Kilian Schärli Jonas Schütte July 19 2022 Cryptocurrencies as contribution in kind for foundations and capital increases – part two MLL Meyerlustenberger Lachenal Froriep Ltd | Banking & Financial Services - Switzerland Kilian Schärli, Jonas Schütte Banking & Financial Services Design of formation and capital increase processCommentThis article is part of a series on cryptocurrencies as contribution in kind for foundations and capital increases (for the first article in the series, see "Cryptocurrencies as contribution in kind for foundations and capital increases – part one"). In particular, this article examines the individual (practical) aspects of the formation or capital increase process in more detail.Design of formation and capital increase process Establishment The (qualified) formation of a stock corporation by contribution in kind is, like the formation in cash, subject to notarisation. Firstly, the documents generally required for the formation in cash pursuant to article 43(1) of the Commercial Register Ordinance (HRegV)(1) must be submitted to the Commercial Register – namely:the public deed on the act of formation;the (certified)(2) articles of association;a declaration of acceptance of election of the member(s) of the board of directors;(3)the declaration of acceptance of election of the auditor (if no opting-out took place);the minutes of the board of directors on its constitution;the regulation of the signing authority of its members;(4) andif applicable, the declaration of acceptance of domicile (if the company does not have its own offices).In the case of a contribution in kind with cryptocurrencies, the documents referred to in article 43(3) of the HRegV(5) must also be submitted to the commercial register. These include:the contribution in kind agreement;the formation report signed by all founders; andthe unconditional audit confirmation of an auditor.Capital increaseThe supporting documents to be submitted to the Commercial Register in case of an ordinary capital increase by means of a contribution in kind of cryptocurrencies result from article 46 of the HRegV. In addition to the documents required for the cash capital increase pursuant to article 46(1) of the HRegV (public document on the resolutions of the general meeting, public document on the findings of the board of directors and on the amendment of the articles of association, adapted articles of association and capital increase report), the documents mentioned in article 46(3) must also be submitted – that is (also in this case), the contribution in kind agreement and the unconditional audit confirmation of an auditor.Particularities of contribution in kind agreementPursuant to article 635 of the Swiss Code of Obligations (CO), contributions in kind are only deemed to be covered if they have been made based on a written or (in the case of the contribution of real property)(6) publicly notarised contribution in kind agreement. In particular, this should specify the quantity and quality of the contribution obligation and determine the imputation value.(7) The contribution in kind agreement must list or circumscribe and value the assets to be contributed in sufficient detail.(8) In practice, the exact quantity of crypto assets to be contributed (eg, 50 Ethereum (ETH)) will be provided for and substantiated with the corresponding value according to common online portals for price calculation (eg, finanzen.ch). In view of the high volatility of cryptocurrencies, it is of particular practical importance that the share capital in Swiss francs is fully covered both at the time of the public notarisation and at the time of the entry in the commercial register.(9) It is therefore advisable to contribute a larger amount of cryptocurrencies to the company than initially appears necessary for the payment.(10) This will also apply to the contribution of so-called "stablecoins" – that is, amounts in such cryptocurrencies that are supposed to have a fixed exchange rate to a certain national currency due to the assumed redemption obligation of a third party.(11)Pursuant to article 634 No. 2 of the CO, the company must still be able to dispose of the contribution in kind immediately as owner after its entry in the Commercial Register. According to the current law, the time of free availability is based on the time of electronic publication in the Swiss Official Gazette of Commerce.(12) According to the wording of the provision, it could be assumed that the actual (in rem) transfer does not have to be provided for in the contribution in kind agreement. However, the literature makes a clear distinction according to the objects of the contribution in kind. Whereas in the case of movable property it is said to be sufficient that a transfer of possession pursuant to article 922 et seq of the Civil Code can be expected with certainty "immediately after the registration", in the case of rights, an assignment to the company to be formed should already be required upon conclusion of the contribution in kind agreement.