Johnny Rockets – offers for the season that’ll blow your mind, and its only here for a limited time. Go ahead, try ’em and let us know your feedback order online on www.johnnyrocketsuae.com
For many companies, the fund raising stage involves facing a number of daunting decisions. Perhaps the most difficult decision during this period is choosing the method of raising capital. Most fund-seekers have chosen the same routes of raising capital for decades like venture capital, angel investors and bank loans.
Seen by many as the newest phase of fund raising, following the recent craze in crowdfunding websites such as gofundme.com, initial coin offerings (ICO) are becoming attractive in various markets. In fact, a number of companies have released their own cryptocurrencies in order to capitalize on the opportunity, for instance the Canadian instant messaging company Kik, which recently introduced their cryptocurrency “Kin” into the market, with a goal of raising $120 million to fund various projects.
What is ICO?
With the support of government and private entities, companies are seeing benefits in opting for fundraising through ICO. But what is the process of an ICO?
When a company decides to go public in an effort to raise capital, it releases its private shares to sell to the public. The price at which these shares are initially offered to the public is called the initial public offering, or IPO. Similarly, when a company using blockchain decides to raise capital in order to fund a certain project, it choses to offer a number of tokens in exchange for capital. But what exactly are tokens?
Tokens are an electronic asset that, just like the shares, which depreciate or appreciate in value. The speculative nature of such units is what causes such variation. Unlike shares that represent equity in a company, investors in cryptocurrencies receive tokens. These tokens can be sold and traded on cryptocurrency exchanges in exchange for other cryptocurrencies, such as Bitcoin and Ethereum.
Releasing an ICO
The process of releasing an ICO can be summarized in the following steps:
Second, if the developers anticipate sufficient demand from investors, they then create the token which they will offer the public in exchange for capital (the recent trend has seen more exchanges of Bitcoin or Ethereum). The volume of tokens offered is capped, as having a limited amount of tokens creates higher demand. Developers also have to decide on the duration of time that the ICO will run. Typically the white paper and the T&Cs of the ICO will encompass the abovementioned information.
Third, the developer advertises the ICO on various online platforms in order to attract further attention from potential investors. If the capital raised by the developer does not meet the minimum funds required by the firm, usually outlined in the whitepaper, the developer returns the money to the initial investors and the ICO is deemed unsuccessful. However, if this fund requirement is met at the end of the time frame, the capital raised is used to initiate the objectives set out in the whitepaper. Sometimes the issuers go for a pre-ICO ie, the token sale event that the enterprises run before the official crowdsale or ICO campaign goes live, to raise the funds even prior to the ICO.
Fourth, entering into the governing documents like token purchase agreement with the investors and the operating agreements between the issuers and operating company. The governing documents can be made bespoke depending upon the requirements of the company and the investors.
Countries all over the world have responded positively towards this crypto-craze, including the UAE. In the Middle East, the UAE has been at the forefront of incorporating cryptocurrency and more generally blockchain technology in its government processes. This is in line with the country’s objectives of advancing the UAE’s technological infrastructure, with cryptocurrency being used by both governmental and commercial entities. In fact, in early October 2017 the UAE government announced its own blockchain based cryptocurrency “emCash”, a digital currency that will enable citizens to pay for both government and non-government services via the Empay smartphone application. In fact, the UAE plans to become the first government to use blockchain technology for all documents by 2020, with the Dubai Land Department being the first government entity to adopt the technology.
The Financial Services Regulatory Authority (FSRA), the regulatory arm of the Abu Dhabi Global Market (ADGM) earlier in October, 2017 described the ICO as a ‘novel’ and ‘cost-effective’ way of raising funds. ADGM then issued a supplementary guidance on the ICOs and the virtual currencies for those considering the use of ICO. ADGM has held progressive stance of assessing the applicability of the regulations on a case to case basis. FSRA shall on a case to case basis decide, whether or not the tokens exhibit the characteristics of a security. The same classification shall decide as to whether or not the activity will be treated as a regulated activity.
