What happens when a venture capital firm partners up with an ICO platform? A venture fund ICO? Sounds like real cutting-edge Fintech! But isn't it against regulations? Not if you are Blockchain Capital! Introducing Blockchain Capital III Digital Liquid Venture Fund ICO, a.k.a. the Most Lawyered Up ICO EVER.
Here is how it works: you send in your USD, BTC or ETH and you get Tokens in return and become a Tokenholder! Yay! And that’s pretty much it.
They called this event the Offering. With a cap of $10,000,000 they hit their ICO target in 6 hours. One of the meanings of “offering” is “a sacrifice ceremonially offered as a part of worship”. I believe this is exactly what has happened here.
The front-man of this event is Brock Pierce, Managing Partner of Blockchain Capital. While I am not commenting on Brock Pierce himself, I am going to quote him throughout this review.
One important thing to keep in mind: the information in this blog about BCAP Token Offering and everything related to it might be incomplete and/or inaccurate. While I did everything humanly possible to understand this situation and report on it I am not infallible or omniscient, and my less-than-a-week exertions cannot amount to those of a team of lawyers acting within a much more extended time frame.
Kowalski, status report!
What they say:
“We’re a security just like someone doing a big crowdfunding campaign, but we’re tokenizing that security. The difference is everyone else is trying to circumvent these regulations. We’re saying, ‘Is there a way to work within them?’, and the answer is ‘yes’." Brock Pierce
They actually said very little. They went to great lengths to make it appear as if they were not soliciting anyone for investment or offering securities. Their landing page is carefully non-committal and provides the following reasons to invest in a (generic) VC Token:
- Level playing field between institutions and individuals in VC
- Get exposure to top tier companies. Our prior investments include Abra and Coinbase
- Have transparency with regular portfolio valuation updates
- Lower fees without middle-men (Terms on the very same page say the fees are indeed as “low” as 2.5% management, 25% performance)
- Option to take profits or increase exposure with a liquid market
- Traded tokens have no minimums or barriers to entry
- Built-in value appreciation mechanism through repurchase
The logic behind it looks okay(ish) until you scrutinise the small print and realise it’s only the innocent-looking tip of the iceberg that lurks under the surface of complacent media hype.
What their small print says:
“Our view is: let’s just face regulation head on, and see if this can be done compliantly. Once we've done this, everyone is going to copy the roadmap we've created.” Brock Pierce
Their legal structure looks like a nested Russian Matryoshka doll. I have no doubts all of the investors did their due diligence and read all the documents thoroughly. For those of you who didn't I’ll briefly touch upon the things some of them contain at the end of this post. Here is what it is comprised of (in the progressive order of degree of control):
- Digital Liquid Venture Fund Terms
- TokenHub.com Terms of Use
- Subscription Agreement
- BCAP Token Offering Memorandum
- Limited Partnership Agreement, “as amended, restated and/or otherwise modified from time to time”
- “Other documents”
BCAP Token Offering Memorandum is a nightmare. It’s the controlling document and second only to Limited Partnership Agreement (“as amended, restated and/or otherwise modified from time to time”) and, probably, “other documents”, which you are supposed to get access to if you ask nicely enough.
Actually there were three Memorandums. A “preliminary” and two “final” ones, the latest uploaded one hour before the ICO launch. They called it “a standard practice” and said the only difference was the cap.
When you serve investors a new version of the controlling document one hour before they are supposed to start investing and it’s 72 .png images glued together, with no text search and you tell them it contains only a tiny little change and it’s normal practice - what kind of reaction do you expect? Correct, the ”shut up and take my money!” reaction. Boom! $10mln in 6 hours. Probably much more: they say the offer was oversubscribed and there is the $20,000,000 cap clause after all.
Briefly on the cap story: they decided $10mln was not enough, raised it to $50mln, then, after a lot of negativity from potential investors, downsized to $20mln. To issue 20,000,000 tokens all they have to do is put a notice on TokenHub. Kindly refer to page 3 of the Memorandum for details.
