Why We’re Shutting Our Successful Fundraising Platform

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Neufund was a security token company that wanted anyone in the world to invest in whatever business they wanted.

For decades, investing has been exclusive, inaccessible and unequal. This has contributed to the growing wealth inequality in Europe and the United States. We wanted to change that.

Today we are closing Neufund, despite its success.

Zoe Adamovich has co-founded several startup companies. Its most recent venture, Neufund, was a fintech token stock firm that aims to democratize access to global innovation capital.

Over the lifetime of Neufund, we have transacted around 20 million euros ($22.6 million) through our own equity platform, which is entirely facilitated by the public Ethereum blockchain. We registered 11,000 investors from 123 countries – an international and diverse crowd with tickets starting at €100 ($113).

Our proof-of-concept case – Greyp Bikes – has made the full cycle, from issuing token shares to retail investors, through corporate governance on the blockchain, to going out to Porsche and distributing the proceeds via ERC20 tokens. Effectively, there were no compliance issues, technical issues, or security breaches. A European technology company raised funds by issuing securities using a decentralized technology. More than 1,000 investors from dozens of countries participated in it. Alice is wonderful.

However, we are closing the Neufund business.

why? Because today, more than two years after Greyp raised funds, we’re still not sure if regulation will allow us to replicate Greyp’s fundraising model with other similar companies. Despite engaging with regulators for years, we haven’t been able to get out of the predicament of legal uncertainty.

And dare I say, no DeFi (Decentralized Finance) company, aimed at regular investors on a larger scale, has succeeded in achieving this so far.

From the start, we’ve played the role of writers – hiring lawyers, getting licenses and spending billions on legal opinions. We have been dealing with regulators and governments in many jurisdictions. However, all this turned out to be a mistake. The search for legal approval was a mistake, as was the search for a transparent discussion of benefits. The reality was presented to us very clearly: if you played it according to Howell, you lost before you even started.

This is what we learned from experience.

Blockchain licenses are useless

Let’s start with the “blockchain licenses” issued by the innovative reformed jurisdictions, such as Switzerland, Liechtenstein, Malta, Estonia, Gibraltar, etc. They all welcome entrepreneurs with open arms.

So, yes, you can get a Swiss Security Token License, a Liechtenstein Technology Service Provider License or a Malta License for Virtual Financial Assets. But the breakthrough is that although there is a single common market for Europe in theory, these licenses are not recognized in other European jurisdictions.

For example, if investors from Germany aim to use your business in Liechtenstein under a TTSP license, BaFIN (the Federal Financial Supervisory Authority, Germany’s financial regulator) will claim that you are behaving illegally, and will issue fraud warnings at any time times.

Perhaps that is why only seven companies in Liechtenstein have obtained such licenses over the past two years, of which two were granted to already licensed conventional banks (Bank Frick and VP Bank).

Recently, some countries have become more explicit about the flaws of their innovative laws. Liechtenstein states on its website: “Registration under the TVTG is effective exclusively in Liechtenstein; therefore, the issuance of a passport according to the model of European financial market laws is not possible.”

Some, such as Estonia, are simply canceling previously issued licenses – 70% of the 2,000 virtual asset service provider licenses in Estonia were canceled in June 2020, and so far no new “blockchain licence” has been introduced.

However, all of these countries are still very active in promoting themselves as blockchain-friendly. As a result, many entrepreneurs flock to those jurisdictions, when in reality the licenses issued there are useless, and almost no work gets done.

Legal solutions, such as .org, are time bombs

Similar to Ethereum, many protocol companies have registered themselves in Zug, Switzerland as charitable foundations. This mask of nonprofits is the reason why we see many blockchain companies marketing within the .org domain, rather than the .com. The concept of utility tokens flourished, and initial coin offerings flourished, thus regulating the purchase of tokens legally as donations for the public good to develop a protocol. All this was possible due to one breakthrough: unlike many other countries, Switzerland does not limit the definition of charitable activity to specific areas.

However, when it became clear that the purpose of these projects was commercial rather than charitable, the initially permissive Swiss regulator, FINMA (Swiss Financial Market Supervisory Authority), cracked down on ICOs and the .org structure. You may ask why Ethereum was barely affected. Well, by the time the search began, the network was already too big to be scrapped.

NFTs (non-fungible tokens) are the new tag truncated, but it’s the next step that aligns with regulatory scrutiny. We can comfortably assume that regulators will not be considered “unique” for what issuers consider “unique”. They’d rather classify NTF’ed avatars and soccer stars as commodities – and boom! Securities Act applies. We’ve seen the movie before.

Classic financial licenses are a dead end

Neufund’s experience in Liechtenstein shows how it works when DeFi meets traditional banking laws. Initially, the CMA gave us written confirmation – sometimes called a “no-action letter” – that Neufund’s business model did not require a financial license. We were told she did not even qualify for such a license. Based on that, we conducted a Greyp fundraising campaign.

After the show closed, we got a stark warning from the FMA that we might be breaking laws and that penalties, including potential crime (yes, that means imprisonment) could apply. We have been accused of operating without the necessary financial authorization.

We resumed the bewilderment, and soon received an official apology from some of the country’s highest-ranking dignitaries. We also reached a negotiated solution with the FMA and agreed to apply for a traditional “asset manager” license. We all knew it didn’t make sense because the company had never managed any assets, yet somehow we had to fit in the fund.

Money and time went into this, until we got another call from the FMA – after review, the regulator again concluded that Neufund’s business model is not eligible for a financial license (palm emoji here). So the process was stopped.

Since then, we have tried to clarify whether we are legal or illegal, and no one can tell us. The whole conversation was pointless. It fueled the narrative of the “progressive state” in Liechtenstein, with no commercial output.

Dodging benefits discussion by discrediting blockchain companies is a common post-protection tactic for regulators

Did you know that most regulators, notably Germany’s BaFIN, maintain a policy of not issuing green flags to cryptocurrencies and other fintech startups? They only emit red lights, and then only after you have already started your business.

These red lights are direct injunctions, or in their milder and more popular version, they are known as general warnings. It is semi-formal – a form of the regulator’s “code”, an arena for publicly expressing the regulator’s suspicions of any business, and where no supporting evidence is published or requested.

These warnings often read as follows: “BaFIN has ample reason to suspect that CompanyX is offering Product Y without the required licenses.”

Often, the alleged offender learns to receive such a warning only from the Internet, leaving it without any avenue for discussion or dispute. Their effect is that they classify the project as potentially fraudulent activity, which has the potential to destroy the company’s reputation or damage its funding round. There is hardly any process of resuming or hiding from the Internet.

The entire system is designed to make any attempt to discuss the substance extremely difficult, and at the same time protect the organizer from any liability, should fraud actually occur.

So, how can we build a legal DeFi business?

Well, you can’t. There is no European law to refer to, no regulator to take a stand. Instead, there is a system of politics built of red lights and glass walls, where the bona fide founder has no way of stating what he or she is actually allowed to do.

For DeFi founders who want to stay in the game, the only chance is to fly below the regulators’ radar, until the business is too entrenched to be shaken off. Don’t waste your money on legal opinions, which regulators have no obligation to respect, and are often ignored. Do not participate in any discussions, innovation regulatory boards, or government advisory groups.

Be unattractive and unattractive. And while appearing colorless, build your customers out of places frequented by money men.

And if you do it correctly and for long enough, like Ethereum or Binance, you may become too rooted to be able to get rid of it. In the current regulatory environment, it is the best chance for blockchain companies to succeed. We did it differently. We tried to do it “correctly”. Thus, we now have to close.

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