International Token Offerings by Indian Entities

6.7.1 Introduction: Cross-Border Token Offerings

Given the regulatory uncertainty and constraints in India, many Indian blockchain projects conduct token offerings through foreign entities to international investors. While this approach can provide regulatory advantages, it also creates complex multi-jurisdictional compliance requirements. Understanding both Indian outbound investment rules and foreign securities laws is essential for advising on international token offerings.

Why Indian Projects Go Offshore

Several factors drive Indian blockchain projects to conduct offerings internationally:

• Regulatory clarity: Jurisdictions like Singapore, Switzerland, UAE offer clearer token frameworks
• Access to capital: Global crypto-native investor base primarily outside India
• Exchange listings: Major crypto exchanges prefer non-Indian token issuers
• Banking access: Easier to maintain banking relationships in crypto-friendly jurisdictions
• Legal infrastructure: Established legal frameworks for token structuring

Key Jurisdictional Considerations

Multi-Jurisdictional Compliance Layers

International token offerings involve multiple compliance layers:

1. Indian Law: FEMA for outbound investment; Indian securities law if any Indian sales
2. Issuer Jurisdiction: Securities/token law where issuing entity is incorporated
3. Investor Jurisdictions: Securities law of each jurisdiction where tokens are offered
4. Exchange Jurisdiction: Regulations governing exchanges where tokens are listed
5. Founders' Personal Exposure: Personal liability in multiple jurisdictions

6.7.2 FEMA and Outbound Investment Rules

The Foreign Exchange Management Act, 1999 (FEMA) governs capital account transactions by Indian residents, including investments in foreign entities. Understanding FEMA is crucial because Indian founders participating in offshore token projects must comply with outbound investment regulations.

FEMA Framework Overview

FEMA replaced the restrictive FERA regime with a more facilitative framework, but capital account transactions remain regulated:

"4(a) Save as otherwise provided in this Act, rules or regulations made thereunder, or with the general or special permission of the Reserve Bank, no person shall - (a) deal in or transfer any foreign exchange or foreign security to any person not being an authorised person..." Section 4(a), FEMA, 1999

Overseas Direct Investment (ODI) Rules

Indian residents investing in foreign entities must comply with the Foreign Exchange Management (Overseas Investment) Rules, 2022:

Permitted Investments

• Investment in equity of foreign entity engaged in bona fide business
• Acquisition of foreign securities through legitimate modes
• Setting up Wholly Owned Subsidiaries (WOS) abroad
• Joint ventures with foreign partners

Key Limits and Conditions

• Annual limit: Up to 400% of net worth of investing company (under automatic route)
• Prohibited sectors: Real estate, banking (without RBI approval), financial services in certain cases
• Step-down subsidiaries: Additional compliance for multi-layer structures
• Reporting: Form ODI, Annual Performance Report (APR) requirements

Token Offerings and FEMA

FEMA implications for token offerings require careful analysis:

Scenario 1: Indian Company Issuing Tokens

• Foreign investors purchasing tokens from Indian entity = inbound investment
• FDI regulations may apply if tokens represent equity
• ECB regulations if tokens structured as debt
• Pricing guidelines may apply

Scenario 2: Indian Founders Setting Up Foreign Entity for Token Sale

• Investment in foreign entity = ODI
• Must comply with ODI Rules (Form ODI, reporting)
• Foreign entity can conduct token sale under local law
• Repatriation of proceeds subject to FEMA

Scenario 3: Indian Founders Receiving Token Allocation

• Tokens from foreign entity may be "foreign securities"
• Acquisition must comply with permissible routes
• Valuation requirements may apply
• Reporting obligations continue

Liberalised Remittance Scheme (LRS)

Individual Indian residents can use LRS for certain foreign investments:

• Annual limit: USD 250,000 per financial year per individual
• Permitted purposes: Investment in shares, debt, property abroad
• Crypto purchase: RBI has not explicitly included or excluded crypto
• TCS applicability: 20% Tax Collected at Source on LRS remittances over Rs. 7 lakh for certain purposes

6.7.3 U.S. Securities Law Exposure

The United States has the most aggressive extraterritorial reach in securities law enforcement. Even token offerings by non-U.S. entities can face SEC jurisdiction if U.S. persons participate or if there is sufficient U.S. nexus. Understanding U.S. securities law is essential for any international token offering.

