17 June 2021
UPDATE: This proposal has been withdrawn.
There have been a number of questions regarding the tax impact of the Spark (FLR) distribution in various jurisdictions. Specifically, there is a concern that due to the Spark token becoming priced subsequent to the launch of mainnet that the long-term distribution of 3% per month, but not the initial distribution of 15%, could be considered as income for tax purposes. Various parties claiming authority on the subject matter, predominantly from a US perspective, have publicly given widely differing opinions.
As followers of the Flare blog will know, the purpose of the lengthy distribution is to make sure that liquidity aligns with the most efficient economic functions of the FTSO and F-Asset protocols. A refresher can be found here: https://flare.xyz/further-information-on-the-spark-token-distribution/
At Flare, we have commissioned research and advice into the US tax implications by a respected tax scholar. This research has resulted in the distribution Option 1 below, which involves the recipient burning a small amount of Spark to buy the remaining distribution, which was briefly discussed by Hugo, Flare Co-founder, in a recent public conversation. This option will not be implemented by default, but will be brought to governance vote (as discussed below).
With regards to that or any other potential option a number of considerations that need to be taken into account are, but not limited to:
The size of the impact of the existing plan on the ecosystem. IE, the number of people and quantity of Spark that the existing plan, without the burn mechanism, effects.
The veracity (and perceived veracity) of any legal advice received by Flare and the opinions of other experts that have been put forward.
The perception of Spark recipients.
Quantifying these factors at this early point is an impossible task but thankfully there is a way to understand what the recipients of Spark tokens feel about the various options and that is to put the distribution decision directly into the hands of Flare token holders through Flare Governance.
The Spark (FLR) distribution will now be set up as follows:
1) At the outset, 15% of the total distribution of 100Bn Spark (FLR) will be made.
2) There will then be a maximum 5-month period whereby the community can come to consensus over at least three possible governance proposals outlined below, or any other option put forward by governance.
3) If no new option wins the distribution will continue, from month 6, as previous defined at 3% of the initial 100Bn.
3 Flare-proposed options:
Option 1: Buy through burn.
This option is based on the legal research commissioned by Flare. A recipient of Spark would receive the initial 15% as previously detailed at the inception of the network. The recipient would then, optionally, burn a small percentage of their Flare tokens in order to buy the remaining distribution. The remaining distribution would then occur at 3% per month from month 6.
The legal research commissioned argues that the remaining distribution would then have been purchased, and thus subject to capital gains tax upon sale instead of income tax upon receipt. A full governance proposal for this will be drafted and released together with the legal memo upon which the proposal will be based.
Option 2: Distribution Halt.
This option would halt any further distributions. The remaining 85 Bn would not come into existence. This would turn the initial 15 Bn FLR into the total distribution.
Option 3: Retain the existing plan.
This option would retain the 15Bn initial distribution with 3Bn FLR being distributed subsequently each month from the point of a successful vote.
Full governance proposals for these options will be drafted, including our view of the pros and cons, and released together with the legal memo upon which Option 1 will be based.
Options 1 & 2 will be based on a super majority requiring >66% positive votes to pass. Option 3, because it is the default setting, will be based on a simple majority >50% to pass.
All options will require a participation rate of at least 30% of all eligible FLR to pass. Flare Networks Limited, founders and employees will not be voting and hence will be removed from the eligibility calculation. The Flare Foundation is not allowed to vote and hence will not be in the eligibility calculation. The FLR held in minting pools isn't owned by anyone and is therefore excluded from the eligibility calculation.
FLR holders can vote on each option.
The first option to pass will win, hence the vote could be finished well before the 5 month deadline. If no option passes the default as defined above will automatically take effect.
This structure ensures that the original distribution plan is retained unless there is a strong desire among Spark holders to change the distribution to Option 1 or 2.
This governance vote does not have an impact on the operation of the FTSO or F-Asset protocol.