Crowdinvesting with GmbH-Token: Christoph Jentzch

Transcript

hello hello welcome um toer Ry he's ill he's not speaking today unfortunately sorry if you're here for his talk so we have a replacement Kristoff is going to talk about crowd investing with gmbh token exactly I didn't know that it was a last minute addition to the to the schedule uh sorry about that um and enjoy go for it thank you very much so I was just asked to talk about this five minutes ago so but nevertheless um I have some slide prepared for those who don't know me um I actually worked for the ethereum foundation in 2014 with vitalik and Gavin was the lead

tester we built ethereum we launched it after that I started a company called slockit mostly known for the da I guess some of you know what the da was so I was the author of the smart contract more or less responsible of the buck um my code and so this is part of the history but let's go a little bit coming from that history I've built something during the last three years which I want to show you today um so if we really go back in 2013 I got into Bitcoin and I still like Bitcoin even though I love ethereum even more but Bitcoin was always about digital ownership it's a currency that needed a

blockchain to function and now with ethereum we got a blockchain which is a really the application layer or where the applications can be built on top which needed a currency to function and if you read the V the white paper by vake and I think you all should it's like almost like a prophecy because everything he wrote in there is fulfilled maybe except nfts he predicted almost everything like from Dows to ens to tokens and so on and this is a part of the white paper where you already wrote as an example people what people could do with ethereum we talked about tokens so a little bit later actually even after the Dow or during the time the es esc20 standard evolved so we had a standardized token for those of you

who have been around in 2013 and 14 those who wanted to build a token created their own blockchain so if look at Prime coin namecoin and so on Master coin so they wanted to do something they wanted to have a token so they have to build their own blockchain network this was one of the first first primary use cases of ethereum that they said now we can just use existing infrastructure to build our token on top okay then the problem was every token contract is different then we got esc2 standard and now they had the same interface so that all those wallets and later on defi protocols could work with them but digital ownership was always at its core so then in 2016 I did this project with

my team called the Dao and I don't want to get into all the details you can read about them in the cryptops from Laur Sheen if you want she got really into the nitty critty details of what happened back then but what we did learn except of the importance of smart contract security is a given we did learn that fundraising through tokens worked like a charm so what happened afterwards so those are just the statistics about yeah 2016 to end of 2018 and this little thing here was the da almost like not important any anymore and then CES came this Ico boom and you know that many of those projects were ferland scammy and a lot of people lost

a lot of money and I don't want to like praise this time but the fundraising process that you could just buy a token see on chain how many token exists you can calculate the market cap it could be listed on some dieselized exchanges this worked like a charm and was really really nice during the time so there were good good learnings from that so fundraising through token still the best so but what happened afterwards SEC came bin came and the German is Baffin well those are most likely security tokens so during the io times again some learnings because I want to take you

through this journey to know what we learned during those years and how this ended up in what I'm currently doing so what you should never do when you have a company is having two cap tables two ownership structures because then an investor has no idea where he should invest in should he invest into your for-profit company or should he invest in your token where is the value and in the end the CEO often has a lot of impact and power to decide where the value goes so that's why I usually never invest in projects which have two cap tables because I have no idea where the value will be and I'm completely dependent on the CEO so one good decision those Ico Pro projects in 2016

17 and 18 did was they wanted to have only one cap table and that's why they they choose to go with a nonprofit they often went to Switzerland created a nonprofit Swiss foundation and if you have a nonprofit there are no real owners I mean there's no one getting any money out of it there are no dividends and so on it's a nonprofit but this also means and I think this was a bit ridiculous when I invested in those projects I actually got the donation received when I'm invested into in my view for-profit blockchain project and get donation Reed that I can get some tax deduction um because it was a nonprofit so then the token what they most of the projects did and I'm now really generalizing there many different

projects many different ways of doing things but many of them said well in order to use our product you need to have the token we kept the supply of the token and by this we have a token where the value is somehow linked to the value of of the product so this is how those icos worked but they did not give investors voting rights dividends exit participation liquidation proceeds all the things a standard investor would expect so they were legally forced to give their investor actually something very weak just because they feared they would become a security token so nevertheless we would like to give our investors actually ownership and

