You Are Probably Breaking the Law: Web3 Founders and the Law | Dave Rodman - The Rodman Law Group

thank you Melissa uh everybody so I guess um kind of more of a broad-based uh presentation di uh gaming ZK I mean literally anything crypto this is going to apply um so I'm Dave Rodman managing partner of the Rodman Law Group um uh we focus on digital asset and web 3 cannabis and psychedelics we're located here in Denver uh I share the digital assets and web 3 uh Venture Capital uh practice um I've been practicing in web 3 since uh 2016 so uh it's a huge part of my life professionally and personally um and as you've probably heard people say in the past while I am a lawyer unless you are currently a client of mine which I don't see in the in the audience I am not your lawyer uh so this is educational in nature um so if you are reading the syllabus uh the original Talk was uh titled you are probably breaking the law um and if you saw what was just up it's not that uh the reason for that is that when I created this presentation um a law had gone into effect that uh few people other than lawyers and CPAs in the space were really aware of and there was no way to comply with it and I'll talk about that in a second um but uh luckily for for the for the industry unluckily for my talk uh it that law was put on hold temporarily uh about a day after it was about to [ __ ] some people over um so this is the actual title it's just legal considerations for web 3 Founders um so we're going to cover the whoa the infrastructure investment and jobs act uh that's uh the corporate transparency act we're going to touch on dealing with tokens which is important to everyone in here and at the end we're going to discuss legal costs because we have seen uh a lot of clients come to our firm shared quotes from very well-known law firms uh and blew my mind at what people thought was normal to accept for legal fees um so to kick off despite looking down the barrel of a new bull market and getting very close to all-time highs 2024 isn't exactly looking great for crypto projects um so the the the law I mentioned earlier um which is I'm going to refer to as the II JJ ja for ease was packed in uh 2021 but it only went into effect this year uh it had two major effects for people in the crypto industry uh it created it required that all brokers or any person responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person file form 1099 B to report such transactions this set off a firestorm in the industry uh as it wildly increas increased the scope of the word broker uh and its wording cast a huge net that could in theory require everything from exchanges both centralized and decentralized sequencers miners validators uh and many others to report transactions to the IRS uh this puts certain project in the impossible situation of having to report on things that cannot be reported on uh thankfully there was push back from the industry uh and that has not gotten into effect um but I suest that everyone who's in crypto pay attention to that and keep keep it in mind because it's it's going to get implemented soon um but we're not going to spend a whole lot we're not going to spend any more time talking about that part because we could we could talk about that for three or four hours um but the second thing that the iig ja did was that it required companies to treat crypto payments as though they were cash um this is a mindblowing requirement for anybody who understands how crypto works and it's the actual law that influenced the original title of this presentation uh the other 2024 goodie that went into effect is called the corporate transparency Act uh and it it significantly increases the disclosure and compliance burden for nearly all small businesses in this country so let's touch on the II ja um basically businesses that receive more than $10,000 in crypto worth of crypto in one transaction or in two and more related transactions must file form 8,300 within 15 days this is exactly how the IRS and Fin treat cash payments so what is one transaction it's all transactions between two parties that occur within a 24-hour period and it's all related transactions between parties that occur within a 12-month period um so what are the penalties for failing to report within 15 days uh the negligent failure to report is $280 per occurrence um uh don't worry not to exceed about $3 million per year uh now that's that's just you know negligence uh intentional or willful failure to report the Civil penalties are the cash value of the transaction the criminal penalties are up to 5 years in prison uh $25,000 in penalties for an individual and $100,000 in penalties for Corporation um if you intend ially file one of these reports incorrectly then the criminal penalty is 5 years in prison or and then civil again breaks between individuals and uh corporations but it's 100 Grand uh and 500 grand um so this is infuriating for a few reasons um it it illustrates the clear misunderstanding of how crypto works and the perception amongst our elected officials that crypto is still only used for illegal activity uh it also further highlights that the single best way to hund money is still through the good old US dollar um but the most uh immediate cause for concern is that this law went into effect on January 1st of this year and it seems like it was designed to trip up crypto companies uh intentionally um the form that you would use to file this sort of thing uh is called a form 8300 and it's put out by uh the IRS and finsen uses it um and you have to sit back and think for a second because the iig ja was passed in November of 2021 um the most recent form