Finance is already on the verge of being disrupted, thanks to blockchain platforms like ethereum.
But now that regulatory easing brought on by the JOBS Act in the US is starting to play a role, venture capital itself could be the next industry to undergo radical change in the face of new, blockchain-based business models.
Already, San Francisco-based VC firm, Blockchain Capital, is on the verge of offering a tokenized security to accredited investors.
But, based on details of the investment opportunity released last week, it now appears co-founder Brock Pierce stopped short of what he believes is the full potential of the offering.
First revealed in March, the firm’s venture fund is designed to let initial investors trade tokenized shares on exchanges long before more traditional venture capital shares typically mature.
Built in compliance with SEC regulations, and established under Singapore’s blockchain-friendly legislation, the tokenized securities have the potential to lower the threshold for investors that want a slice of startup risk and reward, while making liquid assets that are typically locked down for years.
But there is a catch: of the estimated 8.5 million accredited investors in the US, only a small portion will legally be allowed to participate, as a result of SEC restrictions, and only about 8.25% of US households qualify as accredited investors in the first place.
To truly tap into the full potential of the model, Pierce said entrepreneurs would have to do something he himself was unable to do – legally open up securitized tokens to non-accredited investors.
In conversation with , Pierce said:
“That’s the only one other nuance that you can bolt on. The trade-offs are more cost [and] a greater degree of disclosure, but the benefit is non-accredited investors. It allows you to make a true retail offering to the world.”
A new kind of company
Pierce believes an explosion of venture capital could be freed up by following just a few steps that integrate cutting-edge regulation with blockchain tech.
To give an idea of how much money could be opened up, while there was only about $100m raised last year from so-called independent coin offerings (ICOs), there was $132bn raised from independent public offerings (IPOs).
However, it is at the intersection of these worlds, where crowdfunding meets blockchain, that the true power of the technology could still be waiting to be tapped.
“I have a problem with the traditional venture capital model,” said Pierce, arguing that it creates a “club” of people with access to deal flow.
“I don’t think that’s what’s good for the world in the long term.”
While some of the potential impact on venture capital remains untapped, the building blocks are already being tested by Blockchain Capital’s Digital Liquid Venture Fund.
For starters, Pierce argues the entity – in this case a fund – has to be set up in Singapore.
While the Zug region of Switzerland known as ‘Crypto-Valley’ has been home to many ICOs, Pierce said that jurisdiction is a poor choice for several reasons.
First, Switzerland doesn’t usually allow foreign law firms to operate in the country. Secondly, the so-called ‘use coins’ like ether that also help power blockchain applications, aren’t typically defined as securities.
Pierce also expressed concerns over the nature of the regulations themselves. While he is concerned that Switzerland’s permissions could be changed “in a day”, he expects Singapore’s controls will be around for the long haul.
“Switzerland is an island, and it’s not an interoperable island,” Pierce said. “Singapore actually has real stuff on the books and it’s designed for any token.”
Whereas “location, location, location” is frequently bandied about as the most important building block for a young company, this new breed of venture capital firms is a bit more complicated.
Previously, companies like Kickstarter and Indiegogo allowed “backers” to donate money to projects they liked in exchange for “rewards”, such as a free T-shirt or dinner with the founders.
But Blockchain Capital’s partner in the launch of its securitized ICO, blockchain investment bank Argon Group, further narrowed the opportunity for upstart venture capital firms using the JOBS Act, signed into law by President Barack Obama in 2012.
Whereas Blockchain Capital followed the more traditional framework of issuing securities to accredited investors under SEC Regulation D, the CEO of Argon Group, Stan Miroshnik, explained to that the JOBS Act could let non-accredited investors participate in crowdsales in exchange for actual stock in a company.
The so-called ‘regulation crowdfunding’ provision allows for up to $1m a year to be crowdfunded in exchange for securities to be raised under strict conditions of disclosure.
The smallest salary earners are restricted to a $2,000 investment.
Miroshnik described the future impact such investment vehicles could have:
“This is a new corporate finance tool, it’s a new funding tool, and venture capital firms are going to run into it on the funding side. But, also, as these companies mature down the road, they’re going to find things on the cap table, on the balance sheet.”
VC firms as middlemen
For now, Pierce said unaccredited investors will have to wait to get in on the potential rewards (and risk) of investing in startups in exchange for a security.
Following The DAO, a failed attempt to cut venture capitalists out of the picture altogether, bitcoin entrepreneur Charlie Shrem briefly launched an ethereum-based platform aimed at giving private equity investors a way to invest in startups, also in exchange for actual stock in the company.
However, that project was shelved earlier this year, marking the latest in a series of struggles to rethink venture capital on a blockchain. For his part, Pierce has embraced a more incremental approach.
On Friday, Blockchain Capital revealed the names of some of its earliest investors – well known members of the blockchain community including ConsenSys’ Andrew Keys, Bloq’s Matthew Roszak, and Civic’s Vinny Lingham.
The intention is to increase the tokenized portion of his Fund III from about 20% of the total raise this time around to 50% in Fund IV. Further, the fund could completely switch over to a tokenized investment round by the fifth round.
Even as Pierce pushes deeper into tokenized securities, though, he said what he’s able to do as a fund will likely always be limited.
With concerns over disclosure requirements that resemble that of public company, he explained that it’s unlikely his accredited investors will ever be open to participating in a fund that’s available to everyone.
Argon Group, meanwhile, has decided to focus mostly on helping companies raise a Series B of $6m or more, leaving a window of opportunity for upstart investors.
Pierce predicts that the model of merging US-based JOBS Act provisions with Singapore’s legal infrastructure could increase the number of ICOs from about 60 last year to 300 in 2017, and double that the year after.
With an estimated $32bn raised on crowdfunding platforms around the world, according to a recent report, Pierce expects there will eventually be entrepreneurs who will accomplish what he was unable to do.
“The legal structure can be copied by anyone,” he said, concluding:
“We don’t own it. This is a gift.“