Thursday, September 27, 2018

Adam Tracy (Adam S Tracy) Explains Crypto Hedge Fund Fees

Cryptocurrency hedge fund formation attorney Adam S. Tracy explains fee structures for bitcoin and cryptocurrency based hedge funds and investment funds.

The hedge fund. What do I charge people right I get all the time. What do I charge people? What do I charge? Well traditional hedge funds? Okay, traditional heads hedge funds which are 1 to 2% as a management fee and then 20% as what’s called an incentive allocation. Okay, let’s talk about the management fee management fee is a fee that’s intended to cover the manager of the fund managers overhead. 

So like salaries rent whatever overhead and typically in a traditional context wanted to percent is that monthly fee and how it works as one of two ways. It’s Plated in paid in advance of the month, right or it’s paid one month in arrears meaning it’s 1% So if you had $100,000 assets under management, you take 1/12 of 1% times 100,000 and that would either be paid at the front end of the month or one month in a rear is at the beginning of that month, right? And again, it’s meant for to cover overhead. It’s not meant to be sort of a profit Center. So 1 to 2% is always been been the norm now startup hedge funds are well advised to keep that lower.

Okay in the sense that it presents a barrier to entry to somebody wants to invest in your phone. Okay, so you don’t want to come at people with you know, a 3/4 percent because it doesn’t necessarily give them a reason to invest or get into your fun. Especially in the early stages. Now, the incentive allocation is a little bit different because it’s performance-based, right? Okay, and so Typically, its twenty percent of the profit that that fund earns. Um, and that’s pretty standard now in the crypto space because of one liquidity issues to because it’s a very nuanced and sort of specific area. Right I’ve seen a lot of funds do well charging 3035 percent, right and that’s high but given the Alternatives it’s really your only chance for exposure. 



Right so you can justify it in certain certain contacts, but you know as an investor, I would look to see what what that fund is actually doing right? I mean, what are they doing? Are they just pimping icos or are they you know, they have some algorithmic or quantitative trading strategy that has a proven track record and you could substantiate, you know, parting with 35 percent of the profit that you otherwise would be entitled to as a limited. Hedge fund okay.

So from you know my vantage point as one who sets up hedge funds. Okay. I think you start, you know initially, especially when you consider the limitations of a start-up hedge fund, right, you know, the 3 C1 exemption of the Investment Company act limits you to 100 accredited investors. So you’re only going to get to a certain level and you can only take that incentive allocation from accredited investors, so they have to be in credited. Well, you know, I would be wary of taking fees that that sort of vary from the norm right an accredited investor may have exposure to traditional product hedge funds and may be accustomed to in 20% I wouldn’t fear drastically from that, uh, mainly because you’re competing with the ecosphere of of you know, hedge funds Financial products whether it’s debt Equity swaps options, You name it and you’re not and you’re also competing with the varied strategies, you know, high-frequency long short, whatever the case may be. 

So you have to consider that right when you’re starting a fondant when you’re investing in a van. You also have to consider that so my I guess my message is sort of coming from not only for spective of an attorney who’s you know, advising you on on how to maybe set up a fund but also as an investor or maybe you’re a fund to funds right and then this is sort of relevant on both ends. But um generally speaking I like to keep the management fees low in the incentive allocation higher right especially because the performance-based aspect of it in numerous to more investor confidence and it’s a lower presents lower barrier to entry so, you know, the question is what do I try to people? 

Well you can charge them whenever you want in theory, right as long as it’s properly disclosed in your offering memorandum, and it’s a properly accounted for In theory, you could charge whatever you want.
But again your marketing, right? This goes back down to marketing and there’s limited funds out there and you know people want exposure to crypto. So maybe they’re willing to pay a little bit more on that incentive allocation. But I keep the management fees low. That’s my advice. I would say don’t Veer from the norm and you know, go to three four percent just because you have an illiquid asset writing crypto. I don’t think that or you have higher transaction fees versus Equity. I don’t think that makes sense. I think what you have to do is overcome the barriers to entry which is that that fee right and I’m an investor saying well, I’m going to put in $100,000 but four percent of it goes out the door right away and the first year right just to you know, pay your salary.

