Web3 infrastructure projects – those building the protocol layers, identity frameworks, settlement rails, and governance architectures of decentralised finance – face a fundraising environment that has matured beyond recognition since the initial coin offering era.
Venture capital funding for Web3 start-ups fell from $33 billion in 2021 to under $7 billion in 2023 (1).
While 2025 saw a significant recovery, with Q2 alone reaching $9.6 billion (2), the capital flowing back into the sector is fundamentally different in character: institutional, compliance-oriented, and concentrated in fewer, higher-conviction deals.
Notably, while capital volume rose, the total deal count (306) hit a multi-year low, signalling that capital is now strictly reserved for “ institutional-grade” ventures.
Yet many founding teams continue to treat token issuance as a primary capital formation strategy.
This article argues that an “equity-first” approach is now a strategic necessity to bridge the gap between decentralised innovation and institutional liquidity.
Subsequent instalments introduce the Polity Investor Readiness Framework (Part 2) and examine the discipline of sustained investor relationship-building (Part 3).
For a founding team, the allure of a token launch is understandable. It promises fast liquidity, community alignment, and freedom from the constraints of traditional corporate governance.
For a regulator, that same promise is a red flag. For an institutional investor, it is a reason to pass.
The key insight is not that tokens are inherently problematic – it is that the era in which a token could serve as a primary fundraising instrument for serious infrastructure is over.
The shift from token-centric to equity-centric fundraising demands a different standard of corporate governance, regulatory preparedness, and commercial rigour. This series examines what that standard looks like in practice – and why the projects that embrace it earliest will be the ones that attract the capital they need.
The ICO Legacy and Its Consequences
The initial coin offering boom of 2017–2018 left an indelible mark on how the wider world perceives Web3 fundraising.
For a brief window, projects could raise tens of millions of dollars on little more than a whitepaper and a promise.
The consequences – regulatory crackdowns across multiple jurisdictions, billions in investor losses, and a deep erosion of trust – are still being felt today.
Yet the mentality persists. Founders still speak of “our token” as though it were a self-evident funding mechanism, one that will materialise liquidity precisely when the treasury needs it most.
This assumption is strategically dangerous. It conflates a potential network utility instrument with a capital formation tool, and in doing so, it obscures the genuine work required to build a fundable enterprise.
The regulatory environment has evolved decisively against this approach.
Between April 2021 and December 2024, the US Securities and Exchange Commission initiated 125 cryptocurrency-related enforcement actions, resolving 98 of them with $8.2 billion in penalties (3) – including a landmark $4.5 billion enforcement outcome involving Terraform Labs and Do Kwon in 2024 (4).
Under the EU’s Markets in Crypto-Assets Regulation (MiCA), under VARA in the UAE, under the frameworks emerging in Cayman Islands and Singapore, the distinction between a utility token and a security is not academic. It is the line between a compliant offering and an enforcement action.
The July 1, 2026, deadline for full MiCA authorisation marks the final closing of the “grandfathering” period for service providers in Europe.
The regulatory momentum is consistent across every major jurisdiction. MiCA’s full application since December 2024 now imposes capital adequacy, whitepaper disclosure, and market abuse obligations on crypto-asset service providers across the entire European Union.
The UK’s Financial Conduct Authority has progressively tightened its crypto-asset marketing rules and consumer protection requirements.
In the United States, the SEC’s Crypto Task Force has signalled a shift towards more structured guidance for compliant tokenised securities — making regulatory preparedness a decisive first-mover advantage.
For infrastructure projects, these converging frameworks are not obstacles – they are the preconditions for institutional legitimacy. The projects that have anticipated this shift and embedded compliance into their operating models from inception are best positioned to benefit.
Tokens Are Not Equity
A utility token, properly conceived, serves a function within a network. It may govern, it may grant access, it may facilitate exchange within a protocol’s economic architecture.
It does not, however, represent an ownership stake in a commercial enterprise in the manner that equity does – and treating it as though it does invite severe regulatory consequences.
Treating a token as a proxy for equity creates a “ dual-master” conflict, where the fiduciary duties of a Board of Directors often clash with the programmatic incentives of a DAO.
This distinction carries profound implications for infrastructure projects specifically.
Their tokens, if they exist at all, tend to be deeply intertwined with network function – governance participation, transaction validation, identity attestation, or access control.
