Neufund, a German startup, has deployed a security token platform that enables investors to finance companies in return for equity in the form of cryptocurrencies. According to Neufund CEO Zoe Adamovicz, the platform creates a new type of asset: a token that represents equity but is liquid and tradable like a currency.
Neufund’s platform enables companies to issue ERC-20 compatible security tokens on the Ethereum blockchain. These security tokens represent fractional equity ownership in the issuing company. Investments can be made using Euros or Ether (ETH).
Beyond representing shareholding in companies, equity tokens legally protect investors and issuers through smart contracts that are automatically enforced according to pre-defined criteria. Investors are assured that issuers will deliver projects as promised while issuers can raise funds using tokenized assets in a compliant and secure manner.
Security tokens potentially represent a radical improvement to traditional fundraising models and Initial Coin Offerings (ICOs). Traditionally, private companies resorted to venture capital to raise sizeable funds. However, these investment opportunities are limited to venture funds and wealthy investors and the equity stakes themselves were illiquid, not to mention market inefficiencies and high transaction costs.
The ICO market really took off in 2017-18 since it allowed companies to raise funds from retail investors in exchange for utility tokens. However, utility tokens did not provide investor protections and did not represent shareholding in the issuing companies.
Neufund seeks to address the inefficiency of venture capital investments, while improving upon the innovations of ICOs.
Fundraising using security tokens promises to solve many of these problems. Security tokens represent fractional ownership of a private company’s stock, create liquidity for a formerly illiquid asset class, protect investors by complying with securities laws and lower transaction costs using blockchain technology to remove middle men.
Through Neufund, companies, blockchain-related or otherwise, can issue equity tokens on the blockchain. Equity Token Offerings (ETOs), a form of Security Token Offering (STO), can be conducted by any incorporated entity, except entities incorporated in the United States of America, due to regulatory uncertainty.
Neufund’s sale of its own token, the Neumark (NEU) raised over USD 14.7 million. The value of NEU tokens held represents token holders’ share of the Neufund network.
When investors participate in a company’s token offering, they receive equity shares in the form of the company’s security token and will also receive NEU tokens.
At press time, seven company offerings were live on the Neufund platform, ranging from Seed round to Series D offerings. The companies themselves were from Sweden, Germany, India and Malta.
Neufund operates worldwide and aims to accept retail investors retail investors from around the world.
Solutions for investors and issuers
Investing in companies through Neufund gives individual investors legally-binding equity stakes in that company and in Neufund as well, since investors also receive NEU tokens. Every investor’s security token grants them certain shareholder rights, such as receiving dividends and participation resolution voting.
Every investment made through the platform rewards investors with NEU tokens as well. These NEU tokens represent co-ownership of the Neufund platform. NEU token holders are entitled to a share of Neufund’s revenues.
Neufund allows tokenization of real-world assets such as equity and issuance of the resulting security tokens on the Ethereum blockchain.
Neufund’s platform also serves as a primary market for the issuance of blockchain-based tokens that represent private equity. Both traditional and crypto investors can invest in these tokens.
A public listing page will present all legal, investment-related and commercial information about a company to potential investors. All investors will be presented with the same investment offer. This process eliminates the need to renegotiate investment terms and significantly lowers transaction costs and time.
Neufund is implementing a diverse ecosystem to complement its primary platform to benefit customers and members of the general blockchain community.
Employee Stock Option Plan (ESOP)
Current startup stock options for employees are intangible and hard to value. They are subject to an uncertain 5 to 10-year horizon based on an exit that may not materialize.
Neufund’s concept of a tokenized ESOP allows employees to potentially monetize stock options in a shorter timeframe (e.g. 1-2 years). If the company issuing the ESOP permits employees to trade vested options (in the form of tokens) on exchanges or allows employees to convert options into tradeable tokens in an ICO, it creates a secondary option-token market where both employers and employees can benefit.
Ethereum smart contracts will govern stock options for employees and will function as legal agreements. This makes the ESOP program a lot easier and cheaper to manage. Any incorporated startup can use this solution to implement an ESOP on the Blockchain.
Blockchain Policy Initiative
The Blockchain Policy Initiative is an open community of lawyers, blockchain startups and policy think tanks working on advancing the regulation of blockchain, Distributed Ledger Technology (DLT) and crypto assets.
Launched by Neufund, ICO Monitor is a toolkit that will help crypto investors evaluate ICOs and other token generating events. The ICO Monitor allows investors and journalists to learn whether an ICO is transparent and can be trusted. ICO transparency is evaluated based on their smart contracts.
Smart Contract Watch
Created by Neufund, this tool monitors smart contract activity and interactions based on generated transactions and events.
Normally, we use blockchain explorers like Etherscan to check how smart contracts are interacting with a blockchain. Essentially, blockchain explorers allows users to lookup, track and validate transactions. Neufund created the Smart Contract Watch to overcome the shortcomings it identified with blockchain explorers in general.
Term Sheet Ninja
The Neufund platform standardizes the fundraising process using a term sheet template. The template includes standard legal terms for investment offers, generates legal agreements and assists with prospectus drafting.
Neufund is looking to partner with companies that can help expand the market reach of equity tokens issued on the platform. Recently, it has entered into partnerships with the Malta Stock Exchange’s financial technology arm, MSX and Binance, as well as Blocktrade.
Both MSX and Blocktrade.com will become secondary markets for equity tokens offered by Neufund. Neufund’s partnership with MSX aims to foster a “regulated and decentralized, global stock exchange for listing and trading tokenized securities alongside crypto-assets.”
Neufund is the first tokenization platform to establish secondary market partnership with trading facilities such as Binance, BitBay, and now, MSX and Blocktrade.com.
ICOs and utility tokens are fading in popularity, in part due to the threat of regulatory action by bodies such as the SEC in the United States. It is very possible that regulatory-compliant security tokens could replace utility tokens as a fundraising tool.
The current issue with security tokens is the lack of secondary market trading opportunities. Neufund, with its tokenization platform and partnerships with secondary market trading providers, could provide real benefits for issuers and investors.
For more information visit https://neufund.org/.
Disclaimer: Investing in token offerings, cryptocurrencies, and digital tokens is highly risky and speculative. The material presented in this article is meant for information purposes only. It is not intended to provide any sort of investment advice, nor does it recommend any company, token offering, or digital token and should not be taken as the basis for any investment decision or strategy.