SEC Extraterritorial Jurisdiction

The SEC claims jurisdiction over offerings with U.S. touchpoints:

• Sales to U.S. persons: Any sale to a U.S. person may trigger registration requirements
• Conduct in the U.S.: Significant conduct in U.S. related to the offering
• Effects in the U.S.: Foreseeable substantial effect on U.S. market
• U.S. issuer involvement: U.S. entities or residents as issuers or promoters

Regulation S Safe Harbor

Regulation S provides a safe harbor for offshore offerings that exclude U.S. persons:

"Securities offered and sold in accordance with the conditions of Regulation S shall be deemed to come to rest abroad and... not be deemed to involve 'any sale or offer to sell or offer to buy' of securities in the United States." 17 CFR 230.901

Category 3 Issuer Requirements (Most Restrictive)

For equity securities of non-reporting issuers (typical for token offerings), Category 3 requirements apply:

• Offshore transaction: Offer/sale must occur outside the U.S.
• No directed selling efforts: No marketing to or targeting of U.S. persons
• Distribution compliance period: 1 year for equity securities
• Certification requirement: Purchaser certifies non-U.S. person status
• Resale restrictions: Purchaser agrees not to resell to U.S. persons during restricted period
• Legend requirement: Securities bear legend regarding restrictions

Implementing Regulation S for Tokens

• Website geo-blocking for U.S. IP addresses
• Purchaser representations and certifications (checkbox is insufficient)
• KYC verification of non-U.S. status
• Smart contract enforcement of transfer restrictions
• Terms prohibiting U.S. resales during restricted period
• Exchange listing agreements to block U.S. trading

Regulation D for U.S. Private Placements

If U.S. sales are desired, Regulation D provides exemptions:

Rule 506(b)

• Unlimited amount from accredited investors
• Up to 35 sophisticated non-accredited investors
• No general solicitation or advertising
• Disclosure document required for non-accredited

Rule 506(c)

• General solicitation permitted
• Only accredited investors (verified)
• Reasonable steps to verify accreditation required
• More practical for token offerings with public marketing

AML/KYC Requirements

U.S. sales also trigger Bank Secrecy Act requirements:

• FinCEN registration as money services business may be required
• Customer identification program requirements
• Suspicious activity reporting
• Record keeping obligations

6.7.4 EU Markets in Crypto-Assets (MiCA) Framework

The European Union's Markets in Crypto-Assets Regulation (MiCA) creates the world's most comprehensive regulatory framework for crypto-assets. Understanding MiCA is essential for token offerings targeting EU investors or considering EU-based structuring.

MiCA Overview

MiCA establishes a unified regulatory framework across EU member states, effective from December 2024:

• Harmonized rules replacing fragmented national approaches
• Comprehensive coverage of crypto-asset types
• Authorization requirements for crypto-asset service providers (CASPs)
• Issuer requirements for public offerings
• Market abuse and consumer protection provisions

MiCA Token Categories

MiCA creates three categories of crypto-assets (excluding those qualifying as existing financial instruments):

1. Asset-Referenced Tokens (ARTs)

• Tokens referencing multiple currencies, commodities, or crypto-assets
• Stablecoins backed by asset baskets
• Stringent authorization and reserve requirements
• Issued only by authorized credit institutions or e-money institutions

2. E-Money Tokens (EMTs)

• Tokens referencing a single official currency (e.g., USDC, USDT)
• Must be issued by authorized credit/e-money institution
• Holders have redemption right at par value
• Significant EMTs face additional requirements

3. Other Crypto-Assets (Utility Tokens)

• Utility tokens and other crypto-assets not ARTs or EMTs
• Whitepaper requirements but lighter authorization
• Most ICO-style utility tokens fall here

MiCA Public Offering Requirements

For public offerings of crypto-assets in the EU:

Whitepaper Requirements (Article 6)

• Detailed information about issuer
• Project description and token characteristics
• Rights and obligations attached to crypto-asset
• Underlying technology description
• Risk factors
• Disclosure of conflicts of interest

Notification to Competent Authority

• Whitepaper submitted to home member state authority
• No approval required, but authority can object
• Publication requirements after notification

Marketing Communications

• Must be clearly identifiable as marketing
• Fair, clear, and not misleading
• Consistent with whitepaper
• Risk warnings required

CASP Authorization

Crypto-Asset Service Providers require MiCA authorization:

6.7.5 Singapore Framework

Singapore has emerged as a leading jurisdiction for token offerings due to its clear regulatory framework, strong rule of law, and business-friendly environment. Understanding the Monetary Authority of Singapore's (MAS) approach is essential for Indian projects considering Singapore structuring.

MAS Token Classification

MAS uses a functional classification approach similar to other jurisdictions:

Securities Tokens

• Tokens representing shares, debentures, or CIS units
• Regulated under Securities and Futures Act (SFA)
• Prospectus requirements for public offers
• Exemptions available (small offers, institutional, etc.)

