Investigation of Jia Yueting's 900 Million USD Financing through STO for FF: A Clever Sleight of Hand Trick
摘要： Jia Yueting, Faraday Future, blockchain startup, STO...when ChainDD reporter got to the bottom of these keywords and key figures, what was hidden underneath turned out disappointing. Behind the publicity stunt lies a number game which both parties expect to win with their sleight of hand tricks.
News of "blockchain company EVAIO's intention to invest 900 million USD in Jia Yueting's FF (Faraday Future) via STO (Security Token Offering)" has drawn attention again to Jia Yueting and his FF company. However, ensuing doubts and questions remain.
Has EVAIO really invested 900 million USD? Where is the investment capital from? How is the investment going to be enforced and executed? What is a real STO? What kind of role is the STO playing in this incident? Was FF really in the dark as it claimed?
With all these questions in mind, the reporter of ChainDD team conducted interviews of many parties involved including the relevant staff members in charge of EVAIO's involvement, verified information files of all implicated parties and visited people who were heading several projects which successfully launched STOs and four lawyers specialized in the blockchain industry, in order to get to the bottom of the whole incident.
The rapid spread of the news owed a great deal to several popular keywords: Jia Yueting, FF company, blockchain startup, STO. However, when the ChainDD reporter got to the bottom of these keywords and key figures, what was hidden underneath turned out disappointing. Behind the publicity stunt lies a number game which both parties expect to win with their sleight of hand tricks, in other words, a scheme, using the popular concept of STO to help raise funds via FF's questionable equity, the legal basis of which is still debatable.
EVAIO, the blockchain startup which arrived on the scene in the name of the new investor, or more precisely, the underwriter for this round of fundraising by FF, attempted to sell the publicized "short" FF assets by tokenization to private investors in order to raise funds for FF. At the same time, FF was not really kept in the dark as it claimed. The two parties set up this scheme and publicity stunt with a preliminary confidentiality agreement.
Investors on the attack
The new energy auto company Faraday Future (hereinafter referred to as FF) actually controlled by Jia Yueting has been facing pressing financial crisis since FF and Evergrande Health had strong disputes over their cooperation in October this year and applied for arbitration in Hong Kong.
On November 29, Evergrande Health made a public announcement saying Shiying (of which Evergrande Health holds 100% equity) has received the emergency arbitration ruling on the Faraday Future's motion to waive Evergrande Health's right to use Faraday Future's corporate assets as financing guaranty on November 12. It also claimed that "the emergency arbitrators fully dismissed the joint venture FF's motion to waive Shiying's right to use the joint venture FF's corporate assets as financial guaranty." On the other hand, FF issued a public statement on November 30, saying the emergency arbitration appeal would be transferred to the main arbitral tribunal for arbitration and the statement in Evergrande Health's announcement that "FF's motion was fully dismissed" was not completely true.
According to some estimation, there is at least a 500 million USD funding gap for FF91's 2019 production plan. It was revealed earlier that "FF employees had their salaries reduced by 20% across the company, and Jia Yueting, founder and CEO of the company will only receive 1 USD as his annual salary", which attests to FF's difficult financial position indirectly.
FF and Evergrande's disputes over their cooperation
On November 9, FF filed a petition in the District Court for the Central District of California, to confirm and forcefully execute the emergency arbitration award by the Hong Kong arbitration tribunal, which granted Jia Yueting's permission to seek financing, capped at 500 million USD. In other words, Smart King, a joint venture established by Jia Yueting's FF and Evergrande Health will be able to issue new shares valued at 500 million USD by equity dilution.
Michael Agosta, Global VP of Finance of FF stated that FF is currently in negotiation with potential investors of the 500 million USD and EVAIO claimed it is one of the investors.
"We took the initiative to contact Wang Jiawei, FF's CFO, in the hope of reaching an agreement of cooperation." said Director of EVAIO China. The core team members of EVAIO are all from the well known American new energy car maker Tesla and to them, judging from its technological reserve and the design of its current model, FF has been undervalued under its current funding pressure.
"First of all, we hope that our purchase of FF equity using the 'bottom fishing' strategy now will generate higher investment return. Second, as a company providing vehicle mounted blockchain solutions, we hope that our products will be used on a good vehicle model, which can be used as a case of application. Finally, the major shareholder of the joint venture Smart King is Evergrande Health. Endorsed by Evergrande's standing, credibility and background, the investment subject matter can't be that bad. At least it is formally guaranteed." said the above EVAIO director, talking about the reason behind the investment decision.
