NFT Terms
NOT FOR DISTRIBUTION, PUBLICATION OR RELEASE, DIRECTLY OR INDIRECTLY, IN WHOLE OR IN PART, IN OR INTO AUSTRALIA, CANADA, CHINA, HONG KONG SAR, JAPAN OR ANY OTHER JURISDICTION IN WHICH SUCH DISTRIBUTION, PUBLICATION OR RELEASE WOULD BE PROHIBITED BY APPLICABLE LAW.
THE AGREEMENT DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY STATE OR OTHER JURISDICTION IN WHICH AN OFFER OR SOLICITATION IS NOT AUTHORIZED.
The NFTs and OilXCoins have not been registered under the United States Securities Act of 1933, as amended (the “Securities Act”), or any United States state securities laws or the laws of any foreign jurisdiction. The NFTs and OilXCoins that will be received by investors will be offered and sold only to (A) outside the United States to non-U.S. Persons who are not purchasing for the account or benefit of a U.S. Person as defined under Regulation S under the Securities Act (“Regulation S”) or (B) in the United States to “accredited investors” (as defined in Regulation D under the Securities Act (“Regulation D”) pursuant to Rule 506(c) thereof, and other exemptions of similar import in the laws of the states and other jurisdictions where an offering of NFTs or OilXCoins will be made. NFTs sold to investors in the United States will be subject to restrictions on transfer as set forth below.
The Issuer will not be registered as an investment company under the United States Investment Company Act of 1940, as amended (the “Investment Company Act”), and investors will not be afforded the protections of the Investment Company Act.
DeXentra Royalties NFT – Terms and Conditions
This document contains the final terms and conditions (the "NFT Terms") of the Ethereum-based non-fungible digital tokens (the "NFTs") issued by DeXentra GmbH, Zug, Switzerland (the "Issuer" or "DeXentra"). The NFT Terms govern the rights and obligations of the Issuer and of the holders of the NFTs (the "Holders").
1 | Rights incorporated in the NFTs |
1.1 | One-time entitlement to OilXCoin |
1.1.1 | Principle Upon issuance, each NFT shall incorporate a right (the "Entitlement") to the delivery without additional contribution of another instrument issued by the Issuer incorporating a contingent claim to certain assets of DeXentra (such other instrument, the "OilXCoin"). The number of OilXCoins to which each Holder will be entitled to as part of the Entitlement shall range from 1,000 to 1,000,000 per NFT. The exact number shall be agreed upon with the Issuer with each Holder, be specific to each NFT and be recorded in the code of the NFT. A Holder shall be authorized to exercise the Entitlement in whole or in part, as the case may be in one or several transactions and at any time until termination of these NFT Terms, it being understood that once the Entitlement shall have been exercised in full in respect of an NFT, such NFT shall no longer entitle its Holder to receive any OilXCoin. It shall be the responsibility of each prospective Holder to verify (as the case may be by enquiring with the seller) whether the Entitlement incorporated in any NFT(s) they contemplate acquiring has been exercised and to what extent, and the Issuer accepts no responsibility whatsoever in this respect. The Entitlement shall be restricted to delivery of OilXCoins entered onto the Ethereum distributed ledger. Except as the Terms and Conditions of the OilXCoin may expressly provide, Holders shall not be entitled to the delivery of OilXCoins recorded onto other distributed ledgers. |
1.1.2 | Delivery of OilXCoins Before or upon issuance of the OilXCoin, the Issuer shall set forth a procedure for Holders to claim their OilXCoins, such procedure to be notified to Holders in accordance with Section 4 of these NFT Terms. Upon Holders claiming relevant OilXCoins in accordance with such procedure and provided that such claim is otherwise made in accordance with these Terms and applicable laws, the Issuer shall deliver OilXCoins to the Ethereum distributed ledger address (a "DLA") on which the Holder is holding the NFT. |
1.1.3 | Vesting of OilXCoins OilXCoins acquired by the Holder further to the Entitlement are subject to a vesting period during which such OilXCoins may not be transferred, encumbered or otherwise disposed of, whether for consideration or free of charge. The duration of this vesting period shall be determined in accordance to the relevant NFT's Tier, as follows:
As used herein, the "Tier" of an NFT depends on its initial Entitlement, whereas a NFT shall be:
In respect of any OilXCoin, the vesting period shall commence for Holders who acquired the NFT: (i) prior to May 13, 2025, at 13:00 UTC, exactly at such time; or (ii) on or after May 13, 2025, at 13:00 UTC, upon delivery of the NFT. Delivery of OilXCoins to all such Holders shall occur upon completion of the vesting period, following exercise of their Entitlement. The Issuer reserves the right to implement technical measures to enforce compliance with the vesting terms. |
1.2 | Royalty |
1.2.1 | Principle Each NFT will entitle the Holder to receive a portion of the Native Transaction Fees levied on certain transactions on the OilXCoin (the "Royalty"), such Royalty to be paid in OilXCoin only and to depend on each NFT's Tier. As used herein the "Native Transaction Fees" are fees levied in OilXCoin by the Issuer on transfers of OilXCoins entered on the Ethereum blockchain (including without consideration) when the following conditions are fulfilled ("Qualifying Transfers"):
Subject to the foregoing and Section 1.2.2, the Native Transaction Fees shall correspond to 0.75% of the OilXCoins transferred in the Qualifying Transfers. The Native Transaction Fees shall therefore be levied, and the Royalty paid, in OilXCoins. |
1.2.2 | Transfers exempted from Native Transaction Fees Notwithstanding anything to the contrary in Section 1.2.1, the Issuer may, at its discretion: (a) exempt certain transfers of OilXCoins or certain DLAs from the Native Transaction Fee, including, but not limited to:
(b) after giving no less than 90-day notice to the Holders in accordance with Section 4, reduce or cancel the Native Transaction Fee, if so decided by a vote of the holders of the OilXCoin in accordance with the terms of the OilXCoin, Section 5 2nd paragraph of these NFT Terms notwithstanding. The Holder acknowledges that the Issuer has significant discretion when setting the Native Transaction Fee and that it is even possible that there will in the future be no Native Transaction Fee at all, in which case the NFTs may have limited or no residual value. |
1.2.3 | Royalty calculation The Royalty due in respect of a specific NFT shall be determined in accordance with the following formula:
where:
The Issuer shall be entitled to increase the Fees Portion above 12%. If the Issuer has increased the Fees Portion above 12%, the Issuer shall then be entitled to decrease the Fees Portions to any percentage above or equal to 12%. (a) The Issuer has sold all of its OilXCoins and has determined that it needs to mobilize additional resources (by selling OilXCoins) to pay for capital expenditures or temporarily increased operational expenditures, in which case (x) the Fees Portion may only be a number below 12% for a maximum duration of three years, and (y) the Issuer shall give 10-days' notice thereof to the Holders; or (b) The Issuer has sold all of its OilXCoins and a reputable independent expert has determined that the Issuer needs to mobilize additional resources (by selling OilXCoins) to pay for capital expenditures or durably increased operational expenditures, in which case (x) the Fees Portion may be a number below 12% for an indefinite duration, and (y) the Issuer shall give 30-days' notice thereof to the Holders. |
