Tokenization of private companies: state of the art

Transcript

[Music] foreign [Music] hello thank you very much for inviting me so you already heard a bit about tokenization so let me take the topic again from a bit different angle so I want to talk about tokenization of private companies I'm from Germany and we have gmbhs I have a particular talk about this but let's go a little bit back to the history so I first started with Bitcoin in 2013 and Bitcoin really was about digital ownership this is still the main topic in web 3 about most of the things we do

when I read the ethereum white paper this was end of 2014. um you already see there this code snippet here this was actually the first implementation of a token and ethereum was there to make it generous General like you can have all kinds of tokens later on we developed a standard called elc20 standard versus esd20 standard you saw all kinds of token rice but this is kind of the original coming from Bitcoin from ether and now to all kinds of tokens then in 2016 I was part of I I authored something which you might know if you have been around at the time the Dao I want to I don't want to go into the

depths of it I want to go very quickly through it because we want to see some learning to the Token world of today so in 2016 we wanted to raise money for socket my company I was the CEO so I wrote the Dow smart contract intended to be a decentralized autonomous organization which would then fund startups or projects in the sharing economy space this was the narrative back then so the tower in the beginning was very successful it raised about 11.5 million ether which was about 12 to 40 percent of the total Supply and back then about 160 million dollars and because of this ethereum and the Dow of course in particular got a lot of attention so a lot of people actually

came into the ethereum space during that time so this was exciting we got a lot of press globally looking at what is this thing a decentralized autonomous organization and people get it who started to think about what is this token what does a dow token mean and we just basically opened up the minds of a lot of people lawyers investors what is this thing um the Dow was fairly distributed um it had about 23 500 addresses we don't know how many people were behind it the top 50 holders collectively owned 42 percent so compared to many other token projects it was pretty distributed from day one um you all know what happened I don't

want to go through all the story so that was a hack the hack was discussed how to solve the solution in the end there was a hard fork and now we have ethereum and ethereum classic I like this quote by T.S Eliot who said you never know how far you can go unless you've gone until you've gone too far yes the tower was too early too big too much so but this is now enough for the dial but what happened afterwards so you see this little Pub this little thing in the beginning here this 166 million into 16 and then you see this Ico craziness coming afterwards so if you had in 217 and 18 um billions of dollars being raised through icos we know that many of those companies were fraudulent or outright

scams so many bad projects but the fundraising process itself was pretty nice you just sent some ether or stable coins you get some tokens back you can see the total market cap of the company you can transparently see every token moving exchanging well the value on exchanges so the in so the fundraising process was really nice just the projects not that much So what had what happened afterwards everybody want to start doing it let's just make it legal somehow because the SEC said we cannot do this on Germany debuffing I nowadays started with security tokens um it seems like this is an easy thing it's just a stock or Equity or share and you tokenize it somehow

um but not all but many of the projects that one big mistake they just did leave everything as is we have our company we have our Equity or stock and now we have a token and say they are somehow connected usually through a contract but they didn't take off and there are many reasons for this and one main reason and a problem I later on will describe how we solved it is that there are investment contracts meaning the first token issue has an investment contract buying those tokens because there are securities and every time they are traded sometimes in hand really written but mostly just digital sometimes the DocuSign link sometimes just in the HGB of the terms and conditions

saying there is a contract between the buyer and the seller and so technically that's what our lawyers explained us as the most the biggest problem is many of those security tokens if you buy one there is a chain of contracts like investor a b c d e f g and if one of them has an invalid contract for some reason like he was not authorized to sell those tokens his eight-year-old daughter signed this contract or transferred a token for whatever reason there is an invalid contract then technically all the the rights of these investors are still with this person so you might have a token but all the rights are still someone else because in this chain of contracts there's an invalid link

so there's a quote where Buckminster Fuller and I think this describes a lot what we do in ethereum he said you never change things by fighting the existing reality to change something build a new model that makes existing model obsolete so we now try to think this through from this Ico fundraising experience and also the legal realities and how can we build a better token or better security if you take one step back a firm is just a group of people who united through contracts with a joint mission mostly they have limited liability something which most Dao projects don't have that's one maybe the main reason you want to have a limited liability

company you might want to have limited liability so then the next topic is governance um you saw daos daos are really good at managing public goods you see the ens Style and other dials which are most not really for product development and for fast decision making but for keeping and conserving good protocols and so maintenance of protocols Community ownership public goods that's what Dows are good for a traditional firm is good for product development product development finding product Market Fit Fast iterations And so there's something I learned from maybe the last 10 years I would not start a Dao again to build a

product what we tried to do in 2016 a Dao might come later if you want to keep it conserve it or give it to the community and have something which is a public good or more like a protocol so that's why films and classic companies and still have a have a place also in the crypto ecosystem so now I'm from Germany and we have focused our Solution on gmbhs which is like an LLC and why is this the case so in Germany we have about 1.15 million gmbhs compared to 15 000 he's which is like an ink the U.S so why does a simple simple setup low Capital requirements less rules and it's just much much easier to