update to form 8300 was published in December of 2023 this is the section of that form that you would have to use to be in compliance with this a uh with this law take a look at it and see if you can spot the problem there is not a category for cryptocurrency so in essence you have a despite having two years to prepare for this the government put something that went into effect on January 1st and the thing that you would use to report it literally couldn't be used to report it um so this this hits home personally for me and my firm we accepted a retainer payment on the first the 2nd of January uh I looked into reporting it and uh found that I couldn't um because it would have been due for me on the 16th of January so we just kind of resigned ourselves to the fact that we weren't going to be able to report luckily uh the enforcement was delayed on the 16th the day that we would have been in violation personally um but uh it's unclear when it's going to go live it could go live any day now um and it would affect basically everyone in this room uh there's very few exceptions to it uh so this is one of those things where the all that we can really do is talk to our elected officials and try to get them to undo this law uh because it is a an unnecessary burden on on crypto uh companies the second treat from 2024 uh is the corporate transparency act now this affects uh all small businesses are almost all businesses in this country um almost all large businesses are exempt from this um it's build as everything that seems to Target our industry as a way to combat uh moneya laundering um but really all it does is increases the the uh compliance costs and Reporting cost for small businesses and startups um it also requires that Founders and um service providers like myself who help Founders form entities uh file a lot of personally identif in identifiable information with finsen which is the financial crimes enforcement Network proactively now I've done this uh kind of as a test and it is not the hardest thing in the world world but I I had to give all my personal details to the government in one nice little database that seems like it would be an optimal honey trap for any bad actor but who who is covered by this owners of a company with at least 25% Equity ownership individuals like me uh who help form companies but also the founder who directs me to form uh a company CPAs pargal other other providers like that beneficial owners so 25% ownership that makes sense you're a beneficial owner but let's say you're a director that has no equity or you're an officer that has no equity you are also a beneficial owner and you also need to comply what do you need to give to the government your full legal name your date of birth your complete current address and a valid government ID if your government ID expires like mine just did I have it is on my it is my duty to go and uh fill out a new uh finsen form and upload my new driver's license and if I don't my law firm and then by extension me can get in trouble uh for not staying in compliance when is this supposed to happen for any entity any entity anybody in here with the company that was formed prior to the first of this year you have until the end of this year to make this filing if you form an entity in this year you have 90 days from the date of formation so form it today 90 days if you don't do it you're in violation starting on January 1st 2025 you will have 30 days um what are the penalties failure to report accurate beneficial ownership information fines of up to $10,000 an imprisonment of up to two years um people talk about this part all the time they don't seem to talk about the potential uh corollary to this which is that the CTA requires the company and the people working for the company to hire to to to handle personally identifiable information and there's a lot of just general civil risk around that um but in addition to that the CTA also says that if you misuse this information which they haven't really defined what misuse means fines of up to $250,000 and imprisonment for 5 years uh so the these are the the gems that uh uh we were given this year uh and uh I I can guarantee you that crypto companies are going to be the ones that see this kind of scrutiny before any other companies because it gives the government another uh sort of wedge with which to mess with our industry um so basically you need to take the CTA seriously is what I'm saying talk to your lawyers talk to your CPAs make sure that you are filing what you need to file in a timely manner going to switch gear gears now I didn't realize I had this short amount of time but I'm going to switch gears uh and talk about some of the other things that are very important to Founders in this space uh and that is capital considerations so the de facto industry standard that has kind of become prevalent which drives a lot of lawyers Bonkers is this safe and token warrant combination um when you think about it what this effectively does because we all know that the tokens are going to be created offshore uh this requires a US company to sell the Securities of a another entity we all would argue that tokens are not Securities but a warrant a token warrant is without a doubt a security um this bring brings broker dealer rules into play uh and makes the whole process of raising Capital much much more risky um so instruments that pertain to both tokens and Equity sold by a us company are not the way you want to do this and we have case law on this the telegram case clearly lays this out so do not do a safe and a token warrant I tell this to all of my Founders and they will say to me constantly well