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01.12.2020
Mercantus works on a new class of capital raising instrument: transparent and traceable revenue-based capital instruments where the underlying production output figures in quantity and value are connected to blockchain. Tokenized assets’ performance can be verified at any time by capital providers. Revenue-based investing is a very transparent and safe way to grow your capital - your returns are seen almost in real time. Also, this approach allows to make investing itself much more granular as compared to a more traditional approach: an investor can invest not only in the company’s equity, but in separate projects within the company, in select mineral resources locations, in new product lines, or in a separate field of agricultural production etc. In this manner, one can precisely choose the objects of their own investment, obtain full transparency of the investment outcomes and constitute a truly diversified personal investments portfolio.

A bonus point is that no intermediaries are involved in administration and safeguarding of tokens and payouts: smart contracts and blockchain offer sufficient transactional automation and security of asset custody. We were curious what type of investment would benefit the most from this approach, and after a quick research we were unanimous that a revenue-based type of investments would be the best winner from blockchain technology. We think so because business revenue is being accrued every minute, it is easy to monitor, and report and it is also fair that economic risk of the project is equally divided between investor and investee. In a way, this type of financing can create a symbiotic relationship between the investor and the business owner.

It is an innovative type of financing – a hybrid between debt and equity financing and can offer the flexibility a growing business needs, at the same time preserving owner’s equity stake in the business. Let’s take a quick look at the more common forms of financing, debt financing and equity financing.

Debt financing involves a loan that the borrower must repay with interest according to a fixed schedule. Lenders usually secure a loan with borrower’s collateral so that in the case of the business owner’s default, they can seize and liquidate the assets to get the money back. More often than not, such collateral is priced by lenders at a below-the-market liquidation value which makes a borrower freeze more collateral than the market valuation would otherwise require.

Traditional lending can be unattractive in the current situation of business uncertainty: it can be very challenging for business owners to meet fixed loan payments, and very risky to contract one. Their cash flow became sporadic because of lockdowns and other disruptions, or might become variable simply due to a cyclical nature of their business like agriculture. Equity financing can be less restrictive from the point of view of regular payouts but more restrictive in other respects. Equity financing involves capital contribution by external investors in exchange for equity ownership in the business.

It is common practice for entrepreneurs to give up significant control to equity investors through board sits, voting rights or other special contingencies involving mandatory merger or sale of the business. Those conditions imposed by third-party capital providers look problematic for a company in a more traditional business setting where exponential growth cannot be expected. Revenue-based financing is a hybrid financing structure having features from debt and equity: it balances the entrepreneur’s interest in retaining control of the business and the investor’s interest in getting returns commensurate with their risk. In this type of financing, there is no fixed payment schedule. Instead, the payouts are tied to business revenues forming a fixed percentage income stream flowing to investors.

When repayments reach a certain agreed multiple of the original financing amount, the RBF agreement is fulfilled, and the payout should stop. Because of the payouts being tied to business revenues, such “maturity dates” is floating but the mission-oriented investors provide “patient capital” get their expected return. 
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