actually economic participation so this was secur this is yeah then security token came along and there is this quote I like a lot I use it in almost every blockchain presentation I gave over the last 10 years from Buckman fullo who said you never change things by fighting the existing reality to change something build a new model that makes the existing model Obsolete and I think most of the stuff you're doing on ethereum kind of is following this model so but what happened now with security tokens they actually did not follow this model what they did is they did leave all the contracts as is and they just put a token on top meaning now if you want to transfer ownership in your company you

would have to sign all those documents and you have to sign uh change to transfer the token so it became actually more of a hassle and it added burden than making anything better second problem I will then tell you shortly how we solve this if you have those legal rights in a company and you have this technical token there's a very high risk let's say my 9-year-old daughter is transferring the token technically but she cannot enter into this legal agreement legally meaning that the right stay with me so because if you in Investments you have something called an investment contract and with security tokens you always have

to enter into investment contracts either explicitly by signing paper or imp itly just by even more orally just saying you're getting those legal rights so there is a risk that those rights and the token fall apart so with all those learnings together with excellent lawyers for now only in Germany hopefully later on all over Europe so but we started in Germany it's why it's called the gmbh token we developed something where we have a token which is always has the same value as an actually gmbh company share and the next slide is this one slide where I put all the information what the gmbh token is and how it works legally the rest is just

some applications of it so what is the gmbh token from a legal perspective so you cannot directly tokenize a gmbh share period it's not possible it's there's a commercial register in Germany it's called handles register and you need to have a notary signing some papers to get some of it so but what you can do is in English we say profit participation right in German would it would be Gus so and what we have in there is this profit participation right gives the owner of the token the right to dividends exit proceed and liquidation proceeds in summary and that's a very important statement every economic right

of a shareholder is now also with a token holder so there's no economic right shareholder has that a token holder does not have and they are giving out this is legal contract or profit participation right on top of this you get some information rights like annual Financial reports plus I like to call it conversion right lawyers like to like to call it put option that you are as a token holder allowed to give the token back to the company and receive an actual company share so with this like the only thing which is missing is voting rights so token holders for legal reasons are not allowed to vote in company um decisions

like who's the CEO or like which direction should the company take but except of voting rights the token Holder have everything they need all the economic rights plus the right to convert the token into an actual share and if they do this they have to go in Germany to the notary and then they become an actual shareholder with actual voting rights and all the other things but for most token holders or for most even investors the voting rights are not important in the beginning because they only have let's say 1 2 3% where your voting rights don't really matter so but theoretically you can get them if you convert so this is what the token is legally all economic rights of a shareholder plus put option no voting

rights what is it technically okay In This Crowd everybody understands this it's just an erc20 token on the public ethereum main net plus some admin rights by the CEO can burn and Min tokens if they choose to do so they can have an allow list but they can also disable the allow List have it fre transferable or tradeable if they enable the allow list this means only addresses on this list are allowed to send and transfer the token if they want to they can have lockups so for early investors that they can not transfer the token for a certain amount of time vesting contracts mostly used for employees so they have four years vesting one year Cliff all put in a smart contract so with this token you have full access

to the defi ecosystem so we just talked to pwn or pawn and how you can use this token as a collateral to give yourself a loan so let's say you're a startup founder you just raced around you're running out of money you're raising the next round but you just need let's say 100 or 200 or 500k to get to the next round so what you could do is go on PW doxyz put your gmbh token there and get a loan so and then you give the money back um once to close the next round for example so that's a very nice use case how does how does gmbh token plays into this existing or evolving defi ecosystem so and now a very important

part how do we connect the legal rights in a technical one and here we have a very Innovative approach I just told you about this problem that with security tokens you have those legal rights have a technical token and if my daughter is transferring those techn technically transferring the tokens she's not entering into this investment contract that's the problem and this becomes even worse with defi let's just imagine this token goes to the pwn protocol then it's traded on Unis swap had hundreds of owners and then technically I as a new owner would have to check that this chain of legal contracts is valid there's no weak link which is practically impossible you cannot

validate that every transfer of ownership was leg done right and everything was signed and there was no error it's impossible so you're using something which is super super nice and I think many crypto projects in the future will use this as well this was developed by a law firm in Germany so we are using a very old traditional law which is in German called aong the best English trans translation is public award it's extremely simple but powerful you can make a public statement which is legally binding that you promise a reward for a certain action for example if you if I if I lose my phone I can make a public statement that

