Protos are engaged in a ICO and I found the time recently to review their Offering Memorandum. Essentially Protos is a hedge fund that is going to speculate on cryptocurrencies.
What are the manager’s qualifications for running this fund? They used to work at banks, so they will have had lots of training in chicanery. Oh, and one of their advisors works for a real fund management company – so he will know all about fleecing clients. And also based on the (unsubstantiated and unverifiable) assertion that one of them bought Ethereum at ICO, and Litecoin at $2. So did I, but I don’t have the colossal egotism to regard that as evidence of investing brilliance, just good luck.
So you get the rare privilege of giving them your money. Can you have it back by redeeming at NAV (Net Asset Value)? No, the fund is greenfield – they keep the profits and “reinvest” them. Thereby ensuring that the fees flow forever. Can you sell the token? Well, in theory. But there is no centralised exchange for security tokens. So probably not right now. What mechanism is there for ensuring the token trades at or close to NAV? Well, none really.
In fact, there is a deafening silence around secondary market trading altogether. Cayman domiciled funds are supposed to keep a register of individuals who have a beneficial interest in a fund? Doesn’t that mean every transaction is subject to prior receipt of customer due diligence? Could be a bit difficult if someone were to buy a token on the secondary market and then find it is worthless because the CDD wasn’t provided.
What price is this unbeatable offering? Well, a management fee of 2.5%. Which is high. Very high. In the golden years of hedge funds the charge used to be 2%. I guess that isn’t enough for Protos managers. And 25% of profits. Which is high, very high. In the old days 20% used to be enough. And to cap it all the Fund is going to bear all the expenses of the management team, including travel to conferences and marketing and legal costs and professional expenses and whatever. Basically anything. First class travel anyone? Parties? Chauffeur driven cars? It is so broad you could drive a bus through it. I can easily see the annual expense ratio exceeding 5%.
There has been only one substantive tweet since the ICO closed in December and I fear ICO investors have reason to worry. Protos mirrors the worst features of the existing system, without the redeeming feature of being able to exit at NAV. The only people who are going to make money from this token are the promoters of Protos.