1.2.4 | EBIT limit Notwithstanding the above, the Issuer will be entitled to reduce the amount of the Royalty to procure that, in any financial year of the Issuer, the amount of all profits distributed to holders of tokens issued by the Issuer (including, but not limited to, the NFTs), does not exceed 50% of the Issuer's earnings before interest and taxes (EBIT), as reasonably determined by the Issuer in light of relevant accounting and tax guidelines (the "EBIT Condition"). |
1.2.5 | Collection of the Native Transaction Fee and accrual of the Royalty The Issuer shall use commercially reasonable efforts to collect the Native Transaction Fee and procure that the portion of the Native Transaction Fee that accrues to the Holders be held through a smart contract on the Ethereum blockchain operated by the Issuer. If the Issuer incurs fees through such activity, the Issuer shall be entitled to deduct part of the OilXCoins to be paid as Royalty to cover the amount of such fees. When doing so, the Issuer shall determine the number of OilXCoin so deducted based on a reasonable valuation of the OilXCoin, it being understood that the OilXCoin's trading price on important DEXs shall be deemed a reasonable valuation. The Royalty shall accrue on a continuous basis, whereas as soon as any Native Transaction Fee is received on the smart contract operated by the Issuer, the portion of this amount that corresponds to the Royalty to which a Holder is entitled shall be due to the Holder. Any Royalty accrued but unpaid to the Holder shall not bear interest. |
1.2.6 | Payment of the Royalty The Royalty shall be payable in OilXCoins to the Holders, after deduction of any taxes and fees (in the latter case, if applicable pursuant to Section 1.2.5). To obtain payment of any Royalty due to them, Holders shall follow the procedures indicated by the Issuer on its website at https://oilxcoin.io (the "Website"). Such procedures may include (and may potentially only consist in) the use of a smart contract which has been deployed to the Ethereum blockchain and which makes payments only upon request of an authorized party. The Holder is solely responsible for complying with such procedures and paying any fees (e.g. "gas" fees of the Ethereum blockchain) associated with the payment of the Royalty. Notwithstanding the foregoing:
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1.2.7 | Effect of an NFT transfer on the Royalty The transfer of any NFT involves transfer of the claim to the associated Royalty. |
1.2.8 | Other distributed ledgers Should the OilXCoins be recorded onto distributed ledgers other than Ethereum, the Issuer shall, to the extent reasonably feasible, levy fees similar to the Native Transaction Fees on transfers of OilXCoin entered onto such distributed ledgers. In such as case, (i) the Holders shall be entitled to a portion of such transaction fees, which shall to the greatest extent possible be similar to the Royalty, and (ii) the Issuer shall provide Holders with a procedure to obtain the payment of the such portion of the transaction fees, which procedure shall to the greatest extent possible be similar to the procedures applicable to the payment of the Royalty, it being understood that (x) the Issuer shall be under no obligation to make the native transaction fees related to other distributed ledgers available for collection on the Ethereum distributed ledger, and (y) the Holder may be required to procure a wallet, and to perform transactions, on other distributed ledgers than Ethereum to collect its portion of the transaction fees. The Issuer shall be entitled to amend these NFT Terms to implement this Section 1.2.8, Section 5 of these NFT Terms notwithstanding. |
1.3 | No other rights The Holders shall have no rights by virtue of being holders of the NFTs other than those set forth in this Section 1. In particular, the Holders shall have no governance rights with respect to the Issuer or the oil-in-place and gas-in-place reserves. |
2 | Status The NFTs constitute direct, unconditional, unsubordinated, and unsecured obligations of the Issuer and shall at all times rank pari passu and without any preference among themselves. The payment obligations of the Issuer under the NFT Terms shall at all times rank at least equally with all its other present and future unsecured and unsubordinated obligations, except for such preferences as are provided by any mandatorily application provision of law. |
3 | Issuer substitution The Issuer (for the purposes of this Section, the "Current Issuer") may, without the consent of the Holders, substitute any entity (whether or not such entity is organised under the laws of Switzerland) (such substitute entity, the "Substitute Issuer") for itself as principal debtor under these NFT Terms upon giving no more than 30 and no less than 10 days' notice to the Holders, provided that: (i) that the Current Issuer is not in default in respect of any amount payable under these OilXCoin Terms at the time of such substitution; (ii) the Current Issuer and the Substitute Issuer have entered into such documents as are necessary, and have procured that all action, conditions and things required to be taken, fulfilled and done, to give effect to the substitution. Upon any substitution pursuant to the first paragraph this Section 3: (iii) the Substitute Issuer will succeed to, and be substituted for, and may exercise every right and power of, the Current Issuer under these NFT Terms with the same effect as if the Substitute Issuer had been named as Issuer in these NFT Terms, and (iv) the Current Issuer will be released from its obligations under these NFT Terms. Without prejudice to the foregoing, the Issuer shall further be entitled to transfer, change or move its headquarters, registered seat, or country of incorporation upon giving no more than 30 days' notice to the Holders. |
4 | Notices All notices and other communications from the Holders to the Issuer under these OilXCoin Terms shall be made in writing and shall be considered duly given when received, if delivered, mailed by registered mail addressed as follows: DeXentra GmbH Landis + Gyr-Strasse 1 6300 Zug, Switzerland All notices and other communications from the Issuer to the Holders under these OilXCoin Terms shall be made by way of a publication on the Issuer's website https://oilxcoin.io. |
5 | Amendment to the NFT Terms The Issuer shall be entitled to unilaterally amend these NFT Terms, provided that: (i) as a rule, the Issuer shall only amend these NFT Terms provided that the amendment is of a formal, minor or technical nature, is made to correct a manifest error and is not materially prejudicial to the interests of the Holders; (ii) the Issuer may amend these NFT Terms in material respects, including in ways that may be materially prejudicial to the Holders, as a result of unforeseen or exceptional circumstances which make such amendment(s) necessary, in the reasonable opinion of the Issuer, including (without limitation) if required under any applicable law(s). The Issuer may submit proposed amendment to these NFT Terms to a poll of the Holders. If the Issuer elects to do so, the Issuer shall enact voting procedures, wherein the Issuer may (i) determine the applicable majority requirements; (ii) determine whether such poll shall have a binding or consultative nature; (iii) set out how and when the Holders shall log their votes. A vote of the Holders shall be capable of amending these NFT Terms in material respects only if it is approved by a majority of 80% of the votes cast by the majority-in-interest of the Holders, such majority-in-interest to be determined based on the number of OilXCoins to which the relevant NFTs were entitled (such that the weighting of a Diamond Tier NFT in such determination shall be 1,000,000). |
