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SmartChem Security Token Offering (STO): A potential blueprint for financing capital-intensive chemistry startups?

By Dr. Marie Asano, High-Tech Gründerfonds


On the 27th of June 2019, Intelligent Fluids GmbH began its official fund-raising for its SmartChem (SCM) Security Token Offering (STO) seed phase. It would be to our knowledge, the first-of-its-kind STO for a chemistry startup. This is expected to have a large implication on the chemical financial landscape on how capital is raised to address high CAPEX requirements during the growth-phase of chemistry startups.

Chemistry is expensive

Chemistry is an expensive business. Even in the seed stage, specialized equipment and laboratory infrastructure is, almost without exception, a prerequisite for the company to undergo the spinout process from lab bench to startup. As business models are usually B2B, sales-cycles are long and the barrier to entry often depends on whether the new product is a “drop-in-solution”, able to be seamlessly integrated to already existing process/production streams. Products where existing processes need to be modified or disrupted, face an even greater barrier for acceptance.

Then there is the scale-up.

The adoption into mainstream production depends on the ability to produce large quantities (usually in the hundreds of kilograms if not tons). In order to scale-up production, it is necessary to establish new and efficient production facilities where costs in the range of double digit millions can be expected.

This is the challenge Intelligent Fluids GmbH (IFC) faces. IFC offers sustainable, biodegradable, water-based, industrial cleaning solutions by leveraging physical effects (entropy and Ostwald ripening) to overcome the disadvantages of conventional, hazardous, solvent-based cleaning methods. To address a growing customer-base and to enter new, untapped markets, Intelligent Fluids needs to increase their production capacity from 500 tons to 13,500 tons per annum. This requires new production facilities in both Europe and Asia.

Raising Capital with a Security Token Offering (STO)

Raising capital via STO is quite a recent phenomenon. The first STO in history was closed in October 2018 with the Aspen Digital Security Token, which raised $18 million to tokenize common stock shares of St. Regis Aspen Resort in Aspen Colorado [1] [2]. The first BaFin (The German Federal Financial Supervisory Authority) approved STO in Germany was announced by BitBond GmbH in February 2019 [3]. The first Biotech STO, was announced by Agenus Inc. with its launch of Biotech Electronic Security Token (BEST) in January 2019 with a fundraising target of $ 100 million. The asset to be tokenized is the AGEN2034 an anti-PD-1 antibody [4] [5], representing a first-of-its-kind Fintech/Biotech crossover.

In all of these examples, the STO represents a fundamental paradigm shift in how capital is being raised for targeted investments in specific projects or products. By tokenizing an asset, it is possible to fragment an equity stake, allowing a completely new level of participation by investors that have been excluded in the past. As for Aspen before the fragmentation (tokenization) of the Aspen real-estate, the minimum ticket size for participation would have been from $ 250 million upwards. The Aspen Digital Security Token on the other hand, has a listed token price of $ 1.00 with a minimum investment for participation at $ 10,000 [2]. Similarly for Argenus, its STO is expected to revolutionize the financing of drug development, allowing “Patients, advocacy groups, payors, clinicians, and a host of other stakeholders, in combination with traditional investors, [to invest] in a drug therapy where a powerful emotional investment may have already taken place.”- as written by John Nosta in his opinion piece about the Argenus STO for Forbes [6].

What does the SmartChem Security Token (SCM) encompass and how will the STO process look like for Intelligent Fluids?

STO versus ICO

By definition, owning a security token is correlated with owning a real-world asset. This is subject to financial regulations, which operate within legal boundaries. Herein lies the fundamental difference between a normal utility token (ICO) and a security token (STO): the connection to real-world financial regulations and legal frameworks making the issuers of the security token accountable for their actions, thus safeguarding investors. (For an excellent review and further information)

The SmartChem Security Token (SCM)

The ownership of a SmartChem security token (SCM) is correlated with a profit participation of Intelligent Fluids GmbH’s net profits ranging from 5% to 40 % depending on the stage and the total amount of investment raised for the STO. The SCM is on the Ethereum block chain and is an ERC-1400 token on top of the standard ERC-20, thereby restricting the anonymous trade of the token. With the ERC-1400, the transfer will proceed based on the owner’s identify, jurisdiction and asset category. This makes SCM tokens compliant with Know-Your-Customer (KYC) and Anti Money Laundering (AML) regulations and policies. What is also important to note for former shareholders and investors, is that future SCM token owners are not entitled to any voting nor decision-making rights, unlike traditional shareholders. The distribution of the control rights of the company will thus remain identical to the current shareholder structure.

