CIP-29 Why and How CityDAO Should Establish/Operate Funds (Separate from the CityDAO NFT)

Proposal for filing SEC Offerings for CityDAO

The following proposal outlines how CityDAO can operate to raise capital for its operations by utilizing established crowdfunding and private equity funding legal structures to benefit its members.

The benefit of establishing fund offerings for CityDAO is that the fund structure is the most effective means of raising private capital to purchase property for CityDAO for the use of its citizens as well as to derive a profit. After all, an organization exists to provide goods and services to its body of members. Being an organization that operates for profit is the most effective means to generate value for the community. It is important to note that the fund will be separate from the CityDAO NFT.

Below are two examples of offerings CityDAO may create but these structures are not definitive in scope for the kinds of funds that can be started to support commercial development activities. In my opinion, these structures would be the most effective means of accomplishing our goals based on my current understanding of the direction CityDAO is going.

Regulation A+ Tier II Offering

  1. These offerings are for non-accredited investor members of CityDAO. Generally speaking, the terms that define an accredited investor are outlined in the link HERE.

  2. These offerings are not limited solely to non-accredited investor members of CityDAO but, are the only investment offering that non-accredited investors can partake in.

  3. Regulation A+ Tier II offerings allow for CityDAO to raise up to 75M in investor capital annually. By utilizing bank leverage, CityDAO would have the potential to purchase up to about 250M in real estate annually from a fund structure based on a Regulation A+ Tier II Offering.

  4. The offering can be limited to CitizenDAO NFT holders or some other criteria can be formed.

  5. The CitizenDAO NFT holders will make the policy surrounding the mission of the fund through votes and will form the investment strategy through cooperative efforts to achieve its mission.

  6. The Private Placement Memorandum (PPM) will serve as the “bible” of the fund for all intents and purposes and it contains the guiding principles of the fund. The PPM will contain the following sections at a minimum but, may contain other sections to define the CityDAO fund.

  7. Coverage

  8. Legends and securities laws notices

  9. Table of contents

  10. Summary

  11. Use of proceeds

  12. Investment Program

  13. Risk factors

  14. Description of the management company and managers

  15. Discussion of fees (Management fees, Performance fees)

  16. Manner of valuing the investments

  17. Discussion of conflicts of interest

  18. Discussion of brokerage

  19. Discussion of litigation of the investment manager

  20. Discussion of financial statements of the fund

  21. A summary of the LPA or Operating Agreement

  22. Discussion of service providers

  23. Tax disclosures

  24. ERISA disclosures

  25. Other notices (privacy notice, the definition of investors qualified to invest, disclosure on the lack of transferability, etc.)

  26. The limited partnership agreement (LPA) is what will define to the government the relationship between the general partners, CityDAO, and the Limited Partners, CityDAO Citizens. The purpose of the limited partnership agreement is to clearly define the roles, responsibilities, and liability of every individual involved in the partnership. Common LPA clauses include the following:

  27. Cover page

  28. Table of contents

  29. Preamble

  30. Definitions

  31. Information on the formation (business office, registered agent, length of the fund, etc.)

  32. Capitalization structure (initially and on a going-forward basis)

  33. Manner of allocation of profits and losses (including the various tax allocation provisions)

  34. Manner of distributions and withdrawals

  35. Rights and duties of the management company

  36. Rights and duties of the investors

  37. Information on accounting, books, and records

  38. Transfer rights

  39. Dissolution of the partnership; winding up

  40. Manner of final distributions

  41. Grant of power of attorney

  42. Miscellaneous provisions (headings, amendments, applicable law, jurisdiction)

  43. The Subscription Agreement will allow for the CityDAO General Partner to verify if they are able to work with a specific citizen that applies to enter into the organization. It is important that CityDAO verify the identity of each Citizen before accepting citizens into the organization for purposes of complying with Know Your Client (KYC) laws as well as understanding the financial limitations of each member, as for a Reg A+ Tier 2 offering there is a limit that the individual can “can invest to no more than 10% of the greater of the person’s, alone or together with a spouse, annual income or net worth (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)).” - Source: SEC.gov | Updated Investor Bulletin: Regulation A

Regulation D Section 506(c) Offering

  1. These offerings are exclusively for accredited investors.

  2. These offerings are able to be widely marketed by CityDAO.

  3. Much of the same standards will apply from the Regulation A+ Offering in regards to the LPA, PPM, and Subscription agreements. However, in these offerings, the investors must be verified as accredited. Softwares that help manage these process flows include, but are not limited to, the following:

  4. Efront Alternative Investment Solution

  5. Shareworks Private Equity Admin

  6. Lexis Nexis Risk Management

  7. These solutions will help us make an educated decision on managing risk and compliance.

  8. This tier of investment can be more speculative than the Regulation A+ offerings and the returns will reflect that risk. Either positively or negatively.