6 | Liability Any liability of the Issuer under these NFT Terms or otherwise in connection with the NFTs shall be excluded, save in the event of gross negligence or wilful misconduct directly attributable to the Issuer. |
7 | Transfer restrictions |
7.1 | Legend The NFTs and any OilXCoin Tokens issued to holders of NFTs are deemed to be securities for U.S. purposes. Any offer, sale or transfer of such NFTs or OilXCoin Tokens must comply with any applicable securities law, which may include U.S. federal and state securities laws, and may not be offered, sold or transferred except in accordance with the provisions of applicable securities laws and as set forth herein. Each NFT will be deemed to carry the following legend, which will be deemed binding on any holder of NFTs: THE NFTs AND ANY OILXCOINS DISTRIBUTED TO HOLDERS OF NFTs HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. PRIOR TO THE ONE YEAR ANNIVERSARY FROM THE PURCHASE OF THE NFTs BY A BUYER, THE NFTs AND ANY OILXCOINS DISTRIBUTED TO HOLDERS OF NFTs MAY NOT BE OFFERED OR SOLD (INCLUDING OPENING A SHORT POSITION IN SUCH NFTs) IN THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED BY RULE 902(k) OF REGULATION S ADOPTED UNDER THE ACT), OTHER THAN TO DISTRIBUTORS, UNLESS THE NFTs (OR OILXCOINS, AS APPLICABLE) ARE REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT IS AVAILABLE. PRIOR TO THE ONE YEAR ANNIVERSARY FROM THE DATE OF PURCHASE, HOLDERS OF NFTs AND ANY OILXCOINS DISTRIBUTED TO HOLDERS OF NFTs MAY RESELL SUCH NFTs OR OILXCOINS ONLY PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OR OTHERWISE IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S OF THE SECURITIES ACT. HEDGING TRANSACTIONS INVOLVING THESE NFTs OR OILXCOINS MAY NOT BE CONDUCTED UNLESS IN COMPLIANCE WITH THE SECURITIES ACT. A HOLDER OF THE NFTs WHO IS A DISTRIBUTOR, DEALER, SUB-UNDERWRITER OR OTHER SECURITIES PROFESSIONAL, IN ADDITION, CANNOT, PRIOR TO THE ONE YEAR ANNIVERSARY FROM THE GRANT DATE, RESELL THE NFTs AND ANY OILXCOINS DISTRIBUTED TO HOLDERS OF NFTs TO A U.S. PERSON AS DEFINED BY RULE 902(k) OF REGULATION S UNLESS THE NFTs (OR OILXCOINS, AS APPLICABLE) ARE REGISTERED UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION UNDER THE ACT IS AVAILABLE. |
7.2 | Special U.S. restrictions NFTs sold to U.S. Holders and any OilXCoin Tokens issued to such holders cannot be offered, sold or transferred in the United States or to a U.S. Person (as defined in Regulation S) for up to one year after the purchase of the NFT except in a transaction exempt from the registration requirements of the Securities Act, such as a private transaction under Regulation D, that also complies with any applicable state securities laws. Any hedging or shortsale transactions involving the NFTs or OilXCoins issued to a holder of an NFT much comply with the provisions of applicable federal and state securities laws. |
8 | Reporting |
8.1 | Oil-in-place / Gas-in-place The Issuer will make available to investors: (a) An annual third-party audit that confirms the existence and accuracy of all individual oil-in-place and gas-in-place audits (performed by certified oil and gas auditors prior to the acquisition or lease of the reserve) and further confirms the correctness of the consolidated numbers (e.g. amount of resource available and how much thereof is recoverable) derived from the sum of these individual audits. (b) At least twice a year: data on the amount of resource that have been extracted or recovered from the acquired reserves. |
8.2 | Financial statements The Issuer will make available to investors annual financial statements. Additionally, a description of use of funds will be provided annually. The financial statements will be audited by a third party. |
8.3 | Further reporting The Issuer will make available to investors consolidated data regarding the oil-in-place and gas-in-place numbers along with other relevant KPIs. |
9 | Termination All rights incorporated in the NFTs shall terminate fifteen years after their issuance date. Any residual right or receivable of any Holder against the Issuer shall be deemed to be forfeited as of the termination date unless it has been exercised or claimed prior to the termination date. The Issuer shall be entitled, however, to extend the duration of the rights incorporated in the NFTs for another fifteen years, and then periodically every fifteen years. If the Issuer elects to extend the rights incorporated in the NFTs, it shall notify the Holders thereof by publishing a notice on its website (or through an equivalent means of communication). |
10 | Governing law and jurisdiction The NFTs are subject Swiss law, excluding conflicts of laws provisions. Any dispute, controversy or claim arising out or in relation to the NFTs is subject to the exclusive jurisdiction of the courts competent in Zug. |
IMPORTANT NOTICE
Notice to Investors in Switzerland
Neither this document nor any other offering or marketing material relating to the NFTs or the transaction described herein (the “Transaction Documents”) constitutes a prospectus pursuant to the Swiss Financial Services Act (“FinSA”), and the Transaction Documents have not been and will not be reviewed or approved by a Swiss prospectus review office in accordance with Article 51 FinSA. The Transaction Documents may not be distributed or otherwise made available in Switzerland in a manner that would require the publication of a prospectus in Switzerland pursuant to FinSA.
The NFTs are not and may not be publicly offered or marketed directly or indirectly in or into Switzerland within the meaning of FinSA, except under circumstances where such offer does not require the publication of a prospectus pursuant to FinSA. Subject to the foregoing, the Issuer may offer the NFTs in or into Switzerland to less than 500 investors.
No action has been nor will be taken to list or admit to trading the NFTs on a trading venue in Switzerland.
Notice to investors in the European Economic Area
In relation to each Member State of the European Economic Area (each, a "Member State"), the Issuer represents and agrees, that it has not made and will not make an offer of NFTs in a Member State other an:
(a) to any legal entity that is a qualified investor as defined in the Regulation (EU) 2017/1129 (the "Prospectus Regulation");
(b) to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Regulation); or
(c) in any other circumstances falling within Article 1(4) of the Prospectus Regulation,
provided that no such offer of NFTs referred to in clauses (a) to (c) above shall require the Issuer to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.
For purposes of this provision, the expression "offer of NFTs to the public" in relation to any NFTs in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the NFTs to be offered so as to enable an investor to decide to purchase or subscribe the NFTs.
