This chapter illuminates the potential of crypto shares in equity crowdfunding and analyzes the associated legal and practical aspects. It details the role of ecrop as platform operator, registry manager, and custodian and elaborates the benefits for issuers and investors. Concrete examples and use cases illustrate the application possibilities. Equity crowdfunding with crypto shares offers an innovative alternative to traditional financing forms and enables companies to raise capital from a broad investor base without meeting the complex and cost-intensive requirements of an IPO. Equity crowdfunding with crypto shares operates within the tension field of various legal regulations. The German Investment Act (VermAnlG) regulates crowdfunding fundamentals in Germany. Crypto share issuance is subject to eWpG and AktG requirements. Crypto share custody (securing cryptographic keys) must comply with KWG requirements (particularly crypto custody). Additionally, anti-money laundering provisions of GwG must be observed. The EU DLT Pilot Regulation determines crypto share tradability.

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Role of ecrop

ecrop offers tacct, a platform for equity crowdfunding with crypto shares, serving as platform operator, registry manager, and crypto custodian. As registry manager, ecrop is responsible under § 1 Para. 1a Sentence 2 No. 8 KWG in conjunction with § 16 eWpG for proper crypto securities register management and ensures compliance with legal requirements of eWpG and eWpRV. As crypto custodian, ecrop is responsible under § 1 Para. 1a Sentence 2 No. 6 KWG for securing crypto shares’ cryptographic keys and compliance with KWG and CryptoAssetTransferV requirements.

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Advantages of Crypto Shares in Equity Crowdfunding

Crypto shares offer numerous advantages for issuers and investors in equity crowdfunding: Using blockchain technology and digital representation of share rights simplifies processes, reduces costs, and increases transparency. For Issuers:
  • More Efficient Capital Raising: Easier access to capital through blockchain technology and digital processing of crowdfunding campaigns.
  • Reduced Costs: Lower costs compared to traditional financing forms through elimination of intermediaries and process automation.
  • Increased Transparency: Complete transparency and traceability of financing process through blockchain use.
  • Direct Investor Communication: Possibility for direct communication with investors through the platform and building a strong community.
For Investors:
  • Investment Democratization: Easier access to investment opportunities and lower investment amounts through fractional ownership.
  • Transparency and Security: Investment transparency and traceability through blockchain use.
  • Potential for Higher Returns: Opportunity to participate in young, high-growth companies with high potential.
  • Diversification: Easy portfolio diversification through investments in various crypto shares.

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Crypto Shares as a Financing Instrument

Crypto shares have the potential to revolutionize equity crowdfunding by significantly lowering the capital raising threshold. The digital and decentralized nature of crypto shares enables faster, more cost-effective, and more transparent processing of crowdfunding campaigns. This particularly benefits startups, scale-ups, and SMEs that often struggle to access capital through traditional channels.

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Facilitation and Democratization of Equity Crowdfunding

Through simplified and automated transaction processing and reduced costs, crypto shares democratize equity crowdfunding. They enable a broader mass of companies to raise capital through the capital market while simultaneously opening opportunities for a larger number of investors to invest in innovative companies.

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Advantages for Equity Crowdfunding

The advantages of crypto shares for equity crowdfunding lie particularly in:
  • Increased Liquidity: Real-time transaction processing on the blockchain increases crypto shares’ liquidity and facilitates future trading on DLT-TSSs.
  • Lower Transaction Costs: Elimination of intermediaries and process automation significantly reduce transaction costs.
  • Fractional Ownership: Crypto shares enable “fractional ownership,” i.e., acquiring share fractions. This further lowers the investment threshold and enables retail investors to invest in innovative companies.

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Benefits for Issuers: Efficient Capital Raising

Crypto shares offer numerous advantages for issuers in equity crowdfunding:
  • Access to a Broader Investor Base: Through lower investment thresholds and increased transparency of crypto shares, issuers can reach a larger and more diversified investor circle, including international investors. This increases chances of reaching financing goals.
  • Faster and More Cost-Effective Capital Raising: Digital and automated processing of crowdfunding campaigns with crypto shares significantly reduces time and administrative effort. Elimination of intermediaries lowers costs for share issuance and trading. This accelerates the financing process and enables faster project implementation.
  • Increased Transparency and Traceability of Financing Process: Decentralized registry management based on blockchain ensures high transparency and traceability of the entire financing process. All transactions are visible and immutable for all network participants. This strengthens investor trust and increases crowdfunding campaign attractiveness.
  • Strengthening Investor Relations: Direct communication between issuers and investors through the platform and shared participation in company success strengthen investor relations and promote long-term engagement.

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Benefits for Investors: Investment Democratization

Crypto shares open new possibilities for investors to participate in innovative companies:
  • Simple and Accessible Investment Opportunities: Digital processing and low investment threshold facilitate access to investment opportunities and make equity crowdfunding attractive for retail investors.
  • Opportunity to Invest in Innovative Companies and Technologies: Equity crowdfunding offers investors the chance to invest in young, innovative companies and future-oriented technologies and participate in these companies’ growth.
  • Investment Transparency and Traceability: Blockchain transparency enables investors to track their investments at any time and stay informed about funded projects’ progress.
  • Potential: Investments in young, high-growth companies offer potential for good returns but also come with corresponding risks.

