Equity Tokens

Blockchain startup Neufund to debut equity token offerings

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If Germany isn't interested, they'll leave for Malta. Source: Neufund

Neufund, a Berlin-based blockchain fundraising platform, is brimming with self-confidence, declaring “we’re better than Nasdaq” at the Money Conf fintech conference in Dublin last week.

Founded just 18 months ago, the startup wants to revolutionize the global investment market by letting firms raise money on the blockchain by issuing tokens, or virtual stakes, in a process the company dubbed an Equity Token Offering (ETO).

It plans to launch the first financing rounds by November and this week unveiled the first six firms that plan to use it: online retailer Brille24, blockchain experts Blockstate, automotive startup Uniti, second-hand sales platform MySwoop, consultancy Next Big Thing and electric motorbike firm Emflux Motors.

“We will democratize corporate finance,” Neufund co-founder Zoe Adamovicz told Handelsblatt. For the first time, private individuals will be able to purchase venture capital directly, she said. “I want the grandmother or the student with small savings to be able to participate.” That, she said, was a step towards a “fair and inclusive” economy. The current ways of raising corporate finance are non-transparent and expensive, she said.

Dawn of a new, ICO era

Many companies have tried to obtain funding via Initial Coin Offerings (ICOs), which involves issuing tokens that can take the form of shares in the company, a stake in a specific project or usage rights for a particular product or service.

The global ICO market surged to more than $6 billion last year, but many investors were cheated and lost money. “At the moment, investors who finance companies via cryptocurrencies can’t be certain that the tokens issued will really be used for the stated purpose,” Ms. Adamovicz said.

Neufund is offering a different approach, she said. It lets investors buy rights to a company that can be enforced through courts. All firms that use the Neufund platform will be well-established and have functioning business models, she said, promising the dawn of “an era of legal and safe ICOs.”

Investment or securities: Bafin wants to know

But there’s a problem. Neufund is operating in a legal gray area, said Professor Volker Brühl, head of the Center for Financial Studies at Frankfurt University.

Germany’s Federal Financial Supervisory Authority (Bafin) isn’t monitoring Neufund right now. “Companies that aren’t included in our database have no permission for example to do banking business or offer financial services,” Bafin said.

Mr. Brühl said Neufund’s status hinges in part on the legal definition of the tokens it will issue. Neufund wants them to be categorized as an investment, but it’s worried they will be rated as securities.

“If that were to happen, the cost of a token issue would be as high as a stock issue and blockchain as an alternative form of financing would be dead in Germany,” warned Neufund investor Frank Thelen, a founding partner of venture capital firm Freigeist Capital.

Turning tokens into securities

If tokens were treated as securities, they would be handled by Clearstream, the central securities depositary, and that would run counter to the decentralized nature of Blockchain. Mr. Brühl thinks the tokens look more like securities than investments because of the way they’re marketed. They are tradable assets, he said.

At Neufund, the actual company stakes will be held by a single-purpose firm called Neumini which will issue tokens that in turn guarantee the rights linked to corporate stakes, such as dividend payments.

“That is a device used to avoid the direct issuance of securities,” he said. “It’s cleverly done, but in legal terms tokens should be categorized as securities. Anything else wouldn’t be appropriate.” That means Neufund would need a license to sell capital investments and would come under Bafin’s supervision, he said.

Neufund has warned that it can take its business elsewhere. “If it doesn’t work out, we’ll go to Malta,” Ms. Adamovicz said, noting that Malta and France are among countries that make it easy to use the new form of raising capital.

Bafin hasn’t made a decision yet. Mr. Brühl said the watchdog has been quite passive in its approach to the cryptocurrencies. But that’s understandable. The authority faces a dilemma: it doesn’t want to squash a new business model, but it also has to protect investors.

Frank Drost reports on banks and politics for Handelsblatt from Berlin. Felix Holtermann covers finance. To contact the authors: drost@handelsblatt.comholtermann@handelsblatt.com

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