Neufund Report: The Pioneer of a Decentralized STO?
Competitor Analysis
Part (3/3)
Part 3: STO Ecosystem & Competitor Analysis: Polymath vs Neufund
Overview
This three-part report aims at conducting an in-depth analysis of the Neufund security token offering(STO) platform. We have given an overview of the platform in Part 1:
In Part 2, we’ve discussed the technical aspects of smart contracts and some issues regarding the platform:
In the final part of the report, we will present an overview of the STO ecosystem and compare Neufund with Polymath and other STO issuers.
STO Ecosystem
There is no doubt that the STO ecosystem has been growing rapidly in the last few months, attracting the interest of key players in the crypto space as well as institutional investors. At Kintaro Capital, we are not only keeping a close eye on Neufund, the object of this report, but also on the entire STO Ecosystem. In the following graphic, we summarise the STO Ecosystem:
We have identified Polymath as one of the primary competitors to Neufund in the STO platform space. Polymath distinguishes itself from Neufund in a number of aspects.
Neufund vs Polymath
As STO issuers, Polymath emerged from a crowd of competitors and gained widespread attention from the crypto community. Here, we give a detailed competitor analysis between Neufund and Polymath platforms. Some other noteworthy STO platforms are also mentioned at the end of the report.
Token standard
Fundamentally, both projects are based on Ethereum. However, they use different token standards. Neufund Security tokens use ERC-223 while Polymath’s security tokens use ST-20, a token standard developed by themselves which is specialised for security token applications.
The main difference between the ST-20 and ERC-20 standard is the addition of a verifyTransfer function. This function determines whether the token transfer will be completed or not based on a set of criteria like an investor’s qualification. Every time an ST-20 token is sent from one address to another, this function is called.
The verifyTransfer function is vital for a security token that needs to comply with the US regulatory requirements. Every transaction is checked by the function to ensure that it complies with all requirements. These include checking the category of the investor (whether it is accredited in the US or not) and setting certain lock-up requirements in the STO. Readers may refer to a detailed article by Harbor that presents the regulatory landscape in the US for more information.
Even in the case when the STO is not done in the US, the versatility of this protocol enables embedding necessary regulatory requirements into the tokens. Considering the fact that the Neufund platform does not incorporate such a verifying function, it is not easy for Neufund’s equity tokens to comply with US laws. On the other hand, with appropriate supplements, it is possible for an STO based on ST-20 tokens to comply with EU regulations.
Legal Landscape
Neufund’s STO has a structure that is compliant with EU regulations, notably the EU prospectus directive. More specifically, Neufund’s STOs are structured as “investment” under German regulations (see part 1). STOs structured by Neufund allow EU investors to participate in the platform. However, US investors are unable to participate due to “regulations ambiguity”.
Polymath has a strong focus on US regulation instead. In particular, STOs under Polymath’s framework should be compliant with US Reg D 506(c), which allows the participation of US accredited investors . The inclusion of non-US investors, however, may require additional legal structures.
In short, their geographical difference translates to differences of their legal structure, and hence their potential target market.
Legal Support
Legal support is the area in which Neufund has stark contrasts with Polymath. Neufund provides close legal guidance, both on-chain and off-chain, to companies that would like to do an ETO (the STO on Neufund’s platform, see part 1) on their platform. To make sure that every ETO is compliant with German regulations, Neufund provides templates of the necessary legal documents (prospectus, term sheets and more) themselves and acts as the legal representative for various contracts (see part 2 for more details). Moreover, an ETO on Neufund can only be done with the consent of Neufund. From the companies’ perspective, especially off-chain companies, this eliminates the burden of having to dive deep into the complex legislations, while still being able to raise funds in a promising crowdsale. A good example is given by the case of Emflux, an Indian motorcycle start-up which plans to do one of the first ETOs on Neufund platform. To comply with regulations both in India and Germany, they have to set-up a GmbH in Germany to do an ETO. They confirmed to our research team that they received substantial legal advice from Neufund.