I think that the Optics are poor. So I think keep that more in line with what your additional funds are to try to bring money into your fund and then increase it may be on the incentive allocation side because you have specialized knowledge if you are in fact running like a High frequency quantitative trading hedge fund that’s based on cryptocurrency. Then you have a skill that very few people do in fact have so um, you know, the answer to the question in the link very very brief answers really whatever you want to charge but I’d be very cautious and you know concerned about the Optics of it and your ability to raise invest your funds given, you know, that that management fee expecially so hit me up. Uh, I’m on uh, well, I’m on everything I guess but how about telegram at Adam underscore Tracy know, uh, follow me? 
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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Monday, September 24, 2018

Adam Tracy (Adam S Tracy) Revisits the SAFT

Cryptocurrency attorney Adam S. Tracy revisits the Simple Agreement for Future Tokens and FINRA’s recent guidance on the SAFT.

So I’ve talked about this SAFT before, and my problem with the SAFT has always been that it assumes that the token you’re selling is a security, but later it’s going to somehow not become a security and that there’s no real legal or factual basis for that happening anywhere in finance, right? 

There’s situations were securities become commodities and commodities become securities, but I can’t find anything nor do I believe anybody’s found anything where you have something that is a security and then ceases to be a security. And, Finra last week actually came out and said something to that effect, which basically threw water on the whole concept of the SAFT. And so I caution against using it because again, I think it’s predicated upon an untested legal theory. And that’s what Finra said. 

Finra said there’s no guarantee that the SEC or any court would actually agree with the the concept, if you will, that the SAFT holds, that you have a token that you’re selling – a token or a coin that you’re selling – that token or coin is a security for purposes of this ICO, but later down the road it wouldn’t be and that somehow would give you liquidity. Right? And that’s what I believe to be legal fallacy. So I think there’s good parts in the SAFT. I think, you know, it’s generally well written but I think, you know, (and I’ll talk about this in a subsequent video), I think what needs to be adopted is more of the license model, right? 



And the license is a constant exception to the Howey Test and, you know, when you’re drafting your Your SAFT agreements, which really isn’t a good term, you have to redesign that, and take away that nomenclature – that language that contemplates this transformation from something that it is to something it is not, because it just simply doesn’t exist anywhere in securities or commodities law for that matter. So Finra looks like they’re right on point with what the SAFT agreement. I’ve always said that the SAFT agreement was really the byproduct of large law firms, and was created for purposes of giving VC and other venture back private equity access to angel rounds and seed rounds, where they get the lowest valuation because after all, they have the ability, right? 

They have the cash flow, the working capital to sustain the illiquidity that you get in a VC model. And, you know, by labeling your initial coin offering, your initial token as a security, it’s going to be a restricted security, it’s not going to have that liquidity. Then, you know, it brings in sort of the bigger players and, you know, commits their or sort of guarantees their access to the best blockchain deals at the best valuation. So it’s a little bit of a conspiracy theory. I know. But, you know, that’s what I think about this SAFT, and it looks like Finra is actually agreeing with me for once. Who knew, right? So I’m Adam Tracy. Check me out – tracyfirm.com, and I’ll talk to you soon.

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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Friday, September 21, 2018

Adam Tracy (Adam S. Tracy) On Starting An Offshore Crypto Broker-Dealer

Cryptocurrency and offshore attorney Adam S. Tracy explains the options for creating a licensed offshore cryptocurrency broker-dealer.

So I’ve been getting more and more requests about the possibility of obtaining a securities broker license for cryptocurrency – Bitcoin and the like. And taking away the fact that in March there was a reaffirmation that all digital currencies, so think about your Bitcoin, Bitcoin cash, Etherium, were in fact, commodities, it seems extremely difficult to sort of breakthrough in the traditional securities broker dealer market to perhaps say, you know, offer ICO tokens or something like that. Right? 

And, without running through the imaginations of what you have to do to become a licensed broker dealer in United States, it’s pretty intensive, right? You can buy them off the shelf. It’s a little easier, but you need, you know, the requisite licensure. In turn, if you wanted to organically create one, there’s registration with the SEC. There’s registration with your SRO. There’s affiliating with a clearing firm, which is going to be very difficult, especially considering what you’re dealing with crypto, if that’s the model. Uh, you have to join the SIPC, and there’s a whole realm of protocols, which I won’t get into here because it’s really probably not likely that one would pursue it, without having an existing broker-dealer model in place and having the requisite licensure.



