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47. ICOs and NAV - what entrepreneurs and investors think about (Published: 04th Sep, 2017)
This article is a general discussion on the subsequent NAV (Net Asset Value) of a company after an ICO (Initial Coin Offerings).

ICOs are a spectacular way to raise money. According to Smith+Crown, more than 900M have been raised since 2014, an order of magnitude more than traditional venture capital funding.  Most tokens are currently trade above par, that is above the value of the underlying assets if forced liquidation.

An interesting phenomenal is going to happen soon. What if the enterprise that holds a good portion of the tokens, in the form of a lockup, needs to go the market to raise money?  Most organizations promised to lockup a good portion of the tokens they owned for a number of years.

The value of the firm is the sum of the assets minus the liabilities.  Since most of these firms has no cash flow so to speak, valuation on these firms is simple.  So, say a firm raised 100,000 ethereum from an earlier sale and it is inscribed that 70,000 ethereum will be locked up for say 5 years.  How should the enterprise raise money?  

Traditional finance says that the value of the firm is probably around 70,000 eth since the firm at that point really has no liabilities.  A rational investor, say a VC, would not pay much more than the future cash flow of the firm discounted at some interested rate.  If one believes that the project is worth nothing, then the value of the firm is the current sum of the assets.  As I have stated over and over again, the value of the protocol only becomes valuable if the number of users increase exponentially on the network, so unless these protocols have substantial users or awareness, these projects could end up with zero value.

So what can one do if the entrepreneur cannot raise money the traditional way, but is sitting on a mountain of tokens?

Yours truly has been approached by several project to buy blocks of tokens at substantial discount with a lock up.  Think for a minute if you are a “crypto hedge fund”.  Immediate mark to market gain.  Book that 2 and 20% to close the quarter on the high watermark.

For the hedge fund, it's a win:

  1. The hedge fund manager takes the block with a lockup at a discount
  2. Sources another block of tradable tokens - in the form of “borrow”
  3. Sells the borrow
  4. On lock up expiry day, return the borrowed tokens
  5. Boom $$$

Firm that is raising money, it's a win:

  1. Sells the locked up tokens, OTC.  Since the token address never moved, it appears to the public that the tokens are still with the firm.
  2. Locks in funding source immediately
  3. The firm is able to “hedge” its position in the tokens since they are probably spending fiat money for operations and employee cost

At Cryptomover, we believe that such transactions are perfectly legal, while harms everyday investors.  Our indexes are designed with the philosophy of only including “blue chip” type projects (think S&P 500) where project leaders have pristine reputation and are completely transparent about their funding sources.  We therefore, do not buy blocks from distressed projects looking to offload their hoarding of tokens from a previous ICO.  Such short term practice can only harm our reputation but we are here for the long run.

The whole point is, why should a firm sell its assets below the book value?  Should they just return the money back to investors if their ICO failed to deliver a business model or utility for their tokens?  We will discuss this more in later articles.

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