Notice to investors in Austria
In addition to the restrictions described in the section " Notice to investors in the European Economic Area", the NFTs may be offered for the first time in Austria only once a notification to the issue calendar (Emissionskalender) maintained by the Austrian Control Bank (Oesterreichische Kontrollbank Aktiengesellschaft) as notification office (Meldestelle), all as prescribed by the Austrian Capital Market Act 2019 (Kapitalmarktgesetz 2019 – KMG 2019), as amended, has been filed as soon as possible prior to the commencement of the relevant offer of the NFTs in Austria.
RISK FACTORS
The NFTs and the OilXCoins involve a number of significant risks. Before purchasing NFTs, the Holder must carefully consider the risks of such a purchase. The below risks are presented in an order that does not reflect their likelihood of occurrence or magnitude. Further, the risks below are some, but not all, the risks associated with the NFTs. Investment decisions should not be made solely on the basis of the risk warnings set out below since such information cannot serve as a substitute for individual advice and information which is tailored to the requirements, objectives, experience, knowledge and circumstances of each investor individually.
No representation on tax treatment and no tax ruling
The NFTs and the OilXCoins are complex and novel instruments. Their treatment under applicable tax laws is untested and generally subject to a level of uncertainty considerably higher than traditional financial instruments such as equity securities or bonds. The Issuer does not make any representation as to the tax treatment of the NFTs and/or the OilXCoins, whether from a Swiss, Liechtenstein or foreign perspective. The Holder is responsible for assessing, as the case may be with the advice of a tax advisor or counsel, the consequences of purchasing and holding NFTs / OilXCoins.
The Issuer has not obtained any confirmation or "ruling" from any tax authority regarding the treatment of the NFTs and/or the OilXCoins under Swiss tax law, Liechtenstein tax law or tax law from any other jurisdiction. Even if the Issuer later obtains such a ruling (something the Issuer does not undertake to do), the Holder should expect this ruling to apply only to transactions entered into after the issuance of the ruling, meaning that the Holder and any person acquiring the NFTs before such ruling has been issued will not be able to benefit from the ruling.
The Final Terms may differ significantly from those presented in this term sheet
Terms of the NFT are set out in this term sheet, but are not in their final, long form. The Issuer expects to issue the final and long form terms of the NFTs (i.e. the Final Terms) after the date hereof. The Issuer is entitled to make significant changes to the terms of the NFTs when issuing the Final Terms. As a result, the Final Terms may diverge in material respects from the terms set out herein.
The value of NFTs is expected to be highly dependent on the OilXCoins
The NFTs give their Holder a one-time entitlement to acquire a certain number of OilXCoins, and any Royalty payment will depend on certain fees levied when transferring OilXCoins. The NFTs are therefore closely tied to the OilXCoins and the value of the NFTs may depend in large part (if not entirely) on the OilXCoin.
There is no guarantee as to the value of the OilXCoin and the OilXCoin is, for the time being, only described in general and non-binding terms. The actual terms of the OilXCoin may diverge significantly.
The Royalty entitlement incorporated in the NFTs depends on the occurrence of transfers of OilXCoins. There can however be no assurance as to the number of transfers of OilXCoins that will occur. In particular, there can be no assurance that any secondary market will develop for the OilXCoins. The Issuer has not undertaken to have the OilXCoins admitted to any marketplace.
The Issuer may cancel the Native Transaction Fee
The Issuer may resolve that the Native Transaction Fee shall be reduced or cancelled. In the circumstance that it is cancelled, the Royalty entitlement incorporated in the NFTs will be of no use and of no value, at least until the Issuer resolves that a Native Transaction Fee shall again be levied.
Not all investors may pay the same Purchase Price
The Purchase Price can differ from the price initially displayed on the Platform before the Buyer reaches the final step of the order process, for reasons that may include (but are not limited to) changes in the ETH/US dollar exchange rate of reference.
The NFTs are complex and involve a high degree of risk
The NFTs are innovative and complex instruments. The purchase of NFTs involves a high degree of risk, including the risk that the NFTs may become valueless. Potential purchasers should be prepared to suffer a total loss of the capital invested in the purchase of the NFT under certain circumstances. The value of NFTs is difficult to assess and may be extremely volatile.
The NFTs may be prone to fraud
The characteristics of the NFTs (e.g., they only exist virtually on a computer network, transactions in NFTs are usually not reversible and are done largely anonymously) make them an attractive target for fraud, theft and cyber-attacks. Each purchaser is therefore urged to make its own independent investigation and to make its own decisions with respect to the purchase of NFTs. Prospective NFT holders are expected to consult a blockchain specialist, counsel, accountant and/or tax advisor, as necessary, to understand the risks involved. Potential purchasers that are not satisfied with their understanding of the risks associated with NFTs should refrain from acquiring NFTs.
The NFTs and OilXCoins may have a “bug” or other technical defect
While the Issuer intends to take commercially reasonable efforts to ensure the functionality of the NFTs and the OilXCoin token, it is possible that the NFT or the tokens have a technical defect that may enable others to “exploit” the NFTs and/or the OilXCoin token, which could lead to a partial or complete loss of a purchaser’s investment.
Legislative and regulatory changes may impact the NFTs
NFTs have been in existence for only a few years and have been under scrutiny from various regulatory bodies in Switzerland and globally. The regulatory regimes relating to NFTs and blockchain technology may be subject to rapid legislative and regulatory change, which could impact NFTs, be in conflict with the current design of NFTs, and/or lead to their loss. There is a risk that NFTs may be subject to additional regulations in Switzerland or in other jurisdictions, and that NFTs may be adversely qualified or re-qualified by a court or a supervisory authority under the applicable legislation. If the NFT or the OilXCoin are deemed to be securities in any jurisdiction, they will be subject to applicable securities laws and owners of such NFTs or OilXCoins will have to comply with such laws.
Blockchain technology and smart contracts are associated with risks
Distributed ledger technology (i.e. blockchains) and the smart contract concept underlying NFTs are still at an early stage of development and have not yet been sufficiently tested. The functioning of blockchains relies on the collaboration and consensus of various stakeholders ("miners" or "validators") that may exercise control on the relevant blockchain and may be empowered to make changes to its content or to block certain transactions. Blockchains are vulnerable to mining attacks, including but not limited to double-spend attacks, majority attacks, "selfish mining" attacks, timestamp manipulation and race condition attacks. Successful attacks lead to risks relating to the NFTs, the expected orderly execution and sequencing of transactions involving NFTs, and the expected orderly execution and sequencing of contract calculations, and may result in the loss of NFTs. It is possible that hacker attacks and other unexpected activities may occur that could result in the theft or loss of NFTs. Smart contracts are nontrivial pieces of computer code and their interactions with the relevant blockchain are complex. There is no guarantee that the process of creating, receiving, holding, using and storing NFTs will be uninterrupted or error-free and there is an inherent risk that the smart contract may contain weaknesses, vulnerabilities or bugs that could lead to, among other things, the complete loss of NFTs.