This blog analyses the latest (?), $20mln-cap Memorandum. This seventy-two page dire legal behemoth goes down in spiral, reiterating terms over and over again, every time with a little additional twist. Those “twists” finally provide for dramatic changes to the spirit of supposedly harmless clauses. A lot of the governing provisions are hidden, for instance, inside the Risk section. It took three separate posts to describe the beast.
“One of the problems I have with ICOs today is they’ve created convoluted structures to circumvent securities law, which in some cases doesn’t work at all.” Brock Pierce
According to my understanding of the BCAP Token Offering Memorandum, the layout of participants looks like this:
The legend:
- “BC III DLVF” — Blockchain Capital III Digital Liquid Venture Fund (Cayman Islands), which is a limited partnership between BC Manager and BCTH
- “BC Manager” — newly formed BC III DLVF GP, LLC (Cayman Islands). The company that calls all the shots. General partner in BC III DLVF.
- “BCTH”, newly formed Blockchain Capital TokenHub Pte. Ltd (Singapore). Issuer of BCAP Tokens, limited partner in BC III DLVF.
- “Blockchain Capital” — Blockchain Capital LLC (Delaware)
- “Argon Advisors” — Argon Investment Management LLC (Delaware), a subsidiary of Argon Parent, service provider to BCTH
- “Argon Parent” — Argon Group Holdings (Cayman Islands)
- “TokenHub” — the ICO platform that belongs to Argon Group Holdings
- “Proud Tokenholders” — everyone who invested during the ICO
Let’s look at how the fund is managed. The BC III Digital Liquid Venture Fund is a Limited Partnership with two partners, BC Manager (general partner) and BCTH (the only limited partner). BC Manager rules over the fund and its finance and it is managed by people from Blockchain Capital. BCTH holds the only limited partnership interest in BC III DLVF, cash as allocated by BC Manager and operates the Tokens. It is internally managed by Argon Advisers.
“We’ve architected our ICO acknowledging that we’re a security. I believe that this will be the roadmap for everyone going forward” Brock Pierce
The rest of the interesting things from the Memorandum can basically be boiled down to something like this. Apologies if the list is a bit long, I sincerely tried to keep it brief:
- BCAP Token transfer is restricted. Furthermore, every time you sell Tokens to someone you will have to make sure that person agrees to be bound by the Memorandum and its rules.
- Investors are purchasing BCAP Tokens exclusively to hold on to them. If they start selling them and (let’s assume this for the sake of an argument) making profit, they will have some taxes to pay in Singapore.
- BCPA Tokenholders have no voting rights and no decision-making powers.
- No assurances. No liabilities or warranties. No protection of your investment at all.
- If they so much as suspect that you as investor are about to cause them any problems with regulators, your BCAP Tokens will be forcibly redeemed at the price that can be “significantly lower” than the market price.
- BC Manager uses its sole discretion over governing the funds and realization of profits.
- Most of the funds are “expected” to to be invested “by the fifth anniversary” and the fund will be bleeding money all this time.
- The money can be invested pretty much any way it pleases BC Manager.
- Nobody owes you any good investment deals.
- BC Manager can make portfolio changes any way it likes, even if it incurs losses.
- Realization buybacks: minimum 50% get “reinvested”, the rest may be used to buy back the Tokens on the open market if BC Manager makes this decision. If it chooses not to make this decision the money will automatically go back into BC III DLVF. There is no way to make them make that decision.
- The only way to return your capital is the fund choosing to redeem the tokens bought on the open market and you cannot make them do it, remember? But you can get them redeemed if there is a private deal between you and BC Manager. Wink, wink.
- BC Manager can have “privately negotiated transactions” in BCAP Tokens.
- BC Manager may purchase BCAP Tokens for itself or its affiliates at its own discretion.
- BC Manager can dissolve the fund whenever it decides it’s in the best interest of BC Manager and BCTH.
- No liquidation rights for BCAP Tokenholders.
- In case of conflicts of interest you have no rights whatsoever.
- There is 2.5% annual management fee plus 25% “performance” fee (net, regardless of performance). And you don’t get your share of the profit (if there is profit) from “realizations in the portfolio” as the money gets automatically “reinvested”.
- BC Manager can pay itself, its affiliates or BCTH, Argon Advisors or their affiliates “any amounts” for “any services”
- NAV valuation is conducted by BC Manager, no independent audit.