Smart King is a joint venture established by Shiying company in Hong Kong and FF's original shareholders. On November 30, 2017, Hong Kong-based Shiying invested 2 billion USD and acquired 45% of the joint venture's equity and FF's original shareholders bought 33% of the joint venture's equity with the technology assets and business of FF. Smart King wholly owns FF and is the corporate entity of FF. Furthermore, FF's CFO is Wang Jiawei. A report by TMTPOST last year showed that Wang Jiawei is a relative of Jia Yueting and a large number of assets of the latter have already been transferred to Wang Jiawei's name.
900 million USD STO investment is actually public fundraising
In the current market, dual-channel financing in both fiat money and cryptocurrencies is rapidly becoming more difficult and the digital currency market is experiencing a sharp downturn. ICO financing in all major countries globally is facing stricter supervision. Against this backdrop, everybody is pinning great hope on STO financing that satisfies the compliance requirements.
STO refers to Security Token Offering and its purpose is to issue tokens publicly, under the conditions that the offering must comply with the relevant rules and accept supervision of its legality and compliance status.
Security Tokens (ST) are normally backed by real assets such as equity assets, shares of limited liability companies and commodities.
Director of EVAIO China told ChainDD that EVAIO has not so far issued any STO and is not helping FF to raise funds via STO. As a blockchain startup registered at the beginning of the year, EVAIO though has performed private fundraising with project tokens (exact figure not disclosed), itself doesn't have underlying priced assets to anchor STO. EVAIO's plan is that, under ideal conditions, it will use some of its own capital (exact figure not disclosed for confidentiality reasons) to inject capital into cash-strapped FF, in exchange for a certain share of FF's parent company, Smart King's equity. It claimed that EVAIO has already signed the confidentiality agreement with Smart King.
In other words, so far it is only a tentative plan of blockchain startup EVAIO that it will invest 900 million USD to Smart King in three years and its source of funding remains uncertain.
According to the plan of EVAIO, if it acquires Smart King's equity, it will use the equity as the underlying priced asset of its own platform to raise funds via STO. In other words, the equity of Smart King acquired by EVAIO will be sold to private investors by way of tokenization. The profit to be generated from the sale will be used to pay by installments for its funding promise made earlier on to Smart King. The difference between the sales revenue and financing payment, room for price appreciation due to maturity mismatch and appreciation of security tokens held by EVAIO due to the STO are EVAIO's ways of profiting from this model.
Director of EVAIO China told ChainDD frankly that they don't know how to define or name this investment operation. However, CEO Patrick De Potter coined a new name for this fundraising method earlier on in the company's publicity, which is fundraising "Via indirect STO", meaning indirect STO. According to the company's plan, since tokens issued this way involve equity, EVAIO exercised their discretion and defined the tokens security tokens. Thus, this proposal which is still at its planning stage, became a popular talk point in the community that EVAIO is going to raise funds for Jia Yueting via "STO", a story made even more popular by several hot keywords.
EVAIO's "STO" plan
Therefore, the real plan of this once hotly discussed report of "Jia Yueting and FF using STO to raise emergency funds" is that EVAIO plans to carry out a new round of fundraising on its own platform, or to imitate investment banks and engage in equity underwriting business. It plans to use the equity of Smart King acquired and sell the equity by way of tokenization and quantified division of tokens to investors in order for the EVAIO platform to obtain funding and relevant appreciation profit. As mentioned above, EVAIO actually plans to invest 900 million USD raised this way in Smart King in three years.
"Confidentiality Agreement" signed by FF
With permission, ChainDD checked out the confidentiality agreement with Smart King, provided by EVAIO. The agreement is currently a confidential letter of intent and there are no provisions to refer to for transaction execution and it is non-binding to both parties. It is in reality an agreement between EVAIO and Smart King that no details of the meeting may be made public by either party after EVAIO and Smart King met for negotiation, detailing both parties confidentiality obligations and liability for breach of contract. It does not include any details of the negotiation with Smart King. The signatory for Smart King is Wang Jiawei (CFO of FF) and the signatory for EVAIO is Patrick De Potter, CEO of EVAIO.
However, it was reported in a report by Tecent's Frontline program on November 13, 2018, that FF's response to the report of "blockchain company EVAIO's plan to invest 900 million USD via STO" was "we haven't been informed."
ChainDD has learned that it is a common practice after companies' negotiations. Since there are no detailed provisions to refer to for transaction execution in the confidentiality agreement signed between EVAIO and Smart King, and EVAIO hasn't signed any other agreements with Smart King so far, it is unknown how long it may take for the two parties to reach agreements for financing and equity transfer. Exactly because of this uncertainty, in this incident, whether EVAIO is able to issue the so-called “STO”, is primarily based on whether it is able to acquire Smart King's equity. However, it has no control over the time of the capital injection in exchange for the equity, the form of capital injection, and even whether it is able to ultimately acquire Smart King's equity.
