Project overview
A gaming studio is developing a blockchain-enabled game that combines traditional gaming mechanics with Web3 functionality. The project features NFTs in the form of collectible cards and character cosmetics, with plans to implement both cryptocurrency and traditional payment methods. The game's design includes wallet integration, starting with MetaMask connectivity and with the aim of eventually developing a comprehensive wallet system for users.
Existing legal structure and previous roadmap
The project initially operated through a Cyprus-based company that served as their IP holding entity and managed contractor payments for game development. Before contacting Legal Nodes, the project team had engaged with other consultants who recommended setting up a Cayman Foundation for their token issuance and provided them with SAFT agreement drafts. The team engaged Legal Nodes as they were seeking a partner with a web3-specific industry expertise that would help them to validate previous suggestions and implement the legal roadmap in a cost-effective way.
Refining the project's goals and legal needs
Legal Nodes team has held the initial discussions with the project team to pin down exactly what they wanted to achieve.
The project team needed to establish a legal structure that would:
- Enable compliant token issuance and sales to private and retail investors
- Allow for future direct token sales through their website and in-game purchases
- Facilitate acceptance of both cryptocurrency and traditional payment methods
- Additionally, the team needed to take into account potential considerations from a tax and regulatory perspective, as one of the founders was a resident of the U.S.
Suggested legal roadmap
Based on the project's specific needs and drawing from case studies of similar Web3 gaming projects and market best practices, Legal Nodes presented several corporate structuring options to help the team make an informed decision.
The team decided on using a dual entity structure with a BVI token issuer company and a Cayman Islands Foundation.
In this corporate structure, the Cayman Islands Foundation acts as the cornerstone of long-term project development and treasury management. It can operate without formal ownerships, providing added protection to the founding team while creating a structure that supports genuine decentralization. The foundation's role is focused on managing pre-minted tokens and supporting ecosystem development in alignment with the project's long-term vision. Meanwhile, the British Virgin Islands entity handles the token issuance and distribution and is set up as a subsidiary of the foundation.
This separation of responsibilities between the two entities has proven effective in similar projects, providing clear delineation between initial token distribution and ongoing project development.
💡 Worth checking: Progressive Decentralization: a Legal Playbook for Builders
Key factors to consider
During the discovery process, apart from pinning down the corporate structure, Legal Nodes also identified several crucial aspects of the proposed legal structuring that would impact the project's success:
Corporate structure
The project team needed to carefully weigh up their approach to corporate governance, particularly given the founder's U.S. citizenship. The choice between basic nominee and signatory directors would significantly impact both operational efficiency and regulatory exposure. The Legal Nodes team explained how different director arrangements could affect the project's operations and recommended approaches based on similar cases they had worked on previously.
Token sales framework
The complexity of token sales required a nuanced approach to both private and public sales:
- For private sales, the team needed to understand how to compliantly engage with U.S.-based investors while maintaining appropriate documentation.
- The public sales strategy required close examination of the British Virgin Island's VASP (virtual asset service provider) authorization requirements.
The Legal Nodes team explained how structuring sales through launchpad intermediaries could affect regulatory obligations. Additionally, the timing of token utility implementation would significantly impact the regulatory treatment of these sales.
IP management strategy
The project's intellectual property structure required careful consideration to balance operational needs with regulatory compliance. Legal Nodes recommended splitting IP management between off-chain and on-chain components, as this approach has worked effectively for other gaming projects. The IP management strategy needed to account for practical matters such as banking relationships and platform requirements while maintaining operational efficiency.
👉 Need help with a legal roadmap for a token launch? Contact us here and receive a quote for your project.
Legal roadmap implementation
After aligning on the legal roadmap (corporate structure & key considerations) the team transitioned to the implementation phase that was orchestrated by a Virtual Legal Officer on the Legal Nodes side.
The client used the credits of the Legal Nodes plan to activate legal works from their legal roadmap suggestions and receive offers.
Note: Legal Nodes credits are used for services such as legal discovery sessions, legal Q&A sessions, receiving offers from service providers, managing the completion of legal tasks, receiving document templates, and others.
Preparing offers for company registration services
Virtual Legal Officer connected with relevant service providers to gather proposals for company registration and additional services for both entities. The chosen providers were selected based on their experience with similar projects and their understanding of the specific requirements for gaming platforms.
Comparing offers and choosing providers
The Virtual Legal Officer presented multiple options to the project team, detailing the advantages and particulars of each approach. This included various director service packages and corporate service provider options. After reviewing the proposals, the project team selected their preferred option based on their preferences, specific needs, and budget requirements.
Completing company registration and document preparation works
The next part of the process was supervised by the Virtual Legal Officer, who coordinated between the project team and service providers to ensure smooth execution of the roadmap. The Virtual Legal Officer oversaw document preparation (SAFT agreements), helped with director appointments, and assisted the project team with questions that arose during the document filing and company registration process.
Outcome for the project team
As a result, two legal entities, the Cayman Foundation and the BVI limited company, were incorporated within the required timeframes, ensuring that the pre-TGE stage could be completed and the company could receive funding from private investors and prepare for the launchpad campaigns.
As the project team focused on their immediate tasks, it was agreed that they would pick up the next set of recommendations from Legal Nodes (outlined below) after the pre-TGE stage was complete.
It's worth noting that as Legal Nodes works with vetted local providers to complete specific tasks like company registration and document preparation, this allowed the client to stay within their budget, as those services were provided at competitive markup-free pricing.
Post TGE legal roadmap
Along with the pre-TGE guidance, Legal Nodes provided comprehensive guidance on several critical areas that would affect the project's long-term success, starting with the token offering and marketing compliance matters that would require very careful assessment.
Token marketing considerations
The team would need to structure their promotional activities and public communications so that they aligned with regulatory requirements. Legal Nodes explained how different approaches to marketing could affect the project's regulatory status and recommended specific measures for geofencing and promotional content management.
📚 Read more: Marketing Compliance Guidelines for Crypto Projects
Considerations for the existing entity
The Legal Nodes team also flagged that the existing Cyprus company presented both opportunities and challenges for the project team. Legal Nodes conducted an analysis on how the entity could be integrated into the new structure, particularly for handling credit card payments and user-facing operations. They also explored the possibility of establishing a new entity in a jurisdiction with more favorable R&D tax treatment, explaining how each approach would have different implications for the project's development activities.
Banking options
Lastly, Legal Nodes suggested that the project team pay careful attention to their banking and payment processing strategy, particularly given the challenges offshore entities face in establishing banking relationships. Legal Nodes outlined various approaches to payment processing, including the potential use of third-party providers and the role that different entities in the project's structure could play in managing various types of transactions.
Throughout the process, Legal Nodes emphasized the importance of maintaining flexibility in the structure to accommodate future developments while ensuring current compliance across all relevant jurisdictions. They recommended regular reviews of the structure's effectiveness and compliance with evolving regulations, particularly in areas related to token utility and public sales.
Need support for a pre-TGE legal structuring?
Before pouring time and effort into a token generation event, projects need to assess and set up their legal structures, whether as a dual-entity structure or triple-entity structure. This process is vital for both achieving immediate goals and for setting up the project for long-term success.
At Legal Nodes, we understand what needs to happen and when. We offer projects a comprehensive outlook that focuses on the most suitable options. In other words, we do the big-picture legal thinking so you don't have to. We have supported hundreds of Web3 founders and builders with understanding and analysing their legal options, from corporate legal structures to entity registration, banking matters, tax considerations, and legal documents.
If you need help with your pre-TGE legal structuring, reach out to us today.
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