Revenue Based Financing will be the Savior of DeFi

Please note that this is not legal or accounting advice, just my interpretation of securities law and a suggestion on how real-world capital arrangers can legally circumvent SEC registration requirements

As a decentralized finance enthusiast, I have spent quite a bit of time pondering real-world DeFi applications. Upon learning the basic concepts of DeFi, I, like many others, quickly realized that such a system would make it possible for entrepreneurs to raise capital outside of the traditional centralized financial system.

During an afterparty at ETH Denver 2022 I had a chance encounter with a developer from the Centrifuge protocol and spent the next 30 minutes listening to him describe the basics of the protocol and some of the early adopters that were forming capital pools in order to recapitalize real-world assets. I was beyond intrigued, and, the next morning, I loaded up Centrifuge’s¹ website and began to peruse their offering pools. Wanting to seize my chance to participate in the real-world DeFi ecosystem, I connected my Metamask wallet and began to search for the source of my future millions. However, while scanning through the investments’ pages, I noticed that only accredited investors could participate. And then it dawned on me that the primary obstacle to the wide acceptance of real-world decentralized finance would be the onerous regulatory hurdles imposed by the Securities and Exchange Commission (SEC). For those of you unaware of what an accredited investor is, the definition, as promulgated by the SEC, can be found here. For those of you who would prefer the TL;DR version, an investor can be anointed the title of “Investor with Accreditation” if one of the following points is satisfied:

Annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or higher income in the current year and prove income above the threshold for the prior two years.

A net worth exceeding $1 million, either individually or jointly with a spouse.

It should be noted that the SEC also allows for an individual to qualify as an accredited investor if they possess certain professional certifications, designations, or credentials. The full list of the “papered regalia” that the SEC acknowledges in lieu of their proof of stake model can be found here.

SEC Registration

I’m sure many of you are wondering, “Well, why do you need to be an accredited investor to contribute to a Centrifuge pool?” I mean, if you can open a bank account, you can open a brokerage account and g̶a̶m̶b̶l̶e̶invest in the latest memestock. But, alas, even if your personal Oracle of Delphi foretold the vast riches to be had from Gamestop’s Phoenix rising, you cannot toss $10 into a Centrifuge pool. To understand why accredited investors are (let’s be honest) afforded wealth privilege, one needs to possess a basic understanding of the laws regarding capital formation and arrangement. When an enterprise raises funding from investors, that enterprise sells securities, so named, because they represent a security interest — i.e. a lien in the aforementioned enterprise. Most people are aware of the more vanilla securities: stocks and bonds. These securities represent either an equity (stocks) or debt (bonds) interest in a company. In order to clarify if a transaction qualifies as an investment contract, and therefore subjecting it to SEC registration, the SEC has promulgated the Howey Test. One of the hallmarks of an investment contract, as defined by the Howey Test, is that there must exist the expectation of earning a profit from the efforts of another²³. If a security is defined as an investment contract under the Howey Test, the company must either register said securities with the SEC or seek an exemption from registration⁴⁵.

Exemption from registration is, for the most part, a polite way of saying “registration-light” or registration with reduced complexity. The exemption-qualification process still requires substantial communication with the SEC as well as professional overhead. While the exemption process requires the same professionals as should be employed during any investment process (attorneys, auditors, etc.), being involved in anything related to SEC procedures, fees have been known to increase…substantially. This fee increase is due to the fact that broker-dealers and attorneys who work with securities issuers need to possess certain knowledge about the SEC and its procedures. In addition, broker-dealers must be registered with the SEC. This registration requirement enables them to essentially form a cartel as the broker-dealer club is effectively limited. Unregistered intermediaries are not allowed to facilitate securities transactions, even if all parties involved are experienced and are operating in good faith. The SEC registration requirement of those that facilitate securities transactions reduces the free-market competition in the money market. And issuers and capital-arrangers still must be granted permission to be exempt from registration — an outcome not guaranteed. Substantial resources could be expended only for your exemption request to be denied — even if you had a viable enterprise.

