The Next Evolution
in Funding Innovation
▲ Fintech Series
By: Dalibor Cerny, Finance Lawyer, Crypto Enthusiast
Gabriel Dusil, Co-founder & Board Member, Adel
This article is the second part of a Financial Technology series, discussing funding and organizational structures of new digital companies and blockchain ventures. This is the second article following, “The Right Path to Funding Decentralized Organizations”, where we explored the dynamics of financing startups and new entrepreneurships.
An Ecosystem of Participation
Initial coin offerings (ICOs) are a very popular way for ventures to raise funds for their endeavours. Digital companies are developing novel ways of governance as existing models become dated, and needs to be modernized. A new enterprise called Adel is a refreshing example of how blockchain is being combined with traditional venture capital seed funding while exposing the challenges and controversial topics in the fintech evolution.
In this new decentralized community model, Adel created an environment whereby experts, investors, and future employees can co-exist based on their participation in its ecosystem. This is instigated by a less regulated and very user friendly ICO. Several ICOs have used existing cryptocurrency protocols to create cryptocurrency tokens. The most notable are blockchains such as Nxt, Counterparty, Bitshares, or Mastercoin (now Omnicoin). One advantage of an ICO, compared to traditional Initial public offerings (IPO), is that it is done outside of heavy regulation and oversight. Compared to modern funding models such as crowdfunding, ICOs are executed without an intermediary. A growing number of digital technology startups are raising cash this way, by creating and selling their own cryptocurrency tokens and bypassing the need for banks or venture capital firms.
ICOs represent a new way of funding because people can invest their money very flexibly from all corners of the world. Participants of the ICO are investing in the future of the company and in the anticipated success of the solutions they are developing. Contributors to the ICO help to raise awareness in their respective communities. The investors are also motivated by the speculative growth of the cryptocurrency token market price as early buyers. They also provide early liquidity for the cryptocurrency tokens when trading starts. Once funding is completed, the cryptocurrency tokens are listed on cryptocurrency exchanges such as Poloniex to trade against other cryptocurrencies. This allows the participants to immediately trade their tokens based on the speculative movement of the token’s market value. In some cases, this can result in lucrative short-term gains. The token’s price is a reflection of the ICO’s overall vision, market sentiment, project news, and momentum regarding the ideas of project flow, innovation, and future revenue potential. Some well-known cryptocurrency tokens that were developed through an ICO are NXT, Mastercoin, Bitshares, Ethereum, Maidsafecoin, NEM, Synereo, Factom, DigixDAO, Lisk, Waves and others. What can be a potential disadvantage of ICOs is that most of them are not regulated or registered with any government organization and there is usually no investor protection (other than those built into the given platform itself). Also, cryptocurrency tokens have no legal meaning and do not represent an asset in many government jurisdictions. This is why ICOs can be currently deployed, since digital currencies are not considered securities.
Adel understands that their funding model needs to have a regulatory safety net, similar to traditional financing. They are the first decentralized organization launching an ICO that will be compliant with Anti-Money Laundering (AML), Counter-Terrorism Financing (CTF) rules and related Know Your Customer (KYC). This is a logical move because cryptocurrency exchanges using bitcoin are becoming subject to AML/CTF/KYC rules and some have voluntarily implemented similar procedures. Adel’s compliance to KYC will likely omit a segment of the market of bitcoin liberalists who will not give up their identity. On the other hand, that may not be such an issue because the threat of not having AML/CTF/KYC today is having the fund shut down by regulators due to non-compliance.
A New Type of Company
Adel’s organizational structure consists of two major parts. First of all, is membership. Stakeholders of ADL are invited to join the Adel community after the ICO, following a minimum investment of 1 bitcoin (BTC). Membership allows the participant to exercise their right to collaborate and vote on projects based on the amount of Adelphoi coins they hold in their account. Second is an established service company called Adel Ecosystem Ltd., which oversees the rules of the community and AML/CTF rules to meet regulatory requirements. Adel Ecosystem’s advisory and expertise umbrella offers services such as research and development, a project review committee, marketing services, a legal and accounting team, a business development team, and a board of directors. Adel will retain a 15 % stake from the ICO for these services and will also own 30 % of the projects launched in the ecosystem.
