Disclaimer: This is not legal advice. The information provided here is solely for informational purposes. We recommend you consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between you and any contributors to Centrifuge. This article describes the legal structure at a high level and provides boilerplate legal agreements as an example for how to set up the legal framework necessary to ensure Real World Assets can be tokenized and a legal recourse exists for anyone holding these tokens.
The legal setup for each pool mirrors the Centrifuge smart-contract structure and the real-world relationships between the parties. It is structured with two goals in mind:
This article explores the current template for a general-offering structure, and was developed for US-based offerings. It is the simplest and most straightforward offering structure but is continuously being developed in cooperation with law firms that have a background in international asset-backed financing, security laws, and token, crypto, and virtual/digital assets regulations.
Work is also being done to bring offering structures for other non-US jurisdictions. The outlined structure supports either a 506(b) or a 506(c) offering under Regulation D of the US Securities Act of 1933 for a US-based issuing SPV offering investments directly to either US investors with accredited investor status or non-US investors domiciled in jurisdictions with United States Income Tax Treaties under the Foreign Account Tax Compliance Act (FATCA).
A Special Purpose Vehicle (SPV) is an independent legal entity. It has its own assets and liabilities, as well as its own legal status. Usually, SPVs are created for a specific objective, often to isolate financial risk. As an SPV is a separate legal entity, it carries even if its parent company goes bankrupt. Read more
The general flow of financing typically looks as follows:
The Asset Originator sets up a legal entity - a special purpose vehicle - for each pool. The SPV keeps all financings remote and separate from the Asset Originator.
The Borrower wishes to finance an asset such as an invoice or a property.
The Asset Originator originates this RWA. The AO has a business relationship with the borrower and performs the underwriting. It then verifies the RWA and mints an NFT for the asset to be used as collateral on-chain.
The Borrower enters into a financing agreement with the SPV and asks the Asset Originator to lock its NFT in the Centrifuge pool tied to the SPV. As the NFT is locked in Centrifuge, DAI is drawn from the Centrifuge pool reserve, and either directly transferred to the Borrower's wallet or the SPV's wallet, which exchanges DAI for USD and does a bank transfer to the Borrower’s bank account. The SPV is set up in order to keep all financings remote and separate from the Asset Originator. Bankruptcy of the Asset Originator does not impact the SPV and therefore does not impact the financing. All financing transactions and payments are done directly between Borrowers, the SPV, and Investors and happen on-chain in Centrifuge. The SPV is a pass-through entity without the aim to generate profits. It has no employees. Its sole purpose is to finance specific RWAs as underlying assets of one specific Centrifuge pool. The SPV administers this pool and all its services are performed by third parties, upon instruction by the SPV, for a service fee.
The Borrower pays back the financing amount plus the financing fee at the maturity date of the NFT. This happens either directly on-chain in DAI, or the Borrower does a USD bank transfer to the SPV. The SPV exchanges USD for DAI and pays it to the Centrifuge pool. The full repayment of the NFT unlocks the NFT, which is then returned to the Asset Originator where it can be burned.
Investors can join a pool and provide liquidity for assets to be financed. They go through the following process.
Centrifuge Pool uses the following templates to achieve the above described setup.