Mineral Vault Tokenization Structure

In the Mineral Vault tokenization structure, an existing U.S. entity (“Source Entity”) is identified which owns a desirable collection of mineral & royalty interests for tokenization. This entity derives revenue from the properties via a combination of currently-producing wells and future well development, subsequently transferring 100% of this revenue, net of property taxes, withholding tax, and any joint interest billing expenses associated with working interests, to the Special Purpose Vehicle (“SPV”) entity which is fully-tokenized. This is effectuated via a Term Assignment Agreement established between the two entities. The SPV will then distribute dividends to holders of tokens based on this income, which will happen on a monthly basis. Hence, the tokens offered by the SPV to Investors are backed by the Term Assignment Agreement and corresponding revenue inflows from mineral & royalty interests located in the continental United States. Investors should be advised that the only expenses which will be deducted from the Source Entity revenue prior to distribution to the SPV and further to token holders, in accordance with the terms of the Term Assignment Agreement, are property taxes, withholding tax, and any joint interest billing expenses associated with working interests owned by the Source Entity.

Upon receipt of revenue inflows from the Source Entity in accordance with the terms of the Term Assignment Agreement, the SPV itself may deduct some minor incidental expenses from the generated income prior to distributing profits to holders of tokens (such as registration fees, etc.). The SPV will also pay 10% of all revenue received as a management fee to Mineral Vault LLC, a Texas limited liability company (henceforth, “Mineral Vault”), compensating Mineral Vault for ongoing management of the property portfolio on the SPV’s and Source Entity’s behalf, including negotiation and execution of new oil & gas leases, review and validation of division orders related to new and existing wells, verification of payment from operators & purchasers, calculation and payment of property taxes, filing of all necessary tax and regulatory paperwork, token management, and investor communication and coordination, including compliant onboarding of investors, as well as all costs directly related to the provision of these services.

As all mineral properties slowly deplete over time, Mineral Vault term-limits the tokens (and the Term Assignment Agreement) to 15 years and slowly buys back and burns originally issued tokens over their 15 year life in order to (1) steady token price as production volumes deplete and (2) ensure that the tokenized entity can be terminated at the point that the revenue from the oil & gas properties has declined significantly and administrative costs are at risk of becoming too large a percentage of income to continue justifying the existence of the tokens.

The diagram below shows the general corporate structure that describes the interactions between the companies and the distribution of profits in the design herein described:

As an example, for Mineral Vault’s flagship token offering, Mineral Vault I Ltd, the exact entity names involved in the offering are shown below:

Why A Term Assignment Agreement? Why Not Transfer The Assets Into The SPV Permanently?

There are three important reasons why this structure is used:

Reason #1: By tokenizing a separate SPV with (effectively) a 15-year term interest in the mineral properties rather than a perpetual ownership interest, we can ensure that the costs of token & mineral property administration will never exceed the income received on the properties. Without this protection, in multiple decades, the income from the mineral properties will have likely depleted to effectively $0, but the administration of managing hundreds of trivial property tax bills, hundreds of investors, and other fixed costs will make it impossible to economically justify having a token for these assets and the token would therefore effectively become a “junk coin”. The 15 year term prevents this.

Reason #2: The process of moving several thousand mineral properties from their source entity into a new SPV, particularly in a foreign jurisdiction where tokenization is possible, is extremely time-consuming and costly. Many of these inefficiencies are what have inspired us to start Mineral Vault in the first place. More discussion of the inefficiencies in transferring mineral property can be found in our blog post Why Tokenize Mineral Interests?

Reason #3: By signing Term Assignment Agreements with existing entities that own large quantities of mineral interests, we can more quickly generate new offerings for investors and, depending on token holder feedback as to desired token characteristics, we can more rapidly identify existing entities that hold assets of the type that token holders wish to obtain interest in.