As a primary-market investor, one reviews quite a few projects a year, and some investors may right now have two starkly different documents before them: one is a capital increase agreement for a SaaS company, thick as a book, opening onto liquidation preference, anti-dilution, board seats, valuation adjustment mechanisms and repurchase rights, and so on; the other is a token subscription agreement for a Web3 project, thin as a letter: allocation, unit price, unlock schedule, and the starting point of the lock-up.
The former is a full set of rules already written into contracts, judicial precedents and regulatory documents; how the terms should be designed, where disputes should be resolved, and who bears the loss—many people have answered this question. Behind the latter there is a great deal of blank space, but the blank space is not a vacuum; the rules wait elsewhere, and only appear on the day something goes wrong.
I spent six years in primary-market equity financing, helping founders revise their business plans, accompanying them through due diligence, and going through the terms clause by clause with investors; in the past two years I have practiced criminal law, and I see the same actions read another way under criminal law.
I. Two types of financing paths for Web3 projects
The first type: money in exchange for equity.
Negotiating valuation, signing a capital increase agreement, closing, and making the industrial and commercial registration change—no different from the financing of any internet company.
The second type: money in exchange for a token that will later be launched and circulate.
What is obtained is not ownership of the company, but a set of rights within the network, agreed by a subscription agreement.
Both kinds of money can also appear in the same company at the same time: an equity round proceeds as usual, and the investor is separately given a right to future tokens.
But not all Web3 projects need tokens. For protocol-type projects such as public chains, DeFi and DePIN, the token is part of how they operate; for enterprise-facing companies such as wallets, custody, compliance tools and data services, they can thrive without issuing tokens, and their financing methods are no different from those of ordinary technology companies.
II. Evolution of offshore token financing paths for Web3 projects
The offshore market has taken a detour along this path:
How SAFT Was Invented
SAFT, the Simple Agreement for Future Tokens, was launched in October 2017 by Protocol Labs and Cooley LLP, and was first used for Filecoin. The design was a two-step approach: first, the agreement itself was treated as a security and sold only to accredited investors, relying in the United States on the Regulation D private placement exemption; second, delivery would occur after the network went live and the tokens had actual utility, in the expectation that the tokens at that point would no longer constitute securities.
Put simply, it sought to use a design of "first selling to professional investors, and delivering only once the product is actually up and running" to circumvent the registration obligations that a public offering would otherwise require.
How It Was Rejected
In March 2020, in SEC v. Telegram, the United States District Court for the Southern District of New York issued a preliminary injunction. Telegram had sold approximately USD 1.7 billion of token purchase agreements to accredited investors through a Regulation D private placement. The court held that the SAFT and the tokens subsequently delivered under it were "economically inseparable," that the purchasers had intended from the outset to resell for profit on the secondary market, and that the transaction as a whole constituted an unregistered securities offering. The result was termination of the TON/Gram project, inability to deliver Gram tokens, return of approximately USD 1.224 billion, and an additional USD 18.5 million penalty.
In September of the same year, summary judgment was also entered in SEC v. Kik, on the same logic: the private placement stage and the later public offering constituted a "single integrated offering," and the matter was ultimately settled for USD 5 million.
What Is Used Now
After these two cases, the pure SAFT has largely exited the U.S. market. Variants still exist in some offshore jurisdictions, but within the United States venture capital has generally shifted to the SAFE plus Token Warrant model.
The SAFE governs equity. Y Combinator launched it in 2013 and updated it in 2018 to the post-money version. Investors provide funds now, and the instrument converts into equity upon an agreed event, with no maturity date and no interest. The token side is separated out through a separate subscription warrant or side letter. The advantages are clear: the equity portion remains within a mature exemption framework, and token rights and token risk are documented separately, without disrupting the capitalization table.
This is not a universal cure, however: even if the transaction is split into two agreements, a SAFE and a Token Warrant, a court will still conduct an analysis of the overall economic substance of the transaction as a single integrated offering, and will then apply the Howey test to determine whether it constitutes a security. A formal split into two documents does not automatically confer an exemption.
Other common forms include pure token purchase agreements with delivery after the TGE, token allocations attached to equity rounds, and non-dilutive grants by ecosystem foundations.