whoever finds this phone and gives it back to me gets €500 and I can make this legally binding and the important part of this is only I'm signing this legal agreement you don't need to but all of you could come to me and say I found your phone give me the money or I could say if you solve this math puzzle of find the next prime number I give you one I can make this legally binding this action as a as a reward so if any of you does this action I have to give you this reward you can take me to court for this and so now we're using this principle for the token by saying the gmbh is making a public statement on their website and our website it's just a legal contract that they say whoever is

holding the token is rewarded with dividends doing the action of holding the token whoever sending the token back to us as a company is rewarded with this put option or exit proceeds in case you just sold the company so all those legal rights you get based on a very trivial action which you can only do if you hold the token or own the token with this it doesn't matter how you got the token you don't even need to sign any legal paperwork if you have the token you can get this reward because the public company made a public promise to give you this reward based on a trivial action which you can do but you can only

do if you hold a token so this is now the legal link between the legal part and Technical part I mean there's much more to it we also have investment contracts but this is more like a second layer so you're super secure you always get those rights you never have to prove any chain of legal contracts so this is what we have developed over the last two to three years and it is super super powerful and now what can you do is this well it allows for continuous fundraising you don't have to raise a preed seed C A BCD you can just say if I meet someone here today who wants to invest my company I can give him a link and based on this link he can make the investment individually next day I makes the next Investments we have I think

made 27 individual investments in tokenized on our platform there are now I think 108 Investments or 107 executed on the platform and we have company companies who just ra funds continuously based on the terms they currently have so it's technically tradable since there's no notary required to change ownership I like to call it programmable Equity so with ether with ether we created programmable money with this I hope to create programmable Equity so you can say if someone loged in my plat into my platform I can reward him with 0.001 token so you can create incentive mechanisms to directly into your

application so it's one asset for all stakeholders and this becomes super important on to see how messy tmbh are like in often in private companies you have an investor there a convertible loan and real shareholder an employee having a special employee participation program res something but they have something very different they have all different assets and with this token you now again have one asset for all stakeholders like the big companies do with stocks um you can use it for family friends business angels VCS Community customers everybody so now let's get into regulation so not too much I don't have too much time left but if you make an offer to the public in general in

Germany and in most other European countries you have to have a so-called prospectus which depending on your lawyers and where you live and some other circumstances can cost you around 100K takes about one year to get but there are a list of exceptions and those two most important ones if you address only less than 150 investors so less I think there are less than 150 people in this room I would be allowed now to give you all an investment offer and this would not be considered a public offer so this is usually used for business angels family and friends round and so on so you don't need to go to the bathin or sec to have a private investor coming into your company if it's less than 150 and on our platform if you're logged in

with a company you can create a personalized link for an individual or entity where he or she can close this investment the other one is a public offer if you raise only up to 8 billion EUR per year you can with a key information sheet bases information PL in German uh can raise up to 8 million per year if you do this through a license broker vs tokenizer have a license under a liability umbrella umbrella so on our platform you can do something like an Ico just legally complient where you can really make um put ads on there on online you can have an invest Now button on your website or um promote it on social media and just

have investors come to you we have to do kyc and AML and suitability checks but then we can let them in uh invest in your company so what are the applications to summary there are three main features and they all live on our platform number one is private offers so personalized investment offer up to 149 or less under 50 um investors there predefined terms there an expiration date and you can just continuously fundraise using this the next one is employee participation so we have done this with a couple of one one of them is actually sitting here in the room who actually is receiving um tokenized um shares you just have investing time for example four years Cliff For example one

year so that if you would leave the company within one year he would not receive any tokens um you don't need any of those complicated EO and Vis programs it's simple it's liquid and from a text perspective it's the most optimal thing you can do because what we do on a platform is we don't give them tokens right away we give them the option to Mint the token at any time they want so we cannot take away this option so they just can click the button mint anytime they want but only when they push the button mint they actually receive tokens which is then a taxable event in Germany we say Tolus princip so only if they actually get the tokens they have to pay taxes but they can choose at which time they do this so this is much better than