On the business community end, we see that there have been a number cryptocurrencies launching, including Farad Cryptoken, deemed to be the first cryptocurrency backed by real economic activity.
Having said that, both the company initiating the ICO and the investors, need to be diligent and cognizant to ensure that the investment does not result in loss. From the investor’s perspective, it is essential to assess the business model and the credibility of the company and the promotors. At the same time, from a fundraiser’s perspective, it is essential to identify it’s target audience and to ensure that the whitepaper and the governing documents give a fair picture.
Authors: Ms. Kokila, Akshata Namjoshi and Adel Khalil Ahmad
The UAE has been famous for birthing countless success stories, a reason why investors from around the globe rush to it, as they look to expand their commercial horizons, many choosing to take the franchising path. Demand for a product or service elsewhere is seen as a positive indicator that it will also be successful in the UAE. But when it comes to business, one shouldn’t let their eagerness cloud out sound legal understanding. Naiveté in the legalities of franchising can lead to, at best, wasted time, and, at worse, costly legal and business complications. The UAE market is fertile ground for franchisers, but assuming that its laws are identical to those of other nations can add risk to your endeavors. One of the most common unfamiliarity franchisors find themselves in is the subject of the Commercial Agency Law, which may complicate the path of those who act without incorporating it into their business decisions. In this article, we explore the specifics of this law and discover the ways in which a franchisor can accommodate it to prevent themselves from being affected by circumstances it could present
Eligibility for Protection under the Commercial Agency Law
At its core, the Commercial Agency Law is perceived to be the only governing law in franchising that provides UAE-national franchisees with legal protection under all circumstances (more on the specifics of these later). However, simply being a franchisee from the UAE does not automatically enable one to gain protection under this law; a number of conditions must also be met simultaneously, namely:
- the franchisee must be a UAE national (or a company owned 100% by UAE national(s));
- they must have been granted exclusive rights within the UAE; and
- the franchise agreement must be notarized by a Notary Public.
If any one of these conditions is not met, then the franchisee will not have the right to be protected under the Commercial Agency Law. If all of these conditions are met, the franchise agreement is eligible to be registered with the Ministry of Economy(MoE).
Before we proceed, it is important to highlight that the Commercial Agency Law comes with a very specific set of requirements that must be met in order for the franchisee to even be eligible for protection. The UAE has seen a massive influx of a variety of different citizens entering since the implementation of this law, meaning franchisors have a vast pool of candidates they can choose from, both local and foreign. Franchisors can easily avoid the applicability of the Commercial Agency law by selecting franchisees that are tailored to their specific requirements.
Key Rights under the Commercial Agency Law
Nevertheless, let us assume that that all of the abovementioned conditions have been met, and the franchise agreement has been registered with the MoE; what kind of legal protections would this law offer the commercial agents (i.e. the franchisees)? In general, there are three key protections afforded under this law:
- Protection from termination or non-renewal of the franchise agreement – Perhaps this is the most significant issue faced by franchisors affected by the Commercial Agency Law. This entitles commercial agents the protection from both termination as well as non-renewal of the franchise agreement. The Commercial Agency Law makes mutual termination mandatory, and the only way a franchisor can terminate the agreement is by proving that there is a “material reason” to do so. What exactly constitutes “material reason” does not have a clear cut definition and cases are judged by the Committee of Commercial Agencies, which makes its decisions on a case-by-case basis.
- Ability to block the importation of goods –If your franchisee has registered the franchise agreement at the MoE, then they may be able to block your goods from entering the UAE, legally. This is because the registered franchisee has the right to block the importation of any products that it is the registered agent of, into territories it is registered in, by instructing the ports and customs authorities. One scenario that you could possibly face as a franchisor could be this: say your business is in hard times, and you happen to be in a dispute with your franchisee; your situation could take a worse turn if the franchisee happens to be registered for a certain good that could be vital to profits, and chooses to block it from entering the specified territory.
