Many people ask us about what Equity Token Offerings (ETOs)at Neufund are and how they work. We decided to give you a brief overview on how to fundraise with Neufund in this blog post.

As you know from the beginning our goal has been to create a fully-legal and compliant fundraising process. We take all regulatory and compliance requirements seriously, and we believe that many of them make sense. It is, in the end, our mission to protect the investors and the community — in this we are aligned both with the lawmakers, and with the Blockchain’s community democratic and inclusive spirit of transparency. ETOs are the ICOs 2.0 — scam free.

Neufund is a blockchain-based equity fundraising platform which is operating on the Ethereum blockchain. At its core, Neufund is a regulatory and legal framework, connecting investors and inventors and allowing them to conduct fundraising rounds in an easy and legally-compliant manner. Using the Neufund platform, companies can conduct primary offerings of securities as legally-binding smart contracts (i.e., Equity Tokens) on the Ethereum blockchain. The Neufund platform is operated by Fifth Force GmbH and operates under German jurisdiction.

An Equity Token Offering is a novel way of fundraising, which allows any kind of company (blockchain-based or not) to issue Equity Tokens on Blockchain, in a public or private placement. Equity Tokens guarantee crucial equity-like rights for the investors and the issuers. Legally, Neufund’s Equity Tokens are structured to represent shareholders rights in off-chain companies. ETOs can be conducted by any incorporated entity worldwide, however at the moment the platform does not accept companies incorporated in the USA, due to regulatory uncertainty in America

Equity Token Offerings align both worlds, ensuring real-life benefits for all parties. ETOs are an efficient and novel way to fundraise. Both investors and companies are equally incentivised. Companies address a large investor pool with a single pitch, and a syndicate can easily be built from even as many as thousands of investors. Symmetry of information provided by the transparency of the Blockchain technology allows all parties to achieve success.

Blockchain-based tokens are in principle fungible and open in principle an opportunity for a liquid secondary market. Furthermore the beauty of Equity Tokens is that their structure does not exclude utility functions. Every company can specify Token Holder rights in the term sheet as they see fit. For example, imagine that you hold shares of Tesla and additionally to your typical shareholder rights you have premium access to extended versions of Tesla’s software and services offered by this software. This is configurable in the terms of your Equity Token Offering.

Blockchain fundraising with Neufund in 6 steps

Once the Platform is launched and the first ETOs are running, we will open the Platform for any type of innovative ventures. If your company is incorporated and has an innovative vision you will be able to register and list on the Platform. In the early stage of the Platform we will take a closer look at companies that apply for listing. To smooth the process we’ve come up with a simple process to set up your own ETO on our Platform.

There is one crucial rule to our process: no data will be entered twice and all business data will be editable by the founder.

Step 1: Register your company on the Neufund Platform, following standard KYC procedures

To start your journey with Neufund you — as a founder or a legal representative of the company will need to register on our Platform. To ensure safety of your data we’ve come up with a secure process to verify you and your company.

Part of the verification process will require you to upload specific corporate documents considering your business. For German companies the corporate KYC process is limited to providing your company’s registry ID, if you are based in other jurisdictions you might be required to upload a selection of corporate documents e.g. incorporation documents or articles of association. Finishing the corporate KYC process will result in your access to further setup options in the dashboard. It is time to configure your ETO.

Disclaimer: We cannot support companies or investors with residency in Bosnia and Herzegovina, North Korea, Cuba, Iran, Iraq, Sri Lanka, Syria, Sudan, Albania, Serbia and USA.

Step 2: Specify the terms of your offer for investors, and the Platform will automatically turn them into smart contracts, and generate tradable Equity Tokens for you

At its core, Neufund is a legal-tech and a reg-tech platform. It provides an ecosystem of smart contracts, legal structure and technical framework to ensure an easy and compliant Blockchain-based fundraising.

Term sheet: To ease your work we provide you with a term sheet template, containing standard provisions for VC market today. However, you are in charge of configuring the commercial terms of your ETO using your company dashboard on the Platform. Configurable terms include e.g.:

Company’s valuation

Ticket size

Total investment amount

Minimal investment amount

Token Holders’ voting rights

Transferability and tradability of Equity Tokens

Information rights for Token Holders

Pre-ETO and ETO phases and their length

Your term sheet will be generated automatically based on your input in the dashboard.

