Put Your Money Where Your Vote Is: Introducing “Launch Pools”

Launch pools have the potential to turn capital formation on its head by letting the community stake in a refundable pool which turns into committed capital once a project passes a vote. Here’s how.

Capital formation is the Holy Grail of decentralized finance: how to preserve the ease of DeFi-style staking with the process of raising capital for a project, a company or a fund?

On the one hand, DeFi-style pooling is fast, cheap (even with high gas fees…) and global: users simply send their crypto to a pool and get a share of the pool. A pool for an Automated Market Maker or a lending protocol can collect tens of millions of dollars in a week.

On the other hand, capital formation for companies uses a more complex investment contract for shares, notes or units. The offer includes a lot of details that take time to figure out and money to document. It is subject to securities regulations about how it can be sold, and who it can be sold to.

We’ve been doing this all wrong

Launch pools are what you get when you cross DeFi-style pooling with escrow on blockchain to simplify capital formation.

It essentially reshuffles the sequence of how you raise money for your project, by first engaging investors with a refundable escrow pool and only turning it into committed capital once the project passes a community vote.

You have time to do what’s necessary to make the deal work, depending on the needs of your project: you choose a legal form, accredit investors, or in some circumstances you can swap the pool tokens into a utility token and go fully decentralized.

In designing the launch pool, we took inspiration from the SPAC (Special Purpose Acquisition Company) which has recently received a lot of attention in the legacy financial world.

SPACs ask investors to invest in an IPO of an acquisition target before the target is known.

Why would you ever do that? The answer is that SPACs limit risk at each stage:

  • Before the target is identified, you can resell SPAC shares, or redeem them if you do not want to participate in a proposed acquisition.
  • If you redeem, you get your money back, plus a market rate of interest
  • Plus you get something extra for buying the initial offering, in the form of warrants that will be valuable if the deal is successful..
  • Finally, SPAC investors get to vote on potential acquisitions.

A new approach

For our design of a launch pool, we took some of the above features of a SPAC, but we used DeFi to keep assets (and their returns) in the hands of the investor, whilst pushing out the legal setup.

The lifecycle would look as follows:

  • You work on a project but need funding. You of course think it’s a compelling investment but some questions remain and you’d like to see it validated.
  • You create a launch pool, and you announce it with a link in all of your media. This is not an offer of investment, since you are not asking them to send you money. You are asking them to show some interest in return for a voice in your process.
  • Contributors can stake assets that they want to hold anyway (coins or interest-earning assets). By staking, they get votes. They also get a place in line. The earlier investors will receive a bonus, something extra beyond their current return.
  • Answers to the questions around the project get thrashed out as you go along via the same channels, probably using some of the community feedback you got.
  • This results in an investment proposal with a specific investment vehicle and a purchase process.
  • You then call a vote by asking stakers to commit to the new investment.
  • If the proposal reaches a threshold commitment you have set, you convert the stakes that voted “Yes” to the new investment. At this stage,, investor qualification may be required to ensure regulatory compliance.

Variations to the above could include a set-and-forget option that automatically commits stakers who do not want to follow the whole discussion.

Intended benefits include:

  1. Savings: Users can engage with investors and test demand before they spend money on a legal structure (from Otonomos). This could be particularly relevant for funds, which can absorb costs of between USD 50,000 – 200,000 for setup, admin, regulatory and insurance. It may also delay the setup costs related to the cascade of entities required to conduct and decentralize a token sale.
  2. Customization: The investor community can request an investment structure that works for the majority.
  3. Collaboration: The community has a much higher degree of participation compared to legacy investments, and avoids torturous KYC before they are even sure about the deal.
  4. Feedback: For you and your core team, it shortens the distance between an idea and its validation, which is worth a lot: if you are going to get a no, better get a no soon so you can iterate, pivot or move on.

The end of the fund as we know it

Launch pools do not have to be limited to startups and new ideas.

We see a very powerful application for organizing investment funds. Funds can “Launch” and “Organize” in collaboration with investors.

  1. LAUNCH: In the Launch phase, a fund sponsor would simply create a pool and set initial policies. Typically, some founding members (“cornerstone stakers”) would be invited in.
  2. ORGANIZE: Optionally, you can adjust your pool’s policies via an onchain member vote, add investor qualifications at this stage, add a legal entity, etc. All these are spare parts along the assembly line which sponsors can add as they see fit. At a very minimum, what would need definition is the threshold for conversion of the refundable contributions into committed capital. In the case of a fund setup, at this stage asset restrictions and investment strategies would be approved. On-chain rules will reduce off chain admin and audit costs.
  3. INVEST: Once capital is committed, assets could be acquired into the committed pool. This could be done automatically via algorithms and/or with human skills and investments may be made subject to an investor vote. Waterfalls could be customized to create leverage and distribute risk and fees..
  4. FUND: The fund could be opened to further investors at this stage by issuing additional shares. Shares would be tokenized and programmed with specific compliance features such as non-transferability, geographic restrictions etc.
  5. REDEEM: Funds holding liquid assets will allow investors to conveniently buy and redeem.

