CapchainX FAQ SECTION
Introduction to CapchainX
Q: What is CapchainX?
CapchainX is the world’s first CryptoEquity platform for companies to create, manage and trade equity on the blockchain. We create sustainable tokens for clients making sure there are fundamentals backing the token such as shares of the company, or a debenture.
Q: What services do you provide?
We provide an end to end ICO solution as a technology provider. We provide legal support (NOT legal advice), by making sure that shares of the company appropriately backs the token via a Board of Director agreement. We license our technology by providing 3 smart contacts: (1) tokens (2) presale and (3) sale contracts. We also provide a white paper excerpt that contains token structure, allocation and distribution. Clients can access our networks such as marketing agency recommendations or law firms we work with.
Q: Who is behind CapchainX?
Founded by alumni of Cambridge University and Stanford University, CapchainX is a team of forward thinkers from across the globe. The team consists of a group of international and diversified individuals of 12. Our shared interest in private capital markets, and passion for engineering state of the art solutions have brought us together. Feel free to reach out to a team member on LinkedIn. Team information here( link).
Q: What are the benefits of tokenization?
It makes it easier for companies to raise funds because they can easily (1) transfer ownership rights in real time and (2) reduce costs associated with middle office fees.
Q. What is a blockchain?
A. It is a permanent database accessible via a computer node. The database is formed in a sequence of blocks ordered chronologically. Each block contains digitised data such as encrypted files, photos, and information that is cryptographically time stamped. Each block contains the hash of the previous block. The blocks form a long chain that is immutable and decentralised.
Q: Which blockchain protocol are you using?
We are using the Ethereum blockchain
Q: Why Ethereum?
There are 3 main reasons why CapchainX is building on Ethereum.
- Continuous development of Ethereum — Every year, the Ethereum foundation hosts DevCon where the founders, engineers and supporters of Ethereum discuss the future developments and applications of the blockchain. In addition, the formation of the Ethereum alliance (composed of more than 200 member companies) are investing resources to solve real-world problems using the world’s only smart-contract supporting blockchain.
- Liquidity — With a market capitalization of more than US $38B, Ethereum is the 2nd largest blockchain network in the world. More applications are being built in the blockchain, creating demand for Ether and liquidity to the network.
- Scalability — Ethereum founder Vitalik Buterin and his team are working on implementing “Casper” which aims to make transactions more efficient. Development is also underway to implement “Sharding” to allow Ethereum to handle more transactions per second. Learn more.
Q: What are the types of tokens and what does CapchainX support?
There are two types of tokens namely (1) Utility and (2) security tokens.
Utility tokens are used to access a product or service. A security token is used as an investment with voting rights, claim to asset or claim to revenue in a form of dividends. The latter fails the Howey and Reves tests.
CapchainX Crypto Equity tokens is a right to redeem a security such as equity only if the token holder passes requirements to be a shareholder defined by the local securities jurisdiction and the company. As a derivative, it can be argued as a security token in certain jurisdictions.
Crypto Equity Model
Q: What is Crypto Equity?
Crypto Equity is a sustainable method of representing ownership cryptographically on the blockchain through tokenization. Just how fiat currency was once backed by gold, a basket of more stable currencies and reserves, Crypto Equity tokens are backed by equity. Shares represent ownership, claim to asset, claim to revenue and participation, compensating investors for the risk in case of a default.
Q: How does CapchainX represent ownership on the blockchain?
ERC 20 Tokens created on the Ethereum blockchain represent ownership of the company by means of a shareholder agreement. This means, each “coin” or token created on the blockchain represent ownership claim- the eligibility to redeem share certificates for a token.
Q: Why does CapchainX support Equity backed tokens?
CapchainX prefers the Crypto Equity model by backing tokens with company equity. This is more fundamentally sustainable as compared to 90% of tokens circulated in the market. Most tokens in the market have no intrinsic value.
Q: Is Crypto Equity a regulated activity?
Tokens backed by equity can be regulated as a security token in the future. There is no formal definition for equity backed tokens pe se. Although, treating the tokens as though they are a security today prevents future regulatory risks. See the Regulation section of the FAQs.
Q. What other Crypto models has CapchainX done to date?
We only issue tokens backed by fundamentals in the form of valuable assets. Tokens can be (1) Equity backed tokens in the form of Shares (2) Debenture backed tokens in the form of Intellectual Property (3) Intangibles that can be valued.
Q: What is the advantage of Equity backed tokens to token holders?
With equity backed tokens, the token itself does not have claim to revenue or voting rights but the shares that are backing the token may have. Therefore, the token holder has protection and can exercise any rights if he decides and if he is suitable to be a shareholder.
Q: Why does Crypto Equity tokens have more upside than majority of token structures?
