Fundraising Instrument that Fits All Current Trends
Revenue Participation Notes
In the last few years, it has become increasingly difficult to understand which way of financing an SME or a startup is the most reliable; finding the optimal method looks almost impossible. P2P mechanisms, crowdfunding, incubators, JOBS Act, crypto craze — things got really mixed up.
However, turbulent periods bring their benefits too. In such times, it is easier to consider all alternatives aloof, without undue respect to the authority of tradition, which often covers the long-dead-inside zombie structure.
One very interesting approach I suggest you consider today is to sell revenue participation notes (RPNs) issued in accordance with European Union crowdfunding regulations. I know a project in Germany that has raised as much as €1.4 billion that way recently, believe it or not.
The essence of a typical proposal to investors is as follows: “the company will pay the investor 5% of the turnover annually until the investor gets 130% of the amount that was provided as a loan.” There are no restrictions on the choice of parameters (percentages, terms).
Payout formulas can vary depending on relevant parameters such as cumulative turnover and how long it takes to achieve it.
The main factor of attractiveness for investors is the ability to directly enjoy the inflow of money into the firm. Expenses and potential manipulations may only happen after this important gate the investor is standing at to collect his payout.
From the investor’s point of view, the formal ownership and voting rights that a stock gives are mostly just a formality, almost virtuality, while the manipulation on dividends is always quite real. This view may seem a bit radical, but it is certainly not a lie and its marketing potence is growing year after year.
Could RPN Approach Be Optimal for You, Too?
RPN is a reasonable and very flexible hybrid of equity and debt.
First, your company’s shares remain intact. There is no dilution. A typical alternative, private equity placement, is expensive and time consuming. It can also lead to a loss of control. Public offering is even more expensive and complicated, while the circulation of your company’s shares on an open market can entail many difficult-to-predict consequences.
Second, since payouts only occur when the company has revenue, you endure only feasible debt obligations. As a bonus, you provide no collateral.
From the fundraiser’s perspective, a debt with fixed payments complicates business planning. In the case of selling RPNs, you simply get less turnover, as if less customers come to you per unit of time. In the case of an ordinary debt, you are obliged to pay on time, no matter what.
Another problem is that, for a number of “historical” reasons, projects applying for a traditional loan are subject to tighter scrutiny.
From the investor’s point of view, traditional debt is not that perfect either, at least emotionally. It is not intriguing since it has no upside. Unlike that, RPNs can be paid faster than expected. You can also cook RPN formulas with various bonuses.
Third, investors have a direct incentive to promote your project, as the increased turnover immediately affects their payouts.
Noteworthy here, one very handy part of the rapidly cooling off blockchain hype heritage is community building tools. You can leverage it even more by giving it a legal foundation with a peculiar byproduct of some jurisdictions legalising ICOs recently — the programmable legal entity.
Forth, fundraising can be conducted in a comparatively simple regulatory regime — crowdfunding.
Why Is Simplified Regulatory Regime Important?
Besides the obvious reason of saving money and time, the simplified regulatory regime means:
- Convenient, perfectly legal tool to attract investors from all around the world, including non-accredited ones.
- Deliberate target capital setting, without the need for audit and due diligence.
- Almost no limitations in promotion.
Many European countries offer clear rules and comparatively low barriers for crowdfunding. There’s no single entity, though, so some cross-border aggregation might be necessary, but even that does NOT make it harder (and riskier!) compared to the hurdles of applying and staying compliant in the US.
Is Aggregation Across Europe Really That Simple?
Yes and no.
The regulatory landscape for crowdfunding in Europe is motley. Paradoxically, the fact that the EU market for crowdfunding seem to be underdeveloped as compared to other major world economies opens up a temporary window of opportunity.
By applying some crowdfunding aggregation techniques, one can actually take advantage of the lack of common rules across the EU. The fact that cross-border compliance and operational costs are high prevents crowdfunding platforms from expanding and taking monopolistic positions, so a clever fundraiser has some room to manoeuvre.
Although the European crowdfunding sector is highly heterogeneous, the nature of diversity does not affect the readiness of residents of different countries to invest abroad (within EU, though). The chaos merely reflects the range of different starting points of nascent national crowdfunding sectors, not the cultural differences that could make aggregation of your investment offer unreasonable.
One has a multitude of options to establish some form of cross-border market activity. This includes SPVs, subsidiaries, partnerships and investment pools, extending crowdfunding with brokerage activities, etc.
For many cases, though, a single jurisdiction approach is perfectly fine. Look at the freshly brewed Lithuanian crowdfunding law, for example. To register a campaign with the target capital under €5 million is a no-brainer.
Why Not ICO?
From the fundraiser’s’ perspective, ICOs are not effective any longer. Moreover, the incorporation of the so-called utility token into the fabric of your operations will affect the business adversely. There are many examples to prove that. Most importantly, ICO is fraught with severe legal consequences.
From the investor’s point of view, ICO is merely a speculation opportunity. However, the myth that tokens have some of the key properties of bitcoins has already dissipated. Without it, no pumping, the single real source of ICO “value”, will ever work.
Why Not Security Tokens?
STO, i.e. issuing of so-called security tokens is a pure simulacrum, a kind of a myth from the future. In any case, this year, and next year, and the year after that, and probably for many years more, you will have to fully carry out one of the forms of traditional placement. STO offers no way to save time or money. The STO approach will not create any additional demand for your investment instruments.
The magic liquidity promised by STO promoters is years and years away. Moreover, when and if it emerges, it will be all available to you, whether or not you undertake the tokenization efforts now (not free, $50,000+). Please read more about this in my really wicked recent post.
“STO Providers” do not pre-own the magic of forthcoming liquidity. If it does not end up as a myth, if and when that liquidity emerges, it will be much more open and cheap than those air-selling crooks suggest.
Please spread the knowledge and contact me for more details, I will only charge a symbolic €1 for a 30 minutes introductory call so we can discuss the applicability of the approach for your particular case.
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