DAPPCON 2024: Crowdinvesting With GmbH-Token - Christoph Jentzsch

Transcript

it's great to be here back at Decon I think I've spoken at almost I think at every Decon since the beginning so it's I think the best etherum conference in Germany so it's really great to be here so I want to speak about gmbh token and how you can tokenize your GMB um but let's step a little bit back to look at history so taking you a little bit through the Journey how I came here and from where I'm coming from so if you think about Bitcoin I discovered Bitcoin 2013 I I know there are some people here who hate it some who love it I still like it so meaning Bitcoin has this PR digital ownership to the m let's say not to the masses but to a lot of people we for the first time understood that you

could digitally really own something um in 2014 we got ethereum and there is this snippet in the ethereum white paper um where vitalik basically predicted that a lot of tokens will be built this is a bit of Pudo code it's not directly the erc20 standard this was not defined in the white paper but he already predicted there will be lots of tokens for all kinds of use cases so back then you just called them your own currency and I still like the ethereum white paper a lot if you read it almost everything in there um got fulfilled it is like a prediction of the future from Dows to ens to tokens the only thing thing I think ralik didn't predict was nfts but

anything else you can find in the etherum white paper so this was the beginning that you now could say of for those who have been around during the time before ethereum people actually started building their own chains per token so you had prime coin namecoin so if you want to do any application you start your own chain with your own consensus with proof of for later on proof of stake so ethereum solved that problem that you now already have a chain which is stable and robust verus stable consensus layer you can build your token on top of so in 2016 I was most known for the project the da so we took it to the most radical approach if you want fully decentralized just a

smart contract everybody could put ether in get it out token out that's not a topic of my talk you know what happened there was a buck in a SM contract and we got a hot Fork another story for another day it's now almost 10 years ago but what we learned from that except of of course Smart contct Security is that the fundraising mechanism using a token to fund race worked like a charm and what happened after that after that we had this Ico bubble you see this uh Little Dot here in 2016 this 160 million um but what happened afterwards was billions of dollars are raised using tokens many of those projects were scams bad projects some of them were good

again another discussion how good or bad icos were but still the fundraising mechanism of letting people buy your token they can see the market cap on EOS scan it's all completely transparent It's All Digital so don't need a noty or anybody like that and they can see exactly to what terms the token is technically tradable if there's a market so those aspects of the icos and DOW times was really great yeah so but what did we get afterwards so you see it going down in 2018 or so well SEC came Baffin came and others saying most of those most of the tokens are most likely Securities and I'm not a lawyer I

don't want to speak to this point directly but what happened to most of those projects or what was the legal setup not all of again many are different but most of them did they choose a nonprofit foundation in Switzerland and the reasons for for those is that you do not want to have two cap tables I'm also strongly advising against doing a for-profit entity let's say gmbh or H and then you have a utility token next to it or any kind of token because as an investor you have no idea where the value is the CEO of this company has a lot of power to direct the future value towards increase in token price or increase in company share price so two kind of cap tables is always for me as an investor and

absolutely no go so I won't have one cap table so and this was the reason why they went for nonprofits because in nonprofits those shares have zero value um they are actually owned by the state to some extent in Switzerland so this is the nonprofit foundation and then they try to make tokens and to connect the token price to the product roughly speaking they just kept the amount of tokens existing something like 100 million and said you in order to use the product you need to have a token so if the usage of the product go goes up and the limit there's a limited Supply means the value of the token goes up this was roughly the model we saw at the time and you can argue now about some of them are security tokens I'm not depending what

you do but ironically even though those projects wanted to give the token holder dividends and uh real value and exit participation liquidation proceeds they could not because then it would look like a security so those investors if you look at the paperwork they donated to a Swift profit we actually got a donation received and a paper saying this token is nothing will be nothing has no value and whatever so this is actually ridiculous and investors put money into this those kind of tokens so this is this was not a good situation so we looked into how can you like redesign the system and stick don't make it too complicated now I like this quote where

