New Paradigm of Web3 Investment: Opportunities and Challenges of Incubation Investment

Recently, there has been a significant shift in the Web3 investment landscape. With Du Jun announcing the suspension of the ABCDE Fund and the launch of the new incubation brand Vernal, we are witnessing a shift from traditional primary investments to incubation businesses. This change not only reflects an adjustment in personal investment strategies but also heralds a major transformation in the overall Web3 investment model.

In the past few years, the model for cryptocurrency venture capital has been relatively simple: invest in projects, wait for them to go live, and exit for profit. However, in the current market environment, exit channels are blocked and valuation systems have collapsed, leading many investment institutions to realize that merely acting as financial investors may be unsustainable. As a result, some capital is beginning to adopt new strategies, no longer simply betting on project growth, but directly participating in them, integrating resources, capabilities, and networks to help projects develop from scratch.

This is the core concept of "incubation investment." It is no longer an extension of traditional venture capital, but rather a completely new way of participation. In this model, investors are both shareholders and partners; they must invest capital and also bear operational responsibilities. This deep involvement also makes the boundaries of legal responsibilities more ambiguous.

For high-net-worth investors, how to actively participate without crossing boundaries on this resource-deeply bound and legally risky road has become a key issue.

The Core Logic of Incubation Investment

In the current Web3 industry environment, relying solely on financing news is no longer sufficient to drive project success. Capital is no longer an all-powerful driving force; investors need to engage more deeply in project operations.

The essence of incubative investment is to transform "investment projects" into "development projects". Investors are not merely purchasing early equity, but are exchanging their own resources, capabilities, and networks for a higher proportion of early shares, helping the project develop from scratch through actual collaboration.

This investment model usually includes the following aspects:

1. Ecological empowerment: Integrating traffic entry, wallet integration, and community users to provide a user base for the early stage of the project.

2. Technical Support: Provide professional services such as underlying architecture optimization, security auditing, and product testing.

3. Marketing Promotion: Responsible for content marketing, community operation, and joint events, to increase project exposure and user conversion rates.

4. Compliance Assistance: Provide services such as due diligence before investment, license application, and legal consultation to ensure the project operates in compliance.

The investment department of a well-known trading platform is a typical representative of this model. They not only provide financial support but also offer comprehensive support for projects, including wallet integration, listing opportunities, brand endorsement, and legal consulting.

Even some large funds that seem to still focus on primary investments, such as a16z, have already integrated the incubation concept into their investment system. They provide project parties with recruitment support, government relations coordination, compliance framework design, and even establish specialized crypto entrepreneurship schools to systematically train teams on how to operate from scratch.

In short, incubator investment is a model of deep collaboration. It views projects as long-term partners rather than merely financial investment objects. This model requires investors to have resources, team, and system collaboration capabilities, but it also has the potential to bring returns above the market average.

Characteristics and Legal Challenges of Incubation Investments

Although the incubator investment model has its advantages, it also brings more complex legal issues. As the global regulatory environment becomes increasingly stringent, deep involvement in project operations may increase legal risks for investors.

Compared to the "post-investment waiting" model of traditional venture capital, incubator-type investment resembles "participating in the race". This participation is not always fair or safe. We can understand the "high risk, high participation" characteristics of this model from the following three aspects:

1. High participation, blurred identity boundaries

The role of traditional venture capitalists is relatively clear: funders and observers, who do not directly participate in project operations. However, in the incubation model, investors may participate in product meetings, design token economic models, and even be directly responsible for wallet integration, launch negotiations, and community building.

This level of deep involvement, while beneficial for project development, may also raise legal issues. The identity of the investors may be questioned: are they merely investors? Advisors? Or "actual controllers"?

If the contract and structural design are not clear enough, once issues arise, regulatory agencies or project parties may determine that investors constitute "related party transactions," "substantive control," or "shadow directors," thereby bearing corresponding legal responsibilities.

Especially when a project involves fraud, illegal financing, or loss of user assets, investors may go from bystanders to defendants.

2. Multiple ways to earn, higher compliance requirements

One advantage of the incubation model is the diversity of exit strategies. Investors may participate in project revenue sharing, design token buyback mechanisms, bind ecological profits, and even obtain product revenue rights. Although this diversified revenue model increases capital efficiency, it also brings more compliance challenges, such as:

• Does it constitute an unlicensed securities issuance?
• Does the profit distribution comply with local regulatory requirements?
• Is it necessary to file or register tax returns?
• Does token buyback involve market price manipulation?

If a compliant architecture is used to address these issues, the risks can be controlled. However, if individuals participate directly, they will bear the risks entirely on their own.

3. Tokens are still a high-risk area

Regardless of whether the project focuses on physical assets, decentralized physical infrastructure, zero-knowledge proofs, or artificial intelligence, it may ultimately face the question of whether to issue tokens.

