“Every founder needs to read this” Ryón Nixon Explains How to Navigate Crypto Legal Structuring in 2023 - Flywheel #61

Samuel McCulloch
Samuel McCulloch
July 19, 2023
“Every founder needs to read this” Ryón Nixon Explains How to Navigate Crypto Legal Structuring in 2023 - Flywheel #61

Starting a crypto project can be daunting.

While dodging North Korean hackers, MEV searchers, and chat room scammers, focusing on the basic stuff such as company setup might get lost in the sauce.

It's strange sometimes in crypto that founders say "Deploy first, figure it out later." While code might be law on-chain, the police, and lawyers who live off-chain probably have some different ideas around legality and rights.

Portrait of Ryón Nixon
Portrait of Ryón Nixon

When Gary G is trying to shut every rogue crypto company down, the best thing to do is to speak with a lawyer like Ryón Nixon, head of Horizon's Law based in Miami.

Ryón is a seasoned veteran of Flywheel now, making his second appearance to discuss four major questions he's been hearing from founders in these regulatory uncertain times.

So let's dig into the five questions

1.) Can I raise money as a crypto project/founder in the United States?

For all of Gensler's huffing on cable news, YES, you can raise money as a crypto project inside the United States.

Ryón helps a ton of companies every day to set up and raise capital. The United States is the center of the financial universe and while the FUD coming from the SEC has shifted narratives over the last year or two, good projects can still get the money they need to grow.

Projects are leaving the US, but they don't have to.

It's completely fine to raise capital in America with Reg D and Reg S exemptions. These are securities offerings to US and foreign investors that don't have to go through a lengthy process of getting SEC approval to raise money. Reg D is for US persons and Reg S is for foreigners. Reg D does have some restrictions that Reg S doesn't, notably any tokens sold must be locked up for at least a year before they can trade on secondary markets.

Teams and Founders can also receive tokens, but they should be treated the same as Reg D, by locking them up for 1 year. Ryón's advice, “LOCK IT UP”

2.) What structure should I use to raise money?

Founders use a variety of financial instruments and structures to raise capital. Over the past few years, trends have changed and what worked in 2017 would be very risky today.

When you go to raise, you're going to use either a SAFT, SAFE + Token Warrant, or a priced equity round.


A Simple Agreement for Future Tokens (SAFT) is an agreement that swaps cash for future tokens. SAFTs were super hot in 2017. All the big projects used them, but since they only sold tokens, it was easier for them to be scrutinized by the SEC as securities sales. Ryón said these agreements are mainly used by teams with no US exposure. Euros love the SAFT because it's easy and works within their clear regulatory structure.

One issue with SAFTs is they don’t necessarily guarantee a token ever has to be released. SAFTs are long documents, 30 pages or more, and while they pack a ton of risk factors in, they eschew any future statements that could be misconstrued as a security. It's all about positioning with SAFTs, "If we release a token, we'll give it to you, but if we don't, well thanks for the money."

SAFEs + Token Warrant

What's popular in 2023 are Simple Agreements for Future Equity (SAFEs) with an accompanying token warrant. Investors buy both the warrant and the SAFE, but the bulk of invested capital goes towards equity purchase, so the warrant is less likely to be viewed as a securities offering. It's super popular right now for US founders. We'll talk about this in the next section on structuring, but crypto development companies can easily raise equity, and then create tokens they give through the warrant. It's a relatively simple process.

Priced Equity Rounds

A throwback to pre-crypto VC days. These are more typical funding rounds that cost a lot more, but they provide equity directly upon purchase. Since they don't have tokens involved, they usually are built for growing the development company.

3. What does the company structure look like?

Now is when we start to get more nuanced, only because at this point, structures tend to go international in multiple jurisdictions. Delaware, the Cayman Islands, the British Virgin Islands, Switzerland, Singapore, etc. Each locale has its flavor of crypto rules, regulations, and entity structuring.

Ryón drew us a map.

Crypto legal structuring BVI Cayman DAO
A nice little diagram of how many crypto projects are structuring in 2023.

Here's how it goes.

  1. US DevCo - Founders + Employees get paid out of here. Functions like a normal US corporation. DevCo has access to US banking system for fiat payments when necessary.
  2. Cayman Islands Foundation Company - Overseen by independent director, acts at the direction of the DAO, and provides some degree of indemnity and limited liability for token holders. DAO treasury is held here.
  3. British Virgin Islands Subsidiary - Tokens are issued from this entity. When the token warrant is exercised, the BVI entity is the one who fulfills it.

What about Switzerland? Okay, so while some believe that the Swiss have the gold standard for company structuring, they have expensive, constant, highly invasive reporting and monitoring. Projects can't raise stablecoins, has to be cash and the money must sit in a Swiss bank account (also hard to open). Lastly, ongoing compliance is needed to prove non-profit status. Dissolving a Swiss foundation is also a pain. Only look to Aragon DAO to see the weird governance disagreements between the DAO and the foundation.

In Cayman and BVI, costs are lower, it is easier to get back accounts, and reporting requirements are reduced. This is why Ryón mostly deals with these regions for the companies he represents.

4. What happens when the SEC comes knocking on my door?


Jokes aside, when the SEC comes-a-calling, it's not always to sue you into oblivion and put your face in the New York Times as the latest crypto founder to be Genslered.

Sometimes the SEC just wants to ask some questions. At first, they send an info request as a letter to start an informal investigation. They ask questions, which a good attorney like Ryón can answer. Don't go at it alone, get a lawyer.

If the SEC ghosts you then you passed the test. But at the same time, it means they are keeping the door open to further investigation. While you are not required to respond to these fact-finding requests, it's best to respond to the SEC's questions. There are ways to deal with an info request without getting into deep trouble with the SEC.

In this next phase, they stop being cordial and start sending subpoenas and Wells notices. At this point, you have to comply and submit what they request. Non-compliance can lead to civil penalties or even criminal contempt charges for not responding or making false statements.

The last phase is enforcement actions. At this point, you've broken the law and the SEC sends in the valkyries! The entire commission has reviewed your case and decided to charge you with breaking federal securities laws. Penalties can range from cease and desist orders, to written agreements, industry bans, and civil money penalties. A good lawyer should prevent you from ever getting to this point.

Sometimes though an army of lawyers can't stop the SEC. In the case of Coinbase and Binance, the two largest crypto exchanges in the world, the SEC reached out exactly as we described. Both companies cooperated and turned over the documents requested. Then a few months later they got Wells notices. Now the SEC is suing both companies and trying to bring enforcement actions against them.

5. How can we do better as an industry?

The best way to grow is with sunshine and transparency. All of the terrible companies that failed in the last cycle, FTX, Celsius, etc., all had private books that obfuscated the fraud being perpetrated. Retail public needs full disclosure from DAOs and teams as to how money is spent. Sensitive info doesn't have to be released, but there is no reason why companies should hide everything internally. For example, projects can document team and investor vesting info, how the token works, what is the DAO, etc.

One of Gensler's opinions, which Ryón agrees with, is that we need more disclosures and transparency. Frax is a perfect example. Its entire balance sheet is on-chain. Every dollar is accounted for at all times on Frax Facts. The code is open source. Full transparency all the time.

As mentioned many times in the interview: none of this is by any means legal advice. Please consult with a legal advisor, lawyer, or legal counsel if you have any questions or concerns. If you want to hire Ryón, you can directly contact him!

https://horizonslaw.io/ | @ryonnixon on twitter

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