Monday, January 24, 2022

Why we are closing our successful fundraising platform

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Neufund was a security token company that wanted anyone in the world to invest in any business they chose.

For decades, investment has been exclusive, inaccessible and uneven. This has contributed to the growing wealth disparity in Europe and the United States. We wanted to change that.

Today we are closing Neufund, despite its success.

Zoe Adamovicz has co-founded several startups. His most recent company, Neufund, was a financial technology company for the tokenization of securities that aimed to democratize access to global innovation capital.

Over the lifetime of Neufund, we have processed around 20 million euros ($ 22.6 million) through our equity platform, which is fully facilitated by the public Ethereum blockchain. We registered 11,000 investors from 123 countries – an international and diverse crowd with tickets starting at € 100 ($ 113).

Our proof of concept case – Greyp Bikes – has gone through the full cycle, from issuing token shares for retail investors, to corporate governance on the blockchain, to Porsche exit and distributes via ERC20 tokens. Indeed, there have never been any compliance issues, technical issues or security breaches. A European tech company raised funds through the issuance of securities using decentralized technology. And more than 1,000 investors from dozens of countries participated. How cool.

Again, we close the new business.

Why? Because today, more than two years after Greyp’s fundraising, we still don’t know if the regulations allow us to repeat Greyp’s fundraising model with other similar companies. Despite our relationships with regulators for years, we have failed to break out of the limbo of legal uncertainty.

And, dare I say it, no DeFi (decentralized finance), which targets regular, larger-scale investors, has never been successful so far.

From the start, we’ve played it by the book – hire lawyers, get licenses, spend billions on legal advice. We were in contact with regulators and governments, in many jurisdictions. Yet it all turned out to be a mistake. Seeking legal approval was a mistake, as was seeking a transparent discussion of the merits. The reality has been presented to us quite clearly: if you play it according to Hoyleyou lost before you even start.

Here is what we learned from the experience.

“Blockchain licenses” are unnecessary

Let’s start with the “blockchain licenses” issued by reformed and innovative jurisdictions, such as Switzerland, Liechtenstein, Malta, Estonia, Gibraltar, etc. They welcome all entrepreneurs with open arms.

So, yes you can get a Swiss Security Token License, Liechtenstein Token Technology Service Provider License Where Malta Virtual Financial Assets License. But the piracy is that, although Europe theoretically has a common market, these licenses are not recognized in other European jurisdictions.

For example, if German investors want to use your business operating in Liechtenstein under such a TTSP license, BaFIN (the Federal Financial Supervisory Authority, the German financial regulator) will claim that you are acting illegally and issue fraud warnings in no time. of time.

This is probably why in Liechtenstein only seven companies have received such licenses in the last two years, two of which have been granted to conventional banks already licensed (Bank Frick and VP Bank).

Recently, some states have become more blunt about the flaws in their innovative laws. Liechtenstein declares on its website: “Registration with the TVTG is effective exclusively in Liechtenstein; the passport according to the model of European laws on financial markets is therefore not possible.

Some, like Estonia, simply revoke previously issued licenses – 70% of 2,000 virtual asset service provider licenses in Estonia revoked in June 2020, and so far no new “blockchain license” has been offered.

Yet all of these countries remain very vigorous in promoting themselves as blockchain-friendly. As a result, many entrepreneurs flock to these jurisdictions, when in fact the licenses issued there are unnecessary, and almost no business is actually carried out.

Legal workarounds, like .org, are time bombs

Following Ethereum’s lead, many protocol companies have registered in Zug, Switzerland as charities. This mask of nonprofits is the reason why we see many blockchain companies marketing under the .org domain, instead of .com. The concept of utility tokens flourished and initial coin offerings exploded, legally structuring token purchases as donations to the common good of a protocol development. All this was possible thanks to a single hack: unlike many other countries, Switzerland does not limit the definition of charitable activity to specific areas.

Yet when it became clear that the purpose of these projects was commercial rather than philanthropic, the initially forgiving Swiss regulator, FINMA (Swiss Financial Market Supervisory Authority), cracked down on ICOs and the .org structure. You may wonder why Ethereum was hardly affected by this. Well, by the time the hunt started, the network was already too big to drop.

TVN (non-fungible tokens) are the new hot exclusion, but the next for regulatory review. We can easily assume that watchdogs will not be called “unique” what issuers deem “unique”. Instead, they’re going to classify NTF avatars and soccer stars as commodities – and boom! securities law applies. We’ve seen the movie before.

Classic financial licenses are a dead end

Neufund’s experience in Liechtenstein is revealing of how it works when DeFi follows traditional banking laws. Initially, the Autorité des marchés financiers confirmed to us in writing – sometimes referred to as a “non-action letter” – that Neufund’s business model did not require a financial license. We were told that he was not even eligible for such a license. On this basis, we conducted the Greyp fundraiser.

After the offer closed, we received a stern warning from the FMA that we may be breaking the laws and that penalties including a potential criminal offense (yap, that means jail) could arise. apply. We have been accused of operating without the necessary financial license.

Confused, we appealed and quickly received a formal apology from some of the country’s top personalities. We also reached a negotiated solution with the FMA and agreed to apply for a traditional “asset manager” license. We all knew that didn’t make sense since the company never managed any assets, but somehow we had to fill the box.

Money and time was spent on it, until we got another call from the FMA – after a review the regulator again concluded that Neufund’s business model was not eligible for license financial (face palm emoticon here). The process was therefore interrupted.

Since then, we have tried to find out whether we are legal or illegal, and no one is able to tell us. All the dialogue was futile. This fueled the discourse of the “progressive state” of Liechtenstein, with zero commercial production.

Avoiding the discussion of merits by discrediting blockchain companies is the common back-protection tactic of regulators

Did you know that most regulators, in particular the German BaFIN, maintain a policy of not issuing a green light on crypto and other fintech startups? They only emit red lights, and only after you have already started trading.

These red lights are direct injunctions or, in their milder but most popular version, called public warnings. They are semi-official – a form of a watchdog’s ‘blog’, an arena for publicly touting the regulator’s suspicions of any company, and where no supporting evidence is published or required. .

Often these warnings read: “BaFIN has sufficient grounds to suspect that CompanyX is offering Product Y without the required licenses. “

Frequently, the alleged offender learns that he only receives such a warning over the Internet, with no way to argue or dispute. Their effect is that they label the project as possible fraudulent activity, which has the potential to ruin the reputation of the company or harm its funding turn. And there is virtually no process to appeal or remove them from the internet.

The whole system is designed to make any attempt at substantive discussion extremely difficult, while protecting the regulator from liability in the event of fraud.

So how do we create legal DeFi businesses?

Well you can’t. There is no European law to refer to, and no regulator to take a position. Instead, there is a policy system built of red lights and glass walls, in which a goodwill founder has no way of getting clarity on what he or she is actually allowed to do. .

For DeFi founders who want to stay in the game, the only chance is to fly under the radar of regulators, until the company becomes too entrenched to be phased out. Don’t waste money on legal advice, which regulators have no obligation to follow and often ignore. Do not participate in any debate, regulatory innovation council or government advisory group.

Be uncharismatic and unattractive. And while appearing colorless, build your customer base outside of the places frequented by financiers.

And if you do it right and long enough, like Ethereum or Binance, you might get too deep-rooted to get rid of it. In today’s regulatory environment, this is the best chance for blockchain companies to be successful. We did it differently. We have tried to do it “correctly”. And so, now we have to close.

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