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 Tinlake smart-contract structure and the real-world relationships between the parties. It is structured with two goals in mind:
- Ensure that investors in the pool have the most protection possible giving them recourse to the RWA used as collateral in the pool.
The source of truth is on-chain. The legal contracts delegate all possible responsibilities to the on-chain smart contracts.
- For this purpose, each pool has a legal entity tied to it, special purpose vehicle or SPV. The SPV keeps the Asset Originator's business separate from the financing activity in the pool.
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).
What is an SPV?
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
Overview of a Transaction
Asset Finance Flow
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 Tinlake pool tied to the SPV. As the NFT is locked in Tinlake, DAI is drawn from the Tinlake 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 Tinlake. 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 Tinlake 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 SPV’s operations are defined in the Operating Agreement.
- 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 Tinlake 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.
- Investors can purchase either DROP or TIN ERC20 tokens issued by a Tinlake pool. They need to go through a Know Your Customer and Anti-Money Laundering (KYC/AML) process. This process is handled by the Asset Originator on behalf of the SPV. Centrifuge partners with Securitize to offer a compliant investor onboarding service and a US accredited-investor status check to the SPVs issuing the tokens. Securitze is a SEC-licensed transfer agent offering compliant investor onboarding services. Investors who pass KYC/AML and verified accredited-investor status if required get a Securitize iD, which allows them to subscribe to all Tinlake pools.
- Once KYC’ed, investors can sign the subscription document for the Tinlake pool they wish to invest in. They sign either a DROP or a TIN token subscription agreement. This needs to happen only once. The subscription agreement outlines the general structure, risks, terms and conditions of a DROP or a TIN investment. An additional pool-specific Executive Summary outlines the specifics of the Asset Originator, the SPV, and the underlying financed assets. Whereas the DROP Token Subscription Agreement and the TIN Token Subscription Agreement are templates which are easy to reuse, the Executive Summary is pool specific and requires legal review.
Example Executive Summary for the ConsolFreight Tinlake Pool CF3.
- The SPV as the issuer of DROP and TIN is countersigning the subscription agreements using Securitize and whitelists the registered investor wallet address in Tinlake.
- The Investor can now invest on Tinlake in the pool of his or her choice simply by purchasing the DROP or TIN tokens with DAI.
- Investors can request a redemption of their DROP or TIN tokens at any time subject to the provisos that DROP tokens have redemption priority over TIN tokens and TIN token investments must not drop below the minimum TIN buffer set for the pool. The redemptions are executed pro-rata between the addresses requesting a redemption on a best-effort basis. All repayments from the underlying assets (NFTs) will be used for open redemption requests before they can be recycled to finance new assets (NFTs). This means a pool stops to finance new assets if redemptions exceed investments. The pool is forced by its investors into liquidation as already outlined above [INSERT LINK HERE] purely by the Tinlake smart contracts with all DROP investors treated equally.
Legal Contract Templates
Tinlake Pool uses the following templates to achieve the above described setup.
- Operating Agreement: describes the SPVs operation
- DROP Subscription Document: The subscription agreement outlines the general structure, risks, terms and conditions of a DROP investment.
- TIN Subscription Document: The subscription agreement outlines the general structure, risks, terms and conditions of a TIN investment.
- Incorporation Documents: Used to incorporate the Series-LLC (coming soon)