(13)In order not to deprive the client of the – depending on the existence of the crypto assets on a soft or hard wallet – partly complex questions of the transfer in rem and to ensure availability "immediately after registration in the commercial register", it is therefore advisable to regulate the execution and any additionally required execution acts directly in the contribution in kind agreement, to execute the execution in the presence of the client and to record it in the minutes. In any case, it should be ensured that after completion of the execution actions in question, the company alone is factually capable of disposing of the non-cash contribution items. If "ownership residues" remain with third parties – for example in the sense of their potential or actual joint knowledge of the cryptographic private key to the so-called "wallet" in which the crypto units are then located – the legally required free availability of the corresponding contributions in kind could be in doubt.Particularities of statutory provision on contributions in kind According to article 628(1) of the CO, the articles of association must specify the object of the contribution in kind and its valuation as well as the name of the contributor and the shares to which they are entitled. In practice, the formulation of the contribution in kind provision often proves to be a problem and may lead to rejections by the competent commercial registry office. In the case of a contribution in kind with cryptocurrencies, a contribution in kind provision can be formulated, for example, as follows:The Company acquires [number] Ethereum (ETH) from [name] upon incorporation pursuant to the contribution in kind agreement dated [date], at the price and value of CHF [number] in total, for which [number] fully paid registered shares in the Company with a nominal value of CHF [number] each shall be issued to the contributor in kind at an issue amount of CHF [number] each. Any difference in value of the contribution in kind compared to the issue amount in favor of the Company shall be booked to the legal capital reserve without consideration.Comment Founders or future shareholders of companies operating in the crypto or blockchain sector are not infrequently confronted with the problem of being denied by banks the capital contribution account required by law for cash payment. Also, cryptocurrencies continue not to be eligible currencies for share capital under the – now relaxed – framework of cash payment rules. However, the contribution in kind incorporation or capital increase with cryptocurrencies provides the aforementioned companies with a viable alternative. The incorporation or capital increase process is subject to notarisation; for entry in the commercial register, confirmation by an auditor is required – in addition to other supporting documents. In the case of the contribution in kind agreement, which must also be submitted, particular attention should be paid to the process of transferring the crypto assets to the company in rem.For further information on this topic please contact Kilian Schärli or Jonas Schütte at MLL Meyerlustenberger Lachenal Froriep Ltdby telephone (+41 44 396 91 91) or email ([email protected] or [email protected]). The MLL website can be accessed at www.mll-legal.com.An earlier version of this article was first published in German in the Anwalts Revue – Das Praxismagazin des schweizerischen Anwaltsverbandes.Endnotes (1) The new version of article 43 of the HRegV (article 43 of the revised Code of Obligations (revOR)), which comes into force on 1 January 2023, takes into account, in paragraph 1, the possibility of payment in foreign currencies and remains essentially unchanged.(2) According to the practice of various commercial register offices, a corresponding verbal certification can be waived.(3) Separate minutes may be omitted if all members of the board of directors sign the commercial register application in the sense of a circular resolution.(4) In practice, the declaration of acceptance of election by the board of directors is regularly combined with the certified specimen signature to be submitted. The submission of a separate declaration of acceptance of election with a specimen signature can be dispensed with if the relevant member of the board of directors signs the commercial register application and – insofar as the member is to be granted signing authority – this signature is notarised.(5) Article 43(3) of the revOR only contains changes compared with the previous version insofar as acquisitions in kind are concerned.(6) A VOGEL, OFK-HRegV (2020), article 43 No. 39.(7) P BO CKLI, Schweizer Aktienrecht (2009), section 1 No. 396.(8) Id, A VOGEL .(9) See instruction sheet on payment with a cryptocurrency of the Commercial Register Office Zug of 6 April 2018, para 5.(10) Ibid.(11) In volatile market environments, disruptions of such exchange rate pegs have already been observed in the recent past, for example from 9 May 2022 for "TerraUSD" and on 12 May 2022 for "Tether" (USDT).(12) See Art. 936a(2) of the CO and article 34(2) of the HRegV in the version pursuant to No. I of the Ordinance of 6 March 2020, in force since 1 January 2021. A return to the previous legal situation in the sense of a general retroactive effect of the entry in the commercial register to the time of recording in the daily register was considered in the context of the most recent legal reform, but not implemented. See the result of the consultation on the amendment of the Commercial Register Ordinance, No. 9.2 f. Differently – under the old legal situation – still C CRAMER, ZK-OR (2016), article 634 No. 11.(13) C CRAMER, ZK-OR (2016), article 634 No. 12 f.