Polymath, on the other hand, is more decentralized in this aspect. Although it has a sub-unit called Matador which provides advisory services, their support is not mandatory to issue an STO on the platform. Anyone (with sufficient knowledge in blockchain technology) can create their STO based on Polymath’s GitHub or the Polymath Tokenstudio. This, however, brings forth legal compliance risks for companies planning to do an STO, as they might not have enough legal expertise to structure their STO. For instance, they may happen to miss out a lock-up date for the token settings, leading to violations of certain regulations they overlooked. Finding a suitable legal consultant for an STO themselves is, however, not easy at such an early stage in this crowdfunding method.
Therefore we believe that at this stage Neufund provides more comprehensive support to STOs. However, Polymath’s platform provides more flexibility to companies willing to do an STO in different jurisdictions.
Platform implementation
Neufund has built a marketplace where companies and investors can participate together on a unique platform. To join this marketplace, investors and companies need an account on the platform. A comparable example is the STO platform of Swarm Fund. Such a marketplace is easy to assess for investors and it also allows the comparison among different projects. Investors can participate in multiple ETOs while going through a single AML/KYC process.
Please make note that a platform fee is reduced from the ETO proceedings of every ETO to reward NEU owners. In this sense, any investor (who is then also a NEU owner) that invests in one ETO, is also indirectly making investments in all the other projects of the platform. Thus, the quality of every company on the platform affects investors’ willingness to invest. To ensure the credibility of the projects, only selected companies are allowed to participate in ETOs. The due diligence on projects listed on the platform is performed directly by Neufund.
Polymath, on the other hand, does not offer a centralized marketplace. Instead, it provides facilities like Polymath Tokenstudio to help companies create their tailor-made STO. This has the advantage of flexibility, allowing the company to implement the STO and develop their specialized platform. Also, all STOs are independent from each other.
In short, Neufund provides a more user-friendly marketplace and stronger support to companies planning to conduct a STO. The trade-off is higher centralization of the marketplace and scrutiny of companies and investors that would like to join the platform.
Ending remark
From token standard to legal structure on how the STO is made, Neufund and Polymath have very different perspectives. This, in part, is due to how they positioned themselves in the STO environment. Neufund’s focus is on being a user-friendly service and advice provider, while Polymath emphasizes the versatility of their token standard. Polymath has a more adaptable security token protocol, whereas Neufund sets a good example of how blockchain expertise helps off-chain companies smoothly onboard and create a token offering.
Other notable mentions
Securitize: Provides comprehensive tools and advice for companies planning to do a STO. Several STOs were done and some are on-going, notably the SPICE VC STO which raised $40 M, and an on-going STO for Lottery.com.
Swarm fund: Launched an STO platform where STOs are “listed” with information of the companies, their vision etc. Their marketplace is similar to what Neufund is planning to do.
Tokeny: Based in Luxembourg, also compliant with EU regulations, and it has two announced STOs in the future. However, they do not provide too many details on how their STOs are structured both on-chain and off-chain.
Harbor: Provides clear explanation how they achieve regulatory compliance and a detailed github for their R-token. However, there are no known STOs planned/done.
Editor’s Note
With this Kintaro report we want to shed light on the mechanism, challenges and limitations of the Neufund Platform. Our goal is to enable investors and those interested in equity fundraising on blockchain to have a better understanding of STOs performed through the Neufund platform.
What is Kintaro Capital?
Kintaro Capital is a collective investment scheme soon to be established under the laws of Malta as an investment company with variable share capital. At Kintaro we are true believers in the long-term value of blockchain protocols and crypto-assets. Our goal is to offer an alternative to fiat based financial instruments, leveraging our crypto-economic experience, our research and data analytics expertise to yield higher returns, while reducing and managing the inherent firm-specific and market risk.
Co-Authors: Lau Ka Wai, Ganeshdip Dumbare, Biayna Grigoryan, Hsuan Yang, Ivan Ripamonti, Mervyn G. Maistry.
