Introducing
The Token DPA™
A token presale instrument for blockchain companies to fund their growth with investments from everyone – created by Republic Crypto
For companies
Background
The Token DPA (Debt Payable by Assets) (“DPA”) is a debt security created by the Republic Crypto team specifically for token pre-sales. We've designed the Token DPA with unaccredited and international investors in mind, but we believe it's the best way to pre-sell tokens for any project and for accredited and unaccredited investors alike. Just as we created and open sourced the Crowd Safe, we’re open sourcing the Token DPA with hopes that it becomes an industry standard to make investing easier and to help support the blockchain ecosystem more broadly. Feel free to send us an e-mail if you’re planning a token pre-sale or have already held one and want to build a larger, more inclusive network of non-accredited investors.
Deficiencies of the SAFT and SAFTE
Currently, the SAFT (Simple Agreement for Future Tokens) is the instrument widely used by blockchain companies to pre-sell tokens. Republic Crypto aims to change that with the Token DPA. Although the SAFT dominates as a token presale agreement with accredited investors, Republic believes that this instrument is not optimal for less sophisticated retail investors––specifically when the SAFT includes no maturity date or a provision to claim company assets if a project fails. The use of the derivative SAFTE (Simple Agreement for Future Tokens & Equity) hasn’t addressed these concerns, as the promise of future equity offers no protections if the project fails.
Our team realized: Who wants an IOU when we have existing established regimes for lending money to projects and leaving deposits on future purchases?
We're primarily concerned with how many SAFT instruments allows investors' token distribution rights to expire without the recourse of being a debtor as well as the inability of investors' to request money back if goals or projects never materialize on the promised schedule. Our team mitigates these concerns with the Token DPA, providing flexible terms favorable to investors’ interests. Despite using a framework for every agreement, each Token DPA is different and investors should read and understand each investment contract before making an investment.
With a standard SAFT, investors must wait for a public token sale or distribution by an issuing company to receive tokens, otherwise their right to a return on their investment can be left unfulfilled, possibly forever. In contrast, the Token DPA provides a method for investors to either receive part or all of their principal back, earn a cash return or receive the desired tokens when certain events occur. It should be noted, these protections rely on the company issuing the Token DPA abiding by its terms, there can be no guarantee of this. For example, if a company issuing a Token DPA spends all of their capital before investors’ right to request a return of capital occurs, investors’ could force the company into insolvency when they make the request.
What types of companies use the Token DPA?
We’ve made the Token DPA flexible enough to work for companies at every stage of development––whether they’re ramping up their projects and are looking for early followers or have sufficient funding, are releasing their protocols, and now want to legally involve supporters who might not be accredited investors. Either way, we’ve designed the Token DPA for companies to get tokens into the hands of their users, friends, and followers. Under federal securities law, companies can not publicly sell most tokens (or the rights to tokens) to unaccredited investors without seeking a proper securities registration exemption; otherwise, they risk sanction for improperly selling securities. The Token DPA is an effective instrument to sell the right to tokens to anyone, using Reg CF or other securities exemptions.
How it works:
- Companies use the Token DPA to issue debt and collect necessary capital to build out their proof of concept, finalize their white paper and build their protocol. If a company is more advanced and already has done all of that, they can use the capital infusion to hire more staff, market their product, increase their working capital, engage legal counsel and prepare for the distribution of their tokens.
- Companies using the Token DPA through Republic Crypto can:
- Sell the right to tokens through Republic from non-accredited investors (those who don’t meet a high income / net worth threshold or who are from foreign countries) using a tried and tested securities registration exemption.
- The Token DPA sets a time limit for how long a company can hold the funds before paying interest or repaying the debt in tokens. The Token DPA encourages companies to use their funds slowly by giving investors the right to request them back. If the company does not retain the funds then they may become insolvent and will eventually fold. If investors do not request their funds back and never receive their tokens then they can earn interest on their principal. If the company completes its goals, they can repay the debt in tokens, effectively allowing investors to purchase them at a substantially discounted price.
