https://www.youtube.com/watch?v=neVI0GZc_S8&t=39s
Cryptocurrency attorney Adam S. Tracy offers guidance on managed crypto wallets.
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A former competitive rugby player, serial entrepreneur and, trader attorney, Adam S. Tracy offers over 17 years of progressive legal and compliance experience in the areas of corporate, commodities, cryptocurrency, litigation, payments and securities law. Adam’s experience ranges from commodities trader for oil giant BP, initial public offerings, M&A, to initial coin offerings, having represented both startups to NASDAQ-listed entities. As an early Bitcoin adapter, Adam has promoted growth of cryptocurrency and offers a unique approach to representing crypto-clients. Based in Chicago, IL, Adam graduated from the University of Notre Dame with dual degrees in Finance and Computer Applications and would later obtain his J.D. and M.B.A. from DePaul University. Adam lives outside Chicago with his six animals, which is illegal where he lives.
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TRANSCRIPTION:
So manage wallets, you know, you get that phrase — kind of new thing — where individuals want to effectively give another party control of their wallet, and then they’ll invest for them. Well, the problem is if you’re doing that you’re probably triggering some licensure requirement. Bitcoin has obviously been a commodity since 2014 since the CTFC claimed. They haven’t done a lot in of enforcement, but technically it’s a commodity. If you’re managing somebody’s Bitcoin accounts, you’re acting as an unregistered commodities broker. Same with, you know, other coins, especially ICO tokens that are securities. If you’re doing the same thing — managing while taking a commission, right, or taking a percentage of assets under management — then you’re either acting as an unlicensed securities broker or you’re acting as an unlicensed investment advisor. So in each case, it’s problematic. So the managed wallet thing is very very difficult to do. If you want do it, you have to sort of change the way you work on compensation, and it’s got be a flat fee. It can’t be tied to a particular transaction and it shouldn’t pool assets. The custody needs remain with the actual customer, right? And that’s only way to do it. And you can sell, you know, de facto data, right, your investment advisory services, your investment picks, things of that nature, but you can’t work off a commission basis. You can’t work off assets under management basis because again, you know, in my opinion you’re looking like either a commodities broker, securities broker, or investment advisor, and you probably aren’t licensed to act in either capacity.
So what’s the solution, right? What is the solution? You have all these people who want get in. And I get where the sort of managed wallet is a good handling process — it allows people access, right, who otherwise wouldn’t, you know. And that makes sense to me because overwhelmingly, you know, the crypto coiners are younger people who are probably tech-savvy so, you know, use my father as a litmus test, right, I mean he’s seven years old, he’s not going open an account at crack and then start trading. That will never happen. But, you know, conceivably he would be the one who would want access the crypto markets some way. So the managed wallets are all good. There just isn’t a regulatory framework where you can really do that hand-holding, and earn a commission or assets under management like the way you want do it. So the solution really and only, in my opinion, absent having license being affiliated with a license firm or an NFA license firm, is a hedge fund. Right? And you effectively have to go back to this hedge fund model. And the most base level structure for a hedge fund is really no different than what you encounter in equity world. I get this question all the time. What do I need to do? What I need to do? Well, the simplest structure, right, the base level hedge fund structure is to create a limited partnership, which represents the fund. The fund is where people invest, whether it’s in crypto, whether it’s in Fiat, they invest into the fund. And what are they buying? They are receiving a limited partnership unit as pro rata interest in that partnership, right? They are no longer, you know, they’re not purchasing a token. They’re not purchasing stock in company. They’re purchasing a partnership unit, and that partnership is the conduit — the fund, you know, through which the pooled the pooled assets invest in cryptocurrency, whatever the case may be. How that works is that the management company, typically the fund promoter, creates a separate entity like an LLC, and pursuant to an agreement with the partnership which obviously the fund founder sort of negotiates drafts and puts together before soliciting and investors, they are in a return for their work managing that pool funds or that pool of crypto. And that allows you (because is a private transaction, this is private partnership, this is a private offering of securities) it allows you take a percentage of assets under management. Like in a typical equity world, it’s 2% of the assets under management plus 20% of the prophet of the fund. Well in crypto, I’ve seen it go up to like 3–4% of the assets under management per year plus 30–40% of the profits of that fund, and that gets paid to the management company, which is the fund promoter. So it’s a very simple simple thing to do. You got it a limited partnership, typically a limited liability company, management company, a management agreement, operating agreement for the LLC, limited partnership agreement for fund, and then obviously you need some sort of offering memorandum for the the fund investors, because again they’re buying tokens — what they’re buying is a limited partnership unit, which is decidedly an offering of security. Now, obviously that triggers regulation D and the accredited, non-accredited delineation which, you know, I’ll hit on a subsequent video, but you know on the whole right if your objective as wanting to be crypto advisor is predicated upon you earning a percentage of assets under management or a percentage of profit, you know, absent having this license you have to jump in at this hedge fund model because it’s the safest, cleanest, and probably the only truly legal way you can do it. Now obviously, I’ll acknowledge the fact that cryptocurrencies, like Ripple and such, they’re undefined. But the reality is that window is going to close so, you know, I think setting up these funds especially if you do it domestically and even internationally, where you use a country like Nevis or Belize where they have very low cost for formation, you can create a very very basic hedge fund structure, keep yourself legally compliant, avoid acting in an unregistered unlicensed capacity, and still do what you want to do, which is earn maximum profit. And you are allowed to take what is ultimately a very large chunk of profit plus just a straight administrative fee to sort cover your costs associated with it. So if you’re looking to open a fund, give me call — happy to run through it in greater detail. Until then, I’ll talk to you.
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