- Compensation for termination – This means that not only can it be extremely difficult to terminate the franchise agreement, but you may have to pay an additional amount of money to the franchisee after termination. Following termination, the franchisee has the right to claim compensation for the loss suffered as a result of the termination of the franchise agreement. The more losses the franchisee claims have piled up, the higher the compensation amount paid by the franchisor, and these losses can include expenses incurred by the franchisee, contribution to establishing the franchise in the UAE, arrangements the franchisee may have disregarded while presuming renewal, and general losses suffered by the franchisee as a result of the termination.
Considering the Commercial Agency Law, as a franchisor, you could potentially face some unpleasant scenarios. You might find it difficult to enter the market because your goods are held up in customs, or because you’re unable to act without the mutual consent of your franchisee to terminate your contract. That said, you could finally receive mutual consent or file an appeal to the Committee of Commercial Agencies (which can prove to be costly if seeking legal representation) but still be stuck with a massive compensation fee. However, it should be said that this is the upmost extreme scenario, as the two parties in franchising tend to look out for one another since a healthy relationship between the two is a vital ingredient for prosperous enterprise.
Setting Up a Franchise in the UAE
Now that we have given you a rundown of the specifics of the Commercial Agency Law, let’s discuss the viable options that could be available to the franchiser when establishing a franchise in the UAE, regardless of the fact that franchiser entering into an arrangement with a local or foreign/expat franchisee.
- Drafting of a Watertight, Legally Binding Franchise Agreement
As previously mentioned, disputes between the franchisor and franchisee are heard by the Committee of Commercial Agencies, who judge matters regarding termination based on “material reason”. Therefore, tightly drafting a franchise agreement may provide you with the basis needed to argue for the existence of material reason. It is best to seek the guidance of a law firm in order to ensure that the legal details are flawless.
For instance, defining and protecting your intellectual property rights as a franchisor is imperative, as a business’ intellectual property is itself considered an asset. This means that your franchise agreement has to be very specific about IP rights, and what exactly the franchisee can use.
- Legal Structures and Set-up in UAE
- Forming a Joint Venture
One route that can be taken as a franchisor is the formation of a joint venture. In this method, you, as a franchiser, could incorporate a company with the potential franchisee, allowing both parties to be shareholders in the company. Then, instead of executing a franchise agreement directly with the potential franchisee, it can now be agreed upon between the franchisor and the newly incorporated company.
In this scenario, the newly incorporated company would not be eligible for protection under the Commercial Agency Law, since this entity is not owned 100% by UAE national(s). Furthermore, the franchiser could gain the advantage of overseeing the operations of the joint venture company and also maintain control over its management.
- Incorporating a Holding Company
Franchisors can also choose the holding company route, which usually entails incorporating a holding company, with the franchisor being a 100% shareholder. The main difference that distinguishes this option from the last is that the shareholders of the joint venture are the franchisee and the holding company, rather than the franchisee and the franchisor. This would mean that as a franchisor, you are protected from the legal and financial burdens that come along with being a shareholder of a joint venture, since you have no direct link to it. Under this scenario, the Commercial Agency Law is unlikely to be applicable since the entity is not 100% owned by UAE national(s).
So, what should you do? The approach you take as a franchisor depends on the franchisee you are dealing with. In some cases, a franchisee may not be willing to go through the hassle of forming a joint venture, and in other cases you may completely trust that the franchisee will keep their word. As with any business venture, ensuring that you are working with the right partner is absolutely vital. Remember, there will always be legal differences in the operation of a franchise from country to country, so to have a successful business, one must always work with full knowledge of, and in full accordance with, local laws and customs.
Authors of the article namely:
- Kokila Alagh
- Hiba Khan
- Adel Khalil Ahmad