Use & Customize
The Token DPA’s terms can be modified to meet projects’ specific needs, allowing the loan to be paid back in cash or Tokens. For example, you can give your project breathing room by pushing back the date interest accrues. To reward early supporters, you can also ensure investors get preferential pricing on tokens if a token distribution event ever occurs. To make the Token DPA a more flexible instrument than the SAFT, the Token DPA can grant investors (instead of the company) the choice to have all or part of their monies refunded before the loan is paid back. There is no guarantee a company will have the funds to return a investor’s principal, purchasing a Token DPA can result in a total loss.
In the event the start up folds due to insolvency, Token DPA holders may not receive tokens or cash back, but as debt holders they would be entitled to any available assets over equity or SAFT holders, during a dissolution of the business, generally.
A Token DPA can have a hard cap on the time period money may be borrowed in, ensuring that investors’ capital isn’t contributed to a project that won’t materialize within a set period of time.
Companies can customize the Token DPA to include repurchase rights as well as allow for refinancings. Depending on the terms of a company's Token DPA, investors should be aware that repayment in cash or tokens may result in no return.
Download: Early Stage DPA Doc Late Stage DPA Doc
Companies should review and customize this template with the help of experienced counsel. Republic does not assume any responsibility for any consequence of using these documents.
Planning a token sale, or already held one?
Want to give non-accredited investors the same access as your accredited
investors?
For investors
Even as development in the blockchain space is accelerating rapidly, existing regulations make it a risky proposition for token issuers to let everyday people participate in their pre-sales, leaving most people out. Previously, if you weren’t a US accredited investor – meaning you didn’t meet a high income/net worth threshold (3% of the US population), you couldn’t legally participate in public crypto-assets offerings pursuant to Rule 506(c) - also known as Reg D or an advertisted private placement. We created the Token DPA, an instrument appropriate for investment crowdfunding, to help change that.
Anyone 18 or older can purchase the Token DPA through a Republic Crypto offering — American or international citizens, accredited or non-accredited investors and even certain types of entities.
Token DPA — an interest bearing loan that can be converted to tokens
When you join a project on Republic Crypto, you typically receive a security called the Token DPA (Debt Payable by Assets) from the company you loaned money to.
As a loan contract between you and a blockchain startup, the Token DPA is the right to receive interest on your loan or have your loan paid back in the future with the token. The ability to have your loan paid back in tokens is contingent on a trigger event, meaning you will not receive tokens unless a token distribution event occurs.
The Token DPA allows investors to earn interest on the money they lend blockchain companies. With the value of principal of the loan rising due to interest and a promised discount on tokens, investors who hold a Token DPA can receive an advantaged rate on Tokens after a period of time, token distribution offering occurs and the company uses the money responsibility.
Companies provide check-points when investors can request to be paid back, in cash. It should be noted that payment can only be made if the company has retained assets sufficient to service the debt or made money.
Generally, the Token DPA relies on issuing companies to manage the money they raise responsibly, to ensure monies are left if investors request a full or partial refund under the terms of the Token DPA. You should be aware that if enough investors request a refund, it could make the company insolvent - the company may not have sufficient funds to pay all redemption requests. The Token DPA provides flexibility for issuers and investors in the form of an optional escrow provision. a company selects to use an escrow account, the Token DPA can require that a percentage of the monies raised will be held in escrow, ensuring a hard cap on investors’ loss for a set term of the DPA - investors should note this protection relies on the company issuing the Token DPA following its terms and that placing funds raised in escrow will reduce the amount of working capital the company will have, which may have negative effects on company’s day-to-day operations.
Don’t miss out on the next crypto deal:
Loans to blockchain companies are risky, regardless of stage, and you could lose your principal. There is no guarantee that receiving a token in lieu of a cash repayment for a Token DPA will provide a liquid or valuable asset. You should read each company's Token DPA, as repayment terms may change from deal to deal:
Investments with a Token DPA are speculative and involve a high degree of risk.
