Neufund Report: The Pioneer of a Decentralized STO?
Part (1/3)
Part 1: Neufund Overview
Abstract
In this report we aim to conduct an in-depth analysis of the Neufund platform and its marketplace. Neufund aims to provide a blockchain-based platform for fundraising. It has the goal of replacing traditional stock exchanges such as NYSE with a fully transparent, decentralized and community-owned platform. The research draws upon the Neufund Whitepaper, its smart contracts and various web sources in order to provide an overview of the platform mechanism (Part 1) and elaborate on its smart contract execution (Part 2). Finally, we will perform a competitor analysis and discuss possible suggestions regarding the challenges facing Neufund (Part 3).
Why Neufund?
Neufund is a blockchain-based equity fundraising platform with the potential of becoming the leading Security Token Offerings (STO) platform in Europe. It seeks to provide a simple and transparent platform for Equity Token Offering (ETO). This special class of STO allows both off-chain and on-chain companies to issue regulated equity tokens on the Ethereum Blockchain.
Through the Neumark (NEU) token framework, STO investors are able to obtain a “share” of the underlying Neufund platform. NEU can be considered as a dividend-paying token, as every NEU holder gains a fee from every successful ETO on the platform. This is a key differentiator that seperates NEU from the access and utility tokens of other STO platforms.
Neufund Overview
NEU is an ERC20 token that rewards token holders by giving them rights to the revenues generated by the platform, through fees and a portfolio of equity tokens. NEU is generated whenever Ethereum (ETH) or Euros (the stablecoin EUR-T on the platform) is committed by investors for ETOs completed on the Neufund platform.
The Neufund Whitepaper was published in September 2016, while its first public Neumark token offering took place in November 2017. Through this token offering, called Initial Capital Building Mechanism (ICBM), the platform has raised a total of around 12.5 mln Euros in a single month, which generated an equivalent of 55 million NEUs. We would like to note that the above-mentioned committed funds are NOT the property of Neufund. Rather, they still belong to the investors and are kept on their respective platform accounts for future ETOs.
In July this year, Neufund announced their strategic alliance with the Malta Stock Exchange for the eventual goal of building a “decentralized and global stock exchange”. At the same time, a partnership with Binance was announced, which may allow equity tokens of the Neufund platform to be traded on the Binance exchange in the future. In August 2018 NEU was listed on BitBay where it is now available in four trading pairs, including BTC and three FIAT currencies.
Equity Token Offering (ETO)
Equity Token Offering (ETO) is the fund-raising mechanism that is at the core of the Neufund platform. Neufund’s goal is to provide a platform where secure, regulated ICO-like token offerings can be undertaken.
Under German law, securities are divided into “Wertpapiere” (securities) and “Vermögensanlagen” (investments). The main difference between the two security classes is their transferability. “Securities” are freely transferable in the capital market, while “investments” require additional legal procedures for re-assignment to another party.
Neufund structures its tokenized assets as “investments”, as it is easier to register a public offering of investment assets with German Financial Authorities (BaFin). Such tokens are comparable to private equities. ETO is the public offering of such a token, subject to the German Banking Act (KWG) and the Investment Asset Act (VermAnIG). ETOs can be conducted by any incorporated entity worldwide, except those in the U.S. due to the ongoing regulatory uncertainty which has yet to be clarified by the CFTC and SEC, the primary U.S. commodities and securities regulators.
STO vs ETO
Security Token Offering (STO) is the catch-all term for similar token offerings and is the term used most often globally when referring to new token offering, so it is then natural to ask what is the difference between STO and ETO. Strictly speaking, ETO is a subclass of STO, the same way that an equity token is a specific type of a security token. However, their functionality is the same from the users’ perspective.
The Neufund Platform Mechanism
Currently, the Neufund platform is run by Fifth Force GmbH, a sub-unit under Neufund that act as the only platform operator. To incentivize investments, investors are rewarded with 50% of the NEU tokens generated for every successful ETO, in addition to the specific tokens they invested in. The platform operator gets the remaining 50% of the generated Neumarks as their sole source of income.
NEU supply is determined by the total amount of funds invested in ETOs through the platform. Early investments are encouraged through a diminishing NEU reward. For example, when there are no prior investments, an initial investment of 2 mln EUR-T will generate the first 12 943 829 NEUs, half of which will be distributed to investors and the other half to the platform operator. However, a subsequent 2 mln EUR-T invesment will only generate 12 832 133 NEU due to diminishing NEU reward.
Neumark Value
The value of NEU is determined by two factors— the direct fees charged on the platform and the token fees from platform portfolio in the following way:
- 3% of the amount raised by every successful ETO is deducted as a platform fee and distributed pro rata to every owner of NEU, including the Platform Operator.
- 2% of the tokens generated in each ETO is transferred to a platform portfolio pool, indirectly giving NEU owners a share in all companies tokenized on the platform.
It is expected that through these mechanisms, NEU owners have an incentive to further participate in the network. Also, the platform operator aligns its interest with the other ecosystem participants as its revenue is based solely on the value of NEU.
Despite the fact that seven ETOs have been scheduled on Neufund, there is currently no information available on when they will take place. Given that the earliest NEUs were generated in December 2017, the NEU holders have gone ten months without any of the aforementioned benefits.
Summary
- Neufund aims to provide a blockchain-based platform for ETOs, a special class of STO.
- A platform token, NEU, is generated for each successful ETO to provide incentives for participation in the platform.
- NEU can be thought of as a dividend-paying token. Each NEU holder receives a share from every successful ETO.
- Equity token is structured as an “investment asset” under German regulations.
- The platform operator’s only source of income is its share of NEU rewards.
What’s Next
In Part 2, we will discuss the technical aspects of smart contracts and some issues regarding the platform:
In Part 3 of the report, we will present an overview of the STO ecosystem and compare Neufund with Polymath and other STO issuers:
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, Biayna Grigoryan, Hsuan Yang, Ivan Ripamonti, Mervyn G. Maistry, Galen Evans
