Since I have been burned by more than one ICO with a nice website and whitepaper I've been educating myself on what is actually meant by "investor due diligence."
Meanwhile I came across this project by @worbli-bp. It's a very ambitious project and it is seeking to raise $47,000,000 in its upcoming ICO. I have interacted with two of the people on the executive team, so you could say I have a bit of a personal interest in the project. I'm not seriously thinking of investing in the venture at this point, but I thought it would be fun to take a look at the project and whitepaper from the point of view of investor due diligence. With that said, I do want to state that since I know the people involved in this ICO and have no reason to believe they are anything other than sincere, I want to say that I wish them and their project well. I hope they succeed. My looking critically at their project does not in any way change the sentiment. But since investing based on sentiment can be costly I need to put my well wishes aside and take a cold hard look at the project itself.
Before diving into the Worbli project white paper, I want to direct you to this thorough explanation of the Regulation A+ IPO, which is a legal pathway for small companies in the US and Canada to raise funds from investors. I'd like you to especially focus on what it takes for a company to qualify as well as the kinds of documentation it needs to disclose as part of the registration process as these are the kinds of disclosures that you are going to want to see with any venture you are considering investing in.
The Worbli idea
The Worbli website and its 30 page whitepaper do a great job of laying out the scope and goals of the project. They start by identifying the problem, saying that it's a complicated process to go from fiat currency to the particular altcoin you want to buy. You might start with your bank account that you link to Coinbase. You initiate a withdrawal of fiat from your bank account to your Coinbase account in order to buy Bitcoin, Litecoin or Ethereum. From there you have to then send to an exchange that trades BTC, ETH, or LTC into the coin you want. All that takes time and know how, and there are several points at which you could lose your funds. There are also exchange rates and market volatilities that could cost you to essentially bleed funds with every trade. All of that is absolutely true, and yes, it is a problem.
So the solution they propose is to build out a full service financial platform in order to streamline that process. The end goal is that a user can have a single account which handles all the trading needs. Worbli proposes to partner with trading platforms and other financial institutions as well as build out a blockchain running on the EOS platform to make that happen.
It's a good idea and if successful would definitely fill a need.
But it's also an expensive idea and so comes with the need to raise $47,000,000. Much of the expense as stated in the whitepaper has to do with regulatory compliance as the first proposed customers will be US citizens. A proposed partnership with an international legal firm, a financial compliance firm and one other big consulting firm are mentioned in the white paper. I happen to know that there is already a relationship established with the legal firm so I'm sure those involvements are legit.
Reading about this grandiose idea, a few questions come to my mind. The timeline outlined on the website includes the purchase of a bank as early as next year. They're not going to try to build a bank from the ground up, which seems prudent. Better to buy one that's already up and running. My question is this: what does it actually take to buy a bank? I would want to know more details about that. Do you just go out looking for banks for sale and then place a bid? Is it a simple process or a difficult one? What kinds of rules and regulations are involved with that? What kind of licensing do you need to have in order to buy a bank? How much does a bank cost? I don't know the answers to these questions but I would want to make sure the Worbli people do.
The Worbli technology
My next question has to do with the technology. I do not need to know all the nitty gritty coding and programming details, but I do need to know how much of the technical infrastructure they are proposing to build is proven to be feasible vs. how much is going to be a little stretch over what has been done to date vs. how much is completely new and has never been done before. I would want to see all that broken down in plain English. I'd want to see a chart that outlines the main technological steps to take and then categorizes them into "been done so known to be possible," "been almost done but would take a few tweaks (and here is what they are)," and "never been done so not known to be possible." For the last category I would want to know what the proposed steps are to be taken in going from "currently impossible" to "known to be possible." I'd want their explanation of the steps to strongly focus on why they believe they can accomplish what they are setting out to accomplish, and why that is a realistic belief. I may not understand it, but I'd like to know that they have at least thought about it. I'd also want to know that I could take the idea to anyone I know who is knowledgeable about the technology and it would make sense to that person. If my computer programmer friend exclaims, "That's brilliant! Man, I wish I'd thought of that!" then I would say it's a pretty good explanation.
The reason poring over the technological aspects is important is because I've started to come across articles by people who make their living coding and programming claiming that some of the types of technological solutions proposed in many ICOs have never actually been done before. There's nothing wrong with that, as long as that's accurately represented. But if a completely novel coding feat is presented as if it were routine, that could be misleading. There are also challenges to blockchain technology that are the subject of intense research but which have not yet been solved, as this article indicates.