There is no guarantee a token distribution event will ever occur — in this case you could lose all of your principal.
The Token DPA is an unsecured loan. If the company selling the Token DPA dissolves, Token DPA holders will likely receive no return of capital.
If a Token DPA is repaid in tokens, those tokens may not be freely tradeable or have limited value due to a fluctuating market.
There is no guarantee a public token sale or token distribution event will occur.
It is not known how many blockchain startups will release tokens. It is important to understand that as holders of a Token DPA, there are substantial restrictions on resale and trade during the first year of ownership, with few exceptions. Even after the first year, these securities are not easily traded or sold due to the possible lack of a market.
If the company decides to shut down and there are not enough assets to pay off creditors, other higher priority liability holders may receive assets first, leaving Token DPA holders without sufficient funds to be repaid in full, and they therefore may receive no return.
The company may be able to pay back the principal of your Token DPA with no interest at certain points, check the terms of each Token DPA for specifics.
Some DPAs allow you a limited time period to redeem a percentage of the face value and "cash out". However the remaining percentage is forfeited to the company, which acts as a hard cap but can limit a investor’s downside protection.
Can I sell or transfer my Token DPA?
You are limited from selling or transferring your Token DPA for the first 12 months, unless selling back to the company, accredited investors and the like. See general selling restrictions. Additional restrictions may apply for Canadian investors.1
Can I sell tokens I receive through the Token DPA?
If the tokens are utility tokens, they should be freely tradeable, regardless of when you receive them. However, if tokens are considered securities tokens, they may only be tradeable pursuant to the general selling restrictions. Additional restrictions may apply for Canadian investors.1
How do I purchase a Token DPA?
Find a company you want to invest in on Republic Crypto, sign up, select an investment amount, and pay with a bank or wire transfer Credit Card and wait for the fundraising campaign to end. If the company successfully reaches its funding goal, you will receive a Token DPA, otherwise you will be refunded. Currently you do not need to use Ether (ETH) or a bit wallet to purchase a Token DPA, however you will be responsible for providing the company with the address to one later.
How can I earn a return?
Find a company you want to invest in on Republic Crypto, sign up, select an investment amount, and pay with a bank or wire transfer Credit Card and wait for the fundraising campaign to end. If the company successfully reaches its funding goal, you will receive a Token DPA, otherwise you will be refunded. Currently you do not need to use Ether (ETH) or a bit wallet to purchase a Token DPA, however you will be responsible for providing the company with the address to one later.
How do I know how many tokens I will receive?
The Token DPA’s terms set a cliff for when the principal will gain interest; the terms also provide that if tokens are used to repay the loan, participants will receive a bonus. How many tokens an investor actually receives will depend on the price each company sets for their token distribution.
1 A note to Canadian investors, your Token DPA may not be freely tradeable for longer than 12 months due to Canadian Securities law, please consult with your own counsel on trading restrictions.
Feedback
We appreciate the helpful feedback of friends and attorneys, and we expect we will iterate further on the Token DPA. Please send your comments to crypto@republic.co.
“Crowdsafe”, “Crowd Safe” and “Token DPA” are trademarks of Republic and are either registered or are subjects of a registration application pending with the United States Patent and Trademark Office.
There is no guarantee that a company will ever repay the Token DPA in tokens, meaning a participant may never receive tokens. Terms of a DPA may vary from deal to deal, please consult each issuer’s DPA for the terms of the offering. The value of a return on a DPA will be directly affected by the terms of the DPA and/or the value of tokens at the time they are issued, please consult the terms of a DPA for more information.
Republic provides these investment instruments solely for educational purposes — investors, issuers and investment professionals should do their own research and seek their own legal counsel before utilizing these instruments. Republic cannot be responsible for your use of these instruments.