You can view a template of the term sheet here. This seems simple on the first glance. However Neufund is a fundraising protocol and this is only our first feature. With the release of further feature sets the protocol will allow additional amendments of the term sheet. In rare cases this will require some coding effort on the company’s side.

Investment Agreement: Based on the conditions you configured in the term sheet the Platform generates the Investment Agreement. This agreement is a paper contract between the fundraising company and the Neumini.

Neumini is a quasi-bankruptcy remote SPV, set up to bridge the worlds of on- chain tokens and off-chain equity. Neumini represents Token Holders as a single entry in the cap table. It is contractually bound to execute the will of the Token Holders expressed in the smart contracts, and performs a purely bureaucracy function.

Additionally, the Platform generates the Token Holder Agreement, which is a PDF contract generated on-chain based on the ETO smart contract between the Neumini and the Token Holders, that is investors in your ETO. Our legal setup is an interplay of two agreements. The Investment Agreement transfers the shares to the Neumini, and the Token Holders Agreement states that the shares to certain extent are represented by Equity Tokens, owned by the Token Holders. Both agreements are linked (cryptographically hashed) to the smart contract which governs your ETO on-chain.

Of course all final details of the agreements will be editable before the ETO starts. The Investment Agreement will become legally binding once the ETO is successful. The Token Holder Agreement will be signed by Token Holders with their ETH address at the moment of the token purchase during the ETO. You will be able to review a template of this agreement soon.

Company Listing Details: Like on any other investment platform you will have a public listing on our Platform for your investors. The listing will require details similar to those in your pitch deck, whitepaper or a prospectus. All of them contain similar information. No worries, we will guide you through this process and help you fill it out. Your public listing site will allow you to pitch your company to all potential investors at once.

Keep in mind: With this one pitch you will be able to not only address all investors on the Platform but also investors from outside. You can bring as many investors on board as you like. Since it will be possible to invest in ETOs with Euros your investors do not even have to be familiar with Blockchain technology.

Prospectus: Since Equity Tokens are securities you may be required to file a prospectus. But fear not. Everyone is scared of the prospectus, meanwhile writing and filing the prospectus using our Platform does not require more work than a VC pitch deck or a business plan. If you are VC-funded you have already 90% of the information required by the Investment Prospectus. Additionally we are simplifying this process for you. We provide you with an appropriate prospectus template, including legal disclaimers and help filing it with Financial Supervisory Authority (BaFin). You will not need to pay thousands of Euros to a lawyer to write this for you*.

You will be asked to file an Investment Prospectus (Verkaufsprospekt) and a three page long Pamphlet (Infoblatt). In principle, but depending on the final terms, you can offer Equity Tokens both to accredited and retail investors, in public and private placements. You can review the general requirements for an Investment Prospectus for more information.

*However we advise you to have a legal counsel for consultation like you had in your VC round or any other funding process.

Step 3: Raise funds in ETH and/or EUR, using the Neufund payment systems and wallets

You can launch your ETO and offer your Equity Tokens to all the 1000+ investors on the Neufund Platform. There will be a private placement (pre-ETO phase), you can decide on the duration of it, in which only whitelisted investors can purchase your Equity Tokens. The whitelist for your pre-ETO may contain your own investors, syndicates, but also by default all Neufund’s investors. There is an equivalent of 12 582 992.64 EURO from Neufund’s investors reserved for future investments on the Neufund Platform. The network of investors includes VC, PE, BA, crypto-HNWI, and retail which reflects the position of Neufund — one between venture capital and Blockchain.

If the maximum investment amount is not reached during the pre-ETO the ETO (public placement) will be automatically launched. However you will also be able to limit (in the term sheet) the amount of tokens offered in the pre-ETO. Additionally you will decide if you want to raise funds in ETH and/or in nEUR. With the launch of the Platform it is planned that these two currencies will be available for fundraising. nEUR is a 1:1 representation of EUR on the Ethereum Blockchain.

Security of your funds: We take security of your funds on the Blockchain very seriously therefore we propose storing all your nEUR, ETH and Equity Tokens on a hardware wallet. Our Platform provides an integration with the hardware wallet Ledger Nano. The recovery codes for the wallet are crucial for the security of your funds. Learn more about Ledger Nano in our step-by-step setup guide.

Step 4: Close the financing round

After a successful ETO you will sign the Investment Agreement with the Neumini representing your Token Holders off-chain. In Germany it is required to notarise the agreement, but this won’t be the case in other jurisdictions (depending on where your entity is incorporated).