Before I started writing this article, I'd shared the Worbli whitepaper on the DNotes thread of BitcoinTalk as a kind of educational example, since much has been written there about the issues surrounding ICOs in general. One poster pointed out just now that actually there currently is no such thing as an EOS block chain. EOS is actually an ERC20 token, meaning it runs on the Ethereum block chain. While that might be obvious to people who are already into EOS, I missed that part until now. So yeah, you really have to know about the technology.
This begs a question that should be asked: is there another project that might be further along in this? I do know that if you want to build your own blockchain and run tokens on it, you can pretty much do that right out of the box with NEM and its proprietary blockchain system called Mijin. As a potential investor, I would want to know why that possibility was rejected in favor of the very much unproven (and nonexistent) EOS blockchain solution. And if it turns out they don't know about NEM, then I might wonder about their qualifications to take on this project from the "know your competition" angle.
Funding the Worbli concept
I mentioned before that the Worbli developers are hoping to raise $47,000,000 in their ICO. Just for comparison, a small company in the US seeking to raise funds through the Regulations A+ IPO can raise as much as $50,000,000 in its funding round, and that's after going through a rather rigorous registration process as outlined in the article I linked to earlier. One of the required pieces of documentation is two years of financial statements from the company seeking to raise up to $50,000,000. The purpose of this is for the company to show a history of using money wisely and making a profit. As an investor I would want good reason to believe that they will use my money well. In order to be able to produce those financial statements, the company would need to first exist for two years before trying to raise $50,000,000 and second, would have needed to buy and sell things during that time in a way that could be sustained. The point of the Regulation A+ IPO is to significantly expand operations, not to birth them. So one question I would ask of the Worbli company is this: How long has it been in existence, and how has it spent, earned, and managed its money during that time?
If this is a brand new company, then I think it would be more prudent to focus on one or two initial steps, such as testing the feasibility of building their own EOS blockchain, and use a system like crowdfunding or obtaining a business bank loan to raise a smaller amount, such as $100,000 or $200,000. This would give them the opportunity to establish a track record.
Who can invest in Worbli's ICO
If you go down to the fine print at the end of the whitepaper, you will find this strongly worded statement:
And I have to ask why? The whitepaper explicitly says that the first customers will be US citizens. So why can't US citizens invest in the ICO?
Most of us in the cryptocurrency industry know the superficial answer to that question, and it goes something like this: US regulations are so burdensome and it's so expensive to comply with them that we need to find another way. Unfortunately US citizens are barred from participating in that other way.
I'm as much into the conspiracy theories as anyone else, how the Illuminati and New World Order are working tirelessly to crowd out and eventually eliminate anyone other than the "elites." I get that. Overly burdensome US regulation can certainly be one way to accomplish this dark and sinister end, right along with chemtrailing, water fluoridation, and vaccinations. I get it.
At the same time I'm getting less and less impressed with that excuse. More and more it sounds like a cop out--a way to justify not wanting to bother with US rules, not wanting to make the effort to learn about them, why they're there, and what it would actually take to comply with them. It's really another form of not knowing your market or your competition. If you want to operate in the US, then you have to figure out the US rules and figure out a way to make them work, as many other small companies have and are. If you're not willing to do that basic work, then no thanks. Refusing to sell tokens to US investors may seem like the easier path in the short term, but I don't think too many small businesses succeeded anywhere by taking the easier path. Not only that, every country has some degree of regulation on securities and other products sold to investors (which would include ICO tokens). Trying to issue your product as an ICO just seems like a way to bypass not just US regulations, but all other countries' regulations as well, and that's really not a good way to get started.