most of the other programs so can either they can do it early they pay income tax when they do it and then only capital gains tax afterwards or they do it very late then they pay income tax at that point then after that capital gains tax so from a tax perspective there's no better way of doing it than this this way because it's an option to Mint the token and the last one we just launched I think three weeks ago it's crowd investing or let's say Ico if you still like the term so with icos or with crowd investing you make a public offer we give you a link which you can put on your website create an invest Now button or on social media ads or whatever you want to and then when an investor clicks it we do kyc kyc checks AML checks some

other checks then that we have to do um see how much um find information he has if he understands that he can lose all his money and all of that and after that they can invest up to 25,000 or twice of the net income according to German law but important part for you as a Founder you can pass the fundraising if you have enough money you can increase the price of your token if you think your company valuation has just increased you basically have a continuous public offer open as long as you want to so then once this is open you can speak at conferences and just say if you want to invest my company go to our company website and just click the button and help yourself so you can continuously let people into your

company okay so with this I come to an end um what is our vision or our mission we enable everyone to become a co-owner of a company that's what what you want to try to achieve you start in Germany the next one is actually Austria and then next year and then year after we try to get to all the other European countries because the legal framework has to be adjusted for every country that's the thing we have to live with here in Europe we don't have one big Market we have just very small tiny markets many of them but that's the work we are doing so that every European founder founder can use this platform to fundra so in the end I can just show you how easy it is to create a private offer

think I have two more minutes or so yeah so let's do this I hope the internet is stable enough so I now I'm skipping all the onboarding just for time reason you onboard into the platform give the name of the company and it's a sample project we have not issued any shares yet so you can here click on create create a private offer investing plan or crowd investing so let's create a private offer so it's a bit slow internet let's see no I can do this right now it is still in setting up your print okay let's do this real quickly I forgot to do this before I came here maybe now it's a 4-minute demo bear with me I'm just uploading

some logos okay here basically I use just pip Piper and do it really really quickly um you have to set up your branding do it not I'm not doing it nicely I'm just rushing through it now I have to give some website here privacy offer and email don't no you only have to do it once so let's see if the fast okay now we are getting to creating the private offer so I can choose to have a specific amount per investor or I can give him a token range so he can so the investor

can choose let's say he can invest something between one to or 10 token and 100 token I can choose stable coin such as euroc usdc or I can also choose simple bank transfer in case of a Bank trans transfer I have to confirm that I received the money so let's choose usdc as I can set my price per token let's make it um €200 so this would mean or make it €2,000 that would mean he can invest between 20,000 and €200,000 that's the range I'm giving the investor how long will be will the offer be valid let's say for one month um who is the investment for let's say Max musterman I don't need qyc at that point because I know personally

then I'm done I'm seeing the summary so the price per token and I also see the you you cannot really see it is 50 million euro it's a company valuation because we know how much shares you have in a commercial registry we know now your token price we can calculate what's your preone pre-money valuation of the company so you can see how much tokens we take a 2% um platform fee with this if you accept all of those terms um you should go on agree and then you get this link and this link is what you give to your investor and this investor has an easy onboarding as this he just sees the legal documents price per token company valuation yes or no if yes he pays in stable coins or his bank transfer and

it's done and you have have a new investor okay that's it so if you have any questions let me know thank you any question time for one or two questions hello thank you very much for the presentation uh As I understood it correctly you said that the legal link between the token and the company is the public statement of the company that the token holder has right this and this and this is it is it correct that there are also investment contracts and then plus

we have what I described as out SL a public reward which just makes it super safe in case you cannot prove that you have a valid investment contract so have both okay so but if I invest in the company and then they are sell the token so the the person who who bought the tokens they don't have the investment contract they only can rely on the public statement exactly but I think that at least under check law the company can can always take down the public statement how how no so two comments to this first in the invest M contract which is the old way of doing it we have it written down that when you transfer the token you're implicitly um transferring the investment contract as well and the

other one is accepting it but there are some doubts that could be invalid if for example childrens are doing it or some people who don't have the authority so with this public statement we publish this also on our website and with this it's also valid it just needs to be published somewhere so it's basically on their website and on our website and so they cannot take it down what we have published on our website and it's valid for 30 years that's what they put in the contract so every time someone bought the token then they also get all the legal paperwork with it with this statement in it so if somewhere somewhere someone has this statement where they said for the next 30 years we made a promised to reward those tokens with those rights it's valid okay thank you

yeah but again I I'm not a lawyer so always ask your own lawyer yeah very quick one we have one minute left