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The ecrop Approach - tacct: Equity Crowdfunding Reimagined

The ecrop platform tacct offers an innovative solution for equity crowdfunding with crypto securities (including crypto shares). It combines blockchain technology benefits with a user-friendly interface and enables secure and efficient processing of crowdfunding campaigns.
  • Functionality: tacct provides issuers with all necessary tools for creating and managing their crowdfunding campaign. Investors can easily register and invest in offered projects. The platform supports the entire process from registration through investment to return distribution.
  • Features: The tacct platform offers features including: User-friendly interface, secure payment processing (via integrated payment provider), transparent project presentation, communication platform between issuers and investors, automated processes (e.g., dividend distribution).
  • Benefits: tacct’s advantages lie in combining security, transparency, efficiency, and user-friendliness. The platform enables simple and secure access to equity crowdfunding and offers value to both issuers and investors.

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Use Case: Defence Sector - Innovation through Capital Market Access

The defence sector faces the challenge of financing innovations quickly and efficiently to keep pace with rapid technological progress, changing geopolitical tensions, and new threat scenarios. Traditional financing paths are often lengthy, bureaucratic, and offer little flexibility, which delays development and introduction of new technologies. Equity crowdfunding with crypto shares, particularly using the ecrop platform www.arsenalX.eu, offers an innovative and forward-looking solution to address these challenges.

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Challenges in the Defence Sector:

  • High Capital Requirements: Development and production of new, complex technologies in the defence sector, such as AI-controlled weapon systems, autonomous drones, quantum computing, advanced sensors, and cybersecurity systems, require substantial investments and long-term financing commitments.
  • Long Development Cycles: Development of new technologies, particularly in hardware, can take years, increasing capital commitment, slowing adaptation to new threats, and extending time-to-market.
  • Strict Regulatory Requirements: The defence sector is subject to strict security and export regulations that can complicate capital raising and hinder innovation. Additionally, defence sector companies must meet high compliance requirements, e.g., regarding data protection, data security, export control, and adherence to ethical principles.
  • Limited Investor Base: Access to investors is often restricted as special knowledge, contacts, and deep understanding of security policy situations are required. Traditional investors often shy away from defence sector investment risks and prefer established and less risky asset classes.

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How ecrop Addresses These Challenges with ArsenalX

The ecrop platform ArsenalX, a specialized and innovative extension of the tacct platform, offers defence sector companies easier access to capital markets and innovative solutions for financing defence innovations by combining blockchain technology benefits with a user-friendly interface and secure legal framework.
  • Faster and More Cost-Effective Capital Raising: Through digital and automated processing of crowdfunding campaigns on the ArsenalX platform, defence sector companies can access capital faster and more cost-effectively. Blockchain technology use reduces transaction costs and times and enables efficient and transparent processing.
  • Access to a Broader Investor Base: ArsenalX enables access to a large and diversified investor circle, including specialized defence sector investors as well as institutional investors, family offices, and private investors. The platform promotes democratization of defence technology investments and enables smaller investors to participate in innovative project financing.
  • Transparency and Compliance: Decentralized registry management based on blockchain ensures high transparency and audit-proof traceability of the financing process and facilitates regulatory requirement compliance. The platform meets requirements of eWpG, MiCAR regulation, VermAnlG, and other relevant laws and regulations.

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Benefits and ROI for Defence Sector Companies:

  • Accelerated Innovation: Through faster capital access and simplified financing round processing, defence sector companies can develop, test, and market innovations faster and shorten their time-to-market.
  • Competitive Advantages: Early adoption of new technologies and access to a broader investor circle secure competitive advantages for defence sector companies over their competitors and enable them to position themselves as innovation leaders.
  • Growth Potential: Through capital market financing access and development of new investor circles, defence sector companies can fully exploit their growth potential, strengthen their market position, and develop new business areas.

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Additional Application Areas: Diverse Use Cases

Crypto shares and equity crowdfunding offer attractive financing possibilities not only in the defence sector but also in numerous other industries and sectors. Examples:
  • Real Estate: Property tokenization enables fractional ownership and facilitates trading of real estate shares.
  • Renewable Energy: Crowdfunding with crypto shares enables financing of renewable energy projects and offers investors the opportunity to participate in the energy transition.
  • Art Market: Art tokenization enables fractional ownership and facilitates trading of art shares. This democratizes the art market and enables retail investors access to this market segment.
  • Startups & Scale-ups: SMEs benefit from fast and cost-effective capital raising for innovative projects.
These examples demonstrate the broad application spectrum of crypto shares and equity crowdfunding. Blockchain technology’s flexibility and efficiency open diverse possibilities for financing innovations and projects across different industries.