that's what acrylic wants me to do that's what dragonfly wants me to do that's what poly chain wants me to do they're not your lawyers they don't care about you they don't care if you go to jail they don't care if you have fines they just want their returns they are not your friends your lawyer has a ethical duty to make sure you do things correctly so what do you do you have a if you're going to issue a non-price round you use a safe out of your us Co and you do a Saft out of an offshore entity uh this is by and way the fast the easiest and safest way to form uh to to to raise money with tokens and with Equity also before you start any of this you need to decide whether value acrs to the Token or to the equity or to both it might change the analysis slightly but if you're going to talk about both you need to split those instruments up so the offshore entities are expensive and I recognize that so a lot of C are forced to do at least a little bit of raising with a dual instrument so rather than a safe and a token warrant again a warrant is a security I can't emphasize that enough um a safe with a vague side letter that mentions tokens in a sort of abstract manner is far safer so this this is the structure this is how you do it use a company in Wyoming Wyoming is the safest place in America to issue uh to have any kind of T token project um from there you create a token issuance structure Foundation company in the Cayman Islands it has no owners and that is that is the intention of the the structure it owns a company in the Cayman that's the equivalent of uh C Corp in America and then that owns a token issuance entity in the BVI the BVI is the only place in the world that it makes sense to issue tokens from at this point hands down no exceptions that's where you [ __ ] do it um now we used to also throw the opco in the BVI but about two years ago they changed the way uh they changed the laws and they made it difficult for opos to function under the under the law there so we've added to our structure Panama is where you put your opco Panama does not regulate crypto and at least what you're doing there is not illegal in that country and that's about as good as you can get um you'll notice that there's a thing called a secretary and a supervisor those are third parties that you you pay for them um and you can also pay for a professional director um the secretary is mandatory and it's usually included in this in the formation fee uh the supervisor and the director I have some clients that just are the supervisor and their a director of their own project otherwise you hire somebody honestly hiring somebody is the better way to go um so token issuer it sells saps it does idos it does ieos devco project Co business Co whatever you want to call it in the US sells safe issues equities in a p in a priced round um whether or not you do both once you get past the bare minimum to like move stuff offshore if you you know it it entirely depends on your project but if you're going to have value accruit to both places that's how you do it um on top of that you need to do all of your Equity sales under regd which is an exemption to the uh to us Securities laws um 506c in particular and I know I'm saying a lot of jargon that you might not know either come up and talk to me afterwards or talk to your lawyer they'll know what I'm talking about uh but that's how you handle equity in America for your sales of tokens or your sales of safs token purchase agreements safs token warrants whatever um you want to rely be able to rely under reg s regulation s was designed to allow me an American to go to France or Canada Germany buy equity in a French German Equity uh Canadian company and not be regulated by the US it was not designed for the zoom age so so to make this work all of your purchasers should be offshore because you're probably sitting at your home in America or talking to a a fund that is domiciled in America uh so you want to be able to say that the solicitation didn't happen in America there's no real case law on that yet so what you need to do is make sure that the buyer and the seller so the seller in that case is BVI the buyer needs to be non-american as well uh this is the most defensible way to sell tokens by far quick note on safe and I only have a minute left uh post money safe investor friendly pre-money safe founder friendly investors will try and push you to sign postm money safes they will make it what sounds like compelling Arguments for you to do this especially firsttime Founders do not believe their lies post money safes give investors full ratchet anti delution protection at the expense of Founders and their employees you'll have to fight you'll have to stand your ground but ultimately that couple of percentage points that you save you and your team can be lifechanging some fund some angel investor making $100,000 checks those percentages aren't life-changing but they still want them so advocate for yourself have a spine and stand up for your Equity don't let them bully you trust me I seen it done and I've seen the the founders who do stand up for themselves eventually they have better relationships with their investors because they know that they can't be pushed around always push for pre-money safes uh and finally all right I didn't get to talk about the legal cost but do not spend $300,000 on your lawyer do not spend $500,000 on your lawyer these are all quotes that we've gotten this year they are insane it's malpractice uh you should spend no more than 50 Grand at and then likely about 30 um so if you're getting quotes like that you're being taken advantage of that's it thanks [Applause] guys