Neufund was a security token company that wanted anyone in the world to invest in any businesses they want.
For decades, investing has been exclusive, inaccessible and unequal. This has contributed to the growing wealth disparity in Europe and the U.S. We wanted to change that.
Today we’re closing Neufund, despite it being successful.
Zoe Adamovicz has co-founded multiple startups. Her most recent venture, Neufund, was a fintech firm for securities tokenization that aimed to democratize access to global innovation capital.
Over the course of Neufund’s life, we transacted about €20 million ($22.6 million) through our equity platform, facilitated entirely through the public Ethereum blockchain. We registered 11,000 investors from 123 countries – an international and diverse crowd with tickets starting from as low as €100 ($113).
Our concept-proving case – Greyp Bikes – made the full cycle, from issuing tokenized shares for retail investors, through corporate governance on blockchain, to the exit to Porsche and proceeds distribution via ERC20 tokens. Effectively, there were never any compliance issues, technical problems or security breaches. An European tech company fundraised through the issuance of securities using a decentralized technology. And more than 1,000 investors from dozens of countries participated. How cool.
Why? Because today, more than two years after Greyp fundraised, we still are unsure whether regulation allows us to repeat the Greyp fundraising model with other similar companies. Despite engaging with regulators for years, we didn’t manage to get out of the limbo of legal uncertainty.
And, I dare say, no DeFi (decentralized finance) company, aiming for regular investors on a bigger scale, has ever made it so far.
From the inception, we have played it by the book – hiring lawyers, getting licenses, spending bazillions on legal opinions. We were engaging with regulators and governments, in numerous jurisdictions. Yet, all this turned out to be a mistake. Looking for legal approval was a mistake, as was looking for a transparent discussion of merits. The reality was presented to us quite clearly: If you play it according to Hoyle, you’ve lost before you even started.
Here’s what we learned from the experience.
“Blockchain licenses” are useless
Let’s start with “blockchain licenses” issued by reformed, innovative jurisdictions, such as Switzerland, Liechtenstein, Malta, Estonia, Gibraltar and so on. They all welcome entrepreneurs with open arms.
So, yes, you can get a Swiss Security Token License, Liechtenstein Token Technology Service Provider License or Malta Virtual Financial Asset License. But the hack is that, despite Europe theoretically having one common market, those licenses are not recognized in other European jurisdictions.
For example, if investors from Germany aim to use your business operating in Liechtenstein under such TTSP license, BaFIN (the Federal Financial Supervisory Authority, Germany’s financial regulator) will claim you’re acting illegally, and will toot warnings of fraud in no time.
This is probably why in Liechtenstein only seven businesses received such licenses over the last two years, out of which two were granted to already licensed, conventional banks (Bank Frick and VP Bank).
Recently, some states became more straightforward about the flaws of their innovative laws. Liechtenstein states on its website: “Registration under the TVTG is effective exclusively in Liechtenstein; passporting according to the model of European financial market laws is therefore not possible.”
Some, like Estonia, simply cancel previously issued licenses – 70% out of 2,000 Estonia virtual asset service provider licenses were revoked in June 2020, and so far no new “blockchain license” has been offered.
Still, all those countries remain very vigorous in promoting themselves as blockchain-friendly. As a result, many entrepreneurs flock to those jurisdictions, while in fact the licenses issued there are useless, and nearly zero business actually gets done.
Legal workarounds, like .org, are ticking bombs
Following the example of Ethereum, many protocol companies registered themselves in Zug, Switzerland as charities. This mask of nonprofit organizations is the reason why we see many blockchain businesses marketing under .org domain, instead of .com. The concept of utility tokens flourished, and initial coin offerings boomed, thereby legally structuring token purchases as donations to the common good of the development of a protocol. It was all possible due to a single hack: Unlike many other countries, Switzerland does not limit the definition of charitable activity to specific domains.
Yet, when it became obvious that the purpose of those projects was commercial rather than philanthropic, the initially lenient Swiss regulator, FINMA (Swiss Financial Market Supervisory Authority), cracked down on ICOs and the .org structure. You may ask why Ethereum was barely affected by it. Well, by the time the hunt started, the network was already just too big to scrap.
NFTs (non-fungible tokens) are the new hot carve out, but the next in line for regulatory scrutiny. We can comfortably assume the watchdogs will not qualify as “unique” what issuers deem “unique.” They will rather classify NTF’ed avatars and soccer stars as commodities – and boom! securities law applies. We’ve seen the movie before.
Classical financial licenses are a dead end
Neufund’s experience in Liechtenstein is indicative of how it works when DeFi meets traditional banking laws. Initially, the Financial Market Authority gave us a written confirmation – sometimes called a “nonaction letter” – that the business model of Neufund did not need a financial license. We were told it was not even eligible for such a license. Based on this, we conducted the Greyp fundraise.
After the offering closed, we received a harsh warning from FMA that we were possibly breaking laws and that penalties, including potential criminal offense (yap, that means jail) could apply. We got accused of operating without the necessary financial license.
Confused, we appealed, and soon received a formal apology from some of the country’s highest figures. We also came to a negotiated solution with the FMA and agreed to apply for a traditional “asset manager” license. We all knew it made little sense since the company never managed any assets, yet we somehow had to fit the box.
Money and time went into this, until we received another call from the FMA – after a revision, the regulator concluded again that the Neufund business model is not eligible for a financial license (face palm emoticon here). So the process was halted.
Ever since, we have tried to get clarity as to whether we are legal or illegal, and nobody is able to tell us. The whole dialogue was futile. It fed Liechtenstein’s “progressive state” narrative, with zero business output.
Evading discussion of merits through discrediting blockchain companies, is regulators’ common posterior protection tactics
Did you know that most regulators, in particular Germany’s BaFIN, maintain a policy not to issue greenlights on crypto and other fintech startups? They only issue red lights, and then only after you have already started the business activity.
Those red lights are direct injunctions, or, in their mildest, yet popular version, known as public warnings. They are semiofficial – a form of a watchdog’s “blog,” an arena for publicly tooting regulator’s suspicions of whatever business, and where no supporting evidence is neither published nor required.
Often those warnings read like this: “BaFIN has sufficient grounds to suspect that CompanyX offers product Y without required licenses.”
Frequently, the alleged offender learns about receiving such a warning only from the internet, left without any means to discuss or dispute. Their effect is that they label the project as a possible fraudulent activity, which has the potential to ruin the business’ reputation or damage its financing round. And there is barely any process to appeal or make them disappear from the internet.
The whole system is designed to make any attempt at a discussion of substance extremely difficult, while at the same time shielding the regulator from any responsibility, in case a fraud actually happens.
So, how do we build legal DeFi businesses?
Well, you can’t. There is no European law to refer to, and no regulator to take a stand. Instead, there is a system of policies built of red lights and glass walls, in which a good-willed founder has no means to get clarity as to 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 below regulators’ radar, until the business becomes too entrenched to do away with. Don’t waste money on legal opinions, which regulators don’t have any obligation to respect, and often just ignore. Don’t participate in any debates, regulation innovation councils or government advisory groups.
Be uncharismatic and unattractive. And while appearing colorless, build your customers outside of places frequented by the finance folk.
And if you do it right and for long enough, like Ethereum or Binance, you might become too deep-rooted to dispose of. In the current regulatory environment, it is the best chance for blockchain companies to succeed. We did it differently. We tried to do it “right.” And therefore, now, we have to close.
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