Registering securities is not as simple as getting a driver’s license. While the actual process is, at least by federal government standards, simple, it is not easy. A company that seeks to register its securities must engage the services of auditors, lawyers, and other professionals at a cost that can readily exceed six figures. The security registration or the seeking of exemption from registration processes, again, represent a proof-of-stake (pay-to-play) model. Elon Musk can afford $100,000 to play in this game; budding entrepreneurs by and large cannot. And this is the point: If we want to encourage entrepreneurship⁶, then we need a framework to allow for the potentially unhindered flow of capital. I always assumed that DeFi offered this framework. To be fair, technically speaking, DeFi DOES provide the framework, however, government regulation prevents DeFi from fully realizing the value of its ecosystem. When it comes to capital arrangement, government regulation creates a deadweight loss. For essentially the requirement to pay a street tax to those granted social license by the Godfather SEC, a rent-seeking situation is formed. I submit that many of the services required by the SEC would likely have been requested anyway, therefore creating a situation where service-providers are able to extract above competitive fees and prohibiting two sovereign entities from engaging in a commercial transaction. If I want to invest some small amount into a risky venture, I should have that right. After all, if any market should be free, it should be the money market.

Let me clarify that I do believe that professional services are a necessity for capital formation. Personally, I would be MARKEDLY more comfortable investing in an enterprise with audited financials (though after an almost continuous litany of major fraud case studies, one should ask, “Who is auditing the auditors?”). And anytime that a contract is entered into, ALL parties should seek legal counsel. However, I believe that the security-registration process necessitates unnecessary resource expenditures. The required engagement of services by the SEC is not really to protect investors; it is to ensure that the SEC can claim it did its part and certifies that all information that has been requested has been received. The SEC basically just invented the position for itself. Crucially, the SEC makes no effort or claim to warrant that the information supplied is accurate, let alone that the entity raising the capital is a good actor. The SEC merely warrants that a checklist (yet again, as promulgated by the SEC) of information has been supplied and the SEC is officially in receipt of it. In essence, the SEC requires capital arrangers to supply to it information that it arbitrarily requires. Information that a prudent investor would ask for anyway. So if a prudent investor would have asked for said information, why does a company also need to supply it to the SEC and wait for the SEC’s blessing? If a prudent investor requested the same documentation, and the issuer declined to provide it, the investor would simply walk away. It would almost seem as if the SEC’s role is to give the veneer of security rather than actually enforcing it. I believe that many investors see that a security has been registered, or has received an exemption from registration, and assume that it is safe. Although the SEC provides — in crystal-clear verbiage — that this is NOT the case, my assumption is that many retail investors substitute SEC approval for effective due diligence.

Look, investing is risky; investors and entrepreneurs are paid to accept risk. And the potential profit from your efforts comes at the cost of potential loss. Nothing is free. I am not advocating a pro-fraud stance, rather that SEC “protection” offers only an illusory benefit to investors and, therefore, submitting to the onerous process is unnecessary and ultimately value-destroying. Investors can generate the same protection as SEC registration through their own effective due diligence and by only investing in assets that they understand. Considering that there seems to be a roughly equivalent prevalence of scams regardless of an investment’s registration status, it would seem that the requirement of SEC registration is moot. Given the litany of fraud cases that have resulted from companies that DID sell registered securities, one can see that investor losses can still take place, regardless of SEC oversight. Investors should know what they are doing or seek professional advice from those that have a vested interest in their success. I think that the culture of DeFi espouses primarily Libertarian beliefs of sovereignty and autonomy; however, DeFi must find a way to mitigate government regulation if it hopes to achieve acceptance by a widespread audience — not just “the cool kids.” Unfortunately, and despite its ineffectiveness, government regulation IS a part of the financial system and needs to be addressed.