In order to solve the uncertainty problem of the most important variable, namely, the acquisition of the equity, EVAIO revealed two possible future backup fundraising plans to the reporter.
First, if it is not able to successfully acquire Smart King's equity with its existing capital and tokenize it to sell on its own platform, EVAIO plans to obtain the equity underwriting rights of Smart King by way of agreement. EVAIO hopes to be granted the permission to use fiat money to purchase Smart King's equity by way of agreement. Then it will raise funds privately or via ICO on its official website until it has raised enough digital currencies with the value equal to the value of the equity to be transferred from Smart King to EVAIO according to the agreement. The money raised will be injected into EVAIO foundation and the foundation will cash the digital currencies to fiat money to pay for the equity purchased from Smart King, becoming Smart King's shareholder. EVAIO claimed that it doesn't care about how it is going to raise the funds, and ICO and private fundraising are both to be considered.
Second, if neither of the above operations is successful, ICO will be adopted. That means if EVAIO is not able to successfully purchase Smart King's equity with its own capital and then tokenize it for sales. Nor is it able to sign the underwriting agreement with Smart King, then, EVAIO will choose to first raise funds in the secondary market in the form of ICO and verbally inform the investors that the money raised will be used to purchase Smart King's equity and if the money raised is not able to be used to purchase Smart King's equity, it will be returned to the investors.
ChainDD has learned that EVAIO so far hasn't qualified as a security underwriter. During the interview, EVAIO's China Director stated that "underwriter's qualification is only needed in the traditional security industry and the digital field ‘hasneeds more freedom." Since this round of fundraising will not involve fiat money, EVAIO is not planning to apply to be qualified as a security underwriter.
Take America as an example. Although some platforms are in reality not necessarily security trading platforms since transactions on these platforms may not involve security trading orders that match multiple buyers and sellers, as long as facilitating other people's digital assets trading, soliciting customers to purchase digital assets and security, or trading and selling digital assets and security is involved, registration for broker-dealer is necessary to be submitted to the FINRA. A broker-dealer can be an organization, or a person. It's worth noticing that although the relevant provisions in different countries are different, they are not that far different from the American one. Dealers of "STO" which satisfies the compliance requirement must be qualified broker-dealers.
Lawyer: This is not STO
"This is definitely not STO", was the assessment of EVAIO's plan given by Wang Jianwei, Chairman of Lvshangyonglian legal consultancy company. EVAIO will first purchase asset, tokenize it and then use the tokens on its own platform, which can not be called STO, but should be better named ICO backed by assets or equity. ST refers to security token and the standards for issuing security tokens are decided by security supervision departments of the issuing country or region and security tokens are security in nature. However, the “STO” that EVAIO is going to issue does not have a clear nature of security and is not under definitive supervision of any nation.
Lawyer Pang Lipeng of Lian Fa explained to ChainDD that STOs can be summarized as the financialized blockchain projects which can be launched under supervision. Its nature is the issuing of tokens that satisfies the legality and compliance requirements. Unlike IPO, STO has one extra layer of blockchain technologies. No matter what the nature of the fundraising plan of the above case, there are two sure points: first, EVAIO's action is in nature an action of fundraising, but not investment; second, the money to be raised is not for its own development, but to be invested in Smart King, which is different to normal STO.
Assets that can be tokenized include not only the traditional financial assets such as bonds and equity, but also include revenue rights and voting rights etc. From what has been disclosed so far, EVAIO's own equity, used to back its fundraising, has no intrinsic value. Even if it obtains Smart King's equity at the preliminary stage, what will be tokenized is its own equity. These tokens to be issued by EVAIO and owned by the investors reflect this equity and the investors will own indirectly the equity of company B. In this process, EVAIO will "single-handedly raise funds for two companies". As the central figure in the whole process, what can EVAIO's credibility be based on? Will the operation satisfy the supervisory requirements (So far it is not clear where the funds will be raised)? How will the legal compliance problem of equity underwriting be solved? Will this kind of "project" pass the compliance review by the supervisory organs? Furthermore, how will the operation, as a fundraising activity, satisfy the supervisory requirement? All these are questions that demand answers.
Lawyer Guo Yatao at Lian Fa believes that these two backup plans are not "cash on delivery" type of transactions and EVAIO, after obtaining investors' digital currencies, will have to first convert them to fiat money and then purchase Smart King's equity with the fiat money. There will be a long vacuum period, during which there will be a high uncertainty of both the price of the tokens and the price of the equity. Under this circumstance, the amount of equity for the tokens to be issued is uncertain, posing high legal risks, something that will deter the investors.