The Roadmap to the SmartChem Security Token STO

The SCM offering will be done in five stages with the total, targeted investment volume of € 24.25 million (hard-cap), where a maximum of 242 million SCM tokens will be issued. The five stages are as follows (smartchem Project Paper 2019):

    • A–Seed Phase (non-public private sale for seed investors): July to September or until max. funds are achieved (whichever occurs first)
    • B–Main-Sale 1: start: planned for November, duration: 15 days or until max. funds are achieved
    • C–Main-Sale 2: start: the day after B ends, duration: 15 days or until max. funds are achieved
    • D–Main-Sale 3: start: the day after C ends, duration: 15 days or until max. funds are achieved
    • E–Main-Sale 4: start: the day after D ends, duration: 15 days or until max. funds are achieved

 

Each stage of the STO is directly correlated with clearly defined business goals of Intelligent Fluids (Figure 1), thereby allowing the company to maintain full transparency for all current and future SCM owner:

Figure 1: The different stages of the Smart Chem Security Token (SCM) offering and correlated business goals of Intelligent Fluids GmbH as well as the cumulative funds needed. (Source: smartchem Project Paper 2019)

Currently, Intelligent Fluids is in the A-Seed Phase, where latest up to September 2019, funds up to € 1,250,000 will be raised (token price: € 0.04 per token). During the Main Sale Phase the SCM token will be issued for a minimum investment of € 125,000 until pending approval by a European Regulatory body for a prospectus is given (token price: € 0.075 to € 0.200 per token). After the approval is granted, participation with smaller investments will be made possible. The cumulative amount of the seed-phase is the soft cap required to start the STO. If funds of € 1,250,000 can be raised within the defined time frame, the STO will be carried out leading to stages B to E of the Main Sale. If the required funds cannot be raised during the A-Seed Phase, the STO will be cancelled and all investors will be offered preferred shares in intelligent fluids GmbH instead of the SCM tokens.

(All interested investors are invited to register at the smartchem official website)

Summing up, Intelligent Fluids CEO Christian Römlein emphasizes:

“The STO allows us to reach out to global investors. Thus it reflects our international target markets in microelectronics, maintenance and oil & gas industries. The STO is also an amazing marketing tool and should give us the opportunity to jump over several hurdles to success. On the other side, especially the tradability of Tokens instead of waiting for an exit case is a huge advantage for investors. They can help us now to roll out a technology that supports 10 out of 17 SDGs of the UN.”

High-Tech Gründerfonds’ Senior Investment Manager, Dr. Martin Pfister, who belongs to one of the first investors to identify the potential behind Intelligent Fluids, add:

“We have backed Intelligent Fluids very early on, knowing that in Chemistry it will take its time to bring innovative solutions to the market and making it commercially successful. Resources to grow are key for a manufacturing start up. The STO of Intelligent Fluids is for us definite role model that we support to in order to become successful.”

There are many challenges that must be overcome to kick-start, maintain, and bring a materials production-based startup through the growth phase to success. An alternative financing path to raise capital in order to counter high CAPEX requirements in the growth-phase is just one of many factors, which needs to be addressed if the number of chemistry startups is to increase on the long term. If the SmartChem STO is successful, Intelligent Fluids will be a pioneer and a first-of-its-kind, creating an alternative financing path combining FinTech and Chemistry.

The tokenization of chemical processes and production would signal a shift into an approximate democratization of traditional investments in chemistry. It allows the participation of a whole new set of investors and stakeholders beyond traditional boundaries. Intelligent Fluids’ example will undoubtedly serve as a blueprint for other tech-startups with high capital requirements as an alternative, yet also complementary route to traditional investments.

For further information on the SmartChem Security Token Offering:

 

[1] Alois, J.D. (2018, Oct 09). Aspen Digital Security Token Offering closes on Templum, first security tokens trade. Retrieved from:  https://www.crowdfundinsider.com/2018/10/139842-aspen-digital-security-token-offering-closes-on-templum-first-security-tokens-trade/
[2]RealyReturns.io. (2018, Oct 12). Big News in the crypto world: The First STO in History closes for 18 Million. Retrieved from: https://medium.com/@realtyreturnsio/big-news-in-the-crypto-world-the-first-sto-in-history-closes-for-18-million-73de7c81962f
[3] Schneider, K.; Holtermann, F. (2019, Feb 17). Bafin genehmigt erstmals virtuelle Finanzierungsrunde. Retrieved from: https://www.handelsblatt.com/technik/digitale-revolution/krypto-start-up-bitbond-bafin-genehmigt-erstmals-virtuelle-finanzierungsrunde/23991380.html?ticket=ST-1261158-kJHukCKIUNu7wYyu7sJL-ap1
[4] STOScope.  Retrieved from: https://stoscope.com/sto/agenus
[5] STOwise Tokenized Asset Intelligence. Retrieved from:  https://stowise.com/sto/agenus/
[6] Nosta. J. (2019, Jan 29). Fintech and Biotech are coming together to transform drug development. Retrieved from: https://www.forbes.com/sites/johnnosta/2019/01/29/fintech-and-biotech-are-coming-together-to-transform-drug-development/#7abdfc32531b