Type to search

The questionable Block.one buyback, the EOS ICO and why it would be different with security tokens

The latest news is that Block.one, the developer behind crypto-token EOS, will use some of the record US$4 billion it raised in the 2018 ICO to buyback — in a private deal — at least 10% of Block.one´s shares from early investors. According to Bloomberg, which released the news, this will value the company at a record US$2,3 billion from the US$40 million evaluation of its seed round in 2017.

By Andrea Bianconi

More details about who are the fortunate shareholders who will benefit from a stellar 6,657% return in 1 year are not known, nor are the modalities of the buyback.

The problem with ICOs

ICOs have raised only US$300 million in 68 deals so far in 2019 compared with US$6,2 billion in 2018. Regardless of that and despite the many obituaries, ICOs can still play an important role in funding blockchain based projects with a native token. ICOs will find their place along with STOs. The problem is that, so far, they have been used instead of STOs, as a way to circumvent securities´ regulations and raise equity — disguised as utility tokens — in an unregulated manner.

The simple lessons which ICO investors should learn here are:

  • ICOs are not STOs. The token does not grant you any equity or participation rights into the company.
  • always do thorough due diligence. This is basic, but it is too often overlooked by many and I wrote about it in the article Tips for the ICO due-diligence back in 2017. For instance, Block.one is a Cayman Island-based company (this is already a red flag) and it is the developer of EOS. EOS is not a company by itself. It is an asset, a product of Block.one. When you buy the EOS token you give your money to Block.one and — in consideration for that — you get nothing else than the simple expectation that they will use your money to develop the product. This may or may not happen. You have no guarantee for that. There are no legal obligations. Block.one can use this money to do that (if honest) or they can pay themselves a fat dividend or buy back their shares (like they plan to) or spend it all to party. They can do anything they want with that money and you have no saying whatsoever.
  • do not even consider buying ICOs which do not have an escrow in place, in a reliable jurisdiction, with very clear terms and conditions and with reliable escrow agents to supervise the use and allocation of the funds raised.

The difference with STOs

If Block.one had done an STO instead, it would have been different. Depending on the terms and the rights attached to the security token you would have either bought equity rights or profit participation. Likely, you would be granted voting rights to influence the management of Block.one. To circumvent those rights would be much more complicated and you could still be able to enforce some of your basic rights as a security token holder. Ultimately, you could also benefit from such a buyback (though this is not automatic, it largely depends on shareholders´ agreements and corporate bylaws, which is why a proper due-diligence is very important).

The EOS ICO, red flags were everywhere

For EOS token holders, there have been plenty of warning signs since the very beginning. The amount raised was out of proportions. The company did not have a product. They did not have — and still do not have — a clear plan on how this money should be invested. According to Bloomberg, they invested the cash raised in Treasuries, BTC and also US$174 million in VC deals either directly or through Novogratz firm — Galaxy Digital — which was then bought-out with another fat US$71 million check paid with the ICO funds.

Worse, the promoters of the ICO — i.e. Block.one wealthy shareholders — were Wall Street investors who did not need any of that money to bootstrap a blockchain tech start-up. They could have done it easily with their own pocket money. The ICO was a windfall for them, practically a gift, a US$4 billion wealth transfer from naive token-holders to wealthy, smart and unscrupulous WallStreeters.

That such people would pocket the money was predictable. The signs were everywhere to be seen. The following thread was posted on Reddit more than 9 months ago:

Token holder 1: Imagine if Block One did an EOS [coin] buyback of around $1 billion and then got rid of the coins lowering the supply? Or what if Block One at least comes out and says what they plan on doing with the remaining $3 billion? Either of these could more than double the current price.

Token holder 2: It’s a nice idea, but the reality is that “cash” on hand doesn’t and shouldn’t translate into token valuation very well…. Simply put, tokens are not equity: as a holder, you have no contingent claim on the assets in the event of liquidation, so cash cannot effectively be used as a means to determine market cap. All that cash would go to the shareholders of B1 in the event of a liquidation. Very important difference.

Token holder 3: All true, but do not think B1 are doing a good job at deploying resources…

Which is why I would love for B1 to declare where the other $3 billion is going, but of course I guess they could always not honour their promises… Luckily it’s founded by US citizens and has Peter Thiel as an investor (top startup investor)…not likely this is a fly by night in my opinion.

Token holder 4: Bernie Madoff was a US citizen with a stellar reputation as an investor too, and had many prominent people invested with him.

Token holders taken for a ride

The token holders´ faith was clearly misplaced. Indeed the buyback will happen, but it will benefit solely the shareholders. And the fact that the shareholders were well known US citizens and Wall Street investors did not change a thing. Pecunia non olet, specially for Wall Streeters.

Talking about ethics and principles on Wall Street is clearly naive. If principles and ethics have ever been there, they are now long gone. That is not the issue.

More importantly though, this questionable buyback shows that token holders are not worth the slightest consideration. In fact – by pocketing the ICO funds – Block.one´s management and shareholders signal a total disregard for token holders´ legitimate — though not legally enforceable — expectations.

If anything they will pat their shoulders and will be congratulated by their pals for taking naive token holders for a ride. Their Wall Street reputation will not suffer, this is just another successful deal on their CV. They will pay themselves and their Wall Street buddies a stellar return and this will secure them plenty of funding opportunities for the next deals.

Otherwise — if they had the slightest consideration for the token holders and concerns that their actions may somehow backfire — they would act differently.

At least — before cashing in on a 6.500% plus return — they would give some back to EOS token holders who are losing 70% plus from the peak and say — at least — thank you.

So token holders, now ask yourself this simple question: if the EOS developer gives you the finger, how much is the EOS token worth for the developer? Moreover, how much should then the EOS token be worth for the market?

Draw your own conclusions…

I will sum it up with Gordon Gekko´s famous quote “Greed, for lack of a better word, is good… Greed captures the essence of the evolutionary spirit. Greed, in all of its forms… has marked the upward surge of mankind…”.

In the meantime though, the only upward surge is that of Peter Thiel and his pals´ wealth among the Forbes billionaires…thanks to your money.

Disclosures: I have never owned EOS tokens nor have any financial interest whatsoever in Block.one activities and businesses

This image has an empty alt attribute; its file name is Photo-Posterab.jpg
Andrea Bianconi is an international business lawyer with over two decades experience, a scholar of Austrian Economics, monetary history and geopolitics, a believer in the future of Bitcoin and Blockchain based technologies, a consultant to the sector and a speaker/panellist at conferences and events.  Founder and CFO of the Luxembourg based www.thinkblocktank.org, a member of the untitled-inc and an active contributor to the Berlin blockchainhub.net, and the German Blockchain Bundesverband Bundesblock. 


Image by taniarose from Pixabay

More Articles:

Top 10 Security Token and Tokenization Articles of 2020

The Value Proposition of Regulated DeFi


You Might also Like