Once a token is issued, it is impossible to avoid the issue of how different countries recognize the nature of the token.

• In the United States, regulators have a nearly one-size-fits-all approach to tokens, meaning even functional tokens may be classified as securities.
• In Hong Kong, regulatory requirements stipulate that highly volatile tokens are only available to professional investors, which restricts the launch process for many projects.
• In Singapore, if a token involves stable income or expected returns, it needs to be filed with the regulatory authorities in advance, otherwise it may be considered an illegal issuance.

Moreover, it is more complicated that many incubation projects adopt a "global collaboration + multi-location deployment" model. For example, teams are formed in Singapore, tokens are issued in the Cayman Islands, and finally listed on trading platforms in South Korea or Japan. This seemingly reasonable operational model may have already violated multiple regulations in the eyes of regulators.

Compliance Strategies for Incubation Investment

In the face of the complex situation of "deep participation + cross-border operations + multi-role benefits", the key to safely conducting incubative investments lies not in selecting projects, but in building a compliant framework.

Specifically, we can start from three key aspects:

1. Achieve "identity isolation"

It is not advisable for investors to directly bind themselves to the project as individuals, whether providing funds or resources. The reason is simple: if the project encounters issues, individuals will bear legal responsibility directly, which exposes investors to highly uncertain legal risks.

A more mature approach is to establish a dedicated investment structure overseas, commonly including:

• Cayman Islands Special Purpose Vehicle (SPV): Used for holding token shares and distributing profits, flexible and practical, with controllable costs, it is the standard configuration for current crypto funds.
• British Virgin Islands (BVI) holding company: Suitable for equity investments, combined with trust or family office structures for tax optimization.
• Singapore Exempt Fund Structure: Suitable for family capital for portfolio management, and also beneficial for subsequent tax declarations, bank account openings, and other compliance operations.

These structures are not only tax and settlement tools but also the first line of defense in isolating identity risks and managing compliance responsibilities.

2. Token design needs to "de-securitize" in advance.

Many countries do not oppose the issuance of tokens, but are against the issuance of tokens that seem to be "securities."

If the activities are completely prohibited in your area, then do not get involved. However, if you have chosen a region with relatively lenient policies, then it is important to steer clear of regulatory red flags from the design stage.

You can focus on the following optimization points:

• Use SAFT (Simple Agreement for Future Tokens) to bind rights first and postpone issuance, avoiding immediate questioning of "securities issuance."
• No profit guarantees, even a low yield promise like "annualized 3%" may be classified as an investment contract by regulatory authorities.
• Emphasize the "utility" of the token rather than its "investment value", such as being used to offset transaction fees, participate in governance, or exchange for services, instead of being used to "wait for appreciation".
• Bind tokens to ecosystem behaviors, such as lock-up plus task incentives and unlocking use cases, rather than simple linear release. This type of "behavior binding model" is more likely to be accepted by regulatory agencies as functional tokens.

In short, tokens can be issued, but do not make it look like selling equity.

3. Choose the "landing jurisdiction" based on market objectives.

The regulatory environment varies greatly across different regions, and choosing the wrong starting point may prevent the project from going live.

Therefore, many people prefer to consider places with sufficient funding and easy negotiation with trading platforms when issuing tokens, but this line of thinking may be misguided. The first step in architectural design should consider "where you ultimately want this project to land."

• If the plan targets U.S. users, do not consider Reg A, as the process is lengthy and expensive. It is recommended to directly consider Reg D (for accredited investors) or Reg S (offshore issuance) for exemptions.
• If you are planning to start in Hong Kong or Singapore, you should familiarize yourself early on with the local Virtual Asset Service Provider (VASP) system, or enter a regulatory sandbox for small-scale testing first.
• If there is uncertainty about the market affiliation at the beginning, consider a flexible combination structure like "Cayman Islands + British Virgin Islands" so that the path can be adjusted flexibly regardless of where the license is applied for later.

These structures do not necessarily need to be complex, but they must be established before the project goes live and the token model is finalized. Adding compliance measures after market feedback emerges is usually too late.

Suitable Audience for Incubation Investment

Overall, incubation-type investment is not a simple "betting game", but a "long-term cooperation".

It not only requires financial investment but also a comprehensive investment of time, resources, and strategic coordination capabilities. Investors not only need financial support but also the ability to assist in project implementation and integrate resources across different fields.

If you prefer a "light involvement, high liquidity" asset allocation approach, or wish to "invest and walk away, with risks borne by yourself," then incubation-type investments may not be suitable for you.

However, if you are a participant who believes in long-termism and is willing to root yourself in the industry ecosystem, willing to truly integrate your experience, resources, and insights into the growth process of the project, then incubation-type investment not only has the potential to bring substantial returns but also represents an opportunity to co-create with the future.