Quadrant intends to tokenize all of its equity and offer tokens representing approximately 17% of its diluted equity via the token sale.
The token being offered for sale, the Quadrant Token, is a self-avowed security token and it is one of the first instances of something many anticipate will become a pronounced trend. By offering a simple token on the blockchain that represents traditional equity, Quadrant is inviting the community to evaluate its “token sale” as a traditional securities offering. This approach could have broad implications for both the traditional securities and blockchain industries.
What is Quadrant Biosciences?
Quadrant researches and develops solutions for health issues including concussion injuries, Autism Spectrum Disorder, and Parkinson’s Disease. Quadrant is a Delaware C-Corporation founded in 2015 and based in the Institute for Human Performance on the SUNY Upstate Medical University campus in Syracuse, NY. Quadrant’s marketing materials indicate they are developing an intellectual property portfolio, that includes utility and provisional patent filings, though no patents have been granted at time of writing. Quadrant’s current research pipeline is comprised of two product lines: Motion Capture Technology and Epigenetic Bioinformatics Technology.
Their first product in the Motion Capture Technology division is Clear Edge, a portable briefcase sized toolkit and accompanying app designed to establish cognitive and balance “baselines” and track and assess brain health. Clear Edge is made up of ClearEdge Motion and ClearEdge DANA. ClearEdge Motion is a Class I medical device that uses a proprietary sensor to measure the patient’s ability to balance in a series of balance tests. ClearEdge DANA utilizes DANA software, which was originally developed by AnthroTronix Inc. through funding from the U.S. military to help evaluate deployed military service members. ClearEdge DANA is a Class II medical device and is comprised of a series of cognitive and psychological tests administered on a tablet device, designed to measure and monitor changes in cognitive function.
Clear Edge is designed to be used by athletes of all ages, military personnel, and any others who may be at risk for concussions, as well as healthcare providers who want to be able to assess and track their patients’ brain health. Clear Edge has been commercially released and is already being used by healthcare providers around the U.S.
The Epigenetic Bioinformatics Technology division is actively researching reliable saliva based biomarkers for concussions, Autism Spectrum Disorder, and Parkinson’s Disease. Quadrant researchers have already published research demonstrating that reliable biomarkers can identify whether children and young adults who had already suffered a concussion are at risk of experiencing prolonged symptoms. Quadrant is also researching Autism and Parkinson’s biomarker screening tests; their efforts have been supported by the NIH and private funds and conducted in collaboration with Autism Speaks and The Michael J. Fox Foundation For Parkinson’s Research. Quadrant expects that their Autism and Parkinson’s screening tests will be commercially available in late 2018 and mid 2019, respectively.
What is the Token Being Sold?
The token sale will be conducted as a private offering under Rule 506(c) of Regulation D in a combination of pre-auction private transaction and a Dutch auction. The tokens will only be available to (i) U.S. Accredited Investors and (ii) non “U.S. persons” as defined by Regulation S.
Unlike the utility tokens sold in most ICOs, the Quadrant Token represents equity ownership in Quadrant Biosciences Inc. Though not core to Quadrant’s main business processes, Quadrant will leverage blockchain technology to provide for more efficient management of its shares and corporate governance processes, including on-chain voting for corporate directors and the issuance of dividends directly to tokens. One implication of this ICO structure is that trading of the tokens will not be permitted unless and until the company notifies token holders that they may legally do so, which can reasonably be expected once all regulatory issues have been addressed.
Quadrant will be offering for sale 20 million tokens, which will represent approximately 17% of all diluted Quadrant Tokens (when unexercised obligations are taken into account). Quadrant previously raised $6.1 million in a Series A funding round, but these shares as well as previously issued option grants are not part of the token sale. The token sale will be conducted in two phases: a pre-auction private offering and a subsequent Dutch auction. In the pre-auction offering, Quadrant plans to offer for sale 10 million shares of common stock at an expected price of $2.50 per share. Subsequently, an additional 10 million shares as well as any unsold shares from the pre-auction offering will be offered for sale in the Dutch auction. Quadrant expects the price range to be between $2.50 (the share price anticipated during the pre-auction offering) and $10 per token. All auction purchasers will receive their tokens at the same final price. Assuming the full 10 million shares are sold during the pre-auction at $2.50 per share, the expected raise from the entire token sale will be between approximately $50 million and $125 million, implying a valuation between $290 million and $735 million.