Here's a personal example of how people hide behind the "US regulations are too difficult" excuse. The last ICO I invested in was Bankera. It too wants to be an integrated fiat/blockchain bank. That seems to be very fashionable these days. I bought the BNK token mainly because it was a NEM based token and I wanted to see what it was like. It turns out that it's still only an Ethereum based token but it has every intention of also being a NEM token at some point. Anyway, I was happily collecting my meager ETH dividends from the tokens when without warning I lost access to my profile email address because the provider went dark. I had to go through the process of changing my profile email address on BitTrex, CoinBase, Cryptopia, DNotes Vault and several other providers with varying degrees of difficulty but all successful. When I tried to do this on SpectroCoin, the host platform for BNK, they balked. Despite collecting all kinds of verification type information from me, they ultimately refused, claiming that the US regulations prevented them from verifying my account so they couldn't help me. So, there's another investment I have to eventually write off even before it turns out to be a complete scam. I thought of sicking some lawyers on them just to regain access to my funds, but the price tag was too high. I then realized that if they can't perform a basic function such as updating a user's profile email, then there is no way Bankera is ever going to be any kind of integrated financial solution for anyone. I should have looked into that before investing. Thankfully it wasn't that much. But anyway, a clear case of using the impossibility of complying with burdensome US regulations to conceal incompetence.
This is a good time to point out that the DNotes project actually has a lot of similar ideas for integrating the traditional financial world and the blockchain world (or the centralized and decentralized worlds), they already operate in the US, and they are pursuing Regulation A+ mini IPO funding with every expectation of being successful in that endeavor. So the "it's impossible" excuse no longer holds water for me.
My advice is that if the company claims it will not allow investors from the country where it proposes to primarily operate, then skip it. Find a company willing to work with that country's rules and regulations right from the beginning.
Other Worbli fine print
Although I cannot give an exhaustive analysis of the fine print which spans several pages, I do want to point out this one clause, because it is true of all ICOs at this time whether they disclose it or not:
You read that right. The tokens confer no rights traditionally associated with shareholders. You don't get to vote and you do not own any equity in the company just because you bought a bunch of tokens. And in the case of Worbli, the tokens aren't even part of the Worbli platform (because it doesn't exist). I realize a certain amount of that is CYA, and in practice, your input may be highly valued to the developers. But if push comes to shove, there's a dispute or misunderstanding, you have no rights or ownership. Is that really something you want to take on? Why not just call your contribution a donation and be done with it? You are of course hoping that the token itself will amass value on a speculative market so you can one day sell it for higher than you bought it. But what kind of basis for an investment is that? Think about it.
Conclusion
While I truly wish my Worbli friends well in their ICO, I am not convinced that it is a good investment for me or anyone else, certainly not for anyone in the US. I am sure that at least some of my questions do have good answers and I look forward to learning them. The purpose of this critical look is to point out the kinds of questions that need to be asked of this and many other ICOs before buying the token. This is the kind of critical analysis I wish I had conducted on all the previous ICOs I invested in that didn't work out, and which I will conduct for all future ICOs that I might consider funding.
Wow wiser! That was very well written but even more informative. Many of the ICO issues you covered, I've wanted to write about myself. I've been in VC for many different companies and industries. Crypto ICO's have always had me scratching my head of how they will ever pass a compliance and due diligence test. True, they are a great fundraising tool, but put the investor in way too much risk. If the ICO actually grants you rights to equity of any kind, then it's a security no matter how you look at it. That security sold opens up that millions of dollar project to a ton of liability. Liability an institutional, VC investor is not going to touch. Rightfully so. Then if there's a blanket statement essentially saying the token is worthless, donating is the correct term. Until we get some definitive SEC guidelines on ICO's, it's a huge gamble buying into these new coins at the moment. Some people will get out before they fall, most I have a feeling will not. Which most of crypto and ICO's are purely a gamblers paradise, and is why people throw their money at crap coins to begin with...to ride it up and get out before the next guy. Rinse and repeat.
I'm not against ICO's in theory, because I believe a proper, structured fund raising solution in cooperation with blockchain technology is what the future holds for small to large size businesses. Ultimately we will see crypto's as the new stock market where everyone one can participate. This is what will drive innovation and humanity forward.
Thanks for the comment. I hope you do write your article because I would love to know more of the VC perspective. I don't know much about it at this time and would love to learn more. I'm really learning my lessons through the school of hard knocks and I've gotten some good information from DNotesEDU. As I've mentioned in another article, due diligence is one of those things you kind of feel like you ought to know (common sense), but actually need to learn. A few weeks ago I'm not sure it would have ever occurred to me to wonder about things like what buying a bank entails, or how long it would really take to build a completely integrated financial system on a blockchain from the ground up, or even how much are the executives planning to pay themselves in salaries. For the ICOs I did buy into, I pretty much took what I read at face value and assumed that the appropriate deep thinking and working out of details had gone on, when that was not always the case.