By Tyler Horowitz
After the SEC enacted Title III of the JOBS Act, Republic created an investment crowdfunding platform to facilitate investments from non-accredited investors to emerging startup companies. Inspired by the drastic increase in token issuances and emerging blockchain-based companies, the Republic Crypto sub-brand was launched in December 2017. Republic Crypto is the first compliant, inclusive blockchain financing and investment platform. Republic Crypto has pioneered a new model for blockchain companies who wish to raise capital from the public. Their new security is called the Token Debt Payable by Asset (Token DPA), and this new security may have permanently altered the state of investment crowdfunding raises in an ever-evolving, technologically advanced world.
In our exploration of the DPA, we interviewed Maxwell Rich, legal counsel at Republic. Throughout this article we will share highlights from this discussion.
Q: What was the reason for creating the Token DPA?
A: We were disappointed with the SAFT, both from an investor protection perspective and from the manner in which various practitioners proclaimed that it could scrub tokens of their security status. With the Token DPA, we take no such view. The Tokens that are ultimately distributed will be characterized by their function – that’s why we call it the DP “Assets” – tokens are assets of the Company and when they are given to participants, it’s at that point their status as a security should be determined, just like a dividend which can come in the form of stock (clearly a security), cash (a form of fiat) or other things (possibly not a security).
What is a DPA?
The Token DPA is a token presale instrument for blockchain-based companies to utilize when financing their companies through investment crowdfunding (Title III of the JOBS Act). This type of offering allows these companies to offer a token pre-sale and solicit the general public through a crowdfunding portal. In this case, investors submit their investments through Republic’s portal, and in return, the investor receive a Token DPA, which is debt instrument. Once the Token DPA is issued, it can either be a covenant for the company to repay the principal amount with interest, or it can convert to the company’s native token when the network is built. In order to receive the token, the company’s project must launch, and a token distribution event must ensue. Generally, under the DPA, repayment in the native token comes with a premium, in lieu of interest. This method allows the investor to receive tokens at a set preferential conversion rate. On the other hand, should the Company’s project fail, an investor is able to recoup his or her investment with cash and under certain circumstances, with interest.
Q: How many companies have used the DPA so far?
A: 3 companies have successfully completed offerings with the Token DPA, although we hear some companies wish to utilize this instrument for Reg D offerings. We have 2 companies currently raising on Republic using the Token DPA and we hope to host more soon.
Q: Is the Token DPA only being offered through Republic Crypto or have other competitors started creating their own version?
A: Other competitors have created alternatives such as the SAFT-E which adds an equity element (which we dislike for many token issuers as the equity in the company is not what the investor is seeking) but this instrument doesn’t meet the goals we set with the DPA.
Token DPA Terms
Companies can customize the Token DPA in order to suit their projected launch and needs. For example, companies can reward early investor by offering a discount on future tokens when a token generation event occurs. When a company develops its technology and is ready to launch its tokens, the company can opt to either repay the investors’ debt in tokens or in cash. This may be favorable for investors because they are able to purchase tokens at a discounted price. Additionally, the Token DPA sets forth a maturity date, which is the expiration date of the instrument and thus triggers cash repayment (plus interest) or issuance of the company’s tokens. Investors are protected in the event the company is insolvent, because they are entitled to distribution of the company’s remaining assets before equity holders.
The Token DPA comes in two flavors. The first is for earlier stage companies whose token distribution is likely far in the future – under this form of Token DPA, investors can request a partial refund if certain logistical milestones are not met. Companies can keep monies in escrow to provide further assurance that the refunds will be funded. Later stage companies utilizing the Token DPA – with imminent token generation dates – can elect to hold the proceeds of their crowdfunding offerings in escrow until the tokens are distributed. This means in theory that if for some reason tokens cannot be delivered to participants, investor money can be easily returned.
Token DPA vs. SAFT
A Simple Agreement for Future Tokens (SAFT) serves as an investment contract which conveys investors the right to the company’s tokens prior to the development of the tokens’ functionality. SAFT holders must wait for a public token sale in order to experience a return on their investment. In the event of the company’s insolvency, there is likely little recourse for participants, and there may be no time limit by which the company can wait to distribute tokens. On the other hand, a Token DPA is structured to provide investors the ability to receive a return on their investment in either cash or in tokens when available. Token DPA investments allow participants to receive all the benefits of a SAFT with more downside protection.
Q: Why should companies utilize the Token DPA over a SAFT?
A: The Token DPA provides the possibility of investor protections and the use of its optional escrow provision can show investors that a company takes raising capital and the sale of their tokens seriously.
Pre-sale Offerings under Security Regulations
The Token DPA provides an effective method for companies to issue tokens under Regulation Crowdfunding or other securities exemptions. The Regulation CF coupled with the Token DPA security instrument has provided access for retail investors to invest in emerging blockchain-based companies. However, the Token DPA is not a Reg CF only security instrument, and could be utilized, with appropriate changes, for other exempt offerings such as Reg D (accredited-only), Reg S (international) or possibly Reg A+.
Q: Is the Token DPA only being offered through Republic Crypto or have other competitors started creating their own version?
A: Other competitors have created alternatives such as the SAFT-E which adds an equity element (which we dislike for many token issuers as the equity in the company is not what the investor is seeking) but this instrument doesn’t meet the goals we set with the DPA.
Q: To date, is the Token DPA only being used for Regulation Crowdfunding campaigns?
A: To our knowledge, yes, but that should be changing soon!
Republic Crypto’s Token DPA has provided an innovative method for blockchain-based companies to issue tokens and may have transformed the future landscape of investment crowdfunding. By solving the shortcomings of the SAFT, we expect to see more blockchain companies issuing tokens with Republic Crypto’s Token DPA in the near future.