Despite recent market turbulence for cryptocurrencies and associated high-profile scandals, investment in Web 3.0 assets continues as investors seek to capitalize on low valuations and corporations develop Web 3.0 & Metaverse strategies to protect their brands, IP rights, and business lines in this new, shared virtual environment.
We're seeing an increase in the number of investors interested in acquiring Web 3.0 rights and assets. Furthermore, as more companies get exposed to Web 3.0 as a byproduct of their primary business, this will likely become another asset class to deal with as part of the M&A process.
We've highlighted a few points to consider before investing in Web 3.0 opportunities.
1. The old rules no longer apply.
Corporate control of Web 3.0 initiatives can be a difficult idea to grasp. Unlike traditional businesses with boards of directors and clear governance structures, Web 3.0 projects are frequently (to varying degrees) decentralized and autonomous organizations that seek to give underlying users a sense of ownership and a role in decision-making (weighted by token holdings). Because there is (intentionally) rarely a controlling token holder, investors should be aware that governance rights of the underlying projects (including those of the founding organization that an investor may be supporting) can be limited, and the project's future direction may be driven by the collective user base.
In addition, because of the nature of blockchain technology, none of the traditional ownership and proof of title standards apply to things like state-run public registries, physical possession of certificates of title, company books and records, or evidence of title transfers. Instead, it is important to investigate the underlying technology and determine who or what is actually on the ledger (as well as the corresponding stake sizes).
Furthermore, because much of the potential return associated with Web 3.0 projects is likely to be through token appreciation, investors supporting projects may consider negotiating upside by acquiring rights to subscribe for future tokens at a discount (rather than, or in addition to, traditional equity-linked protections in the founding organization itself).
2. In fact, some of the old restrictions still apply.
While the underlying Web 3.0 projects may be decentralized and "on the chain," many of the key players involved in these projects (including the founding organizations and early-stage investors) have traditional corporate structures, and investing in these entities will present many of the same legal issues that affect other types of businesses, which must also be addressed as part of the investment process. Examples include business holding structures, workers, supplier contracts, banking and financing arrangements, and so on. All of this will still require due diligence and is typically warranted as part of the process.
Many Web 3.0 businesses, particularly those involved in the trading of cryptocurrencies and other crypto assets, as well as many web-based gaming businesses, may be subject to varying degrees of regulation in the jurisdictions in which they are based and/or operate, but regulation in this space is still playing catch-up. Depending on the jurisdiction, the current regulatory situation is frequently ambiguous and will need to be evaluated in light of any future regulatory changes envisioned by governments and regulatory agencies. Regulators are becoming increasingly wary of things like advertising, promotions, and celebrity endorsements. Data management and data privacy regulations must also be followed.
3. Understand Your Customer
When investing in an asset class created to encourage anonymity and decentralization, investors face a significant barrier in complying with laws and regulations governing KYC, anti-money laundering, and sanctions. It may not always be clear and transparent who you are dealing with and who owns the assets in question. This becomes more complicated when money exchanges hands and banking payments are required upon finalizing a deal. There is also the question of reputational risk and the potential of accidentally trading with unsavory counterparts. Given these risks, investors should consult with experts who have experience evaluating Web 3.0 and blockchain assets.
4. Exit Analysis and Valuation
Obtaining conventional appraisals of Web 3.0 assets is difficult, making standard purchase finance for most transactions more complex. Because of the difficulties in determining title and ownership, as well as the unusual nature of the assets involved, securing effective security is another issue that must be addressed.
The exit process for investors can also differ significantly from those of typical investments. Tokens linked with a Web 3.0 project, in general, can be placed on cryptocurrency exchanges far sooner than a typical company would seek a public offering. However, investors are frequently subject to extremely long lock-up periods (up to three years in some situations, as opposed to the standard IPO lock-up period of 90-180 days). Any investment will need to understand and negotiate a clear path to liquidity.
5. Enforcement
The governing legislation of the applicable acquisition/investment agreement, as well as the jurisdiction or forum for any dispute resolution, are critical considerations in any transaction. This is usually most relevant to any claims under the agreement, such as for indemnity or breach of warranty, and its ultimate effective enforcement through the courts against the party that has breached. In a world where everything lives somewhere in the cloud, these difficulties simply compound and must be carefully anticipated and handled early on to avoid being left high and dry while pursuing a virtual counterparty.
Comentários