So, we cannot eliminate government regulation, but what if we could find a loophole? CeFi players have quite the torrid love affair with loopholes, so maybe it’s time DeFi finds a loophole of its own. Revenue-based financing (RBF) might fit the bill.

Revenue-Based Financing to the Rescue

Revenue-based financing (RBF) is actually common among venture finance. The primary application is one where a financier is optimistic on the revenue-generating capability of a new venture, but their belief in accounting profitability is not met with the same level of confidence. This divergence could be the result of an inefficient cost structure, lack of economies of scale, or any other reason that a financier can imagine. For those of you reading who are fans of Shark Tank, you have probably heard Mr. Wonderful offer a royalty agreement — maybe he really is wonderful!

In a venture RBF arrangement, a financier agrees to pledge his capital to the new venture in exchange for a percentage of the venture’s gross revenue. The agreement can either be ongoing or for a fixed return of a multiple of the investment amount. In an ongoing royalty pledged, the financier receives X% of gross sales for the life of the venture or until the contract is bought out by the venture⁷. In a fixed-return contract, a financier pledges their capital in exchange for a cumulative payback. For example, a financier would pledge a lump sum today in exchange for 10% of future sales until a total of 1.4X of the original capital pledge has been repaid. The IRR of the cash flow stream is dependent upon the length of time it takes to repay the cash flow multiple.

The real benefit derived from RBF is the construction of a natural alignment between investors and a venture with an uncertain or unproven cost structure. The venture needs capital to reach profitability and establish itself as an ongoing concern. The investor has capital that they need to generate a return on and believe in the revenue-generation prospects of the company but might be unsure of near- or long-term profitability⁸. An RBF agreement fills this void and allows this specific money market to clear, i.e. the financing to consummate. By being concerned only on top-line revenue, the investor is in essence “hedging their bets.” In the context of this discussion, RBF has a characteristic that makes it particularly suited to DeFi applications: Royalties are not considered securities under the Howey Test, as they are not defined as investment contracts. The SEC views a royalty agreement as analogous to an invoice and not an investment contract.

However, the nuance in avoiding SEC scrutiny is that the royalty purchase must be direct from the company. If, for example, the company sold a royalty interest to a special purpose vehicle (SPV), and then that SPV sold interests to investors, those interests would be considered securities and therefore would be subject to the same onerous registration requirements. What about this arrangement results in a security issuance? Technically speaking, the investors are making money from the efforts of the investment advisor (IA) managing the SPV⁹. The investors are, at least from the point of view of the SEC, generating a profit from the successful efforts of the investment advisor, even if such efforts were marginal and limited to the IA organizing the SPV and managing back-office tasks. While there is technically nothing currently stopping companies from selling low-dollar royalty interests to unaccredited investors, the overhead costs would be exorbitant. Later in this discussion we will explore how distributed ledger technology (DLT) will be of benefit.

Intellectual Property Pledge

In a typical RBF arrangement, the RBF is a lien against top-line sales. If sales are halted, then the RBF is effectively null and void. However, investors in RBF contracts can enact certain clauses that serve to enhance the investors’ security interest. Additional security can be affected through a pledge on intellectual property — essentially a mortgage on IP. In a usual mortgage arrangement, the financing contract consists of two parts: the note and the mortgage. The note acts as an effective lien against the borrower’s cash flow. Under the terms of the note, the borrower must remit a pre-negotiated amount to the lender by the end of the current period. If the borrower is unable to make the periodic payment, and thus not honoring the terms of the note, the mortgage document affords the lender the legal right of foreclosure on the underlying asset pledged as collateral. The foreclosure process removes the borrower’s right of possession and use. The lender now has the right of possession and use, and — crucially — that right is negotiable; it can be sold. Typically, financiers chose not to operate or continue the possession of foreclosed assets, rather, the more common choice is to liquidate them and use the proceeds to satisfy, to their best extent, the original terms of the note. RBF investors could enact a similar clause, requiring a pledge of intellectual property as collateral in an RBF agreement¹⁰. If a company negates the financing contract through non-performance, the RBF investors could foreclose on the attached IP and lease or sell it to another company¹¹. Philosophically, I think that an IP pledge makes the most sense for new ventures funded through an RBF. The vast majority of new companies that would be funded under this arrangement are service-based companies and do not have much in terms of physical assets. However, what they do have is a substantial capital asset base of intangible assets. To quote Peter Thiel, “A successful company is built on secrets.” Howard Marks of Oaktree Capital Management resonated this sentiment when he said, “Investors make money on information unknown by the general public.” Intellectual property is the secret sauce of most new ventures¹². Since venture royalty investors are ultimately funding the development of IP, then the IP should be pledged collateral. This arrangement is analogous to a residential mortgage lender placing a lien against the title (right of possession) of a home in exchange for providing purchase money.

