On The Brink with Castle Island - Jeff Dorman (Arca) on asserting tokenholder rights (EP.129)

Episode Date: September 23, 2020

Jeff Dorman is the CIO at Arca, which is currently engaged in a fascinating standoff with Gnosis, a token project in which they have a position. Arca is asserting that Gnosis has delivered little value to tokenholders and has proposed that they perform a tender offer for GNO tokens with the assets held on their balance sheet (which exceed the capitalization of GNO). Covered in this episode:  The original purpose of Gnosis as laid out in the whitepaper Why Gnosis only sold 5% of their tokens in the initial sale How Gnosis's dutch auction backfired How the original objective to create a prediction market failed The history of Gnosis' non-core products and expenditures – and why they don't accrue value to GNO Under what circumstances pivoting is permissible – and when it isn't The existence of obligations towards tokenholders, even if implicit and unstated What should a well-codified arrangement between tokenholders and token issuers look like? Jeff's view of whether the utility theory of tokens is still valid The substance of Arca's proposal to Gnosis, and their preferred resolution Arca's proposal around a tender offer to buy back GNO at a fixed price with treasury assets Why large investors exerting themselves in governance benefits smaller shareholders How Arca's GNO position is similar to the ESG movement Arca's response to the rebuttal that tokenholders have no rights Arca's leverage to achieve a positive outcome – and willingness to litigate Whether explicit security tokens like Arcoin and INX will converge to tokens with equity-like characteristics  

Hello and welcome back to On the Brink with Castle Island. Believe it or not, it's been over a year of us doing this podcast. We've done something like 130 episodes so far, which averages to about 2.4 a week. So it's been a pretty amazing year. We've had some really fantastic conversations. Thank you all for listening. Last week was actually your best ever week and last month was our best ever month of download. So thank you for your continued support.

We really appreciate it. feel free to reach out at any time to at On the Brink CIV if you have feedback or a suggestion for someone to interview. We're always happy to take suggestions. So this week we've a really interesting episode with Jeff Dorman, who is the chief investment officer at ARCA. ARCA is a digital asset firm. One of the things they do is they have a hedge fund, which pursues a variety of strategies, including special situations. One of those special situations involves a Gnosis position that the fund holds. So Gnosis was a 2017-era ICO. They were proposing to create a prediction market similar to Auger. In the end, it took them a really

long time to produce that prediction market, and they kind of dilly-dallied along the way a little bit and built some other things that weren't really specified in the white paper. Arka's contention is that they haven't been particularly judicious with the Treasury funds and largely failed to achieve the objectives that they laid out in that original vision. Now, the interesting thing about Gnosis is that their treasury assets are worth about three times what the token is worth in the aggregate. So they hold a bunch of ETH on their balance sheet, which is worth a lot more than the market cap of the Gnosis token. If you look at the equivalent situation equities, you might say, well, that doesn't really make sense. What company is

trading at a less than one price-to-book ratio. Well, in crypto, things are a little bit different. Of course, token holders don't have an explicit claim on the assets of the company. They don't necessarily have a liquidation preference or even a claim on the cash flows generated by the company behind the token. And so there's nothing that necessarily connects the value of the token to the corporate assets being held by the foundation or company developing that protocol. But ARCA kind of sees it differently.

So recently, they put out a proposal to the Gnosis team to liquidate some of the treasury assets and buy back some of the Gnosis tokens at a tender offer higher than the current market price of Gnosis. And their point is that Gnosis does have an obligation of token holders, even though it's not clearly specified in the original white paper or kind of constitutional documents. So ARCA is trying to impose some governance controls on the issuing company, and their view is that there really was an implicit social contract, and that token holders should be thought of more akin to shareholders as opposed to being completely disempowered. Now, this is kind of a view that's gaining currency in the industry. We're seeing explicit security token offerings, which give investors clearly defined rights, liquidation preference, and access to cash flows, I&X would be a good example. And at the same time, we're also seeing a rise of defy tokens, which give investors certain governance rights

and potentially access to some on-chain cash flows. So the idea of token holders as something more akin to shareholders as opposed to merely holders of sort of arcade tokens has gained a lot of salience in the industry. And ARCA is arguing that this should apply to ICOs in 2017 even if their rights weren't clearly stipulated. So this is going to be a fascinating battle to cover over the coming months, and I'm honestly of no idea what the resolution is going to be.

