This is the Memorandum Challenge! I nominate SEC, ESMA and FCA. Read the BCAP Token Offering Memorandum or donate $10mln to Blockchain Capital. You have 24 hours to respond. Tick-tock.
This is Part III of the Offering Memorandum analysis. It’s a relatively long and unashamedly dreadful read, but (and you have to trust me on this one) it’s infinitely better than going through the 72 pages of the legal equivalent of blatant middle finger demonstration all by yourself.
There are also Part I and Part II. You don’t have to read the whole analysis, soon I’ll post a short summary to complete the series.
It’s just bits and pieces that caught my attention. You are strongly encouraged to check this information against your own copy of the Offering Memorandum.
After a while I just gave up commenting and started copy-pasting some of the juicier pieces. Not that they require any comments at all.
RISK FACTORS
Actually this section is pretty good. It tells you about things that can go wrong and informs you how you don’t have a choice and it takes 19 pages. Just saying.
BCAP Token Risks
page 30
No assurance of investment return
The BCAP TOKENS are subject to significant transfer restrictions
“BCAP TOKENS are not redeemable at the option of the holder and BCAP Tokenholders will not have the right to withdraw their capital”.
“Each BCAP Token subscriber will be required to represent that it is a qualified investor under applicable securities laws and that it is acquiring BCAP Tokens for investment purposes and not with a view to resale or distribution.”
Really?
“Further, each BCAP Tokenholder must represent that it will only sell or transfer its BCAP Tokens in accordance with the restrictions set forth under “Transfer Restrictions” in this offering memorandum and in a manner permitted by applicable laws and regulations”.
page 31
Holders of BCAP Tokens will have no voting rights and may have conflicts of interest with BCTH’s shareholder
No need to worry about this one, you have no voting rights, so just sit back and relax.
(!) Holders of BCAP Tokens will have no distribution or liquidation rights
No distribution or dividend rights.
“The only right of capital return that the BCAP Tokens have is redemption at the election of BC III DLVF”
(!) Repurchase or redemption of BCAP Tokens
“The BCAP Tokenholders do not have the right to compel us to redeem our BCAP Tokens”
“BC Manager May allocate funds … for privately negotiated transactions in BCAP Tokens…”
Bingo. See how with every reiteration of the clauses the document gets more and more interesting?
“Public purchases would be conducted only after notification to BCAP Tokenholders through a press release or other means”
And private transactions are private, I take it?
Then the memorandum repeats the stuff about forcing redemption upon BCAP Tokenholders in ten years time or “upon the occurrence of certain regulatory events”.
page 32
Lack of registration
This event is unregulated and BCAP Tokenholders have no rights whatsoever.
“Compliance with the disclosure, reporting, compliance and operating-related obligations of a registered entity or offering may be expensive and time-consuming, which may distract management from its investment and operating objectives…”
“Any requirement for BC Manager or its affiliates … to register … or any determination that this Offering was not conducted in accordance with applicable laws and regulations ... could adversely impact the ability of BC Manager, BCTH, BC III DLVF, or Argon Advisor to take actions outined in this … memorandum and conduct their business…Furthermore, such a requirement, penalty or determination could adversely impact the rights, value and transferability of the BCAP Tokens and impair your ability to recover your investment in BCAP Tokens”
How someone recovers their “investment in BCAP Tokens” at all is a very interesting question.
(!) We rely on complex exemptions from statutes in conducting our activities
“The requirements imposed by our regulators are designed primarily to ensure the integrity of financial markets and to protect investors in our investment funds and are not designed to protect our BCAP Tokenholders”
BCTH and BC III DLVF Risks
page 36
We are new entities with no operating history
“Given the current low level of return for short-term fixed income investments, and given BC III DLVF’s management fee and other expenses, BC III DLVF will likely lose money until it becomes fully invested”
Highly competitive market for investment opportunities
“There can be no assurance that BC III DLVF will be able to locate and complete investments that satisfy BC III DLVF’s rate of return objectives or realize their values, or that BC III DLVF will be able to fully invest its capital.”
page 37
(!) Master-feeder structure
“BC III DLVF may enter into an arrangement with additional investment funds amanged by BC Manager or its affiliates…to either allow other funds to contibute their assets to BC III DLVF to invest, or to pursue its investment activities by investing all or portion of its assets into a “Master Fund”… The “master-feeder” fund structure presents certain unique risks to investors.”