The setup described above has the potential to move investment activity away from expensive fund management to onchain scripts.

To setup a launch pool to raise capital for a fund, you would need:

  • Information about the founder and manager of the pool;
  • Information about the proposed investment;
  • Channels for communicating about the deal (website, chat, forums, repositories).
  • What is the decision that the pool is trying to make before committing?
  • What is the “something extra” that initial stakers will get by making early contributions?

Use cases galore

Other use cases too come to mind:

  • SPAC-style acquisitions. Gather funds before you know what company you want to invest in. The community can decide if they like your target.
  • Gather funds for a DeFi startup before you know if you’re selling non-US tokens, or equity. The community can decide and you can try to deliver it.
  • A waitlist to reduce stress in a high-demand token offering.
  • Gather funds for a startup before you have attracted key team members. The community of investors can help with recruiting, and the money that they commit will make the job more attractive for team members and partners. Close the deal after the project attracts the right team members and partners.

Product design

So far our design is still on the drawing board with an initial spec for the launch pool smart contract, but we have yet to build a product around it.

Some of the decisions we’ll need to make towards a first launch pool are:

  • What crypto assets can contributors stake in a launch pool? In principle there is no restriction and even e.g. interest-earning digital assets should be stakeable to reduce the cost of depositing into the launch pool. Initially however, it may be easier to limit a first launch pool to stablecoins.
  • What is the something extra? The “something extra” would be calculated on the basis of the order in which stakes arrive, with early stakers getting a bigger bonus if they stay through closing.

Extensions

Eventually, launch pools could be offered on otoco.io as the first component along an onchain investment deal “assembly line”.

Such assembly line will in most cases require a legal wrapper in the form of an onchain LLC or some other legal entity, components OtoCo and otonomos.com already offer.

Other components users may need are services that qualify investors and track investor qualifications associated with blockchain addresses. Some pools will need to use this information to create real-name registries of their investors.

Below is an overview of the add-on services and protocols for pools:

I want you to exist

Elon Musk once said that the secret of building successful companies is to make sure people really REALLY want your product to exist.

With launch pools, if the community really really wants some project to happen, we should give them the tools to stake projects, reward early stakers, and get into a committed deal as frictionless as possible.

OtoCo will soon be running its own launch pool to test if the community really really wants OtoCo to happen the way we have it planned: as an onchain assembler of pools and organizations for the crypto and blockchain economy. Think WordPress for decentralized projects, only better, smart contractified and with a dApp plugin store. 

To help us design our launch pool, we’ve put together a short poll which also lets you pre-register.

Pre-register now

If you’r reading this on mobile, you can also just scan the QR code below to pre-register:

Based on the poll’s results, we’ll craft a specific proposal for OtoCo and broadcast it to the community together with our launch pool smart contract address.

As a contributor, you will be able to put refundable stakes into the pool and vote on our investment thesis. The earlier you stake, the bigger your reward if you eventually commit.

Join our official Telegram group to receive updates.

By Andy Singleton, Special Projects @Otonomos
[email protected]  

Continuous Security Offerings: Money on Tap from Tokenizing Your Revenue

Revenue-based financing (RBF) has been around and lets businesses raise capital from investors who receive a percentage of the ongoing gross revenues. Smart contracts bring this to a new level by continuously issuing tokens linked to revenue. We did some preliminary research.

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How RBF Works

RBF is a way for revenue-generating business to raise capital without issuing debt or diluting equity.

With RBF, a portion of revenues will be paid to investors at a pre-established percentage until a certain multiple of the original investment has been repaid.

Here are some of the termsheets of established RBF providers we analyzed:

The above termsheets show a high degree of communality:

  • Periodic payments continue until a return cap for money invested is reached (usually 1.2x – 2.5x, sometimes 5x!);
  • The reserve pool can fixed (e.g. 10% of all gross revenue) or variable;
  • There is collateral, typically via a first security interest in all business assets;
  • There may also be a “minimum runway requirement” i.e. the business has to have sufficient capital to cover its costs over a period of time.
  • There is typically a warrant clause (a percentage of the outstanding shares as of a specified date, often with anti-dilution protection) or some other conversion mechanism similar to a Simple Agreement for Future Equity (SAFE)
  • Occasionally there even is a personal loan guarantee and there several restrictions on how their capital can be used.

Neither VC nor Debt

RBF providers position themselves in the middle of a spectrum between VC and lenders, however RBF can co-exist with (typically earlier stage) VC and (later stage) pure debt.

It is an attractive option not only because it is anti-dilutive for founders, but the reporting requirements are typically minimal since a business only has to disclose its revenues, so founders can focus on its growth and pitch clients rather than investors.

It’s a tried and tested model and shows a high degree of similarity with accounts receivables-based financing, in which capital providers a business with working capital based on the discounted value of outstanding invoices it is owed.