NFTs may be lost or stolen
NFTs may be lost or become inaccessible if the holder of NFTs loses the respective private key allowing access to NFTs, or due to malfunctions or incompatibilities of the wallet in which the NFTs are stored. This can also lead to the loss of the NFTs. In addition, it is the responsibility of the NFT holder not to lose the key or password that enables access to the wallet. NFTs can also be stolen or lost if the private keys or necessary (computer) addresses are stolen.
NFTs are exposed to risks associated with cryptocurrencies
NFTs are stored on blockchain, and therefore in a relationship of interdependence with their associated cryptocurrencies. Potential purchasers may have to pay transaction fees denominated in cryptocurrencies or associated units of account. The fair value of cryptocurrencies is subjective, extremely difficult to assess and therefore highly volatile. Their market price may also be inflated by temporary bouts of speculation, and they may lose all of their market value very quickly. There is no guarantee that cryptocurrencies will be liquid or that services allowing NFTs holders to exchange them for fiat currency will continue to be accessible.
The Issuer is an early stage company with no operating history or historical financial information
The Issuer is an early stage company in a very competitive field and has no operating history or historical financial information. This makes it difficult for investors to evaluate the Issuer’s business and future prospects. The Issuer’s success will depend in part on its ability to deal with the problems, expenses and delays frequently associated with establishing a new business venture and the extraction of oil and gas.
In addition, although the Issuer’s management has significant experience in the area of oil exploration, the past performance of the management is no indication of its ability to continue to successfully manage the Issuer. If the experience of the management is inadequate or unsuitable, the operations of the Issuer may be adversely affected.
The Issuer can make no assurances that it will be successful in addressing these risks, and the failure to meet these challenges could have a material adverse effect on the performance of the Issuer, the value of the NFTs, OilXCoins and your investment.
Investments in startups involve a high degree of risk. Financial and operating risks confronting startups are significant, and establishing new operations brings a significant number of challenges. The startup market in which the Issuer competes is highly competitive and the percentage of companies that survive and prosper is small. Startups often experience unexpected problems in the areas of product development, marketing, financing, and general management, among others, which frequently cannot be solved. Failure to overcome such problems may mean that the Isser will not be able to successfully operate OilXCoins or extract oil and gas, and it is possible that the OilXCoins may not be minted. Even if the Issuer is successful in operating and extracting oil and gas, it may not be able to operate at a profit, which may affect the long-term viability of the Issuer and the value of the NFTs and OilXCoins.
It is possible that, due to any number of reasons, including, but not limited to, failure to successfully extract oil and gas, unfavorable market prices for oil and gas, the inability by the Company to establish a viable financial ecosystem for the utility of OilXCoins, the failure of commercial relationships, or regulatory issues, the Issuer may no longer be viable to operate, and may dissolve or take actions that result in a dissolution event.
An Issuer substitution may expose Holders to additional risks
An Issuer Substitution may expose Holders to additional risks. In particular, without limitation, (a) the Issuer Substitution may result in a more unfavorable tax treatment of the NFTs, (b) the rights of the Holders associated with the NFTs may be stayed or suspended during the implementation of the Issuer Substitution, (c) the Substitute Issuer may present a higher risk of default than the Issuer, (d) the Substitute Issuer's jurisdiction may have a less favorable legal framework for the NFTs, and may present additional or adverse political, legal and economic risks.
Appendix 1 – Tokenization terms
1. Scope and purpose
This document is an appendix to, and incorporated by reference in, the terms and conditions (the "Terms and Conditions") of certain royalty non-fungible tokens issued by DeXentra GmbH (the "NFTs") and contains the tokenization terms (Registrierungsvereinbarung / convention d'inscription) within the meaning of Articles 973d and 973f of the Swiss Code of Obligations in respect of such NFTs. These tokenization terms apply if so provided in the Terms and Conditions. This document also contains further general information on the tokenization of the NFTs and distributed ledgers.
Capitalized terms not defined herein have the meaning ascribed to them in the Terms and Conditions.
2. Association with Tokens
The NFTs have been or will be issued in the form of ledger-based securities within the meaning of Article 973d of the Swiss Code of Obligations.
Ledger-based securities are represented by digital tokens (the "Tokens") recorded in a distributed ledger (each a "Distributed Ledger"). The creation of and operations on the Tokens take place within the technical framework of one or several smart contracts (together, the "Smart Contract"). The Tokens are – from a technical standpoint – entries into a register maintained through the Smart Contract.
3. NFT Transactions
3.1 Principle
Unless applicable law provides otherwise (e.g. in the event of universal succession further to the death or merger of the Token holder, or if the transfer or encumberment is carried out pursuant to the Federal Act on Intermediated Securities), the transfer of legal title to an NFT and the creation of a security or other interest on such Tokenized Note (such as a pledge or usufruct) (each such transfer or creation of interest a "Transaction") requires the transfer of the relevant Token to a distributed ledger address controlled by the acquirer, in accordance with the rules and procedures of the Distributed Ledger and the functions of the Smart Contract.
A transfer of a Token will be deemed to have been recorded in the Distributed Ledger when 30 blocks or more have been validated after the one relating to the Transaction.
Once a Transaction has been recorded in the Distributed Ledger, the Transaction will remain valid if the agreement based on which the Transaction was carried out is invalidated, for example further to a material error of one of the parties or of a fraud. In such a case, unwinding the Transaction will require a return of the relevant Token to a distributed ledger address controlled by the transferor.
4. Hard forks
In the event of a hard fork or under similar circumstances that may endanger the reliability of the distributed ledger, the Issuer may activate the "pause" function of the Smart Contract to prevent Transactions on both versions of the Distributed Ledger pending its decision on which version it will support and the communication of such decision to the Holders.
If the Issuer decides to support the version of the Distributed Ledger that follows the rules and protocols of such Distributed Ledger that were in force immediately prior to the occurrence of the hard fork (i.e. the "legacy" version of the Distributed Ledger), all Transactions on "forked" versions of the Distributed Ledger will be invalid, and any Token existing on a forked version of the Distributed Ledger will not be associated with Tokenized Securities. If the Company decides to support a forked version of the Distributed Ledger, all Transactions on the "legacy" version of the relevant Distributed Ledger will be invalid, and any Token existing on the "legacy" version of the Distributed Ledger will not be associated with NFTs.
If the Issuer does not activate the "pause" function and does not indicate which version of the Distributed Ledger it chooses, the Issuer shall be deemed to have chosen to support the version of the Distributed Ledger that is the more commonly used among industry participants (which will in principle be the version which is has the highest number of validators and active users).