How the DeFi Ecosystem Plays Into This

When thinking about buying a product, transportation and distribution costs represent a real and often overlooked expense. The money market is no different. Think about it like this: Would you spend $21 to pick up a $20 bill? Your revenue would be $20, but after paying for the distribution costs, you would lose $1. Remember, in order to qualify as a security interest not regulated by the SEC, the RBF must be a direct contract between the investor and the entity selling the contract. So if a company were to raise $1 million through the sale of 100,000 $10 contracts, the company would need to manage 100,000 contracts. This is a problem, especially for smaller companies. A large multinational corporation might be able to handle this, but a small creator just launching a product likely would not. The RBF model needs to be effective regardless of a venture’s scale. There exists in the world of CeFi a service that serves as an intermediary between investors and ventures, raising capital known as a transfer agent. And this service is required for registered securities and exempt securities. The transfer agent is essentially a non-distributed ledger network. The transfer agent operates what is effectively a gargantuan accounting journal, keeping track of who owns the securities and handling remittances between the company and investors. Transfer agents record changes of ownership, maintain the issuer’s security holder records, cancel and issue certificates, and distribute dividends.

When seeking funding from the money market, one must take into account the distribution costs of handling the money. Money-market distribution costs represent a true cost of capital, and these costs serve to effectively increase the cost of capital — a true loss of economic value.

The services provided by a transfer agent are essentially those provided by DLT. A DLT tracks the balances of wallets and records transfers between accounts. By using a DLT in lieu of a transfer agent, small companies, for a relatively low cost, could engage with thousands of small investors. Through a dramatic reduction in distribution costs, ventures of all capital needs’ requirements could access RBF. By being afforded access to royalty venture financing, small companies can have access to sources of capital that do not require SEC supervision.

Applicability

To ensure the success of an enterprise, it must simultaneously accomplish two items: solve a particular problem for a target audience and effectively communicate to the client audience its unique value proposition. During Bitcoin Miami 2022, Jordan Peterson gave a fireside chat in which he introduced a valuable lesson from the beginning of his entrepreneurial journey regarding effective client communication. In his words, “Being smart accounts for only about 5% of an entrepreneur’s success. The remaining 95% of success comes from being able to effectively articulate your solution.” Said another way, the most successful entrepreneurs are in essence 95% successful marketers. And how does a marketer ultimately accomplish their goals? By forming an emotional connection with a target audience.

This insight is applicable to ventures of all shapes and sizes — including the venture of raising money. The companies that are the most successful at raising funds, defined as achieving the greatest success in the money market, are the ones that can most effectively achieve an emotional connection with investors¹³¹⁴. To achieve an emotional connection with a counterparty, one must be able to understand that counterparty’s psychology. And how does one accomplish this? Like most things in life, largely through trial and error. Understanding client psychology in an entrepreneurial setting is largely an iterative process. The process starts with a potential entrepreneur developing an initial insight or idea about a particular problem facing potential clients. A prototype is developed and then that prototype is submitted to a group of alpha clients for the sole purpose of eliciting feedback — what do the alpha clients like about the prototype and, the much more enriching feedback, what do they not like about the prototype. Through this step-by-step process, entrepreneurs are on the path of achieving product/market fit — tweaking a particular technical solution so that it ultimately solves an emotional problem.

