Whenever asked how to start a Web3 project, attorney Mankiw usually recommends considering setting up a "fund" or "foundation" as the first step to compliance. However, these two organizational forms, which differ by only one letter, often make people confused: When should I choose a fund? When should I choose a foundation? What different regulatory rules need to be dealt with when establishing them?
In fact, whether in traditional industries or crypto industries, "funds" and "foundations" are similar in name, but they are essentially very different. At the same time, for Web3 projects, choosing a fund or foundation will not only affect the daily operating model, but also affect compliance in places such as Hong Kong. Therefore, Attorney Mankiw has specially compiled this article to help you understand the differences between the two organizations from three aspects: functions, application scenarios, and regulatory requirements , so as to find the best path to support the long-term development of the project while achieving compliance.
What is a crypto fund?
Simply put, crypto funds are a form of collective investment that is profit-oriented and focuses on crypto asset investment. Its core is to achieve capital appreciation by raising capital and investing in high-growth potential areas such as digital assets and blockchain projects, which also caters to the needs of investors who hope to obtain high returns through the crypto market. Compared with traditional funds, crypto funds have higher flexibility in management strategies and can quickly adapt to the high volatility and global characteristics of crypto assets, but also bring new compliance and risk management challenges.
Typically, crypto funds allocate investors’ capital to crypto assets and projects with greater potential, such as investing in blockchain startups in popular sectors, participating in diversified cryptocurrency trading strategies , or joining DeFi projects for staking , lending, or liquidity mining . These highly flexible methods of operation are very suitable for investors who need fast capital turnover, and can also profit from the volatility of the crypto market.
However, the high volatility and cross-border nature of the crypto market means that investors face higher uncertainty while pursuing high returns. Although market risks cannot be completely avoided, compliance operations can be effectively controlled. For many Chinese funds, Hong Kong's policy environment provides a relatively stable compliance path for crypto funds. Specifically, what are Hong Kong's regulatory requirements for crypto funds?
Get a license plate number 9
Setting up a crypto fund in Hong Kong usually requires applying for a Category 9 (asset management) license, especially when the investment portfolio involves securities, futures contracts or virtual assets (such as Bitcoin, Ethereum). Such a license is not only the basis for legal operation, but also shows that the fund management team has professional qualifications in investment strategy, compliance and risk management, in compliance with the regulations of the Hong Kong Securities and Futures Commission (SFC).
The SFC will also focus on the company's operational processes in portfolio management, asset custody, valuation procedures, etc., to ensure that the fund meets compliance standards in information technology and security controls. The asset management process and transparency are also key areas of the SFC's review to ensure the rights and interests of investors.
Fund Structure and Compliance
When setting up a crypto fund in Hong Kong, choosing the right fund structure not only affects the operating model, but is also directly related to compliance and regulatory requirements. Generally, in Hong Kong, the organizational structure of a fund is generally divided into:
Unit Trust
The fund assets are managed by a trust company, and investors obtain indirect ownership of the fund assets by purchasing unit shares, which is particularly suitable for capital-intensive fund operations. If you want to set up a unit trust, you must ensure that the fund assets are managed by an independent trust company, targeting qualified investors (such as high net worth individuals or institutions) that meet the requirements of the Hong Kong Securities Regulatory Commission, and follow transparency requirements and regularly disclose financial status, fund performance and risk management strategies to investors.
Open-Ended Fund Company (OFC)
OFC is a corporate structure that can flexibly issue and redeem shares. It is an independent legal entity, and its board of directors is responsible for the daily management and compliance supervision of the fund. Hong Kong's regulatory requirements for OFC include: the need to establish a board of directors, and the board members must have fund management experience and meet the SFC's qualification requirements; OFC can choose an open or closed operating model, and open OFC must establish a redemption arrangement; an independent auditor must be appointed to conduct an annual audit of OFC's financial statements; and the minimum capital requirements must be met and a capital adequacy certificate must be submitted to the SFC.