It also shows similarity with royalty-based financing and RBF and royalty-based financing are often used interchangeably, even though the latter is more often used to obtain funding in return for a carry in musicians’ back catalogue or even future output.

A Dream Use Case for Smart Contracts

All of the above provide a dream use case for smart contracts especially for businesses that receive their revenue in crypto, including stablecoins.

In such a setup, a wallet would be earmaked to receive a fixed or variable reserve of revenue and investors would receive their periodic payouts directly in the wallets they used to send funds from.

The revenue reserve wallet would not be accessible to the business, which would only be able to set the % of its revenue it earmarks in line with the rise and fall of its revenue.

The smart contract in essence turns the offchain legal version of the termsheets above into committed code on blockchain, which helps guarantee contract fulfillment and cut costs.

Cue: A Token!

In the above, for the investors the economics would remain essentially the same: They likely do not care that much about the fancy pantsy of smart contracts as long as the terms of the deal are broadly in line with with deals they’ve done before.

It is important to keep this in mind when we introducing a token: many things can and have been tokenized however issuers often won’t find investor demand for their token if they dramatically reshuffle the underlying economics for investors.

Tokenizing a RBF offering would essentially involve the creation and issue of a token that represent a claim on the revenue reserve.

A simplified setup could be as follows:

1. A company commits to set aside a fixed percentage of its revenues in a cryptographic wallet, visible to all but accessible to none (except buyers who redeem — see below).

2. Investors can buy tokens to get exposure to the growth of this reserve.

3. Tokens are also tradeable in a secondary market (subject to securities laws).

4. A minting mechanism would automatically issue more tokens when there is investor demand to purchase tokens directly from the reserve. This would typically be when investors are bullish about the company’s growth prospects.

5. The price of the newly minted token is a function of the number of tokens already outstanding: the nth token will be more expensive than the n-1th token.

6. A predetermined portion, e.g 5% of the token proceeds could in turn be allocated to the revenue reserve, growing the reserve as more investors come in.

7. Token holders can buy or sell tokens (once they’re out of lockup) through a secondary market e.g. tokens could be listed on a exchange or more optimally bought and sold via a decentralized token swap.

8. Anybody who holds a token, either from buying it directly from the reserve or in the secondary market, can redeem it against the crypto currency pool held in te reserve. The redemption price would be continually recalculated as a function of the amount of funds in the reserve and the number of outstanding tokens at the time of redemption.

Money on Tap

The setup above is effectively a continuous offering of a token which, for all intents and purposes, is a security and therefore subject to securities laws and their safe harbors.

If, which is likely, an accredited investor safe harbor would be used, the offering would be conducted via white-listing and accreditation of each and every token buyer.

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Once accredited, token buyers who buy from the reserve continually replenish the company with working capital. The secondary market meantime should offer a mechanism for investors to express their views on the company’s prospect by putting a multiple on a company’s revenues, in the same way traditional shares put a multiple on listed companies.

For the company, a token would provide a tool for a broader group of stakeholders, including its paying clients, to have a carry in the success of the business.

This is a very powerful tool to build community loyalty: for instance, tokens could be issued to paying customers who could be granted a set % of their purchase price in free tokens.

As a result, company and customer could become much closer aligned than ever before: think of it as Elon giving you some shares in Tesla for free after you bought that Tesla car!

Where does that leave me as an investor?

For investors who compare their position as a token holder with that of a traditional RBF deal however, the economics have been radically reshuffled and it remains to be seen if traditional investors will bite.

They’d be worse off in that the simple setup would not include any conversion rights, so maybe some sort of SAFE-type mechanisms would have to be added.

Also, in the above setup there are no preference rights on the assets in the reserve compared to terms of some of the traditional termsheets we looked at.

What token buyers would gain over BRF investors is liquidity. However, as we have seen with a number of tradeable tokens, front-running and price manipulations are still rife in cryptolandia, which makes liquidity a two-edged sword.

Finally, investors would have to have assurances that all revenue, also revenue received in fiat, ultimately gets deposited in the crypto wallet that holds the revenue reserve. Logistically, this would mean part of your fiat revenue needs conversion.

Accounting-wise, investors may insist on an audit of all revenue (and not only the crypto sales proceeds accruing to the company’s main treasury wallet which are visible on blockchain), which may add significantly to the reporting requirements of the issuing company compared to a traditional RBF deal.

CONCLUSION

A continuous issuance of a token that represents a claim on a company’s revenue is a use case cut out for smart contracts: it could radically transform the technological ease with which revenue-generating projects can access capital.

On its economic merits, such token issuance could be a mixed blessing for both investors and the issuing company, and we look forward to continued experimentation with offering terms that balances expectations from both.

At Otonomos we like to be part of this experimentation ourselves and are in dialogue with Fairmint, whose work in this area we learned a lot from and with whom we are in dialogue about a possible Continuous Security Offering for our company.

Join our Telegram CSO group to help us get this right together!

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