Payment Tokens

• Tokens used as medium of exchange or store of value
• Regulated under Payment Services Act (PSA) 2019
• Digital Payment Token (DPT) service providers need license
• AML/CFT requirements

Utility Tokens

• Tokens providing access to products/services
• Generally not regulated if purely utility
• May still be regulated if used as payment or has security features

SFA Prospectus Exemptions

Security token offerings may utilize SFA exemptions:

Small Offers Exemption (Section 272A)

• Personal offers to no more than 50 persons in 12 months
• Maximum S$5 million raised in 12 months
• No advertising permitted

Private Placement Exemption (Section 272B)

• Offers to institutional investors and accredited investors
• No limit on amount raised
• Accredited investor: net assets > S$2 million, income > S$300,000

Institutional Investor Exemption

• Offers solely to institutional investors
• Banks, funds, insurance companies, etc.
• No prospectus required

Payment Services Act Licensing

DPT service providers require PSA license:

Singapore Foundation Structure

Many token projects use a Singapore foundation (Company Limited by Guarantee):

• No shareholders - members guarantee limited liability
• Not-for-profit structure (but can conduct commercial activities)
• Governance by constitution and directors
• Used to hold treasury, fund development, govern protocol

6.7.6 Structuring Options for Indian Projects

This section examines common structuring approaches for Indian blockchain projects conducting international token offerings, analyzing the legal, tax, and practical considerations of each structure.

Structure 1: Singapore Foundation + Operating Company

Configuration

• Singapore Company Limited by Guarantee (foundation) as token issuer
• Singapore or India operating company for development
• Indian founders as directors/members of foundation
• Service agreement for development services

Advantages

• Clear regulatory framework under MAS
• Tax neutral for foundation (non-profit)
• Strong legal system and enforceability
• Geographic proximity to India

Considerations

• Substance requirements in Singapore
• FEMA compliance for Indian founders' participation
• Transfer pricing for intercompany arrangements
• Ongoing compliance costs

Structure 2: Cayman Foundation + BVI Company

Configuration

• Cayman Foundation Company as token issuer
• BVI company as operating entity
• Minimal substance requirements

Advantages

• Tax neutral jurisdictions
• Minimal regulatory requirements
• Established in crypto industry
• Foundation structure available

Considerations

• Reputation concerns (perceived as offshore)
• Banking access challenges
• Economic substance requirements increasing
• May face enhanced scrutiny from regulators

Structure 3: UAE Free Zone Structure

Configuration

• ADGM or DIFC licensed entity
• Comprehensive crypto regulatory framework
• Physical presence in UAE

Advantages

• Growing crypto hub with regulatory clarity
• Zero corporate and personal tax
• Geographic proximity to India
• Modern legal framework (common law based)

Considerations

• Licensing requirements and costs
• Physical presence requirements
• Relatively new regime with limited track record

Structure Comparison

6.7.7 Cross-Border Compliance Matrix

This section provides a practical compliance matrix for international token offerings, summarizing key requirements across major jurisdictions and identifying the documentation and procedures needed for multi-jurisdictional compliance.

Pre-Launch Compliance Checklist

Entity and Structure

• Issuing entity established in chosen jurisdiction
• Corporate governance documents (constitution, articles)
• Director/member appointments completed
• Bank account opened (challenge for many crypto projects)
• FEMA compliance for Indian founder participation (Form ODI if applicable)

Token Classification

• Legal opinion on token classification in issuer jurisdiction
• Assessment of classification in target investor jurisdictions
• Documentation of analysis methodology

Offering Documents

• Whitepaper meeting jurisdictional requirements
• Terms and conditions / Token Purchase Agreement
• Privacy policy
• Risk disclosures
• Jurisdictional restrictions clearly stated

Jurisdictional Compliance Summary

Ongoing Compliance Obligations

Issuer Jurisdiction

• Annual filings and returns
• Director/member changes reported
• Financial statements (may be required)
• Regulatory filings (if licensed)

FEMA (Indian Founders)

• Annual Performance Report (APR) for overseas investment
• Report material changes to RBI
• Repatriation compliance when funds return to India

Token Holder Communications

• Material event disclosures
• Development updates
• Governance proposals (if applicable)
• Tax information for holders

Risk Mitigation Strategies

Documentation

• Maintain comprehensive compliance file
• Document all regulatory analysis and decisions
• Preserve marketing materials and communications
• Record investor verification procedures

Professional Advisors

• Engage local counsel in issuer jurisdiction
• Obtain opinions on key regulatory questions
• Involve tax advisors for cross-border structuring
• Consider regulatory liaison services

Technical Controls

• Implement geo-blocking for restricted jurisdictions
• KYC verification with identity confirmation
• Smart contract transfer restrictions where required
• Audit trail for all transactions