Limited Partnership
The limited partnership structure usually consists of a general partner (GP) and a number of limited partners (LPs). The GP is responsible for the daily operations and decision-making of the fund, while the LP enjoys limited legal liability as a passive investor. The limited partnership structure is widely used in private equity and illiquid asset investments. The establishment of a limited partnership requires a detailed partnership agreement to clarify the rights and obligations, profit distribution and exit mechanism of the GP and LP; provide financial reports, investment performance and risk assessment information to LPs on a quarterly or annual basis; and formulate risk control mechanisms and clearly list them in the partnership agreement, especially in cross-border investments and crypto asset operations.
Fund management team and service providers
The Hong Kong Securities and Futures Commission requires crypto fund management teams to have professional experience in crypto asset management, especially to ensure that managers in key positions have compliance and risk control capabilities, such as department heads, team leaders and key investment personnel. During the review, the focus will be on whether these members have more than 3 years of experience in crypto asset management (especially experience within the last 6 years). In addition, crypto funds need to employ multiple service providers, including custodians, fund administrators and auditors, to ensure the legality and compliance of fund operations.
Fundraising and Promotion Compliance
The fundraising of crypto funds must be conducted in a non-public manner, such as through private communication or industry conferences, to avoid the regulatory risk of illegal fundraising due to public publicity. In addition, the fund's investors must meet Hong Kong's qualified investor standards, which not only avoids the legal risks of illegally absorbing public deposits, but also further guarantees the professionalism of investors. To enhance transparency, crypto fund managers must also regularly disclose key information to investors, including financial statements, risk warnings, and investment strategy adjustments, to protect investors' right to know and decision-making information.
Other regulatory requirements
Anti-Money Laundering (AML) and Customer Due Diligence ( KYC ) : To prevent illegal funds from entering the crypto market, crypto funds must comply with Hong Kong's AML and KYC regulations. Management companies are required to conduct strict identity verification and risk assessment of investors to ensure the legitimacy of the source of funds. These compliance measures typically include hiring dedicated compliance officers, establishing internal review procedures, and using technical means to monitor capital flows to meet the SFC's compliance requirements.
Tax compliance : Hong Kong’s tax policy towards crypto funds is relatively friendly, and offshore funds can enjoy tax exemption, but the specific application still needs to be determined based on the fund’s investment type and operation location.
What is a Crypto Foundation?
Crypto foundations operate in a completely different way. As the core of Web3 project support, crypto foundations are non-profit-oriented organizations, usually initiated by blockchain projects, aiming to help blockchain projects and their ecosystems achieve long-term and healthy growth through ecosystem funding , community building , education and promotion , and industry standard setting .
For example, the recently released Ethereum Foundation 2024 Annual Report details its organizational structure and operating model. Attorney Mankiw has also written an article analyzing the foundation's compliance model. If you are interested, you can read " Web3 Lawyers: Understanding the Ethereum Foundation 2024 Report and Meeting the Compliance Challenges of the Trump Era ". This non-profit nature not only determines the way the foundation uses funds, but also has obvious differences from crypto funds in terms of compliance and supervision.
So, if you want to set up a crypto foundation in Hong Kong, what regulatory requirements do you need to pay attention to?
Foundation Registration
In Hong Kong, crypto foundations are usually registered in the form of Company Limited by Guarantee to clarify their non-profit nature. Therefore, when registering, the foundation needs to submit a non-profit certificate, detailing the source, purpose and management of funds to ensure that it meets non-profit goals and regulatory requirements.
Board of Directors and Governance Structure
The Hong Kong Companies Ordinance requires that foundations establish an independent and transparent board of directors, with qualified directors responsible for the foundation's daily management and compliance supervision. Board members must have relevant legal, financial or management experience and integrity, be able to strictly perform their duties, effectively manage the foundation's operations, and ensure the transparency of its funds. At the same time, directors must also assume fiduciary responsibilities, ensure compliance with the use of funds, and be responsible for the foundation's operational decisions.