- They did not offer or invite you to purchase anything.
- Anything said by anyone anywhere but in the Memorandum means precisely nothing.
- The rules can change any moment and you won’t even know about it.
On top of that I am getting the impression that a lot of the funds are to be invested exclusively with Argon Group. Not only there are numerous references to Argon Group and a mention of some “engagement letter” and private negotiations on page 21, there is this: “BC III DLVF … may have a more active participation in the affairs of the issuer than is generally assumed by an investor”.
What reality check says:
“We think this is going to change the game, this is going to completely disrupt the VC industry” Brock Pierce
Okay, so you have invested money into BC III DLVF and you got a bunch of BCAP Tokens in return. Let’s have a look at the opportunities:
- According to page 23 of the Memorandum, up to 10% of the fund (up to $1,000,000) is already gone. Your Tokens have lost 10% of their value already.
- You investment is the very opposite of “protected”.
- The fund is likely to be losing money for the first 5 years (it’s in the Memorandum).
- You cannot sell your Tokens because you sort of promised (kindly refer to the Memorandum).
- There is no exchange yet. Anyway, every time you transfer your BCAP Tokens you have to strictly adhere to the Memorandum transfer rules or face the possibility of your BCAP Tokens being forcibly redeemed at a very steep discount if you mess up (best-case scenario).
- You don’t know and can’t know about what is going on inside the fund or around it. Any kind of payouts, underhand deals, any insane kind of misconduct is possible. You don’t have a say in anything.
- Any moment your fund can cease to exist and you can’t even sue anyone about it.
- Actually, your “investment” is more like a Pandora’s box.
- Good luck!
If the information above came as a surprise, next time remember to do your due diligence and go through the documents before you queue up for another fix of flashy Fintech. Or ask someone to do that for you.
Actually, this whole affair can be summed up just by a single quote from page 43 of the Memorandum:
“Direct investors in investment funds are generally owed an obligation by the fund and its managers of good faith, fairness in all dealings and other fiduciary duties. However, to the extent permitted by law, BCAP Tokenholders will not be entitled to any such protections from BCTH.”
TokenHub.com Terms of Use:
- Terms of Use can be changed or modified at any moment, effective instantly and they choose how to notify you about that (if at all).
- Your account can be disabled at TokenHub’s sole discretion.
- No warranties and no liability of any kind.
- You are solely responsible for backing up and maintaining duplicate copies of any information you store or transfer through TokenHub.com.
- No document or information publicly available on TokenHub constitute an offer or solicitation to sell securities.
- If anything goes wrong you are always welcome to try arbitration in the Cayman Islands.
Subscription Agreement is a mercifully brief document. Among other things you agree to the following:
- You have “carefully reviewed the Smart Contract and its functions”.
- You have “a sophisticated and deep understanding” of how cryptographic tokens work.
- You are purchasing the tokens for investment purposes only and not with a view to resale or distribution.
- When you transfer your tokens to someone else they become bound by the terms of the Agreement and the Memorandum.
- “Your interest in BCTH, BC III DLVF or the BCAP tokens has not in any way been induced by BCTH or BC III DLVF or any person acting on their behalf”.
- You initiated any discussions about BCTH or BC III DLVF and neither BCTH or BC III DLVF nor anyone acting on their behalf has marketed the BCAP Tokens to you.
And the $20mln-cap Memorandum itself. By virtue of some incredible and highly unlikely accident I found a link to it and by some fortunate coincidence this time it is in pdf and it is searchable (there is somewhat buggy OCR text on the background, so just hit Ctrl-F and enjoy). The link expires in 24 hours.
Update: I’ll also throw in the Subscription Agreement and the BCAP Telegram chat log. Yet another post on the BCAP situation is probably in order.
This is all I have time for now. I hope this helps. Make sure you have read and understood the disclaimer at the bottom. If you come across any factual mistakes or faulty grammar you are welcome to point them out in your comments. To get updates or PM me you can follow me on Twitter.
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My IBO address: 13KoSmPCvKNcWMyXANEShyGW7iUjX7mdRA
My IEO address: 0x4CE74183c002Ea7555Ca4877Ab8f273F10cFBFB6
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