One of bitcoin’s first evangelists will need to wait a little longer before launching a so-called initial coin offering (ICO).
That story, which began last year with the announcement of Mainstreet Investment LP, was supposed to take another step forward today. That’s when the fund, the latest venture from former BitInstant CEO Charlie Shrem and his new company Intellisys Capital, was slated to open to most global investors.
Though this date has now been delayed over larger uncertainties in the crypto markets, the launch will soon mark a milestone for the sometimes controversial blockchain token sale business model.
On a larger scale, the idea aims to harness the same power that spurred the global development of bitcoin, only this time investors would create digitally unique tokens that represent interests in companies, funds or ventures. The tokens would then be used to incentivize users to participate in an investment vehicle or software product.
In the case of Mainstreet, it is touting its token sale as the first to feature a token that would both function as a security and be backed by real assets.
Even before today’s sudden change, though, the limited target market, the notoriety of ICOs, their high potential for fraud, and the involvement of Shrem, have given the launch an air of excitement and suspense.
Still, according to Shrem and Jason Granger, CEO of Intellisys Capital, the idea for MIT came from last year’s uptick in global token sales, including successful launches by projects like computing platform Golem Network and the prediction market Augur.
“I personally saw a lot of eagerness in the crypto world to invest,” Shrem, who serves as technology chief for Intellisys, told CoinDesk, adding:
“I thought, why we couldn’t offer the crypto world a secured asset? Then, we could go out to purchase companies.”
Rethinking investment vehicles
Shrem and Granger’s idea is to offer a diversified portfolio of companies across various industries and market sectors.
The innovation, the founders said, is that not only will investors be able to see how the fund is managed and invested, but they can join and leave without the fear of being locked in.
At time of launch, MIT will offer an asset on the ethereum network with a token cap of 50 million and a maximum revenue cap of $25m. Investors would have 100% of the preferred interests in the fund and 50% of the fund’s future profits.
The sale itself would be conducted in bitcoins, which would be converted to ether for the sake of the fund. Distributions from the fund would be made directly to investors’ accounts via smart contracts.
Once $1.5m has been accumulated, the fund will secure its first purchase: a yet-to-be disclosed sanitation company based in Michigan.
The second-largest provider of portable restroom rental in its service area, the septic pumping company is thought by Intellisys to be poised for growth due to its influence with both the septic industry and the state government.
Intellisys’ prospectus for the company sale reads:
“The sanitary waste industry has remained relatively untouched by larger private equity and institutional investors, so the opportunity for consolidation is significant to the business acquisition plan.”
Yet, the name of the prospective buy is currently redacted by Intellisys to protect the interests of the parties involved. (Shrem and Granger told CoinDesk that they are currently drawing up a shortlist of companies that the fund is interested in acquiring.)
This list would consist 35% middle-market, real estate and ‘fund-of-funds’ acquisitions, 25% future middle-market investments and up to 30% bitcoin and blockchain projects. Ten percent of the fund will be dedicated to operations.
Other questions remain, such as how the fund will be received by regulators, who have been largely silent on token sales.
It’s worth noting that the project got a notable boost last week when it announced it would open to EU investors, a market that it previously dismissed as presenting too big a regulatory burden.
Before Friday, participation in the ICO was restricted from Western markets, and it remains barred in the US. This is despite the fact that the fund seeks to invest in American middle-market Midwestern companies.
Granger told CoinDesk:
“We’ve extensively reviewed the international investment landscape to shield the Mainstreet token offering from a multitude of unknowns.”
While this sounds good on paper, this token sale model has drawn criticism due to the perception that many are ill-conceived ideas or plain-old scams.
There is even the issue with the term ‘ICO’ and its obvious similarity to initial public offering (IPO) – a term that creates an expectation of regulatory requirements, and perhaps, oversight.
An IPO, for example, requires up to six months of filings in order to be effective. A company seeking to hold an IPO in the US, for example, will need to file a registration statement with FINRA, the SEC and the state authority for the company’s registered locale.
A token sale, however, currently has no regulatory requirements.