So that brings us to, obviously, offshore and the question becomes what is an ideal location for an offshore securities dealer? And the the obvious place has always been Vanuatu. And Vanuatu is an island, uh to the extent you don’t know, that is over by Australia somewhere around there. But it has a very streamlined approach to obtaining a securities dealer license, and that Securities dealer license goes farther than just traditional products, but also includes what are really commodities. 

So what you’ll see is a lot of your Forex, a lot of your binary options dealers, are registered in Vanuatu. And the process can take about six weeks, which is, you know, by offshore standards pretty quick. Your main cost is a security bond or a fidelity bond in the amount of $50,000 which depending on credit cost you about $3,000 US, and the process of the application costs about $500. 

So it’s exceedingly easy. I’ve been through it, the process, in terms of like turn around, and what you have to provide them is far less than what you find in most applications for money transmitter licenses, like in the event that you wanted to go sort of the crypto route for crypto exchange. But Vanuatu is the place to go, and it gives you full authority under the laws of Vanuatu to deal in securities, deal in commodities, dealing in Forex, dealing really whatever you will.

Obviously as a United States citizen you have to be cognizant and wary of the interpretation of US laws and how you may or may not solicit US customers, but, you know, being outside the United States, if you in fact are, then you don’t necessarily have the same concerns that a resident of the US would. But, it’s a valid license. It’ss recognized by a great number of nations, especially in Asia, Australia, and other similar developments. 

So, it’s definitely the place to go, and I think when you’re looking at, you know, the uphill climb that you face domestically to create a broker-dealer, you know, there could be significant value to it, there’s near impossibility in clearing penny stocks these days. So to suggest that you’re going to clear some sort of ICO token is really, you know, you’re really grasping, right? Especially when you consider that you have to register with the SEC and FINRA, in order to operate. 

So, I think that’s a bit remote. I’m not saying it’s impossible, not saying you can’t do it, but it’s a bit difficult. So, you know, if you’re going the offshore route, there’s only one place, you know, and it’s really unbeatable. You look at Seychelles, you look at Cypress, you look at Malta, they have some options. They’re good. They’re strong. They’re as not good, and they’re not as cost-effective, and they’re not as timely as Vanuatu. So I would definitely check it out. If you have questions, be sure to hit me up. My contact information is below. I’m Adam Tracy. I’ll talk to you next time.

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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Friday, September 7, 2018

Adam Tracy (Adam S. Tracy) Attorney Explains the Cloud Act

Cyber law attorney Adam S. Tracy explains the legal and privacy issues surrounding the controversial Cloud Act.

 So loss in the commotion around FOSTA and then also loss in the commotion about the spending bill, which nobody read but why are you surprised, is the Cloud Act which was included in the spending bill. And the cloud acts really scary, for not only anybody with an online presence, but even it relates to cryptocurrency and governments sort of diving into cryptocurrency. 

 And you see this parallel as I do like where considering this you know this conceived breakdown or crackdown rather in United States about cryptocurrency, that people are going to sell offshore or do their business offshore. But this Cloud Act, which no one realized passed because it was lumped in with all the bunch of other, excuse me, shit, is pretty significant. One, the Cloud Act enables foreign police to collect and wiretap people’s communications from US companies without a warrant. Right? So that is a massive, massive Fourth Amendment issue. 

 It also allows foreign nations to demand personal data stored in the United States, without prior review from a judge. Right? So consider if you have stuff on like the Cloud platform, that you that you store, right, how that can be easily accessed from foreign government. Third, it allows the president to enter into certain executive agreements. Right? So agreements by FIAT that allow foreign countries to seize data from your cloud storage, from your social media, whatever the case may be. And it finally allows foreign police to collect data without notifying them about it, right, whereas that’s a difference here.



So you’ve got this total breakdown of any Fourth Amendment right, and what’s scary about it is that you’re offering it to foreign powers by basically FIAT In This Cloud Act. And so, you know, you’re talking about Cloud storage, you’re talking about online, you’re talking about adult, you’re talking about crypto, you’re talking about payment processing, you’re talking about all these you know, gaming, anything, that’s like alleged gray area. Well legal or not, it’s still legal, but it’s deemed to be gray. 

