Evolving Fundraising Models: Replacing Equity Commitments With Token Issuance – Case Study

Introduction

A client of Aurum sought to pivot from traditional equity fundraising, which had been completed two years earlier, to a token issuance and distribution model, restructuring existing commitments to align with their evolving goals. This case study examines how we addressed the challenges of transitioning equity obligations into a token-based framework while safeguarding compliance and stakeholder interests.

The Challenge

The client initially raised funds through Safes, which are standard forms of future equity agreements, granting investors the right to receive equity in future, upon occurrence of a triggering event. However, a token-based model became strategically necessary to foster broader ecosystem participation and community engagement. The transition presented several challenges:

1. Contractual Constraints: Existing equity agreements contained adequate investor protections that required careful consideration.
2. Regulatory Complexity: Replacing equity with tokens risked triggering securities laws across multiple jurisdictions, requiring a compliant structure for token issuance.
3. Stakeholder Agreement: Gaining investor consensus for the equity-to-token exchange was crucial to avoid disputes or legal challenges.
4. Tax Implications: Both the project and investors faced potential tax liabilities arising from the transaction.
5. Governance and Ecosystem Design: Establishing a robust framework for token issuance, distribution, and management was vital to ensure compliance and long-term project sustainability.

The Solution

To address these challenges, we developed a legally solid and strategically sound approach, executed in the following stages:

1. Comprehensive Legal Review of Investor Agreements

We conducted an in-depth review of all existing equity agreements to identify all relevant restrictive provisions, such as transfer restrictions, pre-emption rights, and anti-dilution protections that could impact the transition. Flagged and pre-empted potential investor concerns to minimise the likelihood of litigation.

2. Strategic Planning for the Equity-to-Token Exchange

We designed a detailed roadmap for transitioning equity obligations into token distributions, recalculated token allocations based on equity holdings to ensure fairness and maintain investor trust, incorporated vesting schedules and lock-up periods for tokens to align long-term incentives and prevent market destabilisation.

3. Formation of an Offshore Token Issuer Entity

To oversee the token issuance and mitigate legal exposure, we advised on the creation of a specialised offshore entity. Aurum advised the client on the available regulatory frameworks for the token issuance without extensive compliance obligations and designed a governance framework for the new entity, including the allocation of roles and responsibilities for token management.

4. Tax Analysis and Risk Mitigation

As the initial fundraise was conducted through a UK entity, we carefully analysed and assessed potential tax implications and risks to avoid adverse outcomes for both the project and its investors. The tax considerations influenced the final design of the transfer transaction, ensuring it would not result in unintended adverse tax consequences in the UK and that the company remained tax compliant.

5. Preparation of Definitive Agreements and Legal Instruments

During the final stage, our team has designed and drafted definitive agreements that would be employed by the client to replace equity commitments with the right to receive the tokens in future. As part of this process, we have considered three different legal structures, or frameworks, for completing the transition.

The Result

The transition was successfully completed. The equity holders agreed to replace the equity obligations with token rights, maintaining the key stakeholder trust and avoiding legal disputes. The offshore token issuer entity provided a compliant and tax-efficient framework for token distribution, reducing the project’s regulatory exposure.

Key Takeaways

1. Thorough Legal Review: Understanding and addressing the nuances of existing equity agreements is essential for successful transitions.
2. Compliance Considerations: Ensure regulatory and tax adherence in all relevant jurisdictions to mitigate risks of enforcement actions, fines, and other liabilities.
3. Stakeholder Buy-In: Early and transparent engagement with investors is critical for securing their support in complex restructurings.
4. Strategic Structuring: Incorporating lock-ups, vesting, and proportional exchanges aligns incentives and minimizes risks for all parties involved.

Restructuring from equity to tokens demands precise legal, tax, and governance strategies. A carefully planned approach ensures compliance, preserves investor relationships, and positions projects for long-term success.