PALS Finance Explained

Part 2 of 2

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

Henry Ford

The PALS™ Contract

The PALS contract is a new strategic, operational tool designed to facilitate and accelerate business development.

PALS™ stands for Profit And Loss Sharing. The PALS™ Contract is a common framework developed in response to the new risks and challenges unfolding on the down side of the Energy Seneca. PALS™ is applicable and available to all parties who become involved in Fourth Transition business and as far as we have been able to ascertain is compatible with all legal and regulatory systems globally.

PALS™ Principles

PALS is defined as follows:

PALS is a partnership contract between businesses taking part in the Fourth Transition and each stakeholder involved in it. The PALS contract is not equity, nor a bond, nor a form of rent attached to the ownership of some financed goods or any other form of security as defined, for example, in the 1934 US Securities Exchange Act. PALS is a form of venturing between the parties involved in the Fourth Transition: parties providing resources, in kind such as raw materials, equipment, labour, skills, know-how, intellectual property (IP), commercial goodwill, and/or cash and using them to advance the specific objectives of the Initiative. Whether contributions are big or small makes no difference. The framework is the same for all.

PALS falls within the ambit of contract law. PALS is a form of Value Adding Partnership (VAP) where each party remains focused on their own domain of expertise, or business, and cooperates on that basis to maximise their synergies without impinging on each other’s domains.

PALS is the sharing of entrepreneurial risks. This aspect of PALS entails that all parties take responsibility vis-à-vis their understanding of business environment risks, risks attached to not entering into the PALS Contract just as much as risks that the Initiative may not reach its objectives for whatever reason.

PALS creates a domain of trust.  In regard of the Fourth Transition Initiative’s business objectives, the parties to PALS contract in good faith concerning their respective capabilities and contributions with the view of creating a common domain of trust upon which new, non-predatory, sustainable ways of doing business may be built.¹ PALS contract monitoring and auditing provides bases for ensuring that parties perform according to the terms of their contract (no “free riding”).

PALS contracts have a specific duration and do not constitute a debt between the parties.  The PALS contract defines an entrepreneurial involvement and a binding commitment to share the outcomes of the joint Initiative, whatever these may turn out to be, positive or negative over a fixed period of time. Over that fixed term, stakeholders may or may not derive a net return for their individual contributions.

The sharing of the outcomes takes place through a specified percentage of the yearly net results that is allocated to each contracting party. The actual amount of this percentage is established on the basis of audited Statements of Comprehensive Income (commonly referred to as Statement of Profit and Losses, P&L). If there is a loss the parties to PALS share this loss in proportion of the agreed percentage just as they share the profits on the basis of the same percentage. In case of a loss, each party may offset their share of it against any profit within their own accounts, which in many instances can provide a tax advantage for their own businesses.

The schedule of outcome sharing through yearly P&L results can be structured to suit the parties circumstances and preferences (such as grace period specified to let the business gain momentum over the take-off phase with outcome sharing beginning only when this phase is over, agreements concerning re-investing part or all of the profits for a while in order to accelerate the growth of a young business, or duration of the partnership – short versus longer term involvement expected or desired by the contributing party, etc.).

The PALS format is very flexible to enable its tailoring to each contributor’s objectives and circumstances. It offers a range of options concerning outcome sharing percentages according to the chosen shorter or longer terms and concerning any final exit from each PALS contract such as the acquisition of common stock in Fourth Transition businesses once these businesses are well established and a fair market value for such stock can be reliably determined through audits and or a listing.

PALS is a non-speculative contractual arrangement. This is an important distinguishing feature of PALS. PALS insulates all parties from the kind of speculative moves that only too often plague both start-ups and their investors. In particular, without any interest rate determined by speculative factors that the contracting parties do not control (such as by intermediating institutions and related speculative markets), PALS parties are not subject to potential snow-balling effects that often can jeopardise a young venture.

PALS is open to a very wide range of parties. All too often only specialised parties, business angels, venture capitalists, and various funds have early access to the opportunities presented by new technologies and start-up companies promoting them. Almost as a rule, in such instances funding is structured to potentially generate very high returns to the early risk takers, with little consideration given to what may or may not happen next – a “the devil takes the hindmost” kind of approach.

At the other end of the spectrum, for example in many current crowd-funding or charitably funded initiatives, project supporters receive very little for their contributions – they have the satisfaction of having contributed to a neat project, maybe get a T-shirt to show their support, some product if it ever gets produced at a later stage, but often not much more. However, such an approach is neither good enough nor suitable for the current Initiative.

PALS seeks to remedy elegantly the above matters. PALS enables a wide range of parties to become involved in the Fourth Transition in ways that place all on a common footing. With PALS, proportionally speaking, a small contributor stands to benefit just as much as a large one since in PALS the total amount accruing to each party is apportioned on the basis of the percentage each has contributed to the total effort.

PALS is open to contributions in kind as well as in cash. PALS is structured to enable contributions in kind such as expertise, work, IP, material inputs, machinery, and so on. This opens up the possibility of including highly skilled and experienced people who are unemployed or for some other reason cannot contribute monetary investment.

PALS is a tradable contract and is designed to facilitate and make use of developments in cryptocurrency technologies. PALS contracts may be traded between contributors on the basis of terms specified at the outset in each contract, concerning fair value, timing, and acceptability of the transferees to the other parties. All PALS parties may be registered in a similar fashion to share registers, employee rolls, or more innovatively on blockchains and make use of emerging smart contract technology, for example, Ethereum smart contracts. 

