Protocol Labs sent out a blast to all their accredited investor registrants delaying the Filecoin sale 3 days and asking for people to submit questions to them to help clarify aspects of their sale. What follows is what I sent to Protocol Labs. We'll see what they answer in their FAQs over the next few days.
I have been following Filecoin/IPFS for years and looked forward to this event with great interest. As a fan, it's been a tough few weeks.
Q1) "A significant portion of the proceeds of the Offering will be used by the Company to achieve the Minimum Viable Product and subsequently to buildout a decentralized storage network, powered by a blockchain and the Filecoin protocol token."
How is "significant amount" defined? How is that enforced and by whom? How is the rest to be spent? Are there limitations on dividends to equity investors in Protocol Labs? Who controls the money?
Q2) Protocol Labs is a for profit entity whose interests are not necessarily aligned with FIL holders and those interests could diverge. What happens then? One example (of many):
"Guys we've determined FIL doesn't work and have decided to create a different storage network called Holdem -- all FIL holders will get their ratable share of 1% of all Holdem. Thanks for your support. We also have created a business called ChargemHigh for IoT locks. It's doing great. You get nothing from it. Thanks for your support."
Q3) Can PL invest in non-Filecoin dependency projects? To what extent? Who decides whether they are doing this or not?
Q4) Why are you not just giving 100% of the proceeds to Filecoin Foundation or something whose charter forces the recipient of the proceeds to develop Filecoin?
Q5) Why aren't the advisors subject to much longer vesting, if they are truly long term partners? Vesting looks the same for the pre-sale advisors and the public. I am sure many public sale investors would take 5yr vesting in exchange for the prices that the pre-sale investors got.
Q6) Are you aware of any private placement under SEC's Reg D 506(c) or any IPO that used a pricing structure that allowed for certain investors to pay 10x or more than other investors? Did you socialize this with the SEC and get permission that this pricing structure and the disparity it creates would fly and be consistent with Reg D 506(c)? This is the first use of CoinList for a supposedly compliant ICO structure, but it has features that seem dangerous to investors and unproven in normal security offerings. That's a big contrast with a desire to be fully compliant. There are several bad precedents being set and to have a thought leader make these actions normative is disappointing. This may or may not be legally compliant. It's absolutely not compliant with the spirit of the securities laws or the spirit of the SEC's mandate or the spirit of Filecoin circa 1 year ago. It's your prerogative to launch your project, CoinList, as you see fit, and the same goes for Filecoin. But this all stands out.
Q7) Are there any precedents found in normal, compliant security offerings for the pricing structure and the day-one disparity it creates as well as the fact that the raise gives investors an asset but takes the cash on non-recourse basis other than delivering a MVP within 5yrs? It's more asymmetric to the detriment of investors than anything I have seen in regular capital markets and I have done this for a long time. This could be solved easily by giving all the proceeds to the Filecoin Foundation.
Q8) How separate is Foundation from Protocol Labs? What mechanisms are in place to ensure that all their dealings are at arms length and that Foundation will not be a captive proxy to PL?
Q9) Will people who sell FIL token in the future be selling a security? Have Filecoin / Protocol Labs lawyers gotten the SEC to opine on that or not? Removing the ambiguity would derisk this situation for investors.
Q10) I would ask that if you want to raise money for Protocol Labs -- that's great! I am sure you would get a ton of support -- that you do that explicitly by going to VCs, filing an IPO, or an ICO for Protocol Labs and not by selling FIL tokens. It really muddies the waters and isn't fair.
Q11) It's easy to joke about the Dot Com Bubble in hindsight and ask "what were they thinking?" Dot Com Bubble comparisons have been a facile attack on crypto since 2011; I've found them to be trite and to miss the point. Capital formation and tech revolutions happen in cycles. But I find myself looking at the Filecoin ICO in real-time and wondering "what are YOU thinking?" Given the sums involved, the Filecoin ICO seeks to make normative asymmetrical incentive structures, excessive raises, rushed/everchanging details, and FOMO fostering pricing mechanics. You guys will set these precedents and you will see the next ICO push the boundaries even more and worse ICOs mimic aspects of your structure and justify it by saying "Well Filecoin did this." Is this the legacy you want to leave for the space? Is this what you want to have to dig out in conjunction with the public introduction of your great technology and your awesome projects (including CoinList!) to the world?
Easy Remedial Fixes
- Specify that all proceeds from this Private Placement go to the Filecoin Foundation.
- Create strong controls that ensure that Foundation operates at arms length from Protocol Labs.
- Create simple, easy to follow time-based price changes for the ICO like the Ethereum ICO and many others. Reinventing the wheel with a pricing mechanism that requires calculus to understand it is not an improvement. There still exists a motivation for a bad actor to DDOS CoinList for the first hour as soon as the bad actor's payment is confirmed.
- Get clarity from regulators as to how they would view a SAFT holder selling FIL tokens later on on the secondary.
- Consider selling the supply in multiple tranches over time, not in one big single raise. There is no reason to overfund today like a capital camel.
You guys are leaders in this space and have earned all the credibility you have. You are awesome. What you do sets the direction for everyone else -- you create what's normative by how you choose to act. Do you want to be long term greedy (the good kind) or do you want instead to recreate 1999 all over again? It's your call and your choice.
Thanks for your time and consideration,
Eeks from the Internet
