Establishment of a Company using Cryptocurrencies as a Contribution

Michael Barmettler
Michael Barmettler
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The Swiss Code of Obligations (CO) provides the possibility of using different forms of contributions (cash or non-cash) for the formation of a public limited company or a limited liability company. This blog post is intended to show how cryptocurrencies can be used to establish a company.

Cash Contribution

In the case of a cash deposit, it is necessary to use a legal tender. The issued coins of the Confederation, the banknotes of the Swiss National Bank (SNB) and the sight deposits denominated in francs at the SBN qualify as such. As a rule, cryptocurrencies are not issued by a state, so in a legal sense they cannot (yet…) be considered legal tender. Nevertheless, the Federal Council qualified in its report on blockchain that cryptocurrencies can be considered as "money in the broadest sense".

Furthermore, according to Art. 633 para. 1 CO, a cash deposit must be made with an institution that is subject to the Federal Banking Act. Since it is still very difficult to find a Swiss bank that offers accounts for cryptocurrencies, the cash deposit by means of cryptocurrencies has fallen by the wayside in practice. Especially since a fundamental idea of many crypto companies will probably be to act independently of the current banking system.

Contribution in Kind

Article 634 CO sets out the requirements for a contribution in kind. A contribution in kind is given when goods or other assets are transferred to the company to be founded. The contribution must cover the nominal value of the shares to be issued. The requirements for a contribution in kind are significantly higher than those for a cash contribution. This is because the valuation of the contribution in kind is more difficult. From the practice of the commercial registry offices and the doctrine, four cumulative requirements have emerged that must be fulfilled. In future, these requirements are to be set out in the law (cf. Art. 634 new CO).

1. Activation

First, the deposited object must be able to be sold profitably in legal transactions. In the case of established cryptocurrencies such as Bitcoin, Ethereum or Litecoin (the list is not exhaustive), this can be affirmed, as they can be traded on corresponding crypto exchanges at any time. Since in practice there are (or can be) always strong price fluctuations, it is advisable to provide a higher deposit than effectively necessary. This is especially true for younger cryptocurrencies, as they are more volatile. This ensures that on important key dates (notarisation of the foundation, entry in the daily register of the respective commercial register, approval by the EHRA), there is no below par issuance.

2. Free Transferability

Second, the deposited object must be freely transferable. Cryptocurrencies can be freely transferred. This can be done by means of a transaction to the recipient's wallet. Free transferability would no longer exist if regulatory measures (e. g. from the MLA) were taken or the transfer were prohibited in several countries.

3. Free Availability

Third, the deposited object must be freely available. This point can be affirmed if the wallet including the private key is in the freely available sphere of power of the founders. Whether one or several founders have access to the wallet is irrelevant.

4. Free Usability

Fourth, the deposited object must be freely usable. In order to fulfil this requirement, it must be possible for the contribution in kind to be transferred to third parties and proceeds to be generated from this. With the most common cryptocurrencies, this is readily available, as various crypto exchanges provide a buyer market for this.

Further Requirements

According to Art. 634 et seq. CO, there are other requirements when establishing a company with cryptocurrencies. They include:

Contribution in Kind Agreement

The contribution in kind agreement regulates the conditions under which the goods or other assets, in our case the cryptocurrency, are transferred to the company. To be able to counteract potential price fluctuations, it is advisable to include a "safety margin". This means that the value of the chosen cryptocurrency should clearly exceed the legal contribution obligation (such as the obligation to contribute CHF 100,000.00 in the case of the full liquidation of a Ltd.). In the designation of the cryptocurrency and the corresponding value, a provision can be inserted that the surplus is to be allocated to the capital contribution reserves. Since the contribution in kind must be in the freely available sphere of power of the founding company, the concrete transfer to this sphere must be ensured. In practice, this can be solved by means of a multisig wallet. In this case, the majority of the access keys are held by the founding company. This ensures that the contribution in kind is within the sphere of power of the founding company. Alternatively, the cryptocurrencies can be located on the personal wallets of the non-cash contributors, in which case the founding company must be granted irrevocable authority to dispose of the cryptocurrencies immediately after entry in the commercial register.

Formation Report

In the formation report, the founders give an account of the nature of the contribution in kind and its condition. The exact designations of the cryptocurrencies and the corresponding value must be listed in the formation report. If the requirements for a contribution in kind are not obviously fulfilled, it must be described why they are fulfilled.

Audit Certificate

The audit of the formation report must be carried out by a licensed auditor, regardless of whether the company is subject to audit or not. The procedure for this audit is the same as for traditional contributions in kind, such as a car or jewellery. From a material point of view, the audit is decisive in that the certifying officer, as well as the commercial register, may rely on the auditor's findings.

Duty of Disclosure

Swiss company law requires the disclosure of the cryptocurrency asset in various places. This serves to protect creditors and a higher level of transparency is achieved. In particular, the fact that the company has been paid up using cryptocurrencies is made public. The most central provisions are:

  1. Art. 628 para. 1 CO: The statutes must show the object of the contribution in kind, its valuation, as well as the name of the contributor and the shares to which he is entitled.
  2. Art. 634 para. 1 CO: The conclusion of a contribution in kind contract is required it must describe the object of the contribution in kind as a necessary content of the contract.
  3. Art. 635 para. 1 CO: The formation report must give an account of the nature and condition of the contribution in kind and the appropriateness of the valuation.
  4. Art. 14 HRegV (commercial register regulation): The fact that a contribution in kind has been made appears in the Central Company Index (Zefix). Both the object of the contribution in kind and the shares issued for it are published.

Pursuant to Art. 11 HRegV, the above-mentioned points 1-3 may be inspected at the respective commercial registry office or extracts thereof may also be ordered. Since the revision of the commercial register law, it is possible to access the company's statutes on the internet from 1 January 2021. Most cantons have however not yet provided the necessary eletronic access.

The explanations given in the blog cannot cover all cases in practice. An examination of the individual case and sound advice are therefore absolutely necessary. In addition, one must bear in mind that the commercial registers are not very often confronted with such topics.

 
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