Buckman follower said you never change things by fighting the existing reality to change something build a new model that makes the exist model absolete so we are based in Germany so we looked at the German gmbh and what you can do to tokenize it and if you would go to a lawyer that would say go somewhere else like go to Estonia or go to Cayman Islands or Switzerland and you can still do this but it's a tax hassle it's a it's just a hassle to change the location of a company or having something abroad so we look to how you can how can you do it in Germany for a startup which is a gmbh this is something we've worked on now for almost 3 years and I think we have solved it and so in the next slide I have one slide with all the information about

what is this gmbh token so it's a little bit dense but if you understood this slide you have I've got most of the information what I wanted to convey today so the GM first of all you cannot tokenize a real gmbh share those shares on the commercial register called handles register in Germany and only the noty has any access to it that's a problem you all know but what you can do is giving out something called participation right on German G so we are using those or we can also call them profit participation rights and they include dividends exit proceeds liquidation proceeds so if you sell the company or if you liquidate the company

this in essence means every Financial right or economic right the shareholder has the token holder has as well so every time a shareholder gets some money per share the same amount of money per token goes to the Token holder meaning one token always has the economic value of one company share plus uh the token holder gets some basic um information rights um like the annual financial report and one additional thing which I think is very important this is a put option to give the token back to the company and receive an actual company share this of course has to happen at the notary and we do not think this is

done very frequently or it's actually only needed if you need governance rights because governance rights to really like make decisions in the company cannot be given out s those G or participation rights so you can only get them by actually converting your token to an extra share so in essence in a token holder has the same economic rights as a shareholder plus he has a way to convert the token into a share so R this token equals company share Tech technically I don't have to speak too much about this here because it's simple for all of you it's an ec20 token on a public etherum chain for crowd investing we are actually using the noses chain uh since they are cheaper gas costs and

nice monium integration and good safe support that's why for crowd investing starting with a €2 200 minimal invest we using noses but for the other things it's on ethereum Main net it's say e token with admin rights for the CEO so he can burn and Min tokens there's an allow list which he can or cannot use if it is used then only those on the allow list are um allowed to hold the token or send and transfer the token there are lock ups so we can say to investor you cannot transfer the token for a certain amount of time and all of this is smart contract enabled also vesting contracts for employees all of this onchain so with this you have a token which gives you full access to defi ecosystem so we are currently looking

into how we can integrate this into dexes talking with pwn how you can use your token for example as a collateral to give yourself a loan so all those nice applications are now possible because you have a digital token on ethereum and now a very important part how we connect the legal part and the technical part that might might sound a bit boring but a lot of those security token had a problem that legally there's always an investment contract between a buyer and a seller even it's explicitly like in a document or it's implicitly just by doing this um trade the problem is if let's say my 9-year-old daughter is trans transferring the token she's not legally entering into this investment

contract meaning there is this worst case scenario where the token is technically transferred but the legal rights are not and this is the main problem of many security tokens so how do you solve this that there never will be like a dissolvement of to technical token and legal rights solution to this problem is something called public reward or German outl so outling is the bgb and in the German law it's a very simple thing but powerful it says you can publicly announce that you are rewarding a certain action so for example if you find my physical wallet I give you €1,000 if you solve this mathematical puzzle I give you1 million the nice thing about this is It's a

one-sided contract I'm making the statement I'm signing this I'm saying this it's legally binding even though you didn't sign but if you fulfill the requirement you can take me to cour if I don't give you the reward and we're using this mechanism that the gmbh is publicly announcing that it will reward the action of holding the token with dividends the action of sending the token back to the gmbh with the put option so you get those legal rights based on an action you can only do if you hold a token and the action itself is Trivial you just push a button on a on a web app so with this it doesn't matter how you got the token if it went through a defy exchange or whatever um

if you have the token you can always claim your rights based on this public reward or outop and you don't have to prove there's a valid chain of investment contracts because if if this token gets traded you have hundred hundreds of owners legally you would have to check if all of them legally entered into the investment contract that they're all correct which is practically impossible but now with this public reward outlo you do not need this so and this is a very very strong connection and we have worked a lot to figure this all out so this but the end result is we now have an ESD train token on ethereum which is representing economically a company share and it's always linked so what can you now do with this well first it allows for something I like to

call continuous fundraising we often think about preed seed Ser ABCD because it's just such an hassle to raise around but here you can continuously invite someone to invest send out a link here you can invest 100K at a 10 million valuation here's your link you can individually close the deal and then you can go to the next to the next and the next and it's and we have now closed over 100 private Investments on our platform um we have one power user he closed over 30 we have closed over 20 so it's super simple over the life the span of a year just to continuously fundraise at your terms um it's technically tradable you don't need any notary it's an2 token and you can just use your ethereum wallet

hold the token and give it to someone else and they pay you it's what I like to call programmable Equity ether we like to call programmable money and this is programmable Equity so you can do if this then that meaning you can reward your community if they log into your if they use your application you can reward them with tokens with 0.001 Point tokens something like that so meaning you have now a very very powerful tool for incentivizing your users and you have one asset for all stakeholders currently in a gmbh you often have the actual shareholder let's say the founders you have an employee who has a vop then you have an investor who has a convertible loan they all are they are part of your company they invested but they have a