Other activities of BC Manager and its affiliates
“Neither BC Manager nor any of its personnel or affiliates is obligated to make any particular investment opportunity available to BC III DLVF, and they may take advantage of any opportunity, either for other accounts BC Manager, its personnel or affiliates manages or for themselves”
Risks associated with ICOs
“BC III DLVF may invest some of its assets on ICOs”
Does this particular phrase in combination with the “Master-feeder structure” clause and other clauses mentioning the “affiliates” and ties to Argon Group mean that the fund will sponsor TokenHub or buy up tokens of other ICOs on this platform?
page 38
(!) Leverage
“…BC III DLVF may leverage its investment positions by borrowing. Failure to satisfy the terms of debt incurred by BC III DLVF can have negative consequences, including forced liquidation of other BC III DLVF investments in order to satisfy the borrower’s obligations.”
High yield and preferred securities.
“BC III DLVF’s investments may include “high yield” bonds, convertible and preferred securities that are rated in the lower rating categories by the various credit agencies or comparable non-rated securities”.
page 39
Distressed securities
“Certain of BC III DLVF’s assets may be invested in distressed securities. Investments in distressed securities involve acquiring securities of companies that are experiencing significant financial or operating difficulties and of companies that are, or appear likely to become, bankrupt or involved in a debt restructuring or other major capital transaction”
“BC III DLVF may invest in the securities of companies involved in bankruptcy proceedings, reorganizations and financial restructurings and may have a more active participation in the affairs of the issuer than is generally assumed by an investor”
Hedging policies and risks
“BC III DLVF may employ hedging techniques, including, but not limited to, short sales and put and call options…”
page 40
Risk of limited number of investments
“Investors have no assurance as to the degree of diversification of BC III DLVF’s portfolio in investments, either by geographic region, asset type or sector”
BC III DLVF valuation
“…the liquidation values of BC III DLVF’s securities and other investments may differ significantly from the interim valuations of such investments made by BC Manager”.
Still with us? I’ll just post the next three paragraphs in their entirety. Take a good look at them.
(!) Investments with third parties
“BC III DLVF may co-invest with third parties, thereby acquiring non-controlling interests in certain portfolio companies. BC III DLVF may not have control over these companies and, therefore, may have a limited ability to protect its position therein. Such investments may involve risks not present in investments where a third party is not involved, including the possibility that a third party partner or co-investor may have financial difficulties resulting in a negative impact on such investment, may have economic or business interests or goals which are inconsistent with those of BC III DLVF, or may be in a position to take action contrary to BC III DLVF’s investment objectives. In those circumstances where such third parties involve a management group, such third parties may receive compensation arrangements relating to such investments, including incentive compensation arrangements. Such compensation arrangements will reduce the return to participants in the investments. In addition, BC III DLVF may in certain circumstances be liable for the actions of its third party partners or co-investors.”
Effect of management fee and carried interest
“The existence of BC Manager’s annual management fee of 2.5% of NAV and carried interest of 25% of BC III DLVF’s realized capital gains calculated may create an incentive for BC Manager to make riskier or more speculative investments on behalf of BC III DLVF than would be the case in the absence of this arrangement”
Expedited transactions
“Investment analyses and decisions by BC Manager may be undertaken on an expedited basis in order for BC III DLVF to take advantage of available investment opportunities. In such cases, the information available to BC Manager at the time of the investment decision may be limited, and BC Manager may not have access to the detailed information necessary for a thorough evaluation of the investment opportunity. Further, BC Manager may conduct its due diligence activities over a very brief period.”