do if you look at fundraising people are using convertible nodes and you have all seen them I have signed them myself as a business angel I have received them if you look at the details they're actually horrible because they are not Investments they are just giving out a loan with interest maturity date some of you actually don't want to do they are just a walk around more or less to an actual investment to actually get Equity or some stake in the company or you'd go or you go to notary which is a cumbersome and very expensive process another problem we have in the like non-crypto space like the gmphs you have those investors or stakeholders and they all have very different assets so you have to Founders who have actual shares

the company youth investors who might have a convertible node then you have employees who have something like virtual shares or visas all those kinds of things but those are different assets so they are not tradable you cannot have them on a secondary Market so a token helps to unify this and so there are all those different stakeholders have the same unified assets so you can think of this as the public blockchain being like a layer 2. where we I don't need to explain you how a token works it's cheap programmable you have access to D5 ecosystem and the layer 1 and Germany would be the handles register like is it the public registry where only the notary has access and we

we don't intend to change this because it's almost impossible and that's not our goal but how can we link them very strongly together and here we have used something which is called auslobal or public award and I want to shortly explain this because that's the the key value proposition of what we did different than anybody else when it comes to security token I explained to you this problem of having this chain of contracts where a single week link makes the token worthless because every time the token exchanged hands there is implicitly a contract if the contract is not Wallet not valid the value is gone so under this access example a German word best English translation I could

find is public award it works differently it is a one-sided contract where someone promises something to the public and is rewarding an action let me give you an example if I say to you if you've solved this math puzzle you can get one million euro and you don't have to sign this promise I'm giving this promise legally binding that whoever solves this problem gets one million euro and whoever comes will get this money he can take me to court if I don't give him the money because I promise this so this is a legally binding promise which doesn't need to be signed by the other side only by one side and this is what we use for the token what we say is

whoever is holding the token is rewarded with dividends and liquidation proceeds whoever is giving the token back to the company has a right to convert it to actual shares but it sounds so simple but we but we reward the action there is no investment contract needed it's just however you got a token doesn't matter if you perform the action of sending back the token to the company the company has publicly announced that it will that it will reward everyone who is doing so by giving out extra shares then they get shares or the public the company has publicly announced whoever holds tokens is for this action rewarded

with dividends so we keep we throw away this list of contracts we don't need those investment contracts we just base it on this action this is how we solve this problem of linking the token to the value of company share so now let's just go very quickly through this yes you get dividends liquidation proceeds exit participation information rights and a put option which gives you a right to get actual shares so that's why the token has the exact economic value as an actual share but you don't need any investment contracts because you get it based on actions you can only do when holding a token or sending a token back that's the key key part with this we have actually created a token which represents a company share just without

the Voting Rights the Voting Rights can only be get if you actually convert them to actual shares so my time is always almost up so what can you do with this I call it fundraising as it's supposed to be you can make private offers to some persons like business angels and others which way you can create a link on our platform and they see the terms they can click accept send the money get the token done so we have done with about a dozen of business angels almost now and it's so easy fundraising that way like today if someone would would say I'm interested in investing in this company just give him the link with the terms and be done with it so at public offer I like to call it continuous fundraising because we always think about seed round

series A B C D the only reason we do so is because it's so much work and such a big process to do a fundraise but if it's a token you can say it's a continuous fundraising process you can have a public offer now you can say this is those are the terms price per token market cap and so on and at those terms you allow the public to invest so you just have an invest Now button on your website someone can click it and according according to those terms by those tokens and this is what I call continuous fundraising of course you can also do employer participation we have vesting smart contracts for example four years vesting one year cliff and according to those smart contracts those employees get minting rights to receive those tokens

the interesting part is they would have the same tones as investors so it's possibly possible to trade them on a secondary Market um when it comes to regulation I like this uh tweet from Alex who said it would be cool if you could put nansen Equity into uni swap without going to jail that's our goal so if we have those tokens um yes we are treating them like Securities today and on our platform we are having yes to fulfill all those requirements qic AML and so on but once you do yes you can trade them maybe the uni swap interface is not showing them because they're Securities but on our interface you can show them because yes you have a gatekeeping in terms of kyc and then you can actually um trade those

those tokens so tokenized acts under the liability umbrella so we have a broker license and with this we can allow all our customers to have a public fundraising allowing the public to invest we just have to do those kyc email checks and then um you can raise up to 8 million euros in Europe with this regulation framework we are part of and we just want to bring this experience of the fundraising process back to the to actual companies which is very similar to what you see in the Ico space hopefully with much much better projects and those can be extreme behs so let me close with our mission statement we want to enable everyone to

become a co-owner of a company and I think with ethereum as a as our base we're using the public ethereum chain we have the right tools to do so and now we have the right legal framework to do so you can visit tokenize.it to learn more about this thank you very much thanks thank you thank you