Republic, the startup that lets anyone invest in exciting private companies and token projects, has developed a securities instrument specifically for blockchain and crypto token presales. We’re calling it the Token DPA.
By the end of 2017, ICOs (Initial Coin Offerings) had raised approximately $3.8 billion from over 200 projects. The majority of these sales were exclusive to international and U.S. accredited investors, which means the majority of people who wanted to participate in the ICOs couldn’t do so because they didn’t meet the high income and net worth threshold (approximately 3% of the U.S. population meets these requirements). This substantially reduced the amount and types of people that could legally participate in the public crypto-assets offerings pursuant to Rule 506(c) — also known as Reg D or an advertised private placement.
The majority of these offerings were conducted without documents, some relying on smart contracts, and many others used the SAFT (Simple Agreement for Future Tokens) instrument. This means, generally, investors would have little recourse if their monies were not used to develop protocols and those tokens were never minted and distributed.
While we won’t speak to the legality of many of these sales, we do believe that everyone should have the opportunity to invest in exciting equity and blockchain projects. We knew that if retail investors, who are generally unaccredited, were to have access to this exciting emerging market, we needed to develop a new security instrument for crowdfund blockchain projects.
So, we created the Token DPA, which not only has built in protections for investors in the event that tokens are not distributed but also gives founders the opportunity to raise funds to develop their protocols from their actual users and supporters.
The Token DPA (Debt Payable by Assets) is a debt instrument that blockchain projects on Republic can use to raise capital responsibly. (They can also use them in their own Reg D and Reg S offerings.) Created by the Republic Crypto team specifically for token presales, the Token DPA is designed to align the interests of founders with their investors.
The Token DPA has four main features: (i) a fixed maturity date, where investors are due cash or tokens with interest; (ii) a timeline that investors can reference to track a company’s protocol development progress and request money back if necessary; (iii) optional escrow provisions that can further secure funds; and (iv) greater priority in the event of a project’s bankruptcy or liquidation.
Currently, the SAFT is the instrument widely used by blockchain companies to pre-sell tokens. Republic believes that this instrument is not optimal for less sophisticated retail investors, especially when the SAFT includes no maturity date or a provision to claim company assets if a project fails. The use of the der ivative SAFTE (Simple Agreement for Future Tokens & Equity), which provides the prospect of future equity, may not provide adequate protection if the project fails since equity holders are generally below debt holders in the event of a liquidation and many projects plan to ultimately dissolve their entities once a protocol becomes decentralized, making future equity not only potentially worthless but there may be an actual plan to make it worthless.
With a standard SAFT, investors must wait for a public token sale or distribution by an issuing company to receive tokens, otherwise, their right to a return on their investment can be left unfulfilled, possibly forever. In contrast, the Token DPA provides a method for investors to either receive part or all of their principal back, earn a cash return or receive the desired tokens when certain events occur.
With all investments there are risks. If a company issuing a Token DPA spends all of their capital before investors’ right to request a return of capital occurs, investors could force the company into insolvency when they make the request. However, as debt holders, Token DPA participants should have the first rights to assets, assuming none of the assets of the project were secured by another lender.
Since the Token DPA is a loan contract between the investor and the blockchain startup, investors have the right to receive interest on their loan or have their loan paid back in the future with the token or cash. With the value of principal of the loan rising due to interest and a promised discount on tokens, investors who hold a Token DPA can receive an advantaged rate on tokens after a period of time, a token distribution offering occurs and the company uses the money responsibility. The ability to have their loan paid back in tokens is contingent on a trigger event, meaning they will not receive tokens unless a token distribution event occurs. This means if the tokens are developed and the company can compliantly give them to investors, they will receive them, or investors will receive cash equal to the amount of interest that has accrued for lending their money to the project’s growth.
The Token DPA allows companies that issue it to provide check-points when investors can request to be paid back in cash. It should be noted that payments can only be made if the company has retained assets sufficient to service the debt or has made a profit.
Generally, the Token DPA relies on issuing companies to manage the money they raise responsibly, to ensure monies are left if investors request a full or partial refund under the terms of the Token DPA. Investors should be aware that if a high number of investors request a refund, it could lead to the company’s insolvency as the company may not have sufficient funds to pay all of the refund requests.
The Token DPA provides flexibility for issuers and investors in the form of an optional escrow provision. If a company selects to use an escrow account, the Token DPA can require that a percentage of the monies raised will be held in escrow, ensuring a hard cap on investors’ loss for a set term of the DPA. (Investors should note that this protection is contingent on the company issuing the Token DPA following its terms and that placing funds raised in escrow will reduce the Company’s amount of liquid capital, which can negatively affect the company’s day-to-day operations.
The Digital Reserve, which is developing blockchain technology to eliminate predatory loans, is already using the Token DPA for a private presale. After evaluating the SAFT and other investment instruments, CEO and Founder Jomari Peterson said he decided to use the Token DPA because it makes it easier to stay in regulatory compliance. He also noted that the Token DPA helps investors better understand what they might get out of their investment
Though initially designed for use on Republic, we encourage adoption of the Token DPA across other crowdfunding platforms. Since our primary objective is to create investment opportunities for all people — no matter their income or net worth — we hope the Token DPA will catch on as a widely-used instrument for blockchain and crypto projects.