Fund Management and Anti-Money Laundering (AML) Requirements
Although the foundation is non-profit oriented, it still needs to comply with Hong Kong's anti-money laundering (AML) and customer due diligence (KYC) requirements. For example, the foundation needs to strictly review large donations and cross-border funds to prevent illegal capital inflows. At the same time, the foundation's funds must be used exclusively for non-profit activities such as ecological construction, community funding, and industry promotion. Income or surplus may not be used to distribute personal benefits to shareholders or members. To this end, the foundation needs to set up a dedicated compliance department and employ professionals to review the source and use of funds.
Disclosure and transparency
In order to maintain public trust in non-profit organizations, according to the provisions of the Companies Ordinance, crypto foundations must regularly disclose financial information to the public or regulators, such as annual reports, including sources of funds, usage, project progress and annual activity summaries, to enhance the transparency of the organization. It should be noted that financial reports must be professionally audited and comply with Hong Kong's accounting standards in order to be subject to public supervision.
Tax Compliance
As a non-profit organization, crypto foundations can apply for Hong Kong's profit tax exemption, but the premise is that the income is only used for foundation projects and cannot be distributed to individuals. The foundation must strictly follow non-profit regulations and avoid participating in profit-making activities such as fundraising, so as to meet the tax exemption requirements and save costs for the project.
Choose a fund or a foundation?
At different project stages and development needs, choosing to set up a crypto fund or crypto foundation will have different effects. Both have their own advantages in terms of compliance paths, organizational forms and fund utilization in Hong Kong. Therefore, it is very important to choose according to the actual goals of the project. The initial suggestions that Mankiw can give are:
Situations where crypto funds are suitable
For Web3 projects that focus on investment returns and hope to achieve rapid growth in the short term, crypto funds are undoubtedly a more appropriate choice. Generally, such projects have several characteristics: first, a clear profit orientation, second, high requirements for fund liquidity, and third, suitable for the use of diversified investment strategies. Such projects often focus on seizing profit opportunities in market fluctuations or rapidly expanding the scale of projects through capital promotion.
For example, many DeFi platforms, crypto asset management projects, and high-frequency trading platforms require efficient fund management to maintain market competitiveness. In particular, DeFi projects that focus on liquidity mining and decentralized lending rely on flexible capital allocation to quickly adjust strategies when market conditions change. Through the form of crypto funds, these projects are able to attract professional investors and achieve higher capital investment, thereby gaining an advantage in a dynamic market.
In addition, those who are interested in and optimistic about innovative Web3 projects (such as Layer 2 solutions) will usually choose to invest through crypto funds. Since such projects are high-risk and innovative, crypto funds can attract investors who seek high returns and provide flexible financial support for projects, so that they can obtain greater financial guarantees for expansion and technological research and development, while providing investors with diversified investment opportunities to achieve a win-win situation for capital and projects.
Situations where crypto foundations are applicable
For Web3 projects whose core goals are ecological development, long-term community support, and the establishment of industry standards, crypto foundations are clearly a more appropriate choice. Such projects usually focus on community governance, knowledge sharing, and industry development, aiming to create an open, transparent, and sustainable ecosystem. The non-profit nature of the foundation enables it to focus on these more socially and industry-valuable goals, avoiding excessive profit-oriented interference.
For example, many Layer 1 public chain projects will choose to set up foundations to promote the prosperity of the ecosystem, such as the Ethereum Foundation and the Polkadot Foundation. The goal of such projects is not short-term profits, but to consolidate the technical foundation and application scenarios by funding developers, supporting research projects, and promoting educational activities. The structure of the crypto foundation can attract long-term investors who value community governance and industry prospects, so that projects can obtain more extensive resource support when building an ecosystem.
In addition, DAO projects for decentralized governance are also very suitable for operation through foundations. Foundations are not only fund managers, but also important promoters of community development. They can provide support to DAO members through reward programs, technical funding and industry activities, helping their communities to develop steadily in an environment without centralized control.
As a global financial center, Hong Kong's open policy towards the crypto industry provides unprecedented opportunities for Web3 projects. For Web3 projects that hope to operate in compliance in Hong Kong, crypto funds and crypto foundations are undoubtedly the ideal starting point for compliance. Based on this article, Mankiw hopes to give some tips and help to all Web3 projects that plan to develop in compliance in Hong Kong, and also do his best to contribute to the compliance of the entire industry.
