When resources are scarce, one seeks change; beware of fraud.

Recently, I attended an event within the NFT community, where industry talents discussed how to position themselves during a bear market, how teams can break through competitive barriers, or at least avoid financial distress. One guest speaker shared a new cooperation model they are currently implementing—the RBF (Revenue-Based Financing) model—claiming that practical results have been promising and offering attendees a new perspective on financing solutions.

Finding the speaker’s insights compelling, and as a criminal lawyer graduated from a finance and economics university, I will now discuss the RBF model.

 

01

What Is the RBF Financing Model?

RBF, short for Revenue-Based Financing, literally translates to financing based on revenue sharing. In essence, it means that a company exchanges a fixed amount or proportion of its operating revenue for investment capital (loosely speaking, this is akin to taking a percentage of sales). This financing method originated in the United States in the 1980s and was primarily applied in the energy and mining industries (due to their reliable revenue streams).

In recent years, RBF has gained popularity in the U.S. venture capital circle, mainly because this model does not require equity dilution. Investors do not intervene in the company’s daily operations and management, allowing entrepreneurs to firmly retain control over the company or project. It represents amore pure form of financial investment. Of course, this model imposes high requirements on the enterprise’s sustained profitability, which is the primary concern for investors under this structure. Consequently, industries with robust cash flows, such as pharmaceuticals and music, have embraced this model. For instance, Royalty Pharma, an investment firm, frequently invests in small and medium-sized biotechnology and pharmaceutical companies, helping them overcome initial R&D funding challenges, and subsequently generates substantial profits from the actual drug sales revenues in later stages.

 

02
Implementation of RBF in the Digital Collectibles Sector

 

The implementation of RBF in the digital collectibles sector is similar to the aforementioned music industry model. Typically, instead of selling artworks outright to digital collectible platforms, artists enter into revenue-sharing agreements with platforms based on the sales income generated by the digital collectibles derived from those works. This allows digital collectible issuers to list and mint works on the blockchain at zero upfront cost, while artists receive “royalties” from each subsequent transaction of the digital collectibles, creating a win-win situation (not to be confused with “winning twice”).
However, another variant of the RBF financing model has recently emerged.
Given that the RBF model requires no collateral or guarantees, project proponents can simultaneously enter into financing agreements with multiple investors to absorb investment funds, thereby leveraging the entire project. Since these investments come from the general public, I refer to this as the “crowdfunding-style RBF model.”
For example, suppose a digital collectibles project has promising prospects but requires upfront capital support. The project proponent may invite numerous investors to contribute, promising returns based on the project’s monthly revenues after launch. Attracted by the project’s strong IP, effective operations, and vibrant community, investors flock to participate. Upon launch, the project indeed skyrockets, bringing joy to all parties involved.
Nevertheless, this financing model carries certain legal risks.
 
03

Understanding “Illegal Fundraising”

Financing costs under the RBF model are higher than bank loans, requiring projects to maintain sustained and stable profitability with high gross margins; otherwise, they cannot cover various financing costs, placing significant financial pressure on invested enterprises. The crowdfunding-style RBF modelis highly prone to formingcapital pools，. If the project fails to generate high profits and cannot provide timely returns to investors, the actual controller, in an attempt to keep the scheme running, might adopt methods such as borrowing new funds to repay old debts or mismatching funds to sustain operations, while attracting new investors with promises of high returns;

alternatively, some projects may be fraudulent from the outset, where proponents merely use a pretext to defraud investors of their funds or take the money to engage in contract trading (sharing profits if successful, fleeing if losses occur). These scenarios satisfy the four elements of illegal fundraising outlined in the Judicial Interpretation on Illegal Fundraising: illegality (illegal absorption of deposits), publicity (publicly absorbing investments through various social media tools), social nature (absorbing funds from an unspecified majority), and inducement (promising certain returns). Coupled with the intent of illegal possession (appropriation for personal use, wasteful consumption, dissipation, or illegal purposes), such conduct constitutes what is commonly referred to as “illegal fundraising,” potentially involving the crimes of illegally absorbing public deposits or fundraising fraud, which can easily lead to criminal liability.

 

04

Recommendations from Mankun Law Firm

The RBF model can be utilized, but caution and restraint are essential. In light of the aforementioned criminal risks, Mankun Law Firm offers the following recommendations:

1. The RBF model imposes high requirements on project profitability;therefore, financing must be conducted within reasonable limits based on the project’s actual profitability, avoiding exaggerated projections solely for fundraising purposes;

2. Clearly stipulate the intended use of funds in investment agreements;adhering to the principle of responsibility toward investors, funds must not be used beyond the agreed scope, nor transferred to related parties through deliberate loss-making transactions;

3.establish strict financial systems, ensure proper financial segregation,strictly prohibit the formation of capital pools or pyramid schemes,and refrain from borrowing new funds to repay old debts or robbing Peter to pay Paul;

4. Address investment return issues properly and in accordance with the law;formulate solutions based on the project’s actual circumstances;avoid escalating civil disputes into criminal matters.

The above points serve as a self-inspection checklist; rectify any identified issues promptly, and remain vigilant even if none are found. Should you encounter any problems, please contact Mankun Law Firm for assistance.