In recent years we have experienced a boom of investment in companies and projects based on blockchain technology. Now it’s time to know if those projects have real value, so if investors are going to be able to monetize their investment and, most importantly, for what price.
Advice with technical knowledge
Unlike other technologies, the auxiliary industry that normally participates in advising corporate transactions (lawyers, auditors and financial advisers, mainly) still does not have a solid practical knowledge. They do not yet have a historic of transactions on which they may rely nor consult what were the main contingencies and how were they addressed in each transaction.
Now more than ever, it will be necessary to have advisors who have a transversal knowledge and have looked into the technical aspects of technology, this will allow us to:
- Plan ahead the less obvious contingencies.
- Ask the right questions to prepare the SPA.
- Quantify the impact of the breach of the Reps and Warranties by the seller.
Well, this kind of professionals is scarce. We have rarely encountered business models and technologies (blockchain, smart contracts and cryptoassets) that come into conflict with all the capital market regulations worldwide and remain in a situation of regulatory uncertainty and, more importantly, of total uncertainty regarding punitive measures.
Knowledge in Blockchain technology
Technological aspects such as the choice of the blockchain that is used (public, permissioned or a hybrid model), the time for block generation, the probability of hard forks existing as a consequence of the governance model and code improvement, the structure of the smart contacts, the standard that is used to structure the cryptoassets (for example, ERC-20, ERC-721 or ERC-1400) or the type of data that is written on the blockchain, will have an enormous significance not only at a technological level, but also at a legal level, in the growth of the business model and in the consequences upon a liability event of the directors and managers.
Profitability of Blockchain investments
Having said all this, let’s focus on what really matters:
- Is it worth investing in the blockchain project I’ve just been pitched into?
- What is its potential and how much will I be able to monetize my investment?
Regardless of whether the business idea is good or not (I don’t get into that), what will really constrain the future profitability of an investment in blockchain technology, will be the decisions that were adopted in the early stages of the business. Here are some examples:
- How accurate and precise was the information about the business model that was included in the whitepaper?
- How was the process of sale of tokens executed during the ICO? Have Know your Client and Anti- money laundering obligations been complied with? Is it possible that any US citizen had access to the purchase of tokens in the ICO or that the advertising campaign had included US territory?
- Who controlled the use of the funds raised and verified the balance of the wallets?
- Has the business model deviated from the initial description that was made in the whitepaper?
- In the event that there were suspicions of having failed to comply with the securities regulations, when does the statute of limitations to be sued expires? In which countries have infractions occurred? How is the penalty quantified and what price adjustment mechanisms should be included in the SPA?
- How do the rights of the tokenholders determine the future dividends policy?
- Is there a “Plan B” in case it is necessary to migrate to another blockchain?
- Will there be any insurance companies willing to grant a D&O policy (Directors & Officers insurance policy) for a company with a business related to cryptoassets?
The importance of not making mistakes
It is not difficult to guess that a breach or error (wilful or accidentally) related to any of the above issues is of sufficient magnitude to considerably reduce the sale price or even to drive investors away. However, this does not mean that policies helping to prevent or mitigate the impact of a breach related to any of the above points cannot be put in place. That is why I said in the first paragraphs that, when dealing with these technologies, it is necessary to count with specialized advice and practical experience. An advice that can provide a distinctive value that helps respond to the question: Why invest in a blockchain company and why not.
By Santiago Navarro.