A public token offering made directly to retail investors globally remains a high-risk activity in the United States, and most projects open subscriptions only to accredited investors.
Where are overseas rules heading?
The EU's MiCA (Regulation (EU) 2023/1114) has applied in full since 30 December 2024. Public offerings of crypto assets require a white paper and prior notification to the competent authority, and service providers must obtain a licence.
Hong Kong has a licensing regime for virtual asset service providers, and stablecoin issuance is governed by separate dedicated legislation.
In one sentence: overseas is not a regulatory vacuum. Financing models such as SAFT, once regarded as a compliant solution, have been rejected by judicial precedents, but the relevant regimes are still gradually taking shape.
What this means for domestic teams
First, building a Web3 project and raising funds by issuing tokens are two different things.
Many teams complete financing at the equity level and retain tokens as tools within the ecosystem; such arrangements are assessed no differently from traditional projects.
Second, using tokens as a fundraising tool and offering them to the public.
This has a clear characterization in China. The 2017 Announcement No. 94 issued by seven ministries and commissions expressly states: "Token issuance financing is in essence an act of illegal public financing without approval."
Note where the emphasis lies: what is characterized is the structure of the fundraising conduct, not the project itself, nor the technology itself; who is collecting the money, from how many people, what consideration is given, and what has been promised are the objects of assessment.
Third, overseas issuance has its own framework, but taking the issuance offshore does not take the risk offshore.
Article (13) of Yin Fa [2026] No. 42 addresses precisely this layer: without the lawful and compliant consent of the relevant authorities, domestic entities and the overseas entities they control may not issue virtual currencies overseas; where the control relationship, the place of decision-making and the flow of funds are domestic, the assessment remains domestic.
III. Early-Stage Financing of Web3 Projects: Equity as the Vehicle, Hybrid Structures as the Mainstream
Many Web3 projects still use equity structures as the financing vehicle in their early stages; some involve pure equity financing, while a large number of protocol-type projects adopt a hybrid model of "SAFE + Token Warrant," under which funds enter the corporate equity entity, but investors are simultaneously granted future token rights.
Projects that conduct pure token fundraising at a genuinely early stage are now in the minority.
Even where a pure equity structure or a hybrid structure of equity plus token warrants is adopted, equity financing of domestic Web3 projects must still comply with domestic regulatory rules: the number of shareholders of a limited liability company may not exceed 50; where the cumulative number of offerees in a targeted issuance by a joint stock company exceeds 200, this constitutes a public offering, and conducting it without registration is unlawful. If the funds come from private funds, the rules on qualified investors, caps on the number of investors, the prohibition on public solicitation, and the prohibition on promising guaranteed principal or returns must also be strictly observed.
Many people believe that establishing an offshore entity for a Web3 project can circumvent the above rules, but an offshore structure is merely a financing vehicle and does not automatically eliminate domestic legal liability; nor should equity financing of Web3 projects be treated as a special species—once a dispute or criminal risk arises, the approach to handling it overlaps heavily with that for ordinary SaaS startups.
IV. Two Special Variables in Web3 Financing: Cross-Border Structures and Investor Composition
Structure:Web3 projects commonly combine an offshore entity with a domestic operating entity, with capital from USD funds entering the offshore entity. This is a technical financing matter and does not change the legal nature of the conduct, but it makes it difficult to ascertain who the decision-makers are and where the money comes from and goes. This creates both evidentiary difficulties and room for defense arguments. Many projects place the contracting entity and the token-issuing entity overseas, while the core business team, the actual controller, and all business decisions remain in China. Once a dispute arises or a criminal case is filed, practical problems emerge: difficulties in cross-border evidence collection, fragmented fund trails, and confusion over the boundaries of liability between domestic and offshore entities. It is not permissible to assert complete exemption from domestic legal constraints simply on the ground that the place of contracting or the place of entity registration is offshore.Investor composition:USD funds and RMB funds differ in their availability in this field, and many teams have raised their two successive financing rounds from these two types of institutions respectively. The two types of capital are subject to the regulatory rules of different jurisdictions, and they differ greatly in investment logic, investment agreement terms, qualified investor standards, and subsequent exit paths. Where a single financing round brings in both domestic RMB funds and overseas USD funds, compliance complexity rises further: a single fundraising exercise must simultaneously satisfy two regulatory systems, and any defect in the fundraising process will give rise to multiple complications in cross-border jurisdiction, tracing of funds, and disposal of property involved in the case, thereby increasing the difficulty of legal handling.
