In April 2024, Du Jun announced the suspension of the ABCDE fund and launched a new incubation brand, Vernal. The primary investment was paused, but the incubation business was accelerated. This was not only a shift in his personal path, but also to some extent foreshadowed the change in the Web3 investment paradigm.

In the past few years, the strategy of crypto VCs has been clear: invest in projects, wait for launch, and exit and cash out. But now that the exit path is blocked and the valuation system has collapsed, many institutions have begun to realize that if they continue to be "financial investors", they may not even be able to watch the whole show. As a result, a group of capital began to change their posture - no longer betting on project growth, but personally taking action to package resources, capabilities, and networks directly to push projects from 0 to 1.

This is the logical starting point of "incubation investment". It is not an extension of traditional VC, but a brand-new participating role - both a shareholder and a collaborator; both investing capital and bearing operational pressure; even in terms of legal responsibility, the boundaries are far more blurred than in the past.

In this article, Portal Labs will take you to dismantle the key logic and compliance blind spots behind incubation investment.

For high-net-worth investors, how can they neither be absent nor cross the line on this road of deep resource binding and high legal risks?

The logic and gameplay of incubation investment

In the early years, as long as a financing news was released, the Web3 project could take off instantly, the community would explode, and the exchanges would line up. But now, Web3 is no longer the era of "XXX completed financing".

In this cycle of scarce narratives and dispersed traffic, capital is no longer an omnipotent driving force. More and more investors are beginning to realize that if you want to make a project really run, it is not enough to just throw money, you have to do it yourself.

So, "investing in projects" began to become "doing projects".

This is the essence of incubation investment. You are not just buying an early ticket, but using resources, capabilities, and networks to exchange for a higher proportion of early shares, and using real collaboration to help the project go from 0 to 1.

In practice, the approach of incubation investment is usually a set of "combination punches":

• Ecological empowerment: Integrate traffic entry, wallet integration, and community user import to ensure that the project has "people using and people watching" at the initial stage of launch;

• Technical support: Including underlying architecture optimization, security audits, and product testing, which are "engineering jobs" that cannot be done with money;

• left;">Market promotion: Conduct content marketing, community fission, joint activities, etc., to increase exposure and conversion throughout the entire chain;

• Compliance collaboration: Pre-investment due diligence, license application, and legal advisory must be arranged in advance. Don't wait until something goes wrong to find a lawyer.

The most typical case is Binance Labs.

Polygon and Injective were able to rush to the forefront in those days, relying not only on the amount of financing, but also on the substantial support given by the Binance ecosystem: wallet docking, exchange listing, brand endorsement, legal consultation... In other words, it is the complete process of "helping to get on the table".

A similar path is now being copied by Vernal (a new incubation brand established by Du Jun): while investing in projects, it also brings projects into the market, turning "running with" into "co-construction".

It should be noted that even some large funds that seem to be still doing primary investment, such as a16z, have long quietly integrated incubation into the system. They provide recruitment support, government communication channels, compliance framework design, and even opened Crypto Startup School to systematically train teams on how to start from scratch.

This is no longer the logic of "I give money, you fend for yourself" in the past.

In short, incubation investment is a heavy collaboration game. It does not treat the project as a "financial target", but as a "long-term partner".

If you just want to invest and leave, you may not be able to play it. But if you have resources, a team, and the ability to collaborate systematically - then you can indeed use this path to obtain returns far higher than the market average.

Characteristics and legal challenges of incubation investment

But then again, incubation investment is not a panacea.

It can indeed bring stronger project synergy and a more complete ecological collaboration chain - but it also pulls investors into a more complex legal context. Especially in the current context of accelerated tightening of global supervision, the deeper the participation, the greater the responsibility, and the possibility of stepping on thunder also increases.

If VC is "waiting after investing", then incubation is more like "playing the game in person". And this game is not always fair or safe.

Portal Labs recommends looking at the "high risk + high participation" characteristics of this path from three perspectives:

1. High participation and blurred identity boundaries

The identity of a traditional VC is relatively clear: investor, observer, and non-interference in project operations. But incubation is different. You may appear in product meetings, participate in the design of Token economic models, and even find wallets, discuss online listings, and build communities in person.

It sounds like "helping a little more", but the law does not see it that way.

Are you an investor? An advisor? Or a "de facto controller"?

If you do not clearly draw the line in the contract and structure, the regulatory authorities or project owners may determine that you constitute "related-party transactions", "actual control" or "shadow director" and bear joint legal liability once they pursue accountability.

Especially when the project involves fraud, illegal financing or user asset losses, you may not be a bystander, but a "second defendant".

2. Diverse paths to income and heavier compliance responsibilities

One ​​of the benefits of incubation is that there are more diverse ways to exit.

You may participate in project revenue sharing, design Token Buyback mechanisms, bind ecological profits, and even collect product income rights. It sounds like an upgrade in capital efficiency, but it also means that you need to deal with more diverse compliance challenges. For example:

• Does it constitute an unlicensed securities issuance?