In some ways PALS contracts can be seen as part of the global trend towards disintermediation and securitisation of finance. Apparently, such products presently amount globally to over US$10 trillion. PALS contracts, however, differ from most existing products in that they are specifically not securities and are being designed to be non-speculative.

Overall, PALS is intended as a benign change in business practices that offers a more sustainable method of doing business without reducing the potential for profits.

An illustration of how PALS works

In its Phase 1, Fourth Transition Initiative (FTI) is exclusively focused on demonstrating the nGeni Technology Class and initiating early licensing activities. The FTI budget for this is €20 million. Here is an illustration of how we envisage PALS contracts may work as part of Phase 1:

• Profit and Loss Sharing: stakeholders contributing to Phase 1 projects receive, say, 25% of net results after any interest and tax payments (we do not intend to have any significant interest amounts, but there may be the odd lease payments, such as for some equipment).

• Grace period: three years. This is to enable FTI to produce the nGeni Demonstrator, use it to demonstrate the nGeni Technology Class, market it by way of licenses and franchises, initiate the formation of joint ventures (JVs) with licensees concerning the first nGeni Applications.

• Schedule: payments of shares in profits and losses (P&L) over the ensuing 5 years.

• Allotment: contributing stakeholders receive a share in the P&L results pro rata of the amount they have contributed over the total contributions received.

• Final payment option: contributing stakeholders have an option to be paid in equity once the venture has reached break-even point.Bonus: contributing stakeholders, from the nGeni Demonstrator onwards receive a priority ranking entitling them or their businesses to be equipped with the first series of nGeni GreenBoxes to be produced and made available commercially in their area of residence, with these units to be supplied, delivered and installed at cost, and with the amount of their total contribution to be deducted from that cost.

• Potential results: on the basis of FTI’s P&L projections over 8 years we estimate that an amount worth €1000 contributed as above would return in the order of €285,000, i.e., an IRR in the order of 1000% (internal rate of return). This high value is due to the highly disruptive character of the FTI technology, the dire energy situation the industrial world presently finds itself in and the dearth of viable technological situation.

Of course, the above projection assumes success and purely reflects our assessment of the potential of the nGeni Technology Class. It also shows that the prospects present a wide margin. Even if initial results turn out much lower, the prospects are most likely to remain attractive to a wide range of parties.

The above data is only an illustration of the potential as we see it, and, of course, cannot be considered binding.

To conclude

While PALS financing may appear as off the beaten track, it is important to realise that on the downside of the Energy Seneca venturing off BAU has become a necessity. As noted earlier, PALS falls within the very substantial global disintermediation trend. It is a contract and as such is well covered legally. One of its merits is that it is eminently compatible with crowd-funding in a way that goes well beyond present crowd-funding forms. It can be structured to be attractive to a very wide range of investor categories and can be marketed directly to potentially interested parties.

In recent years, months and weeks, numerous parties have sought to assess the costs of addressing global warming. For example, already in 2019, the US versions of a Green New Deal had been variously assessed at necessitating expenditures between US $5 Trillion to US $10 Trillion over 10 years and more; while the UK’s Government’s climate action plan had been assessed as likely to cost over £1 Trillion over the same period. In turn, the costs of global warming to the world’s top 30,000 businesses was estimated to top €1 Trillion in the present context of lack of effective action, while the value of the assets of the world’s top 500 investment companies was estimated likely to drop by well over €9 trillion.¹

Now, in the light of the huge emergency finance measures taken in response to the Covid-19 pandemic since March 2020, the massive losses already incurred by businesses worldwide, and the even greater impacts of the war in Ukraine and climate extremes all over the planet the above figures have begun to look rather small… This is the broader context for the Fourth Transition whose aim, by way of contrast, is to retrieve most of the over €10 Trillion/year presently lost as waste heat and the context for PALS as an innovative financial product designed to ease the Fourth Transition.

In other words, PALS financing is a business opportunity in its own right with substantial potential, that can be developed by way of a value adding partnerships (VAP) between FTI, i.e. a business with extensive expertise in technology assessment, business assessment and management in situations of emergency, on the down side of the Energy Seneca, on the one hand, and, on the other hand, parties having extensive investing clienteles (such as financial advisers, investment clubs, investment funds, impact investing, etc.).

Many investors have become wary of current trends, e.g. speculative volatility, dangers of assets becoming “stranded”, and sensing somehow that worse may, or is likely to come. We can observe many attempts to provide such investors with some form of refuge, an “insurance policy”, in the form of alternative investments such as in precious metals, real estate, and other value holding resources, e.g. agricultural land, forests, etc. However, to the best of our knowledge, the promoters of these attempts have not yet understood the dynamics of the Energy Seneca and what they reveal: the only real source of wealth in this situation is “grey matter”, the ability to bring technology and expert people to bear in order to latch onto solar energy to generate power (in the thermodynamic sense) very rapidly, affordably, safely and sustainably – the other tangible stores of wealth are mere complements.

Overall, PALS financing, as presented in this document, would offer any investors, small or big, an opportunity to have both an insurance policy against the risks and take part in the very high rizq to be generated by addressing effectively the Energy Seneca.