5. Cancellation of lost or stolen Tokens
If a Token holder initiates proceedings to have one or more Tokens cancelled pursuant to Article 973h of the Swiss Code of Obligations, the number of public notices required pursuant to Article 973h para. 2 of the Swiss Code of Obligations will be one, and the deadline imposed on Token holders to produce the relevant private keys will be one month. The Issuer will cancel and re-issue a Token upon delivery of an enforceable (vollstreckbar, exécutoire) court decision ordering such cancellation and re-issue.
6. Amendments
The Issuer may amend the tokenization terms of the NFTs at any time and without prior notice. Amendments to these terms will be validly made and binding upon all Token holders upon being published in accordance with the Terms and Conditions. Amendments to these terms will only affect the acquisition, encumbrance or disposal of NFTs (including Transactions) entered into after the amendments became effective and will not affect such transactions (including Transactions) previously completed.
7. Additional information regarding the NFTs, the Distributed Ledger and the Smart Contract
7.1 Functioning of the Distributed Ledger and the Smart Contract
The distributed ledger technology is a technology that allows the operation of a distributed ledger, i.e. a ledger that is not kept by a trusted intermediary but by a community of independent participants.
The distributed ledger technology, as implemented on the Distributed Ledger is based on complex mathematical and cryptography concepts, which are described in this document at a high level only. The technology makes it possible to keep records of data relating to persons whose identity is protected by asymmetric cryptographic methods. Such methods are based on the interplay between a public key and a private key, which are two numbers that are mathematically related. The public key (often referred to as the "distributed ledger address") is available to all ledger participants, while the private key must remain secret.
The holder of the private key can generate "signature messages" that can be identified as authentic (i.e. as having been generated with the private key) by the ledger participants. Such signature messages can be used to initiate "transactions", i.e. new entries in the ledger. In a distributed ledger that functions as a "blockchain", the participants validate transactions in blocks, by adding a new set of data (or "block") to a chain of pre-existing blocks. Each ledger participant maintains its own copy of the ledger, and updates such copy when a participant includes a new "block" in a manner consistent with the chain’s protocol. This regime aims to ensure the transparency and immutability of the transactions recorded in the ledger.
7.2 Functioning of the Ethereum distributed ledger
The Tokens will be recorded in the Ethereum blockchain (such that references to the "Distributed Ledger" in this document and the Terms and Conditions shall be construed as references to Ethereum).
The Ethereum distributed ledger has two functions:
- The first is related to Ether (or ETH). Ether is a cryptocurrency (or digital currency) that is recorded and traded on the distributed ledger. Users of the Ethereum distributed ledger can trade Ethers on the distributed ledger and use such Ethers as a means of payment.
- The second is the use of smart contracts. The Ethereum distributed ledger allows for the creation of computer codes called "smart contracts", which can perform a large number of functions, including creating a record of digital tokens on distributed ledger addresses. A "token" is an entry in a register that is maintained by means of a smart contract. Each token is attributed to a particular distributed ledger address. The fact that the register maintained through the smart contract contains a corresponding entry is evidence that a token is attributed to the relevant distributed ledger address. Entries in the distributed ledger are validated by a large number of participants. Any person or entity may act as validator and validate transactions in the distributed ledger, subject to technical requirements unrelated to the identity of the person or entity (e.g. technical infrastructure requirements and/or minimum amount of Ethers "staked" (i.e. locked on a distributed ledger address for a certain period of time)).
7.3 The Smart Contract
The Smart Contract is based on OpenZeppelin contracts ERC721.sol version 5 which is based on the ERC-721 Non-Fungible Token Standard. Read more
Token holders should carefully review the source code of the Smart Contract and should be aware that it includes a number of functions, in particular:
- blacklisting of individual wallets (e.g. to prevent sanctioned individuals from acquiring Royalties); and
- pausing or termination of further entitlement of Royalties to Holders; and
- termination of entitlement to claim OilXCoins.
8. Material U.S. Federal Income Tax Considerations
The following is a discussion of certain material U.S. federal income considerations relevant to a U.S. Holder and a Non-U.S. Holder, each as defined below, with respect to the NFTs. This discussion does not purport to deal with the tax consequences of owning NFTs to all categories of purchasers, some of which (such as dealers in securities or currencies, investors whose functional currency is not the U.S. dollar, financial institutions, regulated investment companies, real estate investment trusts, tax-exempt organizations, insurance companies, persons holding our NFTs as part of a hedging, integrated, conversion or constructive sale transaction or a straddle, persons liable for an alternative minimum tax, persons subject to the “base erosion and anti-avoidance” tax, persons required to recognize income for U.S. federal income tax purposes no later than when such income is included on an “applicable financial statement” and persons who are investors in pass-through entities) may be subject to special rules. This discussion deals only with holders (i) who acquire NFTs in connection with this Offering, (ii) who hold the NFTs as capital assets within the meaning of Section 1221(a) of the Internal Revenue Code of 1986, as amended (the “Code”) (generally, property held for investment) and (iii) who own less than 10%, actually or constructively, of our NFTs.
You are encouraged to consult your own tax advisors concerning the overall tax consequences arising in your own particular situation under U.S. federal, state, local or non-U.S. law of acquiring, owning or disposing of NFTs. The following discussion of U.S. federal income tax considerations is based on the Code, judicial decisions, administrative pronouncements, and existing and proposed regulations issued by the U.S. Department of the Treasury, all of which are subject to change, possibly with retroactive effect. There can be no assurance that the Internal Revenue Service (“IRS”) will accept the determinations in the following discussion about the taxation consequences of NFT activity. The U.S. federal income tax consequences for U.S. Holders and Non-U.S. Holders may differ from the determinations in the below discussion if the IRS successfully challenges our anticipated characterization of the NFTs.
As used herein, the term "U.S. Holder" means a beneficial owner of NFTs that is a U.S. citizen or resident for U.S. federal income tax purposes, U.S. corporation or other U.S. entity taxable as a corporation, an estate the income of which is subject to U.S. federal income taxation regardless of its source, or a trust, if either (A) a court within the United States is able to exercise primary jurisdiction over the administration of the trust or one or more U.S. persons have the authority to control all substantial decisions of the trust or (B) the trust has an election in place to be treated as U.S. person. A “Non-U.S. Holder” means a beneficial owner of NFTs that is not a U.S. Holder.
If a partnership holds NFTs, the tax treatment of a partner of such partnership will generally depend upon the status of the partner and upon the activities of the partnership. If you are a partner in a partnership that holds NFTs, you are encouraged to consult your tax advisors.
8.1 Treatment of NFTs
The NFTs shall be treated as equity interests of the Issuer solely for U.S. federal income tax purposes. There is limited guidance issued by the IRS pertaining to cryptocurrencies. The IRS generally treats “convertible virtual currencies”, which are virtual currencies that have an equivalent value in fiat currency, as property and not as currency for U.S. federal income tax purposes. It is not always clear as to the proper U.S. federal income tax classification or treatment of certain cryptocurrencies in all situations or transactions. The Issuer shall endeavor to apply general U.S. federal income tax principles to the NFTs where there is uncertainty from a U.S. federal income tax perspective. The Issuer may take positions on its tax returns that have not been address by existing Treasury regulations, administrative guidance or case law. The IRS may not agree with the positions taken by the Issuer with respect to the NFTs.