The raise charts below provide a comparison of related company ICOs vs IPOs. The first chart shows the largest 25 biopharma IPOs in 2017 and the second shows health related ICOs to date.
While the upper bound of the expected raise range for the Quadrant Token would be high for an ICO, it looks more reasonable when compared to recent biopharma IPOs.
Certain details surrounding the token have not yet been specified, such as whether or where tokens will be able to be traded once the required 12 month lock-up period has ended. Quadrant has created a dedicated website where they will provide more information about the company and the token sale.
Who is the team behind the Project?
Quadrant’s CEO Richard Uhlig, is a Wall Street veteran with over 25 years of team-building and managerial experience with institutions like Morgan Stanley, Merrill Lynch, and Deutsche Bank. Richard cites a concussion his son sustained while playing ice hockey as the impetus for wanting to pursue concussion research, and ultimately starting Quadrant. This also illustrates how a seasoned team builder from outside the industry finds himself at the head of an innovative biosciences startup, and provides insight into the sense of purpose that appears to motivate the Quadrant team. Uhlig has put together an executive team with considerable experience in engineering, medical devices, regulatory compliance, marketing, supply chain management, and clinical research.
Why pursue a token offering?
Management acknowledged that while Quadrant could pursue established equity investment avenues, they view the pursuit of a token sale as the fullest expression of their fiduciary duty towards existing investors. Specifically, coupling a token offering with a Dutch auction will allow Quadrant to get equity into public hands while bypassing traditional IPO underwriters and their accompanying fees (which can be as high as 7% of raised capital), thereby preserving maximum value for the company and its shareholders. However, this means that Quadrant will not benefit from access to large prospective stock purchasers as well as marketing efforts that underwriters typically provide, a risk Quadrant is willing to assume given the company’s confidence that their products will allow them to attract investors through their own efforts.
Prospects and Challenges
It is important to acknowledge the difference between evaluating a tokenized blockchain protocol and evaluating a biosciences company. Though many application protocols blur this line, those with a deep understanding of the blockchain industry can parse fact from fiction regarding the purported value of blockchain technology. When evaluating companies undertaking a tokenized equity offering, potential investors should be particularly cognizant of their own limitations and biases. At the same time, they could approach such investments in the same way some have with token sales: as ways to support strong, meaningful projects.
That said, several areas merit highlighting for potential investors. Risks surrounding intellectual property should be considered carefully. Even though patent applications are pending, there is no guarantee that they will mature into full patents. It is difficult to assess the risk without knowledge of the industry. Approximately 55% of patent applications don’t materialize into patents, with medical device applications and applications from small companies experiencing some of the lowest allowance rates. However, without more intimate knowledge of the industry and Quadrant, it is difficult to quantify specific risks in this instance.
Further, Quadrant is in the final stages of negotiating ownership and licensing agreements with the Research Foundation for the State University of New York and the Pennsylvania State Research Foundation. Though these agreements are standard practice in the industry, the potential failure to finalize and maintain them, as well as any onerous terms, represent risks for Quadrant. Finally, until licensing agreements and any potential royalties are settled, any forecasts of sales, revenue, and net income are tentative. This introduces obvious challenges in terms of evaluating Quadrant’s market comparisons and revenue projections.
It is also important to consider the extent to which Quadrant’s ability to successfully commercialize its products depends on third-party reimbursement policies. Assuming Quadrant can demonstrate efficacy and obtain all necessary regulatory approvals, they will still be at the mercy of health insurers/payers, such as Medicare and United Healthcare, to obtain coverage and reimbursements. Even if coverage and adequate reimbursement is achieved, these third-party payers can always revisit their decisions at any time. That said, this issue is not unique to Quadrant and experienced investors in the sector will be able to reach their own conclusions regarding the risks this represents for Quadrant in particular.
It appears that Quadrant is working on products that have clear demand and the potential to solve significant problems, and has developed innovative tools and approaches that appear quite promising. Quadrant seems to be making progress towards their goals, though potential investors should note that the field is notoriously risky.
It is significant that this transaction is based on the notion of pursuing equity funding via an arguably more democratic method, employing a Dutch auction mechanism that bypasses intermediaries while allowing the market to value the company. This is especially noteworthy coming from a former Wall Street executive. It will be interesting to observe whether other similarly positioned companies choose to follow in Quadrant’s footsteps in conducting a security token offering, as such a shift would represent a profound change from both the prevailing model of traditional offerings and the emerging practices around ICOs.