V. The Five Most Critical Differences Between Ordinary Equity Financing and Token Fundraising
First, what is exchanged for the money is different.
Equity is an instrument with a clearly defined identity: capital contribution certificates, the register of shareholders, the articles of association, and industrial and commercial registration; even nominee shareholding arrangements that are not registered are recognized by judicial interpretations as giving rise to a contractual relationship.
However, tokens are not recognized within China as a lawful fundraising instrument. As to the attribute of property, they may fall within the scope of protection of network virtual property under Article 127 of the Civil Code, but the protection of property rights and interests does not equate to recognition of the lawfulness of token issuance and fundraising activities.
If a dispute arises, on the equity side the question contested is "how many shares should be given to me, and can I exit"; on the token side, the first question to be answered is "what exactly is this thing".
Second, from whose hands the money comes.
On the equity side, qualified investors are screened out: compliance requirements require you to screen them, so the target audience is inherently specific.
On the token side, whitelists, community groups, and public subscriptions expand the circle outward ring by ring, making it difficult for the target audience to be specific.
Whether the target audience is specific is a by-product of the process in equity financing, but in token fundraising it is a constitutive element of criminal law assessment.
Third, how the price is set.
One is a calculable number: revenue, profit, comparable transactions, priced once and fixed once written into the agreement.
The other is a story that is told: total supply, release curve, initial circulating ratio, market capitalization expectations, priced in rounds, each round more expensive than the last.
The same "discount" carries completely different meanings in equity and token fundraising: in equity financing, early investors subscribing at a discount is reasonable consideration for bearing high risk and is an industry practice; whereas in token fundraising, if a layered structure is formed in which early participants acquire tokens at low prices and later buyers take over at high positions, this will become important adverse evidence in the judicial assessment of the fundraising model.
Fourth, what the investors receive.
On the equity side, there is a full set of protective provisions: liquidation preference, anti-dilution, valuation adjustment repurchase, and veto rights;
On the token side, there is an economic model: lock-up and release, staking returns, governance voting, and repurchase and burn.
A reminder is warranted here:
Provisions used in traditional financing to protect investors, if transplanted directly into token fundraising scenarios, may well directly satisfy the constitutive elements of the "inducement" element of illegal fundraising under criminal law: repurchase equates to a promise to repay principal, principal protection and fixed returns equate to a promise to pay interest, and personal guarantees by founders may also be assessed as disguised repayment of principal and payment of interest. Industry practice originally intended to "protect investors" may instead deliver the inducement element—the hardest of the four elements of illegal fundraising to prove—directly to the judicial authorities.
Fifth, when the invested money can come back.
One is a five-to-ten-year exit cycle: listing, mergers and acquisitions, secondary share transfers, and repurchases; it is normal for capital invested to remain locked up for a long period. The other is tradability upon launch, with tokens sellable once the lock-up period expires, completing a cycle in a few months to a year.
Risk therefore sits at different points along the timeline: on the traditional side, risk remains at the end—valuation adjustment repurchases falling due, a listing failing to materialize, shareholders turning against each other; on the token side, risk takes shape at the starting point—the project later succeeding does not change the nature of that earlier act.
Lawyer's Observations
In equity financing, whether for traditional projects or Web3 projects, expressions such as principal protection, repurchase, and fixed returns should be eliminated from financing documents as far as possible.
The list of fundraising targets, external publicity messaging, and investor headcount statistics should be retained in full from the very start of fundraising in accordance with evidentiary standards. Risks often surface only years later, and what can help you then is the written material retained early on.
If a project team plans to issue tokens, it must distinguish between tools and fundraising, and think clearly about three questions: from whom funds are raised, what has been promised, and where the money goes.
Those who understand traditional financing most need to guard against directly applying the clause-thinking of equity financing to token scenarios; those who understand tokens most need to remember that the act of fundraising itself carries significance for criminal-law assessment.