8.2 Treatment of the Issuer
The Issuer is a corporation for U.S. federal income tax purposes. The Issuer or its subsidiaries may be subject to U.S. federal income taxation on its net taxable income, currently imposed at a rate of 21%, to the extent that the Issuer is engaged or deemed to be engaged in the conduct of a trade of business in the United States. In addition, the Issuer may be subject to an additional tax on branch profits and this may depend on how it structures its investments and activities.
8.3 U.S. Holder Considerations
8.3.1 U.S. Holder Tax Considerations – Distributions
Subject to the discussion below of passive foreign investment companies (“PFIC”), any distributions, which for this purpose includes both any royalty payments and a distribution of OilXCoin Tokens to the extent treated as a taxable stock dividend for U.S. federal income tax purposes, made by us with respect to our NFTs to a U.S. Holder will generally constitute dividends, which may be taxable as ordinary income or “qualified dividend income,” as described in more detail below, to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions made in kind will be valued at the time of distribution. Distributions in excess of our earnings and profits will be treated first as a non-taxable return of capital to the extent of the U.S. Holder’s tax basis in his NFTs on a dollar-for-dollar basis and thereafter as capital gain. Because we are not a U.S. corporation, U.S. Holders that are corporations will generally not be entitled to claim a dividends received deduction with respect to any distributions they receive from us. Dividends paid with respect to our NFTs will generally be treated as “passive category income” or, in the case of certain types of U.S. Holders, “general category income” for purposes of computing allowable foreign tax credits for U.S. foreign tax credit purposes.
Assuming the Issuer is not a PFIC, dividends paid on our NFTs to a U.S. Holder who is an individual, trust or estate may generally be treated as “qualified dividend income” that is taxable to such U.S. Holders at preferential tax rates provided that the Issuer is a qualified foreign corporation for U.S. federal income tax purposes. There is no assurance that any dividends paid on our NFTs will be eligible for these preferential rates in the hands of a U.S. Holder. Any dividends paid by us which are not eligible for these preferential rates will be taxed as ordinary income to a U.S. Holder.
If we pay an “extraordinary dividend” on our NFTs (generally, a dividend in an amount which is equal to or in excess of 10% of n investor’s adjusted tax basis (or fair market value in certain circumstances) in the NFTs or dividends received within a one-year period that, in the aggregate, equal or exceed 20% of an U.S. Holder’s adjusted tax basis (or fair market value upon the U.S. Holder’s election)) that is treated as “qualified dividend income,” then any loss derived by a U.S. Holder from the sale or exchange of such NFTs will be treated as long-term capital loss to the extent of such dividend.
8.3.2 U.S. Holders Sale, Exchange or other Disposition of NFTs
Assuming the Issuer does not constitute a PFIC, a U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange or other disposition of our NFTs in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder’s tax basis in such NFTs. Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition. Such capital gain or loss will generally be treated as United States source income or loss, as applicable, for U.S. foreign tax credit purposes. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations.
8.3.3 Passive Foreign Investment Company Considerations
Special U.S. federal income tax rules apply to a U.S. Holder that holds NFTs in a foreign corporation classified as a PFIC for U.S. federal income tax purposes. In general, we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year in which such Holder held our NFTs, either
- at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains and rents derived other than in the active conduct of a rental business), or
- at least 50% of the average value of the assets held by us during such taxable year produce, or are held for the production of, such passive income.
For purposes of determining whether we are a PFIC, we will be treated as earning and owning our proportionate share of the income and assets, respectively, of any of our subsidiary corporations in which we own at least 25% of the value of the subsidiary’s. equity. Cash is a per se passive asset. In addition, it is possible that we or our subsidiaries may structure our activities in a manner that generates passive income in certain years. Although we intend to conduct our affairs in a manner to avoid being classified as a PFIC, we cannot assure you that the nature of our operations will not change in the future.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year which included a U.S. Holder’s holding period in our NFTs, then such U.S. Holder would be subject to different U.S. federal income taxation rules depending on whether the U.S. Holder makes an election to treat us as a “qualified electing fund” (a “QEF Election”). As an alternative to making a QEF election, a U.S. Holder should be able to make a “mark-to-market” election with respect to our NFTs, as discussed below.
(a) U.S. Holders Making a Timely QEF Election
Pass-Through of Ordinary Earnings and Net Capital Gain. A U.S. Holder who makes a timely QEF Election with respect to our NFTs (an “Electing Holder”) would report for U.S. federal income tax purposes his pro rata share of our “ordinary earnings” (i.e., the net operating income determined under U.S. federal income tax principles) and our net capital gain, if any, for our taxable year that ends with or within the taxable year of the Electing Holder. Our “net capital gain” is any excess of any of our net long term capital gains over our net short term capital losses and is reported by the Electing Holder as long term capital gain. Our net operating losses or net capital losses would not pass through to the Electing Holder and will not offset our ordinary earnings or net capital gain reportable to Electing Holders in subsequent years (although such losses would ultimately reduce the gain, or increase the loss, if any, recognized by the Electing Holder on the sale of his NFTs).
In general, an Electing Holder would not be taxed twice on his share of our income. Thus, distributions received from us by an Electing Holder are excluded from the Electing Holder’s gross income to the extent of the Electing Holder’s prior inclusions of our ordinary earnings and net capital gain. The Electing Holder’s tax basis in his NFTs would be increased by any amount included in the Electing Holder’s income. Distributions received by an Electing Holder, which are not includible in income because they have been previously taxed, would decrease the Electing Holder’s tax basis in the NFTs. Distributions, if any, in excess of such tax basis would be treated as capital gain (which gain will be treated as long-term capital gain if the Electing Holder held its NFTs for more than one year at the time of distribution).
A U.S Holder makes a QEF Election for a taxable year by completing and filing IRS Form 8621 (Return by a Holder of a Passive Foreign Investment Company or Qualified Electing Fund) in accordance with the instructions thereto. If we were aware that we were to be treated as a PFIC for any taxable year, we would provide each U.S. Holder with all necessary information to make the QEF Election described above.
Disposition of NFTs. An Electing Holder would generally recognize capital gain or loss on the sale or exchange of NFTs in an amount equal to the difference between the amount realized by the Electing Holder from such sale or exchange and the Electing Holder’s tax basis in the NFTs. Such gain or loss would generally be treated as long-term capital gain or loss if the Electing Holder’s holding period in the NFTs at the time of the sale or exchange is more than one year. A U.S. Holder’s ability to deduct capital losses may be limited.