Valuations reflected in equity price of potential startups go up many fold. This is based on the potential of team, product plan, revenue model as examples. Theoretically, tying up the tokens with the same fundamentals will reflect in its prices. In addition, the advantages of circulating tokens rather than equities (ex. quick digital transfers, reduced costs from the hassle of paperwork and middle office fees).
Q: Is it possible that Asset backed tokens can also be a Utility token?
Of course! It can be used as payments, to access a service or product. The more demand the tokens have (not artificially created), the higher the value of the token.
ICOs and Token Sale
Q: What is an ICO?
Initial Coin Offering (ICO) is a primary offering of tokens for company fundraising. The token’s representation could vary. This could be discounts and early access to a company’s product to rights to a company’s assets and revenue. The amount raised in an ICO is used to develop a product the team has promised. Detailed plans for the product and allocation of funds are detailed on the company’s white paper.
At CapchainX, we encourage that tokens represent equity. Share certificates of the company represents voting rights, claim to asset and claim to the company’s revenue.
Q: How should I conduct an ICO?
You could find a checklist to consider on this blog.
Q: How much is the average amount raised in an ICO?
$1m usd on average. The largest ICO up to date is FileCoin, raising up to $272m USD.
Q: How long do I need to prepare for my ICO?
Depends! Some companies decide from 1 month to 6 months. The success depends on various factors such as progress of product, team, and most important of all, Marketing reach. At CapchainX, we can definitely provide you your structure, white paper and all your smart contracts (tokens, preslae and sale contracts) in 3 weeks.
Q: How long should I run my ICO for?
Presale would typically be from 1–4 months, depending on how much you need to prepare you for the sale period. The sale period typically runs up to 3 months.
Q: What is the difference between the presale and the sale period?
The presale period is usually for private investors offered at a discount. A number of companies have now opened a portion of its presale round to more participants. CapchainX normally structures the presale into 5 discount periods. The earlier an investor participates, the bigger the discount and lower the price of the token. The funds in the presale is usually used for marketing in preparation for the actual sale period.
The sale period is the auction period opened to investors to participate. At CapchainX, we normally structure the prices as a geometric ratio. Prices go up at a geometric ratio subject to demand volume.
Q: What kind of companies can participate in an ICO?
We’re seeing more companies in different industries participate in an ICO. This can range from blockchain technology startups to traditional industries such as Agriculture and Mining companies. CapchainX has also used its Crypto Equity tokenization for a tender offer for a public listed company to move to a crypto model.
Q: The more famous ICOs raised their money in just 10 minutes. What should I expect?
They usually had their pre-sale going on privately or at a discount for a few months. They usually create noise and open their sale period. This is when the public starts auctioning their tokens from the last price they were able to sell their tokens for in the pre-sale. The price goes up during the sale. Normally, I would give the sale period at least 1 month. Of course, this depends how much noise you create in the market.
Q: How long does it take CapchainX to launch the ICO contracts?
3 weeks. CapchainX helps companies it in its token economic structure, presale and sale plans. It produces the white paper and 3 smart contracts. This includes the ERC20 tokens, the presale contracts that include 5 discount periods and Sale contracts that has a geometric pricing model.
CapchainX has been working on its standardised approach during the last year. It does not use open source code. The code CapcahinX has produced is thoroughly tested. We provide tech support during the ICO campaign.
Q: What are the costs involved in an ICO?
Apart from the cost of issuing tokens and its smart contracts (CapchainX service), companies will need to put in efforts in marketing its product and legal costs (depends on jurisdiction).
CapchainX charges an upfront fee and commision on the sale, depending on how companies are able to pay upfront. Get in touch with the team to inquire about our service here.
Q: Who are the majority investors participating in ICOs?
High networth and Institutional investors. 80–20 rule. VCs and big investors still want voting rights, claim to asset/ revenue which is reflected in equity.
the CapchainX Crypto Equity model (by redeeming shares based on a criteria and circulating the token with no underlying but updating SEC on the capital structure to back token only after redemption) can be argued that it misses the full on definition of a security because it excludes redemption participants. However my team and our legal partner- DLA Piper- do not like risks and highly encourages treating it as though it were a security since any “investment vehicle”, which includes any utility token out there poses a possibility to be regulated as a security/cryptocurrency in the future. Therefore there are risks either way! You should take advantage of security exemptions which is different for different jurisdictions. We have one we share with clients for those in the UK/EU. By far, they have a flexible exemption list as compared to RegA+ even if it looks more enticing. This excludes you from issuing a prospectus.
Q: Is there *any* tech company seeking Series A or Series B in an ICO?
The ICO space is evolving. More companies in various industries, subjects and stages in their development are getting involved. Any company whether Series A or B can certainly adopt the ICO model.