Reliance on BC Manager and BCTH
BCAP Tokenholder don’t get a say in making decisions. BC Manager “has exclusive responsibility for BC III DLVF’s activities” and there is “no assurance” that the current BC Manager team “will continue to be associated with BC Manager”
page 41
NAV valuations
“When BC III DLVF invests in illiquid securities or instruments for it may be difficult for BC Manager to accurately determine the fair market value. Valuations of such assets … maybe speculative and will depend largely on BC Manager’s judgment. … BC Manager’s judgment on such matters shall be binding and not subject to audit by BCTH, the BCAP Tokenholders or other outside persons.”
page 42
BC Manager and its management manage other funds
“In addition to managing BC Ill DLVF, the management of BC Manager is also the manager of other venture capital funds in the Blockchain Capital family: Blockchain Capital I, LP (previously known as Crypto Currency Partners I, LP), Blockchain Capital II, LP (previously known as Crypto Currency Partners II, LP,) and Blockchain Capital III, LP, as well as Stephens Investment Management. LLC. Furthermore, Blockchain Capital and BC Manager may advise additional funds in the future or undertake other commercial obligations. This may reduce the time BC Manager and its investment management team have to devote to the affairs of BC III DLVF and adversely impact return on BC III DLVF’s capital deployments.”
(!) Conflicts of interest
“By acquiring an interest in BC III DLVF, each Partner will be deemed to have acknowledged the existence of any such actual or potential conflicts of interest and to have waived any claim with respect to any liability arising from the existence of any such conflicts of interest.”
Nature of private investments
“DLVF’s investments will generally be private, illiquid holdings … In addition, the realization of value from any investments will not be possible or known with any certainty until BC Manager elects, in its sole discretion, to sell BC III DLVF’s investments and subsequently distribute the proceeds to its investors or to distribute securities to investors in lieu of cash”
“Many of BC III DLVF’s investments will be highly illiquid, and there can be no assurance that BC III DI VF will be able to realize a return on such investments in a timely manner, if at all.”
(!) No assurance of returns
“There can be no assurance that BCAP Tokenholders will receive value on redemption from BC III DLVF in an amount equal to their investment in BC III DLVF. The timing of profit realization, if any, is highly uncertain. BC III DLVF’s operating costs, including the management fee payable to BC Manager, may exceed BC III DLVF’s income, thereby requiring the difference to be paid out of BC III DLVF’s capital. Most of the capitalization of BC III DLVF, except for operating cash reserves and funds set aside for follow-on investments in BC III DLVF’s portfolio companies and investments then in process, are expected to be invested or committed by the fifth anniversary of BC III DLVF’s initial closing date. The expenses of BC III DLVF in its early years will likely exceed its income. Such losses will reduce BC III DLVF’s capital. It is possible these losses may never be recovered.”
page 43
Reliance on BC Manager’s investment discretion for BC III DL VF
“BC Manager will have sole discretion over the investment of the funds committed to BC III DLVF as well as the ultimate realization of any profits. … BCAP Tokenholders will not make decisions with respect to the management, disposition or other realization of any investment made by BC Ill DLVF, or other decisions regarding BC III DLVF’s business and affairs.”
My absolute favourite:
(!) BTCH does not owe you any fiduciary duties
“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. Accordingly, BCAP Tokenholders will have very limited, if any, rights of recovery against BCTH if such parties engage in gross negligence or act against the interests of the BCAP Tokenholders. Furthermore, BCTH has no obligation to BCAP Tokenholders to enforce any rights that it may be deemed to have against BC Manager or BC III DLVF.”
page 44
Focused investment strategy
“BC III DLVF will generally be focused on investments in blockchain technologies and cryptocurrency businesses and ICOs, although it may change its investment focus at any time without the consent of BCAP Tokenholders.”
