In April 2024, Du Jun announced the suspension of the ABCDE Fund while launching a new incubation brand Vernal. The first-level investment has been paused, but the incubation business has accelerated its launch, which not only marks a shift in his personal path but also, to some extent, signals a change in the Web3 investment paradigm.

In recent years, the strategy of crypto VC was clear: invest in projects, wait for them to go live, and exit for cash. But now, exit paths are blocked and valuation systems have collapsed, many institutions are beginning to realize: if they continue to be 'financial investors', they may not even finish watching the show. Thus, a group of capital began to change their approach - no longer betting on project growth, but getting personally involved, packaging resources, capabilities, and networks 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 role of participation - both a shareholder and a collaborator; needing to invest capital while also bearing operational pressure; even in terms of legal responsibility, the boundaries are much blurrier than in the past.

In this article, Portal Labs will break down the key logic and compliance blind spots behind incubation investment.

For high-net-worth investors, on this path of deep resource binding and high legal risks, how to ensure not to be absent or overstep?

The logic and gameplay of incubation investment

In the early years, as soon as a financing news was released, Web3 projects could take off instantly, communities would erupt, and exchanges would line up. But now, Web3 is no longer in the era where saying 'XXX has completed financing' is enough.

In this era of scarce narratives and dispersed traffic, capital is no longer an omnipotent driving force. More and more investors are beginning to realize: if they want the project to truly take off, just pouring money is not enough; they must get personally involved.

Thus, 'investing in projects' has begun to transform into 'doing projects'.

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

In practice, the strategy for incubation investment usually consists of this set of 'combined punches':

• Ecological empowerment: integrating traffic entry, wallet integration, and community user import from the beginning so that the project has 'users and viewers' right from the start;

• Technical support: including underlying architecture optimization, security audits, product testing; these are not 'engineering tasks' that can be solved by money;

• Market promotion: doing content marketing, community fission, joint activities, etc., pulling exposure and improving conversion across the entire chain;

• Compliance collaboration: due diligence before investment, license applications, legal consultants must be arranged in advance; do not wait until something goes wrong to find a lawyer.

The most typical case is Binance Labs.

Polygon and Injective could rise to prominence not just due to funding amounts, but because of the substantial support from the Binance ecosystem: wallet integration, exchange listings, brand endorsement, legal consulting... In other words, it is a complete process of 'getting them onto the stage'.

Similar paths are now being replicated by Vernal (the incubation brand newly established by Du Jun): investing in projects while bringing them into the market, turning 'running alongside' into 'co-building'.

It should be noted that even some large funds that still seem to be doing first-level investments, like a16z, have quietly integrated incubation into their systems. They provide project parties with recruitment support, government communication channels, compliance framework design, and even launched the Crypto Startup School to systematically train teams on how to start from 0.

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

In short, incubation investment is a game of heavy collaboration. It does not treat projects as a 'financial target', but as a 'long-term partner'.

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

Characteristics and legal challenges of incubation investment

But to be fair, incubation investment is not a panacea.

It can indeed bring stronger project collaboration and a more complete ecological collaboration chain - but it also pulls investors into a more complex legal context. Especially in the current global tightening regulatory environment, the deeper the participation, the greater the responsibility, and the higher the likelihood of stepping on landmines.

If VC is 'invest and wait', then incubation is more like 'getting personally involved in the game'. And this game is not always fair, nor always safe.

Portal Labs suggests looking at the 'high risk + high participation' characteristics of this path from three angles:

1. High participation, blurred identity boundaries

The identity of traditional VCs is relatively clear: funders, observers, not directly involved in project operations. But incubation is different; you may find yourself in product meetings, participating in the design of token economic models, or even personally seeking wallets, negotiating launches, and building communities.

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

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

If there are no clear lines drawn in contracts and structures, regulatory bodies or project parties may find you liable for 'related party transactions', 'substantial control', or 'shadow directors', and you will bear legal responsibility.

Especially when projects involve fraud, illegal financing, or user asset losses, you may not be an observer, but a 'second defendant'.

2. Diverse revenue paths, heavier compliance responsibilities

One of the benefits of incubation is that exit methods are more diverse.

You may participate in project revenue sharing, design token buyback mechanisms, bind ecosystem profits, and even earn product revenue rights. It sounds like an upgrade in capital efficiency, but it also means you need to face more diverse compliance challenges. For example:

• Does it constitute an unlicensed securities issuance?

• Does the profit-sharing agreement violate the dividend regulations in the jurisdiction?

