Note: Blockchain Capital has released their Offering Memorandum (OM). Due to legal restrictions, interested non-US persons must first have their identities verified and US persons also must have their net worth or incomes verified before viewing the memo. Smith + Crown has not reviewed the OM. Information in this article may be obsolete or superceded by the OM. We encourage anyone serious about participating to get verified and review the OM in depth.
Blockchain Capital is a venture capital firm investing in blockchain technology companies. Their first fund was launched in the fall of 2013. Since then, the fund has made investments in forty-two companies at varying stages of development. In 2017, Blockchain Capital will be holding an ICO to raise capital for their third fund.
Blockchain Capital was co-founded by Bart Stephens, Brock Pierce, and Brand Stephens who also act as the fund’s managing partners. Together they have more than six decades of investment management and entrepreneurial experience. Brock Pierce is the Chairman of the Bitcoin Foundation and an early digital currency entrepreneur. Brock serves on the founding board of multiple blockchain start-ups including the omni foundation, GoCoin, and Tether among others.
The sale will be open to US residents under SEC D506(c) which exempts the sale from registration with the SEC. An Accredited Investors exemption allows the sale of unregistered securities to US residents with a net worth greater than $1 million or with at least a $250,000 income, and as long as the issuer takes reasonable steps to verify accredited investor status, it may generally solicit the security. As a result, all interested token sale participants will need to submit documentation to have their identities and net worth or income verified.
A Blueprint (and a Carrot) for Token Sales
In an interview with Smith + Crown, Brock Pierce highlighted several issues with the predominant models of token sales.
- Many token sales have a one-and-done approach to raising money: give us $5 million and we will build the entire product. In contrast, the early stage venture financing industry has developed a milestone-based approach in which companies can seek outside funding in multiple rounds. Meeting goals will increase a company’s valuation, its ability to attract capital, and improves the terms under which it can issue shares. This helps mitigate execution risk that is almost impossible to factor out of investment decisions: can this particular team deliver a working product?
- Companies are trying to raise too much money too early. Venture capital firms invest in teams–people they feel confident will deliver a working product, even if the business plan or marketing strategies end up changing. They would not invest in a white paper unless a team has an impeccable track record. A better approach for early-stage firms is instead to ask for a small amount of funds to build a working prototype, then ladder that success into another token sale. Santiment had and Sikoba is now taking a similar approach. (Brock did not cite these projects specifically.)
- Current terms are not always favorable to investors. For example, projects do not have a fiduciary duty to token holders in the way they would to shareholders. If those two would ever co-exist on a single project, existing legal structures would better shield shareholders. Trying to issue a sale under existing regulations is one way to address this: the token is a security and enjoys the legal protections a security is entitled to. While this does limit token sales to accredited investors in the US, it is a step in the right direction and paves the way for applications of emerging and potential crowdfunding laws that could make the sale of registration-exempt securities open to anyone.
- Existing token sales have a “regulatory overhang” that is stifling investment. This refers to the long-term liability generated by having sale events that could be illegal. The risk associated with this makes traditional investors–who otherwise see potential in a technology or a team–wary of committing other people’s money.
Brock hopes that Blockchain Capital can improve the emerging token sale industry in two ways. First, it will be a blueprint for other token sales that want to have an ICO under US securities law. Second, the fund itself will seek to invest in ICOs that exhibit best practices in their approach to raising capital and growing their company.
He sees immense promise in token sales broadly. In the private equity sphere, investments are usually illiquid and take a long time to realize returns.
What is the token being sold?
The BCAP tokens, to be offered in the upcoming token sale, will grant holders a portion of the profits earned by the fund. The fund’s managing partners will collect a 2.5% management fee (based on total assets under management) and a 25% performance fee (fee on returns). The remainder of profits will be distributed to token holders. The BCAP token will be fully transferable, providing liquidity that is not usually found in traditional venture capital markets. The team anticipates making 10 – 20 investments at an average of $500,000 per deal.
The tokens themselves will represent a maximum of 20% of the third fund they are raising: they will raise $40 million through traditional channels for a venture capital firm. These investments won’t be tokenized, but they will be equivalent in terms of payout structure. A Singaporean company will issue the actual tokens.
Issuing under Regulation D: a security exempt from registration
Blockchain Capital is unique in offering tokens they clearly state are securities and they have attempted to launch within existing regulatory requirements. Briefly, the SEC does permit the sale to US residents of a security that is exempt from registration requirement if it satisfies two conditions. One of them is that the sale is only open to accredited investors and that there is a 1-year lock-up on the tokens sold to US investors. International users will have a 40-day lock-up period before selling to US investors.
Any US residents interested in participating in the sale will need to submit documents to verify both their identity and their status as an accredited investor. International investors will still need to submit documents verifying identity.
Who are the project’s competitors?
Two projects are attempting to collateralize shares in a private equity fund: ICONOMI and Taas.
In 2016 ICONOMI raised more than $10 million in their token sale to launch a platform for managing funds on a blockchain. Some of these funds were earmarked for an actively managed investment fund focused exclusively on ICOs. Profits are distributed using a recently announced buyback scheme. Their token sale was open to anyone and did not reference securities law in any substantial way, though in recent posts, they have clarified they are not offering ICONOMI services to US residents at this time. In this legal FAQ, they also express the viewpoint that ICONOMI does not fit within traditional regulatory frameworks–a quite different philosophy from what Brock and Blockchain Capital have taken in their sale.
Taas, a hedge-fund focused on trading cryptocurrencies, is also currently raising funds. They have closed their sale to US persons, though the legal status of their tokens is unclear.
|Role of token:||Proof of membership in the fund and the rights to a portion of its profits|
|Token supply:||10 million|
|Distributed in ICO:||100%|
|Emission rate:||No new coins created|
|Sale period:||April 10th, 2017 to May 10th, 2017|
|Token distribution date:||May 2017|
|Minimum investment goal:||TBA|
|Maximum investment cap:||TBA|
|How are funds held:||Tokens sold through TokenHub|
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