Recently, the Reddit-like social media site Steemit saw a tongue-in-cheek post about how to create an ICO scam. While this post – in no way – paints how one could go about actually creating a fraudulent ICO, it does illustrate how simple doing it could be, given the right factors.
Per the post, coming up with a believable fake ICO is as easy as:
- Creating an attractive brand
- Developing a presentation with fake resumes and impressive images
- Buying enough high-profile bitcoin forum accounts to fake enthusiasm
- Creating a proof-of-system that – while only existing on paper – ‘wows’ observers
- Slapping on a bitcoin or ether address.
While there have been successful ICOs – ethereum being a notable example – the number of frauds are hard to ignore.
“A number of crowdsales for cryptocurrencies have turned out to be outright scams, where people promised the launch of a new cryptocurrency but never made good on the promise, absconding with the funds collected during the process,” said Veredictum.io CEO Tim Lea, adding:
“The community as a whole, therefore, has become increasingly cautious and wary of new coins.”
While it should not be interpreted that this example alleges that token will be or is a fraudulent vehicle, MIT’s experimental status has raised questions about the nature of the prospectus offered.
For example, the only two named members of Intellisys to hold non-advisory or non-marketing roles in Mainstreet are Granger and Shrem, with the former currently being the sole voting interest in the company.
In addition, while the prospectus went into detail about how the invested companies will be underwritten and secured, there was little discussion about the seeming legal and logistic contradiction about the company’s stated position and the realities of its offerings.
For example, not registering in the US as an ‘investment company’, as defined by the Investment Company Act of 1940, and actively seeking investors while seeking to secure US-based financial securities – such as the ‘fund-of-funds’ the company indicated it is interested in investing in – creates ambiguity that may doom the fund in the future.
This is compounded by the refusal to sell the fund to US customers, which can be construed as a means to avoid regulatory liability. Carried interest, or private equity shared interest, cannot be traded under most conditions in the US.
The memorandum specifically points out that knowledge and adherence to applicable laws regarding the local legality of being involved in the fund is the sole responsibility of the investor.
If trust is the key consideration in determining the investment-worthiness of a token sale, then we must also face the biggest metaphorical elephant in the room.
As stated previously, there are only two officials publicly stated to be attached to this project in non-advisor or marketing roles. One is Jason Granger, who is well established in the real estate and private equity sectors.
The other is Charlie Shrem. This would be his first venture since the shutdown of BitInstant on anti-money laundering charges and his release from prison following the subsequent sentencing.
Shrem founded BitInstant in 2011 as a way to improve the bitcoin purchasing and selling process. BitInstant offered over 700,000 locations, allowing users to quickly buy and sell bitcoins from the exchanges by means of temporary credit.
Shrem later plead guilty in 2015 on the charge of dealing with Robert Faiella, who supplied $1m in bitcoins to people seeking to buy drugs on the now-seized dark-web site Silk Road.
In a later blog post, Shrem said, “I don’t look for sympathy, I did the crime and I will do the time. They say those who stand by you in the bad times, deserve to be with you in the good times.”
Shrem was jailed for 16 months, and is currently serving out three years of supervised release.
Still, there are many who defend the ICO model and hope that Shrem will be able to provide it with added visibility.
“ICOs are a good idea for the number of reasons,” said, Alex Fork, CEO of the Humaniq Project, a next-generation bank built on the ethereum network. “ICOs give an opportunity to the people who believe in the success of the project to take part immediately with any sum they can afford.”
Fork, however, pointed out that mechanisms such as escrows, smart contracts and advising attorneys cannot be counted on to ensure the integrity of a coin or token offering.
One of the biggest issues he sees is the limitations of the technology needed to deliver the high-tech offerings.
Fork ended with an appeal to the community in this regard, adding:
“In the absence of a better means to guarantee the safety of an ICO, the publicity of company’s key holders – who are open to the public and ready to be in touch with the community – must serve as a reliability guarantee.”
Anvil image via Shutterstock. Mainstreet image via the company
Published at Mon, 13 Feb 2017 12:30:49 +0000