different asset so they cannot trade and with this you have one token similar like in H has stock now you have for the gmbh you bring the same advantages which a h has into the gmbh okay now getting into to regulation one slide so when you make an offer technically you need a prospect and there are list of exceptions and two of them we are they are the most important ones we using on our platform first if your offer is only directed towards less than 150 investors you do not need a prospect what we call the private offer so business angels family and friends VCS and so on meaning on a platform you

would just create if there's some time I might show you in the end um say those are the terms this is the one the private offer is for you're creating a link sending the link to this investor and he can then individually close this investment so up to 150 if you want to do a public offer and that's also one of the main achievements what we like to call crowd investors similar to an Ico in spirit you can up to 8 million EUR per year using something called a key information sheet in German bases information plot um and we are providing this with a pro license we have through a liability umbrella so we are com we are making sure it's complying with German law and on our platform you can just raise

publicly up to 8 million per year this means you can have an invest Now button on your website so every time our your users or those interested in your product are on your website they like it they click the invest Now button they see your current terms they can just invest with a minimum of €200 um you have you can spread the word in social media really shouting out you can invest in my company and this is legally compliant up to 8 million per year this is really what we had with Crow with icos just in a legally compliant way okay now what are the applications I already mentioned them so to summarize them you can do a private offer meaning create an individual link for an investor with individual terms for up to

150 investors um with an expiration date and continuously fundr fundraise over a certain amount of time you can do employee participation which is tax optimized in Germany because the employees only pay income tax and you receive the token and afterwards afterwards only about 25% in German UPG stoer so it's much much better than those vop programs vop they always pay income tax so taxwise the best way to have your employees participating in your C company and we have Smart contracts for vesting and Cliff everything happens onchain and we have legal template provided by our lawyers you don't have to pay lawyers for creating those legal docs they are all on a platform as templates you can use

them as they are and of course you do not do legal um advice you can still ask your lawyer if they are correct but technically they have been prepared by our lawyers we trust them so and then the last one most importantly crowd investing so you can set a term such as price per token max amount max amount of tokens to be sold and you can at any time just PA the fundraising if you have enough funds if you still say I need more you can open it up again if you urgently need money you can decrease the price if you have enough money you could also increase the price so you can change those parameters always with a 24-hour time window before to avoid any um or at least one hour time window before to avoid any M boards

or other things but you can always just change parameters and have a continuous public fundraise um through tokenizer okay so that's it um our vision or our mission we enable everyone to become a co-owner of a company so we started now with the gmbh we the product is completely live with all of the features I just explained everything is there today for you to use the next is to go to other European countries and my vision is to be something like a web 3 based angelist for Europe if you want so meaning that all those legal entities we have in Europe which are private like the LS U Sal in Germany the gmbh that we customize this setup for for each of

them and then allow for all of them in Europe to fundraise through tokens and I think it's totally possible we have proven it that is doable also from a legal point of view in a compliant way and you have this es training token on ethereum so I have 1 minute and 40 seconds left let's give you a very very quick demo of our platform and just let's create a private offer one second let's connect zo so you can connect on a platform with your wallet but using web 3 or in the background we can also create a multis for you using your um social logins so for those Web Two users

who have no idea what the wallet is they can also connect with Google if they want to so I'm showing this here in the background but you can also use your metam mask Hardware wallet whatever so I'm now logging in as a Founder for time reason I'm skipping the onboarding process so I'm now already onboarded I can now look at all the private offers my employees and the crowd investing or I can create one of those like a private offer investing band or crowd investing so now let's just create a private offer for one for an investor um I can choose if he gets a range of tokens he can choose from or if he gets a specific token amount he can buy so let's give him the right to buy 100 tokens I call them here pip Piper

coins PPC um we are using stable coins such as USC and usdc for crowd investing we have integrated monium so we're using Euro e there which is a very very nice user experience they just do a sta transaction we get a stable coin push them through our smart contracts and are done all the ster instant and seconds so it's a super nice user experience for the crowd investor so all the like all pieces are coming together right now like from monum knows the safe also that we have regulation which works for us we don't need to love the regulation but we can comply it's possible so we have this spe specific amount let's say 100 tokens I'm choosing um EUR Z for example the price per token is my price per company share so if I have for example 25,000