COSTS:

  1. The approximate cost to set up EACH of the aforementioned entities can vary greatly depending on hours billed, the number of questions we have to ask about the structure of the fund, and the level of understanding we have about setting up the fund to suit CityDAOs needs.
  2. As a rule of thumb, CityDAO should budget about $100,000 USD towards the setup of EACH entity. Because of the special considerations of the funds relating to the metaverse, costs may rise to this level. However, if there are fewer billable hours utilized due to CityDAO having a granular understanding of what is required in the structure of their documents, costs could be as low as $20,000 per registered entity.
  3. McCollum & Associates, LLC, a trusted real estate legal team, has offered its services to guide CityDAO towards the creation of the entities it needs as well as its continued legal protection.

Disclaimer: I am not an attorney and this is not legal or financial advice. I am opening up this topic for discussion by CityDAO before having an attorney review the full proposal. Will advise once new information becomes available.

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So let’s imagine a future where CityDAO has invested in legal fees to do a Reg A+ or a Reg D offering, and the investors sign subscription agreements, they invest and own what? A membership interest in a legal entity, which has General Partners as managers. Is CityDAO the owner of the General Partnership entity? Do the limited partner investors own any tokenized representation of their ownership? If these LP investors wanted to transfer their ownership, they’d be selling a security and would need to go through a broker dealer.

Would it make sense for a Trust to own all of the limited partnership interests, for tokens to be created that represent shares of the limited partnership, tokens that govern the actions of the Trustee, and for there to be no signing of any subscription agreement, just an implicit agreement that you agree to the terms of the offering if you purchase the token, and for all purchasing of the token to be via a whitelist by those who have gone through KYC (and any accreditation certification). A centralized broker dealer partner would do that KYC and accredited certification.

If that is accomplished, the power is still in the hands of the General Partner, who is the junior equity in the deal but has the governance control. If that is CityDAO, then, I guess, there needs to be an asset management org setup.

Just tossing my free flowing thoughts out here with the goal of finding the best way forward.

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These are all 100% great ideas. I hadn’t considered the transferral of ownership and the liquidity that the investors would desire from a tokenized asset.

Let me see if I understand you correctly.

Step 1: Set up General Partnership (GP)
Step 2: Set up Trust and have the trust be the LP. Investors purchase tokens that translate to governance in
Step 3: assign interest in the TRUST as token at a specific strike price so that the amount needed to perform the project is raised…

That’s where you lost me. I think then it’s basically the same thing but we’re adding in a trust. We would still have to do verification and I still believe the legality would be murky waters at best. (I am not an attorney, it just sounds a bit off)

I definitely believe there needs to be asset management and I know there are ways to do more hands off real estate investments as well through other more passive means.

Moreover, can’t someone in the CityDAO community function as a broker-dealer?
It may make sense to leverage community expertise to function as a broker dealer specifically for CityDAO. Or, we contact already registered broker dealers and form a strategic partnership. Maybe we contact seedinvest, circle up, or start engine to see if we cant make something happen.

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Thanks @blacktiger for all that information! To clarify, the purpose of CityDAO creating a Reg A Tier 2 offering would be if CityDAO acknowledged that the citizenship NFT is a security. Securities needs to be registered with the SEC. An exemption from that rule would be the Reg A Tier 2 status.

These companies do not need to go through the SEC registration process. However, they do need to provide an offering circular to investors, including the balance sheets, income statements, cash flows and stockholders’ equity for the two most recent fiscal years. The circular also needs to be reviewed and vetted by the SEC. So if CityDAO issues a Reg A Tier 2 offering, there is still a significant amount of procedural work that needs to be done.

It might be preferable to issue a Reg A+ Title IV, which would allow a private company like CityDAO to raise up to $50 million (for Type 2, $20 million for Type 1) from the general public (non-accredited investors) thus creating a “mini-IPO”.

However, all this is contingent on the idea that the CityDAO citizenship token is a security. I think this would be the issue to question first. Right now, the citizen’s don’t receive a share of any profits (as there are none), but the NFT may rise in value. Does that rise in value automatically make the NFT a security?

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100% good thoughts. A lot to consider with a qualified attorney.

nice strong and logical ideas.fully support