainly reflected in the following aspects.
Tax advantages: Offshore funds are established in low-tax jurisdictions, such as the Cayman Islands, and enjoy zero corporate tax and capital gains tax, which significantly reduces the tax burden of funds and investors and increases net income.
Privacy and confidentiality: Offshore funds offer greater privacy and confidentiality. The identity of investors and transaction information do not need to be disclosed publicly, which is very attractive to investors who want to keep their investment strategies or identities confidential.
Free capital flow: Offshore funds enjoy freer capital flow. Without strict capital controls, funds can flow freely across borders, facilitating global investment and attracting investors from all over the world.
Cost-effectiveness: Offshore funds may have lower operating and management costs. Due to the relaxed regulatory environment in offshore jurisdictions, there are fewer establishment and maintenance fees, which improves overall cost-effectiveness.
How to apply for offshore funds?
According to related articles previously published by Mankiw lawyers, such as "Web3 Project Compliance: Why Choose Cayman Funds for Token Issuance?", taking the Cayman Fund as an example, a conventional crypto fund usually requires the following compliance configuration:
Regulatory agency registration
Registration time. Registration must be submitted within 21 days from the date of acceptance of subscribed capital contributions, and actual capital contributions may not be required before registration is completed.
Registration materials: Submit the fund's basic documents, auditor/administrator consent letter, and notarized director's affidavit.
Directors and Management. At least two natural person directors; appoint two anti-money laundering officers.
Audit and Financial Statements
Appoint a Cayman local auditor from the CIMA approved list.
Submit audited financial statements to CIMA within 6 months after the end of the financial year.
Financial records are kept for at least 5 years to ensure that the records are adequate and accurate to show and explain transactions.
Valuation and Conflict of Interest Disclosure
Prepare an appropriate and ongoing valuation program, with valuations performed at least once a year.
Clearly disclose conflicts of interest within the fund.
Asset safekeeping and cash management
Fund property is usually held in trust by a custodian unless CIMA is specifically notified that this does not apply.
Cash supervision requirements are clear and can be fulfilled by GPs.
Securities Identification and Fundraising Documents
The Fund should keep a record of the securities identification numbers traded in case of enquiries from CIMA.
Prepare fundraising documents or term sheets to ensure compliance with relevant regulations.
Therefore, a conventional fund involves auditing, custody, administrative managers, lawyers, etc. to maintain the operation of the fund. Undoubtedly, this will increase the operating costs of the fund. Although these costs will eventually be borne by investors. However, in the face of uncertain investment returns, investing a large amount of operating costs in the early stage of project launch is a major test for both fund managers and investors.
How to start a crypto fund at low cost?
After many attempts and explorations, Mankiw found a cost-friendly way to set up a fund - the BVI Incubator Fund. The fund has very low requirements, such as no more than 20 investors, each investor's investment amount must not be less than US$20,000, and the cost of setting up is extremely low.
At the same time, the BVI Incubator Fund is also a fund entity regulated by the BVI Financial Services Commission and can be converted into other types of funds later. It is a fund type that Mankiw believes is more suitable for a variety of Web3.0 projects.
When setting up a BVI incubator fund, Web3.0 projects need to pay attention to the following compliance points:
Registration
Register with the regulator. Commencement of business within 2 working days of receipt of application by the Financial Services Commission.
Submit materials: Fund basic documents and an authorized representative.
Establishing directors and management
At least two directors, one of whom must be a natural person. An anti-money laundering officer must be appointed, who can be an insider of the fund.
Auditing
Financial statements are required to be filed but do not need to be audited.
Valuation
Prepare an appropriate and ongoing valuation program, with valuations performed at least once a year.
Preparation of fundraising documents
Prepare fundraising documents or term sheets in compliance with relevant regulations.
It is worth noting that in the process of establishing and operating the BVI incubation fund, Chinese founders also need to be careful not to accept onshore RMB from mainland investors, not to actively help investors exchange U.S. dollars, and avoid public fundraising and publicity and promotion.
summary
As the Web3.0 industry is developing rapidly, choosing the right fund structure and ensuring its compliance is crucial for the management of crypto assets. BVI incubator funds are an ideal choice due to their low threshold, fast establishment process and low costs, especially for early-stage Web3.0 projects and smaller investor groups.