From an organizational perspective, Adel combines the best of both worlds: regulatory, legal and ethical compliance, together with an innovative governance structure. Unlike The DAO or similar models (as explained in our previous article of this series), Adel is not governed by smart contracts. Day-to-day decision making maintains a “human element”, rather than computer code. Given the fact that smart contracts are still a concept yet to be proven resilient in the real world, this is definitely a safer solution for the time being.
The role of stakeholders in the Adel ecosystem will consist of collaborating on idea development, participation in business planning, and voting on new projects that emerge from the ecosystem. Through democratic voting, stakeholders will be able to influence which projects will be deployed. Because Adel will be community driven, stakeholders will have the opportunity to raise the necessary capital for projects. Once deployed, the stakeholder can then follow the project’s progress, or even get the opportunity to participate actively as an expert.
Compare Adel’s decentralized and self-sustaining community to the role of employees in a traditional corporation. The negative aspects of corporate life are significantly attenuated. Would discrimination exist on the same scale it does today if organizations were decentralized? Would people be treated unfairly? Would you spend time working on something that didn’t interest you, or continue to sit in an office just to prove you were at work? Would the notion of climbing the corporate ladder be as important? Would projects continue to be disrupted or derailed due to personal agendas and insecurities?
Adel’s project decisions reside at the membership level. Every project is submitted to a community vote. This process revolves around a social networking engine where good ideas can become a community project if a majority rules in its favour. But even if this is not the case, then the project can survive with a minority vote. In such a case, it becomes a group project. This process is democratic, transparent, and flexible enough to function properly. A necessary prerequisite is complete access to all information relevant to projects. This level of transparency is not provided to shareholders in traditional corporations. Disclosure of information in these companies is purposefully challenging. For example, sensitive information probably requires a formal written request, or is limited to shareholders on a need-to-know basis.
Shareholders of traditional securities are granted shares in exchange for money paid to the corporation for holding that equity. They may meet annually at the corporation’s annual meeting and receive quarterly statements on their performance. In Adel, project performance is reflected in an online “Project Dashboard” which shows the performance of investments on a weekly or bi-weekly basis. Members of the Adel community not only get a stake in projects through a future token called the Adelshare (ADS), but will also participate in the creation and execution of projects. So Adel members have an emotionally vested interest in its success because they’ve participated in the project’s growth from infancy to adulthood.
Traditional companies are mostly based on a structure where the board of directors oversees the officers of the company and ensures operations follow corporate mandates and legal procedures. Directors have, among other duties, a fiduciary duty to act in the corporation’s best interest, as opposed to their own. These duties are in place to protect the shareholders’ investments. Adel’s board of directors has documented a similar function.
Distributions of profits (dividends) in traditional companies are usually made through proportional amounts per shareholder. The proposal to distribute profits is made by the corporation’s board of directors. The board can decide to either distribute the profits to shareholders or to keep profits in the corporation as working capital or to fund a new endeavour. Adel will distribute its profits in a similar manner. This is contingent on establishing Adel’s second entity after its ICO called Adel Ltd., which will have a fund license to enable its members to buy Adelshares (ADS) in projects. Dividends to members will then be distributed in Adelphoi (ADL) currency (Figure 1).
The protection of intellectual property within the Adel ecosystem is not the same as in a traditional company, mainly due to its transparency. Social media and the internet has largely done away with the notion of secrecy anyway, as evidenced by WikiLeaks, government monitoring, and Facebook’s and Google’s ongoing correlation of user behaviour. Adel realizes the difficulty of balancing transparency with confidentiality, and has stated their interest in withholding secret information that may be critical to a project’s success. This is mainly positioned to protect both stakeholders in the community and the rights of the projects’ authors (referred to as Innovators, in the Adel ecosystem).
