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Can venture capital invest in Tokens?

When a venture capital is asked to invest in a tokenization, crypto or token, questions arise about whether the venture can invest in that asset according to its investment policy.

Despite the novelty of tokens and crypto, there are enough clarifications from regulators to know whether or not venture capital can invest in token.

The regulation of venture capital in Europe

The legislation regulating venture capital is common to all Member States and the United Kingdom. This regulation of the European Parliament indicates how the money of venture capital should be invested, and from this information we highlight the following elements.

The VC is obliged to invest at least 70% of its capital in the category of “eligible investment”. To be an eligible investment, the ultimate goal of the money has to be an eligible company (one that meets a series of requirements, most of them startups) and has to be invested in equity or quasi-equity instruments, loans, shares, etc.

Managers of such venture capital funds may invest up to 30% of the fund in investments other than eligible ones.

Token differences to invest the VC

The question is which token or crypto falls into the category of eligible investment and which in the percentage of free investment?

To do this, we must previously differentiate between the security token and the utility token. In general, and following the provisions of the ESMA and the CNMV, the Security token is one that could be understood as a transferable asset or financial instrument according to MiFID II. In this category would also enter those crypto that grant profit rights as capital of a company.

On the other hand we find the utility token, where we would encompass everything that does not have security condition, such as certain types of NFT, crypto asset of video game exchange, worthless cryptocurrencies (those that give access to certain benefits), etc.

The possibility of investing in Token or crypto for Venture Capital 

Given the difference, we can understand that venture capital funds can invest in a security token within the percentage of eligible investments, provided that the characteristics of the company that is subject to tokenization comply with the provisions of Regulation 345/2013.

On the other hand, if we talk about utility tokens, cryptocurrencies that do not meet the requirements established above, or any other token that is not a security or meets the elements of a qualifying investment company, all those investments will be computed as 30% of free admission. In this category we could place the holding of cryptocurrencies such as Bitcoin or Ethereum.

Regarding one of the questions that arises the most: can the manager invest in a token in accordance with the investment policy or prospectus delivered to investors if the investment in token is not detailed? The token is an element of capital or quasi-capital, so if the company that tokenizes is part of the target of the fund, if it can be invested.

 

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