This process is one of the themes expressed in the book Hitmakers, which provides numerous examples of this process of developing an initial concept into a mainstream brand. Likely the most salient example of an entrepreneur having an initial thought and then meticulously refining it through constant alpha client feedback is the origins of 50 Shades of Grey. 50 Shades of Grey got its start as Twilight fanfiction, and the author E.L. James would spend hours refining her stories to fit her niche audience of fanfic interested Twihards. She would write a story, submit it to her fans, and they would tell her what they did and did not like about her most recent writings. Hitmakers described how she became obsessed with pleasing her fans. As the popularity of her writings increased, an increasing number of readers became excited to respond with feedback and suggestions. Through the iterations that James performed, she became a subject matter expert on the psychology of her fans — what drove them to engage with the brand that she was building. James’s fans ultimately decided the course of the novel by describing what resonated with them. James’s value as an entrepreneur was her ability to not only elicit meaningful feedback, but to synthesize that feedback into a product.

In this example, fans were contributing the resource of time spent critiquing her stories to the eventual success of the 50 Shades of Grey franchise. In essence, they can be thought of as initial investors — contributing their human capital in exchange for a future emotional rate of return. By contributing the resource of time, James’s initial human capital investors were expecting a future return on capital in the form of a bespoke version of Twilight fanfiction.

While the use of human capital could make sense during the proof-of-concept stage, it is not easily scalable, because human capital is, for the most part, not fungible. Not all human capital financiers provide equal quality of capital. As a venture expands and its capital needs become greater, to effectively scale capital consumption, the capital inputs need to be increasingly fungible — one unit of capital from a financier is indistinguishable from a unit of capital from another financier. As a venture grows, it tends to rely more on outsourced financial capital and more on insourced human capital. Could it be possible to combine the cash conservation of emotional dividend with the fungibility of financial capital? Well, that is effectively Indiegogo’s business model.

For those unaware of Indiegogo¹⁵, it is a platform that allows backers (investors) to purchase a product in advance of receipt of the product. The companies that run Indiegogo campaigns use the funding from backers to fund an initial production run and to generate additional growth capital (the profit made by selling the products on the platform). What is interesting about the funding campaigns on Indiegogo is that backers are essentially providing an investment of financial resources in exchange for emotional dividends: They get to enjoy a cool product that currently does not exist on the market. The campaigns that are on Indiegogo could be conceptualized as a sort of royalty arrangement, wherein the return is provided for in-kind by receipt of the product at some point in the future for a lump-sum investment in the current period.

Why does this business model work? Well, remember that a successful company is one that can effectively “speak” to a target audience. The companies on Indiegogo use their marketing skills not only to sell a product, but to also persuade backers to accept some risk that the product might not ship on schedule, or at all. As an aside, I backed a high-end air filter on Indiegogo and ended up waiting almost two years for it to arrive. Why was I willing to engage in this risky trade? Because the air filter that I backed better resonated with me on an emotional level than did current air filters on the market. In exchange for lending my capital for a then unknown period of time, I received higher emotional dividends than if I were to purchase an air filter from a retailer that already had the product in stock.

My argument is that RBF can be an effective financial instrument for raising growth capital from a target audience that is invested in having the product come to market. Why were E.L. James’s readers willing to use their one limited resource — time — to help her improve her product? Because they wanted to see such a product on the market. If one were to extrapolate the Indiegogo’s model to one where investors receive both an emotional return and financial return, I think many more products and services would be launched and entrepreneurial ventures that do not require, or are not at a stage of development to accept, large infusions of capital from more traditional funding routes could have a viable path to success. Imagine if E.L. James offered her alpha clients not only the right of first refusal to buy the product they helped to create but also a share of any subsequent revenue generated from said product. I would be willing to wager that once a partial financial reward is introduced, her alpha clients’ willingness to engage in product development would be markedly increased.