(b) Mark-to-Market Election
A U.S. Holder is not expected to make the mark-to-market election with respect to NFTs.
(c) U.S. Holders Not Making a Timely QEF Election or Mark-to-Market Election
A U.S. Holder who does not make a timely QEF Election or a timely mark-to-market election (a “a Non-Electing Holder”) would be subject to special rules with respect to (i) any “excess distribution” (generally, the portion of any distributions received by the Non-Electing Holder on the NFTs in a taxable year in excess of 125% of the average annual distributions received by the Non-Electing Holder in the three preceding taxable years, or, if shorter, the Non-Electing Holder’s holding period for the NFTs), and (ii) any gain realized on the sale or other disposition of NFTs. Under these rules, (i) the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s holding period for the NFTs; (ii) the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC, would be taxed as ordinary income; and (iii) the amount allocated to each of the other prior taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed tax deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year. If a Non-Electing Holder dies while owning one or more NFTs, the Non-Electing Holder’s successor would be ineligible to receive a step-up in the tax basis of those NFTs.
Distributions received by a Non-Electing Holder that are not “excess distributions” would be includible in the gross income of the Non-Electing Holder as dividend income to the extent that such distributions are paid out of our current or accumulated earnings and profits as determined under U.S. federal income tax principles. Such dividends would not be eligible to be treated as “qualified dividend income” eligible for preferential tax rates. Distributions in excess of our current or accumulated earnings and profits would be treated first as a return of the U.S. Holder’s tax basis in the NFTs (thereby increasing the amount of any gain or decreasing the amount of any loss realized on the subsequent sale or disposition of such NFTs) and thereafter as capital gain.
8.3.4 Application of CFC Rules to Certain U.S. Holders
Special rules would apply if the Issuer were considered to be a “controlled foreign corporation” (a “CFC”) as defined in Code Section 957. A foreign corporation is considered to be a CFC if, on any day during its taxable year, more than 50% of the total voting power or the total value of all classes of its equity, which for this purpose includes the NFTs, is owned, directly or indirectly, by “United States shareholders”. A “United States shareholder” is a United States person who owns, directly or indirectly, 10% or more of the total voting power or value of the stock or NFTs of the foreign corporation. If the Issuer were classified as a CFC, each U.S. Holder who owned, directly or indirectly, 10% or more of the NFTs would be required to include in his gross income, for his taxable year in which the taxable year of the Issuer ends, his pro rata share of the Issuer’s income for such year. This income would be reported by the U.S. Holder as ordinary income even to the extent that it is attributable to long-term capital gains of the Issuer. The PFIC rules will not apply to any portion of a U.S. Holder’s holding period during which the investor is a “United States investor” and the Issuer is a CFC. The Issuer is not expected to be a CFC, but there can be no assurances on this point. U.S. persons investing in NFTs should consult with their personal tax advisors regarding the impact of these CFC rules. The CFC rules are complex, and a complete discussion of such rules is beyond the scope of this section. U.S. Holders that own more than 10% of the NFTs should consult their own tax advisors regarding the consequences of investing in a CFC, including the potential application of Code Section 1248 to any disposition (including in redemption) of Trust interests.
8.3.5 U.S. Holder Reporting Obligations
U.S. persons investing NFTs may be subject to certain IRS filing requirements. For example, pursuant to Code section 6038B, a U.S. person which transfers property (including cash) to a foreign corporation in exchange for stock in the corporation, which for this purpose includes the NFTs, is in some cases required to file an information return with the IRS with respect to such transfer. Accordingly, a U.S. Holder may be required to file an information return with respect to its investment in the NFTs. Additional reporting requirements may be imposed on a U.S. Holder that acquires NFTs with a value equal to at least 10% of the aggregate value of the Issuer. U.S. investors also may be required to file other information returns with the U.S. Treasury Department or the IRS with respect to their investment in the NFTs, including IRS Forms 961, 8621, 5471 and FBAR. Investors should consult their own tax advisors with respect to any applicable filing requirements.
8.4 Non-U.S. Holder Considerations
8.4.1 Non-U.S. Holder Dividends on NFTs
Non-U.S. Holders generally will not be subject to U.S. federal income or withholding tax on dividends received from us with respect to our NFTs, unless that income is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States. If the Non-U.S. Holder is entitled to the benefits of a U.S. income tax treaty with respect to those dividends, that income is taxable only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States.
8.4.2 Non-U.S.- Holder Sale, Exchange or Other Disposition of NFTs
Non-U.S. Holders generally will not be subject to U.S. federal income or withholding tax on any gain realized upon the sale, exchange or other disposition of our NFTs, unless:
- the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if the Non-U.S. Holder is entitled to the benefits of a U.S. income tax treaty with respect to that gain, that gain is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States); or
- the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year of disposition and other conditions are met.
If the Non-U.S. Holder is engaged in a U.S. trade or business for U.S. federal income tax purposes, the income from the NFTs, including dividends and the gain from the sale, exchange or other disposition of the NFTs, that is effectively connected with the conduct of that trade or business will generally be subject to regular U.S. federal income tax in the same manner as discussed in the previous section relating to the taxation of U.S. Holders. In addition, if you are a corporate Non-U.S. Holder, your earnings and profits that are attributable to the effectively connected income, subject to certain adjustments, may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable U.S. income tax treaty.
8.5 Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made within the United States to you will be subject to information reporting requirements if you are a U.S. Holder. Such payments may also be subject to backup withholding tax if you are a U.S. Holder and you:
- fail to provide an accurate taxpayer identification number;
- are notified by the IRS that you have failed to report all interest or dividends required to be shown on your U.S. federal income tax returns; or
- in certain circumstances, fail to comply with applicable certification requirements.
Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on an IRS Form W-8.
If you are a Non-U.S. Holder and you sell your NFTs to or through a U.S. office of a broker, the payment of the proceeds is subject to both U.S. backup withholding and information reporting unless you certify that you are a non-U.S. person, under penalties of perjury, or you otherwise establish an exemption. If you are a Non-U.S. Holder and you sell your NFTs through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you outside the United States, then information reporting and backup withholding generally will not apply to that payment. However, information reporting requirements, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made to you outside the United States, if you sell your NFTs through a non-U.S. office of a broker that is a U.S. person or has some other contacts with the United States. Such information reporting requirements will not apply, however, if the broker has documentary evidence in his records that you are a non-U.S. person and certain other conditions are met, or you otherwise establish an exemption.
Backup withholding is not an additional tax. Rather, you generally may obtain a refund of any amounts withheld under backup withholding rules that exceed your U.S. federal income tax liability by filing a refund claim with the IRS.
The above-mentioned tax considerations do not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase, own or dispose of the NFTs. Holders who wish to clarify their own tax situation should consult and rely upon their own tax advisors.