After signing the agreement all Equity Tokens will be released to the investors, the success fee (see Neufund’s fees at the end of the blog post) will be deducted and you will be able to access all the funds you raised. If you have decided to fundraise in both currencies: ETH and nEUR — you will be able to withdraw all ETH raised in ETH and all EUR raised in nEUR. It is then your decision if you exchange the ETH into fiat or not (outside of the Neufund Platform).

Step 5: Govern your organisation after the ETO

After the fundraising you will have a community of Token Holders who’ll have the rights of shareholders (information, voting, trading rights). With our dashboard you will be able to easily communicate with them without the burden of logistics. Using the functionalities of the dashboard you will be in full control of the actions of the Neumini through the will of the investors.

Your dashboard for Token Holder management will include:

Resolutions and voting mechanism for Token Holders

Automated proceeds disbursement payout for Token Holders

Reporting mechanism

Secondary market tracking

Cap table management

Furthermore except for the initial prospectus, the law does not impose any general reporting rights after the ETO except for those you are subject to anyway. It is up to you what information rights you will give your Token Holders. We recommend, however, as much transparency as possible, in the Blockchain Community spirit.

Equity Tokens are securities, and can be traded only by properly licensed entities, e.g. stock- and crypto-exchanges (licensed), brokers, banks etc. Over the past year two trends have emerged in the industry which open for you the door for secondary trading:

Due to the awakening regulator, crypto-exchanges are getting licensed for securities trading. Progressive banks, financial institutions, as well as progressive stock- exchanges are applying Blockchain technology to enable tokenising of securities as part of their offering. Neufund is working with a number of partners around the world to develop such trading ecosystem, and we will guide you through the process.

Step 6: Raise follow-on rounds easily, by issuing new Equity Tokens

Doing an ETO once allows you to do as many follow-on rounds as you wish. This is awesome since by simply issuing more Equity Tokens your future fundraising effort will be significantly minimised. Our platform will guide you through this process.

Eventually you will be able to tokenise existing equity (e.g. your own— founders’ equity, and the equity of your initial investors) and this way step-by-step fully tokenise your company. This fundraising process allows you to approach an IPO in a controlled way. Even better, a classical IPO or an exit is not prohibited by pursuing this method of fundraising.

Campaign and investor roadshow

An ETO is a hybrid investment model combining advantages of an IPO, an ICO, and a VC round. Thus, we recommend to conduct a campaign or a roadshow to inform your investors about your offering.

In our experience, the ETO campaign may take 2+ months before the ETO starts. Neufund does not offer campaigning services, however, we will share our experiences with you and refer you to our partners who will help you set up and execute your campaign. Your success is our success.

To start your journey you might want to consider creating qualitative content, establishing communications channels on e.g.Telegram, Reddit, Bitcointalk, Medium and Twitter, and start presenting and communicating your mission and business plan. This can go hand-in-hand with your company listing on the Neufund Platform. You may also want to talk to ICO listing sites to list your ETO. I have prepared a list of all influential ICO listing sites that you can refer to. Furthermore advisable is also to plan your presence and speaking slots at key conferences and meet-ups as well as using services of a PR agency to establish more media visibility.

Note: By offering equity publicly in an ETO your company becomes partly public, you need to be aware of all the implications regarding your new company status. You may promote your ETO as long as you stay truthful and do not promise anything that you cannot deliver.

What if Blockchain goes down, Neufund gets shut down or I lose my agreement?

Neufund structure ensures legally binding Equity Tokens. That means your rights as issuer or as investor are protected also off-chain with the Investment Agreement that is physically signed on paper. Since this legal structure is mirrored in the Blockchain smart contracts, your rights are actually protected twice — off-chain law is a backup for Blockchain failure. If for whatever reason Neufund ceases existence, you can always refer yourself to the Blockchain or to the signed agreements.

Neufund’s fees

After a successful ETO Neufund Platform deducts a success fee and distributes it to all NEU token holders (not only to Neufund):

3% of raised funds, in EUR and/or ETH

2% of issued equity tokens *

There is zero** upfront fee.

*These tokens are held by a smart contract and in the moment the company generates payouts, ETH/nEUR will be distributed to all NEU token holders.

**If your ETO requires consulting or smart contract extension, for example you’d like to build a token model in your product, or extend the Equity Token with a utility function, we may discuss a consulting fee.