The ICO craze comes full circle; now it’s all about how to return funds to investors
Cofound.it announced today that they would be shutting down the company and returning assets to token holders.
This is an important move, both obviously for Cofound but also for the industry as a whole:
It marks a symbolic culmination of the ICO craze which now comes full circle, as projects move from raising huge sums to returning raised funds to investors
While ICO investors may have reason to be aggrieved, on the face of it it appears to be an example of good practice and a responsible move
Cofound.it was a project based on the premise of helping other companies in the space raise money through ICOs. This included facilities such as funding and information services, as well as helping start-ups grown post ICO. The CFI token allowed holders to have access to ‘Priority Pass’, enabling them to invest in projects on boarded by Cofound.
You may have your own views on the need for such a project, but last June when it raised a then record $14.8m very few would have guessed the swift changes the ICO market would undergo which rendered less of a need for Cofound’s services.
ICOs went from crowdsales theoretically open to all, to being the preserve of venture capital firms, well connected private buyers and pools. They also changed from being driven by those with interest in using the project and with a technical background (albeit still with a profit motive) to pure speculation, in which a project was considered a failure if it didn’t achieve a hefty multiple on day one of launch.
This is not to entirely blame external circumstances for you could make the argument that Cofound was never going to succeed even last June. This is not a slight against the project; you could make the very same case against 99%+ of ICOs.
The more interesting aspect to me is the wind-down process.
In a piece I wrote last November, I noted that:
The major issue here comes from the vast amounts of funds teams hold from the ICO — companies that have raised $20–250m will have been unable to spend all of that on employee costs (at least you’d hope so). What happens to the money in this scenario? Well, they could liquidate their holdings and return it proportionally to token holders — but they are not legally obligated to. They could pivot to a new idea and give token holders a proportional stake in the new token — but they are not legally obligated to. Or they could limp on as ‘zombie’ companies — unable to fulfil their initial raison d’être, but with too much money to let them go out of business, able to pay themselves for working on a project they know they can’t deliver, but which will be much more profitable than starting from scratch again.
Owning CFI confers no right to any of the underlying assets of Cofound. This is true of nearly all crypto projects. You are not a shareholder. You do not have a right to their assets.
Cofound have, however, decided to return their existing assets to holders. This amounts to some $14.4m against a current market cap of c. $8m, with trading now frozen. This should see current holders well compensated, assuming all assets are liquid and that the liabilities are in line with the current estimate of $350k. ICO investors who may have already sold (and they have had had plenty of reason to given how CFI has depreciated against ETH and BTC by 70% and 90% respectively since last June) have no recourse.
Despite this, on the face of it this seems the best possible outcome for all parties:
It returns some value (and in fact nearly all USD value) back to holders
It prevents a zombie company from operating and taking up resources whilst wasting capital
It allows the team to move on, reputations largely intact (many startups fail) and able to work on new projects
The more ICOs wind down in such a manner, the less stigma there will be attached to it and the more acceptable it will become. Failing doesn’t need to mean exit scam and lost dreams. By preserving some value, it actually makes investing in ICOs a better bet.
Furthermore, there are hundreds of companies that have raised money for ideas which will never come to fruition. Better they follow this path of a pre-emptive windup than burn through investor’s money with no chance of success.
Market cap = asset holdings?
As explained above, token holders have no right to any of the underlying assets. However, if (and it remains a big if) asset redistributions become commonplace then I would expect there to be a clamour for over capitalised and under-performing projects alike to follow suit. This opens up the possibility for speculative holds.
Diar’s recent newsletter broke down some of these ICOs with large asset holdings:
The most important aspect in such a prospective trade would be for a well-governed and ‘morally sound’ leadership. Top of this list, Aragon are coincidentally a project I believe meets such criteria.
And what is this from the co-founder of Aragon on August 14th…
Edit: My writing was on assumption team wouldn’t be taking assets for themselves as holders. However, team awarded themselves 15% of total supply at ICO. I would hope that they would not be taking $2m or so out of what’s left over but will reserve judgement until they clarify.