Use-case - Next Generation Capital Markets (NGC)
The potential for tokenization to disrupt existing interactions is huge – offering both more efficient solutions to existing paradigms (e.g. crowdfunding, fractionalized ownership) as well as opening up whole new models for financing and collaboration beyond the currently dominant approaches. The use-case Next Generation Capital is about creating a new way of funding (vertical funds), focusing on hightech ventures that are building solutions for a sustainable future.
What is a Vertical® fund?
A Vertical® is a new way of investing in a theme based basket of ventures, offered as one bundled investment proposition and subsequently listed as separate security tokens on a regulated secondary market, using standardised documentation, standardised issuing practices and complying to a standardised framework of investor requirements.
The NGC business case
The Netherlands is a resilient, progressive country. It has a healthy business climate with over 450 multinationals like Philips, Heineken, and Unilever, an established financial industry and high ranking academic institutions in order to make it a solid home for technological development.
Yet very little and a very fragmented supply of venture funding is available with little or no institutional investor contribution. After validating, business models of early- and later stage startups with revenue between Eur 0 - 1 mln, fall into a critical valley of death where there is little or no funding available. In order to ensure that ventures get access to investors and funds, there are challenges to be addressed:
- Investment deal sizes are too small for institutional investors as opposed to the relatively high administrative costs;
- Mismatch of venture risk profiles and risk appetite of institutional investors;
- Unpredictable and uncertain deal flow and a potential lack of available investment opportunities;
- Due to different (restrictive) investment terms its hard to co-invest / make future investments in ventures;
- The pool of private investors is relatively unorganised;
- Little or no availability of venture debt for scale-up ventures;
- The lack of a self sustaining transparent online marketplace where ventures and investors can seamlessly connect and access support services;
- No fiscal stimulation to invest in early stage high risk ventures; and
- Public and private funding possibilities are fragmented over many parties.
For the above mentioned reasons, having a well designed
technological infrastructure does not necessarily mean that raising capital or listing a security token can be done efficiently for ventures. An optimal, aligned process is needed to help ventures start, grow and scale. For this purpose, the concept of a venture vertical has been developed.
The vertical will be offered to Investors in the primary market as one single (bundled) investment offer using standardised documentation, standardised issuing practices and complying to a standardised framework of investor requirements. Subsequent Funding will take place when the relevant venture satisfies pre-agreed Milestones.
In the secondary market, each single financial instrument as issued by each single venture can be traded individually in order to create flexibility for the investors to continuously optimize portfolio allocation or, at the request of an Investor, be traded in a bundle as to be determined by that investor. A Vertical is managed by a Program Manager for purposes of developing and/or accelerating the ventures’ (initial) business ideas into a successful venture, business or company.
Characteristics of a vertical
A vertical will have the following characteristics:
- A venture vertical consists of a minimum of 20 ventures (diversification) with a minimum Technology Readiness Level / Investor Readiness level of 4 that will run through an acceleration program of a maximum three years
- the total value of capital that needs to be raised for the venture vertical is > Eur 20 mln
- the ventures in the vertical are funded with 80% equity and 20% in debt, grants and subsidies
- an investor can only invest in the vertical of ventures in the primary market
- every venture is separately listed on the secondary market (separate ISIN) of an exchange and can be traded as such
- the bundle of ventures can also be traded on the secondary market
The Token is an actual representation of a Security. The Security Token follows the economics of a publicly listed Security. Within the publicly listed securities domain, there are certain permissions granted to licensed operators. A key technological feature of the token is the ability to govern permissions and (various) whitelist(s).
A fully regulated Security Token will be issues that is developed specifically for financing ventures. The blockchain, and thus the token, should have the following characteristics:
- Automated fund raising and asset distribution via smart contracts
- Transferability and tradability of assets governed by permissions and whitelists
- Smart contracts that can manage vesting / milestone financing
- Lifecycle applications to manage voting and corporate actions (eg dividend payments)
- Compliance with existing (financial) frameworks (MIFID II, SRD2, GDPR), most notably
- Tradability on a regulated securities Exchange
In collaboration with