Q: What is the biggest determinant to succeed in an ICO?
This highly depends on you market reach. We highly recommend working with a PR/Marketing company.
Q: What are the risks involved?
There are legal risks with cryptocurrencies, whether designed as a utility or asset backed (security). There could be future regulation and sanctions if activity is declared a regulated activity such as a security in the future.
Post — ICO Sale
Q: How do token holders become shareholders by redeeming shares?
A token holder may redeemed the share if he passes the minimum threshold for shareholders in the local jurisdiction where the company is incorporated. The eligibility criteria to exchange the token for shares is also specified by the company. An example would be a requirement to hold a minimum number of tokens to redeem shares.
Q: What happens to the tokens once share certificates are redeemed?
Once share certificates are redeemed from the company, the tokens are destroyed and the token holder becomes a “shareholder”.
Q: What happens if tokens are not sold?
You have an option. Either Tokens are destroyed and any underlying is taken back or the tokens are reserved for future token offerings/fundraising.
Q: How do I find out more about the process?
Get in touch with the team and we will provide you a proposal with a timeline, requirements and costs. Learn more.
Q: What is the general legal status of ICOs
ICOs fall within a grey area that is neither specifically regulated nor illegal in most jurisdictions. In the UK tokenisation does not fall under any regulated activity. Therefore, no licenses or permission is required from local authorities to conduct an ICO.
Q: If it is not regulated why is it not “illegal”?
Since “ICO” has only been recently invented because of the recent developments of the blockchain technology, regulators are still catching up to this phenomenon. Technology development is faster than the research efforts of regulators to come up with a decision on how to regulate ICOs. Most advanced regulators keep in mind that they do not want to impede innovation however, it is in their best interest to promote transparency by protecting minority interest.
Q: How do I mitigate the risks when conducting an ICO?
We highly recommend clients to treat the token as though it were a security for preventive measures. This requires legal advice from a law firm of your jurisdiction. While security law requires companies to file for a prospectus and subjective reporting, there are existing exemptions to security law in certain jurisdictions. This exempts companies that apply the exemptions from issuing a prospectus as an example. Generally, these exemptions contain KYC/AML requirements to limit the number or the type of participants, or even limit the amount of investment from non-accredited investors. Again, this depends on the jurisdiction of your company and the nationality of your investor. You will have to consult a law firm or your legal counsel.
Q: Does CapchainX have a legal opinion for its Crypto Equity model?
Yes. We have a legal opinion from DLA PIPER. They are our current legal partners whose head of international finance and partner at the London office looking after our case. We are happy to share this document to our clients.
Q: What is CapchainX’ status with regulators?
We have been communicating with regulators and keeping an open mind with future regulations in the space. We have been working closely with law firms and consultants to make sure we adopt the strictest compliance and keep up with the latest announcements. We have a legal opinion from a top tier law firm and we take a collaborative approach with regulators in the world. We also highly encourage our clients to seek legal opinion for their intended token structure in their jurisdiction.
Q: What is CapcahinX’s liability for a client or the client’s ICO participants?
The liability as technology providers is the quality of the code we write or functionality of the smart contracts we build. If in any circumstance, our smart contracts stop working from an error on the technical side, we will fix the contracts/code immediately at no additional cost.
Q: Is CapchainX liable for accepting clients that does not comply with security law?
It is not a requirement for technology providers licensing its technology. There is no provisions for technology providers to collect certain documentation on accepting clients before licensing out technology to build on the blockchain. At the moment, there is no such requirement. There is also no legal implications of any kind against building on the blockchain that is decentralised by nature.
We want to make it clear to the public that it is their responsibility to conduct their own due diligence on any token investments they make from any company. We are purely a technology licensor allowing anyone to build on the blockchain. We do not endorse or arrange deals in investments.
Q: What if i don’t understand tokenization?
If any individual does not understand the nature, the purpose, and the risks involved in tokenisation, we suggest them to read up on the blockchain and cryptocurrency. There are many articles available publicly. We are not held responsible for anyone’s negligence on available public data on the subject. Visit our resources page.
Q: What does the Board of Director agreement contain?
This indicates the (1) emission of a share, (2) redemption of token for a share if eligible shareholder, and (3) destruction of token upon shareholder conversion.
Q: When is a token a security?
A token is a security if it has voting rights or a claim to the asset, profits or revenues of the company. The investment fails the Howey and Revest Tests under the US SEC such as the DAO tokens.
Q: Are crypto equity tokens considered a security?
Since we back our tokens with shares by giving an option to token holders to become a shareholder, the token can be argued a security in some jurisdictions. It is better to err on the safe side and treat the token offering as a security offering unless stated otherwise.
Q: What are the concerns of issuing security tokens for a company?