Relying on such tokens for fundraising conflates the project’s operational mechanics with its capital structure, creating a tangle of legal, regulatory, and commercial risks that sophisticated investors will identify immediately.
Consider the practical consequences. A token-dependent fundraising strategy tethers the project’s capacity to fund development, hire talent, and meet operational costs to secondary-market conditions over which the team has no control.
When the crypto market lost $2 trillion in 2022, Web3 venture funding fell from over $8 billion per quarter to $2.4 billion by Q4 – and continued falling to just $1.1 billion in Q4 2023 (1).
Projects that had raised through token sales, or that held significant treasury reserves in their own tokens, faced an existential reckoning: a bear market could render a project unable to meet payroll.
This was the reality for dozens of ventures that launched tokens between 2021 and 2023 and subsequently found themselves unable to sustain operations.
In response, sophisticated teams in 2026 use equity as a “Volatility Buffer,” funding the “Rails” (core development) with institutional capital while using tokens strictly to power the “Traffic” (network utility).
The precedent set by the most successful Web3 infrastructure companies reinforces this point.
Fireblocks, Chainalysis, and the Canton Network all pursued conventional corporate financing to achieve institutional credibility.
ConsenSys, despite its deep Ethereum roots, has funded its infrastructure development through equity investment. These are not outliers – they are the pattern. In each case, equity-first capital formation enabled institutional credibility, clean governance, and sustainable growth.
What Institutional Investors Actually Expect
When a venture capital fund, a family office, or a sovereign wealth vehicle evaluates a Web3 infrastructure investment, it applies a “Traditional Tech Plus” lens.
The “Plus” accounts for the unique technical risks of decentralisation, but the “Traditional” core remains non-negotiable.
The packaging may differ, but the underlying questions are identical.
The 2025 recovery in Web3 venture funding is instructive: the strongest quarter on record saw $9.6 billion deployed, but across only 306 deals – the lowest deal count since mid-2023 (2). Capital is consolidating around projects that can demonstrate institutional-grade fundamentals, not narrative momentum.
Clarity of Corporate Structure
Who owns what? Where is the entity domiciled? What rights attach to each class of share?
Is the cap table clean, or has it been muddied by prior token distributions, SAFTs of dubious enforceability, or side arrangements that will complicate future rounds?
In 2026, “Clean-Room” documentation is the standard. Any legacy SAFTs or side-agreements that remain unresolved are now viewed as significant “Governance Debt” that can block institutional term sheets.
Institutional investors expect a corporate structure that they can underwrite, with recognisable legal instruments and clear protections for minority shareholders. A clean cap table is not a nicety; it is a prerequisite for any institutional term sheet.
Defensible Intellectual Property
Open-source is a distribution strategy, not a legal vacuum.
Investors expect to see formal IP ownership, clean licensing arrangements, and a clear “IP Perimeter” around proprietary implementations.
An open-source ethos is not incompatible with IP rigour; indeed, some of the most successful open-source infrastructure companies have built substantial IP portfolios around their core technology. But it requires careful structuring, particularly where protocol layers intersect with proprietary implementations.
Investors will ask who owns the code, what licence governs it, and what would happen to the IP in a liquidation scenario.
Regulatory Positioning
The 2025 recovery was led by “Regulatory Integrators” – firms that have embedded compliance into their code and initiated the CASP authorisation process under MiCA.
Has the project obtained or applied for the licences it needs? Does it have legal opinions on the classification of its token, if applicable?
Can it demonstrate proactive engagement with regulators?
The regulatory frameworks now in force across major jurisdictions impose specific obligations on crypto-asset service providers – from capital adequacy and governance standards under MiCA to the evolving requirements under VARA and the SEC’s Crypto Task Force (5).
Investors will assess not only whether the project has addressed these requirements, but whether it has done so with sufficient lead time and strategic coherence to inspire confidence. A regulatory strategy assembled reactively, under pressure from a term-sheet negotiation, will not survive scrutiny.
Revenue Model and Unit Economics
Token appreciation is not a revenue model.
Institutional investors want to understand how the project generates sustainable income: through licensing fees, transaction charges, enterprise subscriptions, infrastructure-as-a-service pricing, or some other mechanism that does not depend on speculative secondary-market activity.
