Chroma.fund is taking a disruptive approach to small venture crowdfunding: it’s goodbye to donations and hello to investment, using the blockchain technology that underpins Bitcoin.
The founders of Portland, Oregon-based startup Chroma Inc. have created the Chroma.fund with the intention of reinventing crowdfunding for startups, small business ventures and multimedia projects. In terms of the basic approach, nothing has changed for those wishing to back a project: the platform looks very similar to other crowdfunding sites such as US-based Kickstarter and French rivals KissKissBankBank and Touscoprod. However, if you help to support a campaign on Chroma.fund, you will be making an investment rather than a donation.
The Chroma.fund team, L to R: Leif Schackelford, Marcus Estes, Adam Wong, K. Mike Merrill
Entrepreneurs seeking funding who decide to run a campaign on the Chroma.fund site are required to issue Chroma.Coin, a branded asset built on the Bitcoin technology. What this means is that they are selling investors a percentage of their company’s future earnings rather than a direct stake in the company.
Investing in the company’s future earnings
To take a typical example: the producer of a low-budget film has to put together a team, which s/he can only pay with part of future sales. Using Chroma.fund s/he could issue Chroma.coins, which will subsequently be distributed based on a given percentage of the film’s future earnings. Once the team has been set up, the film is completed and profits have rolled in, investors can then exchange the Chroma.coins they hold for cash payment. Chroma.fund will automatically transfer the remuneration due to investors into their bank accounts.
One of the advantages of this system is that it does not require a third party, a broker of the kind usually needed for transactions on the financial markets. When you buy shares on Wall Street, you need an intermediary in the transaction process. With our system, we don’t depend on a broker,” points out Chroma.fund co-founder Marcus Estes, explaining: “When someone invests on Chroma.fund in dollars with a traditional credit or debit card, it takes about 40 minutes to register the transaction via the blockchain, which is a sort of large public ledger. This same person is now in possession of what we call a Chroma.coin certificate.” In fact, argues Estes, transactions via Chroma.fund are more secure than traditional certification systems because the blockchain record is maintained cryptographically and operated in automated fashion via a ‘smart contract’.
Using ‘smart contracts’ to set up transactions
In the world of Bitcoin and the blockchain, one expression has now become very fashionable: people talk a lot about ‘smart contracts’. With Chroma.fund, this means guaranteeing future remuneration under certain conditions. In the above example, the trigger will be when the venture has attained a given, pre-defined level of profit.
Practically speaking, a ‘smart contract’ is a software programme which works on the ‘IF THIS, THEN THAT’ principle. Taking our example of the low-budget film, the ‘smart contract’ would work as follows: IF the venture being funded achieves X% profit, THEN Y dollars must be transferred to the investors.
There is nothing revolutionary about this principle but what is revolutionary is the fact that the entire procedure is carried out on an automated basis. Here the contract is not deposited with a notary or lawyer’s office: the registry ledger is a software programme which authorises or refuses transactions. People can put their trust in the software programme because, say the proponents of the blockchain system, as the transaction is immediately registered by all the computers running the Bitcoin protocol, it is entirely secure.
A ‘Wall Street’ for all
To date, Chroma.fund only exists and can only function in the US state of Oregon. United States federal laws governing investment securities, in particular the National Securities Markets Act, stipulate that only investors with a defined level of revenue and a given amount of capital are authorised to invest in certain types of, usually unregistered, financial assets. ‟In other words, only investors who qualify as ‘very rich’ can today go on to the markets in the United States,” Estes underlines. However, Oregon has passed an exception to this legislation, a new state administrative rule known as the ‘Oregon Intrastate Offering Exemption’ which allows people of modest means to invest in these riskier assets, up to a maximum of $2,500 per investor. ‟This has enabled us to launch Chroma.fund in Oregon and we’ll perhaps be able to do so soon in other US states where there is interest,” he predicts.
Apart from transcending commonly held ideas about crowdfunding platforms, Chroma.fund’s vision is part of a much broader initiative: ‟Chroma.fund is an investment crowdfunding platform that allows anyone in Oregon to make investments in local businesses, products, and creative projects,” announces the website. Marcus adds: ‟We’d like even small companies and startups to be able to draw on the financial markets. We’re trying to build a marketplace that’s accessible to all”.
With extra reporting by Pierre Pariente