In the examples of 50 Shades of Grey and Indiegogo, investors’ returns come from their emotional dividends received. But what if a platform were developed that allows investors who believe in a product to only contribute financial capital in exchange for financial dividends? The initial investor audience for 50 Shades of Grey and Indiegogo campaigns are effectively limited to those investors who want the end-product. There could have been investors who believed in the revenue generation capability of 50 Shades of Grey but because there was not an option to receive dividends except for ultimate enjoyment of the product, these potential investors were locked out of what ultimately became a wildly profitable venture and E.L. James did not have the option to accept financial capital; only human capital. A successful venture ultimately requires both forms of capital to succeed. And I believe that it is in this area of venture of finance where RBF fills a key role. I think the most valuable use case of RBF would be to essentially supplement founder’s and seed rounds — what can be thought of as the “active equity” portion of the capital stack.

RBF as a Supplement to Active Equity-Bridge to Passive Equity

When thinking about how a typical capital stack for a business is constructed, it would look like a pyramid.

At the top, representing the least amount in terms of volume, is founders’ equity and seed rounds. As you go down the pyramid, the volume of capital raised increases, but the level of involvement typically decreases. As Howard Marks of Oaktree Capital says, “Pay attention to the losers and the winners will take care of themselves.” After initial due diligence and the occasional monitoring of personally defined heuristics, the most work a debt investor does is cash his interest check. While a founder might contribute very little in terms of total financial capital, he contributes an immense amount of intellectual — i.e human — capital. Why are investors willing to part with progressively larger amounts of capital while relinquishing control? Because as an enterprise develops, the error bars encapsulating the variance in profitability become narrower. The variance of Microsoft’s profitability is almost non-existent compared to a tech startup that is six months from its initial seed round. However, I argue that there exists a void between the active equity (founders’, friends and family, seed rounds) and institutional equity rounds (professional VCs with lettered rounds), and this is the void that I think RBF could fill. I believe that it is this void that Indiegogo’s platform is seeking to fill.

I further argue that there exists a twilight zone in the capital stack where an enterprise can display a relatively high probability of revenue generation — the concept has been proven and you have initial client interest. However, the venture might be still too risky for more passive equity holders — cost structure might be still unknown, or the cost structure is capacity dependent (high fixed costs, but could benefit from economies of scale if a minimum quantity of demand were met). The company has not produced enough data for investors to meaningfully model expected profitability and therefore makes it difficult to price equity, let alone debt. There are still too many “what if” questions. This is typically solved by equity investors underpricing equity in a heuristic attempt to limit their risk. I argue that this underpricing, due to a large expected variance in profitability, is value destroying — it often does not capture the true option value of a venture investment.

Another factor to consider is that due to their intrinsic nature, physical asset-light information businesses simply do not need that much financial capital to scale an initial successful proof of concept. They require high upfront intellectual capital investment, but not as much risk capital for scaling. One solution that has been developed is the micro-VC fund, or the seed fund. These funds seem to make small investments in companies (typically less than $100,000) in order to fund the development of an idea and to provide bridge financing until a larger VC is willing to take an interest. However, given the relatively low barriers to entry to form a micro-VC fund, the AUM of this group in aggregate has exploded. I theorize that given the rise of these funds, the original situation of too much capital chasing too few deals still remains. I wonder how many of these funds are investing just to get capital deployed instead of making investments in technologies or innovations that are truly understood by the venture capitalist. And the preponderance of these funds further exacerbates the problem of retail investors being precluded from such deals.