 Now, all these foreign governments now have this unfettered right, which is actually greater than what you’d probably find, by any sort of police force in United States. Right? Like in any in any instance, within the context of the United States, at least they have to get a subpoena. At least they have to convince a judge to do something. Like, the Cloud Act basically allows for the president to make deals, these treaties, with anybody, much like a tax treaties and judgment enforcement trees. But it also lowers the standard for foreign entities trying to obtain information from US-based companies and US based sources about US residents. So it’s really like frightening to a large degree. And it’s been largely overshadowed because it comes on heels of the FOSTA. And it was also just buried in this spending bill. Right? So it’s got some pretty significant implications.

 But, I think in you know, especially like in the cloud storage space, its massive. So you know the implications are huge across the board, right, like for my crypto followers, it’s significant, because what you may think wasn’t information-sharing, right, when you go offshore now, could be subject to it. Right? Especially when you’re talking about like EU Nations, like common law nations, stuff like that. And then, you know, from like adult clients, things like that, I mean, you know you don’t know what the implications are. Right? Because the laws related to indecency are so wide and varied, and any one country would now have this unfettered access to your content. So it ostensibly could be a very frightening thing. But at a minimum it is something to watch out for. You know, any law is law whether they choose to enforce it vigorously is one thing. Right? And there’s majority of the laws on the books arguably that aren’t enforced. But neither here nor there, that’s terrible legal advice. And I’m telling you that, and an I’m attorney. So check out the Cloud Act, and be very of it. You have questions hit me up at at@tracyfirm.com.
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Wednesday, September 5, 2018

Adam S. Tracy Discusses Cryptocurrency Trading Taxation

Adam S. Tracy
Cryptocurrency tax attorney Adam S. Tracy explains the impact of the new GOP tax plan on cryptocurrency taxation and especially the availability of Section 1031 exchanges.

It was fun while it lasted but, the tax deferred party is over with the passing of the GOP tax bill. They made significant changes to 1031 exchanges. I’d previously opined on how you could utilize a 1031 exchange to shield capital gains on investment property, and bitcoin, and all the cryptocurrencies currently sort of being that undefined ground of not being securities, not being commodities, not being currency, and deemed by the IRS to be property. 

It was a great way, especially with early adopters, to shield their capital gains. That party is effectively over, as of the first of the year. And so what the 1031 allowed you to do was effectively take investment property, and sell it, and use the proceeds to purchase another investment property, and avoid paying that capital gains. But, that window has been closed, and now it’s only limited to real estate transaction. So, you can purchase a real estate transaction, earning capital gains, sell that, purchase another real estate property in a 1031 exchange, and shield gains. 



 You can’t do that with cryptocurrency or any other type of investment property anymore. So the question becomes, what do I do? Is there any way to really shield capital gains? And the problem is a couple things. One, people have made so much that, you know, simple retirement accounts really won’t help shield significant gains. Two, most people have earned the money onshore, which wouldn’t allow them to take advantage of offshore jurisdictions where there’s lower capital gains or no capital gains, as the case may be. 

So you’re really looking at a scenario, where you’re probably faced with paying at tax, if you want to cash out any amount of that cryptocurrency. One thing to consider is the concept of LIFO vs FIFO – first in first out, last in last out, which is methodology for calculating your gains from cryptocurrency. So, it’s worth the analysis to see, especially in rising market as it relates, to whether or not you are minimizing your capital gains burden or maximizing it, depending on which mythology you adopt. 

Outside of that, you’re pretty much stuck. Short term capital gains obviously carry a higher rate than long-term capital gains, which are a year or more. So you may want to look at that as well. But as far as my prior guidance here that 1031 exchanges will shield you from potential tax liability, that went close pretty fast.
A former competitive rugby player, serial entrepreneur, trader and attorney, Adam S. Tracy offers over 15 years of progressive legal and compliance experience in the areas of corporate, commodities, cryptocurrency, litigation, payments and securities law. Adam’s transactional experience ranges from initial public offerings, mergers and acquisitions to initial coin offerings, representing the pure startup to NASDAQ-listed entities. As an early Bitcoin adapter, Adam Tracy has been deeply involved in the growth of cryptocurrency and offers a unique, proprietary approach to representing crypto-clients. Adam resides in Chicago, IL with his six dogs/cats, which he is fairly certain is illegal in the town in which he lives.

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