Projects in Adel’s community will assume different forms, based on whether the Innovator of ideas wants to keep a portion of the equity, or to release it as a community project. This approach is meant to ensure that innovative projects continue to be launched, while minimizing the risk of copycats.
Whatever becomes of Adel’s final structure, it is important to emphasize that the world of cryptocurrencies and ICOs is still a Wild West when viewed from the perspective of traditional financial vehicles. It is strongly advised before taking part in any investment of such nature to do your due diligence on a given ICO and on the people running it. There are risks involved and the possibilities of being scammed are well documented.
There are also grey areas where regulators still need to catch up. Blockchain startups need to have a proper legal structure for an investor to fall back on in the case of trouble. However, the same reasons why this space is so risky also make it so attractive. Innovative projects are being created using untested structures and technologies, which may either evolve into something marvellous or won’t make it out of the starting gate. The choice is up to the investor whether to be a part of the blockchain movement, but informed decisions should always be made. Participants are given an opportunity to enter a playground of high innovation, clever minds, and the creation of cutting-edge projects that may positively change the world. To say you were a part of it from the beginning has its own prestige.
About the Authors
Dalibor is an (alternative) finance lawyer, crypto enthusiast and Vipassana meditation practitioner. He has roots in Prague, Czech Republic, where he obtained his PhD. in Private International Law and International Trade Law. He also studied Master of Law (LL.M) in San Francisco, California and International exchange program at Bucerius Law School in Hamburg, Germany. In his professional life, Dalibor is focusing on banking, finance (including alternative finance, crowdfunding, cryptocurrencies and fintech), capital markets, insurance, reinsurance and international trade law. He worked as an attorney and in-house legal counsel for global financial institutions such as AXA and European Investment Bank.
Gabriel is a seasoned sales and marketing expert with over twenty years of experience in senior level positions at companies such as Motorola, VeriSign (part of Symantec), and SecureWorks (part of Dell). His strengths lie in international business development and strategic partnerships, as well as the unique ability to translate complex ideas and technologies into language that decision makers can easily understand. Gabriel has a Bachelor’s degree in Engineering Physics from McMaster University in Canada and possesses expert knowledge in cloud computing, IT security, and video streaming technologies (Over the Top Content, OTT). Gabriel also runs his own company, Euro Tech Startups s.r.o., and manages two blogs: https://dusil.com/ and https://gabrieldusil.com/.
 This article targets a broad audience without getting too deep into technical, economical or legal jargon. The reason for this approach is to explain the latest activities in fintech in the most accessible way possible, without getting lost in all the technicalities. The authors assume that the general public struggles to keep pace with technical, legal and social media developments and that it is challenging for individuals to orient themselves in the jungle of media overload, fake news, scams and annoying trolls.
 A very basic visual introduction to the concepts behind a blockchain: https://www.youtube.com/watch?v=_160oMzblY8&t=143s
 Adel’s cryptocurrency tokens will be created on top of the NXT protocol.
 More detailed example here: https://www.thebalance.com/cryptocurrencies-are-changing-capital-raising-process-for-new-companies-4115445
 What Initial Coin Offerings are and why VC firms care: https://hbr.org/2017/03/what-initial-coin-offerings-are-and-why-vc-firms-care
 However, this view may change fairly quickly: https://www.americanbanker.com/news/are-crypto-tokens-securities-by-another-name
 Adel establishes LLC in the Isle of Man: http://www.fintech.finance/01-news/adel-establishes-llc-in-the-isle-of-man/
 Smart contracts are not smart by nature: https://www.finextra.com/blogposting/12569/smart-contracts-are-not-smart-by-nature
 These resources can help with your due diligence: http://startupmanagement.org/2017/03/13/the-ultimate-list-of-ico-resources-18-websites-that-track-initial-cryptocurrency-offerings/
 How not to be scammed by an initial coin offering: https://blockgeeks.com/how-not-to-be-scammed-by-a-initial-coin-offering/