The founders are either stuck trying to cover capital needs through personal funds or accepting more capital than needed, thereby unnecessarily reducing founders and other initial investors equity in exchange for accepting more growth capital than needed. While the current VC model is not bad, per se, my stance is that it is not a cure-all. There still exists a twilight zone where companies need financial capital, but institutional VC capital (from any size fund) might not be the best solution. RBF can fill this void. Such a mechanism could afford those ventures that possess both a successful proof of concept and meaningful forecasts of demand the ability to raise money from an audience that has shown demonstrated belief and likely demand for the concept without SEC oversight, thereby allowing them to accept more passive equity at a better price and better timing. RBF can be an effective bridge between active investor investment and more passive institutional equity investment. By crafting financing solutions that better fit a company’s unique situation, the odds in favor of long-term success would increase.

Conclusion

Decentralized finance holds the promise of releasing humanity from the clutches of the centralized finance cartel. However, there still exist several arbitrarily imposed hurdles that must be overcome. Power achieved is power that is never willingly given up. DeFi participants must fight for their right to participate in a truly inclusive financial system. Fortunately, there exists at least one route that I believe will allow DeFi participants to begin to reimagine a financial network that exists entirely outside of the current CeFi system and will allow the premise of DeFi to come to fruition. DeFi holds the promise of allowing anyone to participate in the global financial system as they see fit — be it a lender or borrower, in any capacity.

However, regulatory hurdles that attempt to safeguard investors do not work as planned and ultimately hamper widespread adoption of decentralized protocols. Investors are paid to accept risk — that is the job and anyone who tells investors, “Trust me, this time risk is off the table,” is either too stupid to be in a position to manage capital or is simply a fraud. The SEC wants to give the impression that it was instituted to protect retail investors from unscrupulous operators and capital arrangers, but, in reality, it exists almost exclusively to safeguard the rent extraction by entrenched financial intermediaries. The SEC has given us a gift, if used appropriately; permitting revenue-based financing to not be labeled a “security.” While this may seem like a pie-in-the-sky dream, I do believe that RBF instruments, coupled with the infrastructure of DLT, will allow retail investors and entrepreneurs to manage and grow their financial wealth without the value destroying mommy culture of the SEC and other regulatory agencies. The ethos of blockchain and its derivatives is, “Know what you’re getting into and accept the risks.” I believe that is how the global financial system SHOULD operate, and I believe that my sentiment is shared by all true hodlers.

I truly believe that we have a path to a truly democratic financial system laid before us — we just have to reach out and take it.

[1] Centrifuge.io

[2] The full legalese can be found here

[3] Expectation of profit on the efforts of another is part of the SEC’s Howey Test

[4] For the sake of brevity, anytime I use the phrase “security registration” or “registration” in reference to securities, I am referring to both full security registration and exemption from registration.

[5] The full list of registration exemptions can be found here.

[6] In the words of Andy Warhol, “Being good in business is the most fascinating kind of art. Making money is art and working is art and good business is the best art.”

[7] Typical clauses give the venture the right to end the contract through the payment of a cancellation fee.

[8] The uncertainty in long term profitability is usually related to the underlying cost structure. For example, the investor might be unsure of the ability to achieve sufficient economies of scale.

[9] For a discussion of efforts of another, read this article.

[10] An article from 2008 from the World Intellectual Property Organization talking about pledging IP as credit collateral

[11] This actually opens up another channel through which DeFi can be used — IP digital rights management.

[12] Typically, the book value of intellectual property, or “company secrets,” is encapsulated under the balance sheet account capitalized research and development. In their book Quest for Value, Stern and Steward detail how research and development should be treated as a capital investment and then amortized over the course of its useful life — analogous to full cost accounting in oil and gas exploration.

[13] VCs use the phrase, “Better to have a C product with an A team than an A product with a C team.” Why? Because the A team can attract more clients. Why can they attract more clients? Because they are the most effective at communicating and building perception of value in client’s minds. A core tenant of Austrian economics is that there is no distinction between real value and perceived value.

[14] This concept is also applicable when it comes to operating a company. Companies that are able to maintain an emotional connection with their clients are also able to maintain a predictable revenue stream.

[15] Indiegogo.com