shares in the commercial register this means now if I put 1,000 as price per token I value my company at 25 million so um I continue I'm giving a duration let's say this is valid for one month I'm choosing don't know Andre horovitz um he can now if I don't know him personally I could require kyc then he has to go through an ID now check but for private offer you don't need to do this because if you know them personally it's fine um it's just a help function here you can do a lock up in that case the tokens are locked up during the time period for example one year or two years where they cannot transfer the token I'm choosing to have it freely transferable so then you see the fees in the end we

are charging a 2% fee on the cash amount which is way cheaper than your lawyers I promise and so then you see the complete you also see the company valuation here is very small you cannot really see it you cannot you can see it okay so if it's all fine you click agree and create private offer and you get this link and this link is what you share with your investor he will just see company valuation investment amount your legal docks where you can download them he can also see your pitch te if you uploaded one and then he can choose yes or no if yes he sees your either your wallet where he can transfer the euroc or he sees the iban if you choose bank transfer and just transfers the money and that's it and so you can continue your fundraise and very very

similar for the crowd investing the only difference here is that we have to do a stability check some more AML stuff but it's all happening back in the background so that's it we're very proud of this product I hope you're using it so thank you very much I think we have time for one or two questions um there's a mic um thank you for the presentation I have a question about the tax law perspective on this because the Dividends are usually withhold in a normal dividend would be withheld with

26. 375% in Germany and with this dividend for example when you transfer will also be withheld in the platform and also um yeah so the dividends so the short answer is taxwise the gmbh token work exactly like gmbh shares that's a short answer for to a dividends um in Germany in the gmbh if you pay out dividends you need to have a a shareholder resolution with a date and what we do is only if you hold the token at that date you will get the dividends so if you sell one day later you are not selling the dividends with it basically the token if you hold the token at that date we doing a snapshot on chain in the token contract

um and then on the next day you are selling then you will be eligible for dividends and you can claim them later you're paying the same amount of tax as you would if there's a gmbh paying you out dividends as a shareholder depending if you do it as an entity or a private person yeah so ask your Tax Advisor but it's essentially the same okay thank you yeah he was the first he can do afterwards let's go let's go ahead but just that we have one more question for him then yeah lovely service I can't wait for you guys to come to Netherlands where we're based um so you mention um continuous fundraising but at the same

time you're also talking about uh putting a price on the token which is linked to the share price so like I I'm familiar a little bit with the US system so I don't really know how it works over here but there for private companies you go through a 409a process to set the share price before your public so not if you get an investor in like if you get an investor it's basically you're negotiating a deal like my company is worth 10 million or 20 million what you're referring to is from a tax perspective if you for example give employees shares they need a valuation which is valid for the text officials and here yes either there's three ways to get this valuation you can get a vft proofer like someone who checks your

company and just puts a price on it number one is similar to the 409 a valuation or if the tokens are actively traded in that case you can use this as a reference price um those are the two options you have but you only actually need this valuation when the employees are minting the tokens because then you have to pay income tax based on that valuation but for the investors or for the crowd investors you don't need that so do have one more questions we have a few more I think we have time for maybe one one more uh hi um how do you think about the governance rights of of this whole thing because like it seems like as a traditional investor I would kind of

like I would look at your model and I'd be like okay I can't sit on the board there's no way for me to actually have governance like kind of an influence of company does so how like is there like an implicit understanding there's two solutions for this so first of all legally they don't have any governance rights because they couldn't do it but as long as they have a good relationship with the CEO they can still talk to them and they can do onchain voting using snapshot and so on they can still do all of those things it's just not legally binding so but if you say well the CEO is not doing this even though he made a vote and he doesn't do it I can convert to actual shares and get be be part of be actual share older and have real governance rights so this

is like the the like speaking from a game three point of view why should this say I'm not doing this if you can just convert to extra shares and then actually get legal voting rights so if this is the case then I would just accept the token voting and things like this and at the last for investors you can still have a S letter this individual investors I'm just not with the token so it's not transferable but let's say you're a VC and you want to invest and you have some different terms or want to speak about veto rights or something you can have a s side letter and we do this as well as tokenize it where some investors for example have veto rights if you would sell the company or stuff like this so they can get individual govern governance rights through an agreement which is dependent

on them holding a certain amount of tokens but it's not bound to the Token itself so if you would sell the token someone else he would not get those governance rights but as long as you have a certain amount of tokens based on the S letter you can have some governance rights that's usually for larger VCS for crowd investing it's less relevant okay thank you so much uh all the other questions I think they can approach you directly kristo will be around so thank you so much for the amazing presentation