• Does the income agreement violate the local dividend supervision?

• Is tax declaration or filing required?

• Does Token Buyback involve manipulating market prices?

For these issues, if you use a compliance framework to handle them, the risks are controllable; but if you are an individual + directly involved, it is equivalent to "running naked", and all risks are borne by yourself.

3. Token is still a "high-risk area"

No matter what you are incubating, RWA, DePIN, ZK or AI narrative, the final question that cannot be avoided is:Should you issue tokens?Once a token is issued, the issue of the attributes of tokens in various countries cannot be avoided.

• In the United States, the SEC's attitude is almost one-size-fits-all, and functional tokens can easily be classified as securities;

• In Hong Kong, the SFC requires that high-volatility tokens are only available to professional investors, and the online process of many projects is stuck in the access mechanism;

• In Singapore, if the token involves stable income or predictable returns, it must be filed with MAS in advance, otherwise it may be regarded as an illegal issuance.

What's more troublesome is that many incubation projects adopt the "global collaboration + multi-location deployment" model. For example: you set up a team in Singapore → issue tokens in Cayman → finally want to list on exchanges in South Korea or Japan. It sounds like a clear division of labor and reasonable logic, but in the eyes of regulators, this set of operations may have crossed more than one red line.

Compliance path and structure of incubation investment

Faced with the complex situation of "deep involvement + cross-border operations + multi-role benefits", if you want to safely enter incubation investment, the most core ability is not to invest in projects, but to build a compliance structure.

Specifically, Portal Labs recommends starting from three key dimensions:

1. Do a good job of "identity isolation"

Whether it is to provide money or resources, Portal Labs does not recommend that investors "directly bind to the project as a natural person". The reason is simple: if something goes wrong with the project, the individual will be responsible for the bottom line, which will expose investors to highly uncertain legal risks.

A more mature approach is to set up an exclusive investment structure overseas. Common paths include:

• Cayman SPV: used to hold Token shares and distribute returns, flexible and easy to use, with controllable costs, it is the standard configuration of current crypto funds;

• BVI holding company: suitable for equity investment, combined with trust or family office structure for tax optimization;

• Singapore exempted fund structure: suitable for family capital portfolio management, and also conducive to subsequent compliance operations such as tax declaration and bank account opening. These structures are not only tax and settlement tools, but also the first firewall for isolating identity risks and managing compliance responsibilities. 2. Token design needs to be "de-securitized" in advance Many countries do not object to you issuing tokens, but they object to you issuing a token that looks like a "securities".

  If you are in a restricted area, such as mainland China, then don't move. But if you choose a region with relatively loose policy space, then from the beginning of the design, you must stay away from the high-voltage line of supervision.

  Pay attention to the following optimization points:

  • Use SAFT to bind rights first and postpone issuance to avoid doubts about immediate "securities issuance";

  • Do not promise returns, even if it is "annualized 3%", it may be characterized as an investment contract by regulators;

  • Highlight the “usage” of tokens rather than their “selling points”, such as using them to offset handling fees, participate in governance, and exchange for services, rather than “waiting for appreciation”; and bind them to ecological behaviors, such as lock-up + task incentives, and unlocking usage scenarios, rather than linear release. This type of “behavior binding model” is more likely to be accepted by regulators as a functional token. In a word, it’s okay to issue tokens, but don’t issue them as if you are selling equity.

    3. Match the "landing jurisdiction" according to market goals

    Regulatory environments in different regions vary greatly. If you choose the wrong starting place, it may not be a matter of less profit, but a failure to go online at all.

    Therefore, many people like to see who has more money and whose exchange is easier to negotiate when issuing coins, but this is actually wrong. The first step in structural design should be to see "where do you hope this project will eventually land."

    • Are you planning to target American users

      ? Then don't touch Reg A, the process is long and expensive, it is recommended to directly look at Reg D (for qualified investors) or Reg S (overseas issuance) for exemption;

    • Preparing to start in Hong Kong or Singapore?Then get in touch with the local VASP system as early as possible, or enter the regulatory sandbox for small-scale testing;

    • Uncertain about the market at the beginning?Then you can consider the flexible combination structure of "Cayman + BVI", so that you can flexibly switch paths no matter where you apply for a license later.

    These structures are not necessarily complicated, but you need to build them before the project is launched and the token model is not determined. When the market feedback comes, it will be too late to go back and make up for the compliance.

    Who is incubation investment suitable for?

    In the final analysis, incubation investment is not a "betting game" but a "long-term collaboration".

    It requires not only funds, but also a comprehensive investment of time, resources and strategic synergy. You must not only have financial support, but also the ability to coordinate project implementation and integrate resources across domains.

    But if you prefer an asset allocation method of "light participation and high liquidity", or hope to "invest and leave at your own risk", then incubation investment may not be your ideal field.

    Of course, if you are a participant who believes in long-termism and is willing to take root in the industry ecosystem, and is willing to truly integrate your experience, resources and vision into the growth path of a project, then incubation investment brings not only potential multiple returns, but also an opportunity to build with the future.