What is STO which satisfies the compliance requirement
ChainDD App has collected information about 16 publicly available STO cases on the European and the American markets:
Some STO cases in European and American markets
On December 1, at the "2018 Leaders of Chinese Enterprises Annual Conference", Huo Xuewen, Chief of Beijing Financial Supervisory Bureau warned STO practitioners that all STO practice in Beijing is deemed to be illegal financial activities and will not be permitted in Beijing. Furthermore, in other provinces and cities in China, there is no recognition of STO's legality or administration for the time being. Nevertheless, the need for STO financing remains.
Currently, many Chinese enterprises are trying to raise funds overseas with STOs. and how to satisfy the legality and compliance requirements is the key.
For this potential market, Yang Jinyan, General Manager of Huobi believes that STO should only be issued in strict compliance with the laws of the issuing country and the country where the funds are raised. Currently, the best developed STO mode of operation is in America. The legal basis that STO in America relies on is the exemption provision of the Securities Act of the United States of America (RegA/D/S). Fundraising activities not only have to satisfy the American legality and compliance requirements, but also need to abide by the laws of the countries where the investors reside. Furthermore, projects of planned STO fundraising must be under the professional guidance of lawyers. For companies which are not registered in the U.S., it is completely legal to undergo recordation in the U.S. in compliance with the law, under the guidance of lawyers and raise overseas funds through issuing security tokens.
If the project intends to raise funds from Chinese investors directly in the name of STO, it will not be tolerated by the law. Just like enterprises which issue IPOs in America cannot ignore Chinese regulations such as the foreign exchange regulation and directly raise funds from Chinese investors.
Yang Jinyan further stated that "the real risk that the blockchain industry has to be wary about is direct ICO fundraising activity in China in the name of STO, which will arouse suspicion of illegal fundraising."
tZERO is the first completed STO case on the main public website of Ethereum. On October 13 2018, the blockchain platform tZERO of the American e-commerce giant Overstock completed its STO. ChainDD has learned that the STO was in compliance with the Securities Act of America and obtained registration exemption according RegD and RegS of the SEC. It is an STO case that has been launched which satisfied the compliance requirement.
An Huaguo, Chairman of BANKORUS, who has had some in-depth cooperation and exchange with the team of the STO project tZERO of Ethereum explained to ChainDD that "the STO that EVAIO is planning to issue has no prior case."
First of all, to judge whether a token is a type of security, "Howey Test" needs to be performed. Second, whether the equity to be invested in can be tokenized for STO needs permission from the board of directors of the other party. Furthermore, the laws of the country of the company's registration and also those of the issuing country must be complied with, making the implementation highly complicated. An Guohua expressed his opinion to ChainDD that, "it is of the highest importance in STO that all the procedures at the preliminary stage must be complete and the ownership of the assets to be tokenized must be transparent and clear."
In addition, not only STs issued by companies which have obtained registration exemption with the SEC under RegD and RegS can be called STOs. RegD and RegS were not designed for STOs. However, we have to admit that America, as the maker of many financial rules took the lead and gave recognition to tZERO's STO. Other countries and companies will copy tZERO's STO operation gradually.
"Therefore in long term, operations of STOs in the future in different countries and the relevant procedures and rules will not be that different." said An Huaguo.
Furthermore, An Huaguo told ChainDD that an STO project must first go through the private fundraising stage. Only the private fundraising, it will enter the secondary market for circulation through a certain trading exchange. STO issued directly to the public without gaining permission from the investors from the private fundraising stage is impossible.
At the private fundraising stage, an STO project must first of all comply with all the legal requirements of the securities laws of the place of operation, place of registration and the place of ST issuance and trading. The investors that the private funding targets must be accredited investors (verified through KYC/AML) and there are also limitations on the number of investors for private fundraising in different countries. Simply put, at the private fundraising stage, two requirements have to be met: first, a suitable law firm needs to be commissioned to make sure the compliance requirement is satisfied. Second, the permission by the investors is needed. When these two conditions are satisfied, ST private fundraising can go ahead.
The chart below is a comparison between different registration exemptions of SEC summarized by ChainDD:
An Guohua further informed ChainDD that no STO project will tokenize all its assets or equity for public sale. An STO project can only tokenize a part of its equity for fundraising and the rest will be held by the founders, early team members and investors. Therefore, in theory, companies who are doing STOs cannot sell tokens which are anchored on priced assets and can thus make profit from market price appreciation. However, in real operations, an STO project will first have to disclose certain facts such as its quantity of STs to be issued and the quantity to be retained, detailed distribution rules, and circulation increase or circulation decrease in the future.
This article was written by @Mao Yuan from ChainDD and edited by the TMTPOST team.