Portfolio company turnover
“Although we expect that many of BC III DLVF’s investments will be relatively long term in nature, we may make changes in particular portfolio holdings whenever it is considered that an investment no longer has substantial growth potential or has reached its anticipated level of performance, or (especially when cash is not otherwise available) that another investment appears to have a relatively greater opportunity for capital appreciation. BC Manager may also make general portfolio changes to increase BC III DLVF’s cash to position us in a defensive posture. BC Manager may make portfolio changes without regard to the length of time BC III DLVF has held an investment, or whether a sale results in profit or loss, or whether a purchase results in the reacquisition of an investment that BC III DLVF may have only recently sold.”
Sure. Remember page 40, Effect of management fee and carried interest? Remember how they get 25% net for every exit?
Limitations on ability to exit investments
“BC Manager expects to exit from its investments in two principal ways: (i) private sales (including acquisitions of its portfolio companies) and (ii) initial and secondary public offerings. At any particular time, one or both of these avenues may not be open to BC lll DLVF, or timing with respect to these exit mechanisms may be inopportune. As such, the ability to exit from and liquidate portfolio holdings may be constrained at any particular time.”
TRANSFER RESTRICTIONS
page 49
“Each purchaser of BCAP Tokens will be deemed to represent, warrant, and agree as follows will be deemed to represent, warrant, and agree as follows:
…
(3) It is acquiring BCAP Tokens for its own account for investment purposes only and not with a view to resale or distribution.”
(4), (5) Restrictions on “U.S. Persons” as Tokenholders and restrictions on selling BCAP Tokens to “U.S. Persons”
“(8) It acknowledges that (a) none of the Issuer or any person acting on its behalf has made any statement, representation, or warranty, express or implied, to it with respect to the issuers or the offer or sale of any BCAP Tokens, other than the information we have included in this offering memorandum, and (b) any information it desires concerning the issuer, the BCAP Tokens or any other matter relevant to its decision to acquire the BCAP Tokens (including a copy of the offering memorandum) is or has been made available to it.”
LOL.
page 50
“(10) If it is located or resident within a member state of the European Economic Area, that it is a “qualified investor” within the meaning of Directive 2003/71/EC, as amended (the “Prospectus Directive”).
(12) It acknowledges that BCTH will not be required to accept for registration of transfer any BCAP Tokens acquired by it, except upon presentation of evidence satisfactory to BCTH that the restrictions set forth herein have been complied with.”
NOTICE TO INVESTORS
page 51
“We have not authorized anyone to provide any information other than that contained or incorporated by reference in this offering memorandum. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we nor the initial purchasers have authorized anyone to provide you with information that is different. BCTH takes no responsibility for, and cannot provide any assurance as to the reliability of, any information or any representations outside of this offering memorandum.
The information in this offering memorandum is current only as of the date on its cover. For any time after the cover date of this offering memorandum, the information, including information concerning our business, financial condition, results of operations and prospects may have changed. Neither the delivery of this offering memorandum nor any sale made hereunder shall, under any circumstances, create any implication that there have been no changes in our affairs after the date of this offering memorandum.
This offering memorandum is a confidential document that we are providing only to prospective purchasers of the BCAP Tokens as described in this offering memorandum. This offering memorandum is personal to each offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire the BCAP Tokens. You are authorized to use this offering memorandum solely for the purpose of considering the purchase of the BCAP Tokens from us. You should read this offering memorandum in its entirety before making a decision on whether to purchase any BCAP Tokens.”