• Is tax reporting or filing required?

• Does the Token Buyback involve manipulating market prices?

If you handle these issues with a compliant structure, the risks can be controlled; but if you are acting as an individual and participating directly, it is equivalent to 'running naked', with all risks borne by yourself.

3. Tokens remain a 'high-risk area'

Regardless of whether you are incubating RWA, DePIN, ZK, or AI narratives, one question remains unavoidable: Should you issue a coin?

Once you issue a token, you cannot avoid the issue of different countries' recognition of token attributes.

• In the United States, the SEC's attitude is almost a blanket ban, and functional tokens can easily be classified as securities;

• In Hong Kong, the SFC requires that highly volatile tokens only be targeted at professional investors, and many project launch processes are stalled due to entry mechanisms;

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

What’s more troublesome is that many incubation projects adopt a model of 'global collaboration + multi-location deployment'. For example: you build a team in Singapore → issue tokens in the Cayman Islands → finally want to go live on exchanges in Korea or Japan. It sounds like clear division of labor and logical reasoning, but in the eyes of regulators, this operation may have already crossed multiple red lines.

The compliance paths and structures of incubation investment

Facing the complex situation of 'deep participation + cross-border operations + multi-role benefits', if you want to safely enter incubation investment, the core ability is not to invest in projects, but to build a compliant structure.

Specifically, Portal Labs recommends starting from three key dimensions:

1. Ensure 'identity isolation'

Whether providing funds or resources, Portal Labs does not recommend investors to bind projects directly as 'natural persons'. The reason is simple: if a project runs into trouble, individuals will be liable, exposing investors to highly uncertain legal risks.

A more mature approach is to establish a dedicated investment structure overseas, common paths include:

• Cayman SPV: used to hold token shares and distribute profits, flexible and controllable in cost, is the standard configuration for current crypto funds;

• 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, also beneficial for subsequent tax declarations, bank account openings, and other compliance operations.

These structures are not just tax and settlement tools, but the first line of defense for isolating identity risks and managing compliance responsibilities.

2. Token design needs to be 'de-securitized' in advance

Many countries do not oppose you issuing tokens; what they oppose is the issuance of tokens that look like securities.

If you are in a restricted area, such as mainland China, then hold off. But if you choose a region with a relatively relaxed policy space, then from the beginning of the design, you must stay away from regulatory high-pressure lines.

You may want to focus on the following optimization points:

• Use SAFT to bind rights first, delay issuance, and avoid immediate questions about 'securities issuance';

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

• Highlight the 'use' of tokens rather than their 'selling points', for example, using them to offset fees, participate in governance, and exchange for services, rather than just waiting for appreciation;

• Bind it with ecological behaviors, such as staking + task incentives, unlocking usage scenarios, rather than linear releases. These 'behavior binding models' are more likely to be accepted by regulators as functional tokens.

In short, issuing tokens is allowed, but do not issue them as if you are selling equity.

3. Match the 'landing jurisdiction' according to market objectives

The differences in regulatory environments across regions are enormous. Choosing the wrong starting location may not just mean earning less, but may result in being unable to launch at all.

Therefore, many people who issue tokens tend to first look at who has more money and who has better exchanges, but this is actually incorrect. The first step in structural design should consider 'where you want this project to ultimately land'.

• Planning to target US users? Then don't touch Reg A; the process is long and expensive. It is recommended to look directly at Reg D (for accredited investors) or Reg S (overseas issuance) for exemptions;

• Planning to start in Hong Kong or Singapore? Then engage with the local VASP system early, or enter the regulatory sandbox for small-scale testing;

• Uncertain about the market's allocation at the early stage? Then consider a flexible combination structure like 'Cayman + BVI', so that no matter where you apply for licenses later, you can switch paths flexibly.

These structures may not be complicated, but you need to establish them before the project goes live and the token model is determined. By the time market feedback arrives, going back to catch up on compliance may already be too late.

Who is suitable for incubation investment?

Ultimately, incubation investment is not a 'betting game', but a 'long-term collaboration'.

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

However, if you prefer an asset allocation method of 'light participation and high liquidity', or hope to 'invest and leave, with risks borne by yourself', then incubation investment may not be your ideal domain.

Of course, if you are a participant who believes in long-termism and is willing to root yourself in the industry ecosystem, ready to genuinely integrate your experience, resources, and vision into a project's growth path, then what incubation investment brings is not just potential multiple returns, but also an opportunity to co-build with the future.