The trend is unmistakable: Web3 companies are increasingly pursuing IPOs on traditional exchanges rather than launching tokens (6), because equity listings provide clearer exit paths, deeper liquidity, and stronger institutional validation.
If the unit economics only work when the token is trading at an aspirational multiple, the model will not survive due diligence.
The Equity Readiness Self-Assessment
Before approaching institutional capital, founding teams should be able to answer “yes” to each of the following questions.
A negative answer in any area signals a gap that investors will find – and that should be addressed before a formal fundraise begins.
Part 2 of this series provides the full Investor Readiness Framework for a comprehensive assessment.
The Discipline of Equity-First Thinking
Adopting an equity-first approach to fundraising is a statement of organisational maturity.
It signals to the market that the project’s leadership understands corporate governance, respects investor protections, and has built something that can be evaluated on its commercial merits.
This does not mean that tokens have no role. A well-designed token can be a powerful mechanism for network coordination, governance participation, and value alignment among stakeholders.
But the token’s role must be defined by the architecture, not by the treasury.
The moment a token exists primarily to fund the project, it has been misconceived – and the market, post-MiCA, will treat it accordingly.
Founders who internalise this distinction – who build their capital strategy around equity instruments with clear rights, proper governance, and institutional-grade documentation – will find that the universe of available capital expands dramatically.
The institutional pools that remain largely untapped by Web3 ventures are not closed because investors lack interest in the sector.
They are closed because too many projects have not done the work required to open them.
That work begins with treating fundraising as a discipline, not an afterthought to the technology.
Polity’s own programme has adopted this equity-first discipline as a foundational principle – not because it is the easiest path, but because it is the most credible path to the institutional partnerships upon which serious infrastructure must ultimately be built.
Next week: Part 2 introduces the Polity Investor Readiness Framework – a structured assessment across four dimensions that must converge before a project is fit to approach institutional capital.
About Polity
The disciplined fundraising framework presented in this series is part of an ongoing programme of governance publications developed within the Polity governance model. Polity builds infrastructure for regulated digital finance. Its governance frameworks are designed to bridge decentralised systems and institutional-grade compliance requirements, with a focus on MiCA alignment across European and international markets.
Disclaimer: This article is published for informational and educational purposes only. It does not constitute investment advice, legal advice, or an endorsement of any product, service, or security practice. Polity does not provide investment advice, custody services, or regulated crypto-asset activities. Readers should conduct their own due diligence and consult qualified professionals before making any decisions based on the content of this publication. All third-party sources are cited for reference; their inclusion does not imply endorsement by or affiliation with Polity.
References
(1) Crunchbase (2024). ‘Web3 Funding Cratered in 2023.’ Crunchbase News. Available at: https://news.crunchbase.com/web3/funding-cratered-sbf-ai-crypto-bitcoin-eoy-2023/ (Accessed: 10 March 2026).
(2) CoinDesk (2025). ‘Web3 Funding Hit $9.6B in Q2 Despite Fewer Deals.’ CoinDesk. Available at: https://www.coindesk.com/business/2025/08/29/web3-funding-hit-usd9-6b-in-q2-despite-fewer-deals (Accessed: 10 March 2026).
(3) Ralhi, A.S. (2025). ‘Beyond Enforcement: The SEC’s Shifting Playbook on Crypto Regulation.’ Georgetown Law Center on Transnational Business and the Law. Available at: https://www.law.georgetown.edu/ctbl/blog/beyond-enforcement-the-secs-shifting-playbook-on-crypto-regulation/ (Accessed: 10 March 2026).
(4) Cornerstone Research (2026). ‘SEC Cryptocurrency Enforcement: 2025 Update.’ Available at: https://www.cornerstone.com/insights/research/sec-cryptocurrency-enforcement-2025-update/ (Accessed: 10 March 2026).
(5) Holland & Knight (2025). ‘SEC Enforcement 2025 Year in Review.’ Available at: https://www.hklaw.com/en/insights/publications/2025/12/sec-enforcement-2025-year-in-review (Accessed: 10 March 2026).
(6) CryptoRank (2025). ‘State of Venture Capital in Crypto, Q3 2025.’ CryptoRank. Available at: https://cryptorank.io/insights/reports/crypto-fundraising-report-Q3-25 (Accessed: 10 March 2026).