Some jurisdictions may not have exemptions to offering securities and may require submitting annual reports, or even issuing a prospectus just how companies go through during an IPO. It is expensive.
Q: Are the exemptions you are using allowing the advertisement of the token offering via social media?
Technically a token is not a security until it is exchanged for a share (and meet the criteria to be shareholder). Therefore token offerings have been more open via social media.
Others have taken a more cautious approach, and are limiting their publicity in social media, only giving their full pitch to those that contact them and are filtered as Sophisticated or Private Investors. It is argued similar as crowdfunding, limiting the dissemination of investments publicly to attract non high net worth/ non sophisticated individuals.
Q: Are those exemptions valid for the whole EU area regardless of the country?
Yes for as long as they are an EU member, the same security exemptions apply. This applies to the UK. The opinion also applies to the UK.
Q: What are the biggest risks to shareholders?
When a bubble bursts, your asset price should adjust back to fundamental values. Most tokens in the market are not backed by fundamentals therefore, can disappear. When the mania hits and asset prices plummets, equity backing tokens will set you apart from the token market providing residual confidence and will serve as an anchor for your asset price.
Q:What Legal support do you provide for an ICO?
We provide legal support and not legal advice. Legal support will be in the form of sharing our current (1) Legal Opinion for Crypto Equity by DLA Piper; (2) a CapcahinX Board of Director agreement to bind shares to tokens; (3) checks for its Articles of Incorporation and By Laws; (4) Any required KYC/AML documentation.
Q: Do you work with other law firms?
We highly recommend clients to obtain their own legal opinion. We are happy to work with your legal counsel. In any case, we can forward clients to our network of lawyers. This discussion will be outside our platform. We work with DLA Piper and other law firms depending on your jurisdiction
Q: Do you provide Marketing services for the ICO?
We have a network of marketers ranging from bloggers to PR companies. We are happy to assist at linking you to our network however, clients will have to have a separate discussion outside the platform. Our network will be happy to provide discounted offers since CapcahinX has been forwarding existing clients. For marketers that want to be part of our network, pls do get in touch through this link.
Q: For the big successes like Gnosis or FileCoin, how much do you think they spent on marketing?
My wild guess is $100,000 usd. Keep in mind, there is an optimal pont for marketing. Marketing expenditure has an optimal point, after which, the effect becomes marginal. 100k USD is a good amount. An average ICO on average spends 30k usd based on my colleague’s research but they raise 1m usd on average.
Q: What should be the focus of our marketing campaign?
ICO marketing expenditure is worth it if you aim to hit 2 birds with one stone- acquiring customers and investors by chance. Aragon, Bancor, Civic — their marketing was focused on the value- add of product they want to build rather than saying “im raising funding” out loud.
Q: Summarise CapchainX ICO services.
We do the token structuring (economics, prsale and sale mechanics of the token sale), Creation of the tokens and smart contracts, and we provide legal support (BOD/Shareholders agreement and share a legal opinion for Crypto Equity tokens by DLA Piper).
Q:Do you provide us access to a network of investors?
We will list you on our website as an existing Client raising an ICO. Due to a regulated activity called “dealings in investment”, CapchainX is unable to help you match funds on the CaphainX website. However, we are able to introduce you to contacts interested getting in touch with our clients outside the platform.
Q:How much does CapchainX charge for its ICO solution?
Cash upfront and commission charges depending on ability of company to pay upfront. Get in touch with us to inquire.
Q: What will push crypto currencies and assets further to the mainstream?
Regulation. This legitimises cryptocurrency as an asset class increasing confidence among high net worth individuals and sophisticated investors. Hedge funds and other fund managers will be more comfortable adding these assets into their portfolio unlike today. Their LPs will most likely withdraw if they did this.
Q: Can we issue more tokens in the future?
Yes but take note that in a crypto equity model, your equity backing the tokens gets diluted. The number of “issued” shares stay the same but new authorised shares will dilute the ownership %. This increases shares in circulation.
Q: What is CapchainX’s General Policy Statement?
CapchainX is a technology provider and does not discriminate participants to build on the blockchain. It is the public’s duty to invest at their own risk and conduct their own due diligence for any of our clients fundraising activities.
Q: Legal action
Any breach on our policy statement, attacks on individual team members, Infringement on our privacy rights or harassments of such kind will not be tolerated. The team reserves the rights to disclude individuals in its private social media accounts and ban the right to provide service. The issue will be subject to legal action by our legal partners.
Q: CapchainX does not participate in Arranging Deals in Investment
CapchainX does not endorse any investment to the public. It does not arrange deals for investment. It does not accept investment on behalf of its clients. It does not accept deposits. CapchainX provides code and blockchain expertise for its clients to build asset backed tokens on the blockchain. Our activities are described in a legal opinion provided by DLA PIPER UK.