“You expressly agree, by accepting delivery of this offering memorandum, that:
this offering memorandum contains highly confidential information concerning Blockchain Capital, BC Manager, BC Ill DLVF, BCTH, TokenHub aud our affiliates;
you will hold the information contained or referred to in this offering memorandum in confidence and you will not distribute any copies of this offering memorandum or any documents referred to inside to any other person other than persons you have retained to advise you in connection with this offering;”
“By purchasing any BCAP Tokens, you will be deemed to have acknowledged that:
you have reviewed this offering memorandum in its entirety;
you have been afforded an opportunity to request from us, and to review, and have received, all additional information considered by you to be necessary to verify the accuracy of, or to supplement, the information contained in this offering memorandum;
…
no person has been authorized to give information or to make any representation concerning BCTH, this offering or the BCAP Tokens, other than as contained in this offering memorandum, in connection with your examination of us and the terms of this offering.”
page 52
“This offering memorandum contains summaries of certain agreements that we have entered into or will enter into in connection with this Offering, such as the limited partnership agreement of BC III DLVF and the Subscription Agreement. The descriptions contained in this offering memorandum of these agreements do not purport to be complete and are subject to, or qualified in their entirety by reference to, the definitive agreements. Copies of such agreements will be made available without charge to you in response to a written request to us.”
“By purchasing any BCAP Tokens, you will be deemed to have made certain acknowledgments, representations and agreements as described in the “Transfer Restrictions” and “Notice to Investors” sections of this offering memorandum. You may be required to bear the financial risks of investing in the BCAP Tokens for an indefinite period of time.”
TO INVESTORS GENERALLY
page 53
IN PARTICULAR, ANY POTENTIAL INVESTOR CONFIRMS THAT (I) ANY DISCUSSIONS BETWEEN REPRESENTATIVES OF THE POTENTIAL INVESTORS AND OF BCTH AND ITS AFFILIATES REGARDING A POTENTIAL INVESTMENT IN BCTH WERE INITIATED BY ONE OR MORE REPRESENTATIVES OF SUCH POTENTIAL INVESTOR, AND (2) PRIOR TO DELIVERY OF THIS MEMORANDUM OR OTHER OFFERING OF SECURITIES, NONE OF BCTH OR ITS AFFILIATES HAS MADE AN INTEREST IN BCTH AVAILABLE FOR PURCHASE BY SUCH POTENTIAL INVESTORS, EITHER AS AN OFFER THAT CAN BE ACCEPTED BY POTENTIAL INVESTOR OR AS AN INVITATION EXTENDED TO POTENTIAL INVESTOR TO MAKE AN OFFER TO SUBSCRIBE FOR THE INVESTMENT.
NOTHING IN THIS AGREEMENT IS INTENDED TO CREATE A CONTRACT FOR THE INVESTMENT IN BCTH, AND EACH POTENTIAL INVESTOR ACKNOWLEDGES THAT BCTH WILL RELY ON THIS ASSERTION OF A POTENTIAL INVESTOR’S STATEMENTS WITH RESPECT TO COMPLIANCE WITH THE LAWS OF THE JURISDICTION IN WHICH POTENTIAL INVESTOR IS LEGALLY DOMICILED.”
At the end of this exemplar of legal user-frendliness there are 13 pages of peculiarities pertaining as to the respective domiciles of proud BCAP Tokenholders.
To those of you who survived the Challenge — congratulations! You've just crawled through the intestines of the most lawyered-up ICO ever. Go take a shower.
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 always follow me on Twitter.
Tired of ICOs? Try IBO or IEO (Initial Bitcoin or Ether Offering). It is very simple and ingenious: initially you offer me BTC or ETH by sending a random amount to one of the addresses below and then I accept your offer by keeping it. Besides being fun and neighbourly the process lends additional inspiration to the author.
My IBO address: 13KoSmPCvKNcWMyXANEShyGW7iUjX7mdRA
My IEO address: 0x4CE74183c002Ea7555Ca4877Ab8f273F10cFBFB6
The information listed above is provided “as is” and does not constitute or substitute for legal and/or financial advice. The author cannot be held responsible for any inaccuracies or omissions in the information. This applies to information and/or recommendations provided by the author and to information received upon following the URLs provided by the author. Inaccuracies or omissions provide no legal right to financial compensation. The author is not responsible with respect to readers or any third parties for any direct, indirect, incidental damages, lost profits or for any damages caused by negligence or omission in providing, compiling, assembling, writing and interpreting information.
