EVAIO Blockchain to ‘Engage in Equity Underwriting’ Through Questionable “Indirect STO”

EVAIO Blockchain, a fintech startup that weeks ago was reported to invest $900 million into the cash-strapped electric car startup Faraday Future (FF), is reportedly set to “imitate investment bank and engage in equity underwriting business” by tokenizing the equity it purchases from FF to raise funds on its own platform.

According to an investigation conducted by ChainDD, EVAIO is actually planning on investing the $900 million into FF within three years, in exchange for equity in Smart King, FF’s parent company. Its plan will be to acquire equity in the company to then create a security token (ST) based on it, so it could then be sold to private investors through a securities token offering (STO).

Faraday Future is notably controlled by Jia Yueting, and has been under the pressure of Evergrande Health, a Chinese healthcare company that was set to purchase a 45% stake in the firm for $2 billion.

The company was selling its stake as it has been struggling with funds. Some reports suggest there’s at least a $500 million gap in its FF91 2019 production plan, and the firm’s employees have already taken a 20% pay cut. Yueting himself is said to be receiving a $1 annual salary.

Smart King, a joint venture established by FF’s original shareholders and Evergrande Health that wholly owns Faraday Future (FF), has last month been granted permission to issue new shares valued at $500 million by equity dilution. EVAIO Blockchain, according to FF’s Global VP of Finance Michael Agosta, is one of the potential investors.

The profit EVAIO Blockchain is set to make out of its plan, ChainDD reports, will be “used to pay by installments for its funding promise made earlier on to Smart King.” The director of EVAIO China told the publication he wasn’t sure how to define the operation, although the firm’s CEO Patrick de Potter called it an “indirect STO.”

Taking this information into account, ChainDD summarized the once-touted STO fundraising plan as follows:

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.

Per ChainDD the confidentiality agreement signed between Smart King and EVAIO is merely a confidential letter of intent, that doesn’t refer to when the transaction has to be executed and is non-binding to both parties. It also doesn’t include any details of the negotiations that were carried out.

Taking this into account, it isn’t clear how long it may take for EVAIO’s investment to actually be realized. Moreover, the fintech firm is only set to raise funds through its “indirect STO” if it’s able to acquire Smart King’s equity with its own capital.

Addressing this uncertainty, EVAIO has reportedly come up with two future backup fundraising methods: obtain equity underwriting rights through an agreement so it can use fiat currency to purchase the equity, and then raised funds through a private offering, or through an initial coin offering (ICO).

If none of these options work, ChainDD notes, EVAIO is set to go with an ICO in which it informs investors the funds it raises will be used to buy equity in Smart King. If it doesn’t raise enough money this way, it’ll return the funds to investors.

Lawyers’ Takes

In its investigation ChainDD spoke to several lawyers about the legalities and ramifications of EVAIO’s move. Wang Jianwei, the chairman of consultancy company Lvshangyonglian, noted that this isn’t an STO as EVAIO will first acquire equity to then tokenize it. Per Jianwai, it would be better described as an “ICO backed by assets or equity.”

Pang Lipeng of Lian Fa noted that STOs can be seen as “financialized blockchain projects,” which can be launched under supervision. The fintech firm’s move is in line with the nature of a regular fundraiser and not an investment, he added, and the money that’s set to be raised is to be invested in Smart King, and not on its development.

Guo Yatao, another lawyer at Lian Fa, added that the move is an uncertain one as after raising funds through an ICO EVAIO would have to convert the cryptocurrency it received to fiat, to then purchase the equity. This, he said, would involve a “long vacuum period” during which prices could fluctuate, equaling high legal risks.

Huo Xuewen, chief of Beijing’s Financial Supervisory Bureau, has earlier this year warned STOs are illegal in the region. Per ChainDD, the legality of the fundraising practice isn’t clear in other regions in China.