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Introducing
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.
As the industry has developed, numerous instruments have been used to pre-sell digital assets to investors. Popular instruments include the SAFT (Simple Agreement for Future Tokens) and the SAFTE (Simple Agreement for Future Tokens or/and Equity) but we don’t use them on Republic. Instead, Republic Crypto created and has successfully used the Token DPA as an alternative. Many instruments currently used are equivalent to IOUs, without clear procedures in the event the project fails or there are delays in development. Additionally, the use of the SAFTE which provides the prospect of future equity if tokens are not delivered may not provide compelling upside if the project fails as equity holders are generally below debt holders in the event of a liquidation.
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 pre-sale instruments allows investors' token distribution rights to expire without the recourse of allowing participants to become a debtor; many do not provide the inability for investors' to request money back if goals or projects never materialize on the promised schedule. The Token DPA can reduce these concerns, providing flexible terms which can be made 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. As the Token DPA is a debt instrument, investors should assess the credit worthiness of any potential user of the Token DPA. Many pre-sale instruments require investors to 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 request 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.
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:
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, 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 an investor's principal, purchasing a Token DPA can result in a total loss.
In the event the startup 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 other-non debtors, during a dissolution of the business, generally.
A Token DPA can have a hard cap on the time period money may be borrowed in and can have built in milestones that provide investors the option to request the return of part or all of their capital if said milestones are not met. There can be no guarantee an issuer will have sufficient funds to pay back a request for a (partial or full) refund on the Token DPA and therefore these provisions may prove not to protect investors. Investors should review each Token DPA for its specific terms and conditions, as it may be different between issuers. 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.
If your company is a Delaware entity, the DPA will likely be considered a debt instrument. In accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 470, Debt (“ASC 470”) the DPA will be considered debt because it (i) contains a fixed maturity, (ii) provides for interest, and (iii) is enforceable as such under the laws of Delaware. Under ASC 606, upon a repayment in tokens or prepayment in cash of the DPA, the company (borrower) will recognize income as a performance obligation has been fulfilled. Please consult with your tax and accounting advisors for further details.
Download:
Early Stage DPA.doc
Late Stage DPA.doc
Early Stage DPA with Escrow.doc
Late Stage DPA with Escrow.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?
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 (approx. 6% 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 advertised 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 - accredited or non-accredited investors and even certain types of entities.
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.
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.
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
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
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.
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.
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.
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 [email protected].
“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.