This is a topic that's really fascinating to me personally. Modeling token holders as shareholders and looking at it through the lens of governance was actually the subject of my own master's thesis written in 2016-2017. At the time I concluded that token holders really were disempowered, seems like things have changed a little bit. how it goes. Without further ado, here's Jeff Dorman. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion.

This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of Concentuteeasing. You print a couple trillion dollars, and all of a sudden, people, people started to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Jeff Dorman, thanks so much for joining the show. I really appreciate it. Thanks for having me. Happy to be here. This news had the kind of token investor space in crypto industry, all of Flutter recently. I happen to think it's really cool. There's a few of us

that have been sort of expecting this to happen with more assertive token holders relative to token issuers, but for whatever reason it hasn't seemed to happen. So all that is to say that I'm pretty excited, frankly, by the fact that you guys are taking the mantle on this on this Gnosis situation and, you know, becoming much more sort of relative to the team. Yeah, I guess I guess we'll dig into it. Why don't we start by talking about ARCA a little bit and the strategy you've developed there and kind of your positioning as a fund? Yeah, sure. So, you know, ARCA is an innovative investment management company focused on digital assets in blockchain technology. We do this through two core business lines.

We have ARCA funds, which is a hedge fund manager where we are investing and managing risk across the more esoteric opportunities and special situations in this ecosystem. And then we have ARCA labs, which is pioneering innovative regulated products in a digital structure that aims to revolutionize, you know, how the market thinks of investments. I'm the chief investment officer. I oversee ARCA funds. And our flagship fund strategy is the ARCA digital assets fund, which is a long-biased special situation strategy focused on capturing alpha in small and mid-cap digital assets, where there's very little competition. And would you describe your Gnosis engagement as a special situation? Yeah, when we think of special situations, and in fact, it's funny. We don't even consider ourselves a digital asset fund.

to ourselves a special situation fund that is using the digital assets medium as our investment tool because it's so inefficient and there's so many opportunities right now. But yeah, I would say, you know, when I think of special situations, I think of, you know, anything that uncovers value, right? You know, it's not, it's not beta, it's not trading, it's not momentum, it's uncovering value. And in this case, what we did with Prenosis and the GNO token, you know, we saw an opportunity here where this is incredibly undervalued using real fundamental valuation techniques, using real book value investing techniques, similar processes to what we've used in the debt and equity markets for years. And we wanted to work with the company to help unlock that

value. And thus far, they've been unwilling to work with us. But we believe that there is tremendous value to be uncovered here. And we feel like we can be an agent for change. to help uncover that. So I want to dig into the precise nature of your proposal of Gnosis, but maybe let's just start at the beginning for those of us, for our listeners that weren't necessarily around in 2017 when Gnosis launched, how it was launched, what the original purpose was for the token, the stated purpose, what it was kind of sold as,

and what the objectives were, and then how that kind of changed over time, if you don't mind doing a brief recap. Yeah, for sure. So as you mentioned, you know, as this was one of the earlier projects in this ecosystem. You know, the team, you know,

very well respected, intelligent people who understand, you know, the digital asset ecosystem, big, big proponents of Ethereum and everything Ethereum-based. But like a lot of the ICOs done in 2017, it was done without really any thinking of token holder rights

and what ultimately is going to be given back to token holder. But a lot of the ICOs were just, let me raise some money with this new token structure and we'll figure it out later. You know, a lot of them were promises that we would build something. So in Gnosis's white paper, what they set out to do is to build a prediction market. A prediction market meaning, you know, very similar to what you might be familiar with in the gambling world with a bookie. But a prediction market would simply be anybody can come up with some sort of a prediction, like who is going to win the 2020 presidential election. And then people can stake their tokens on either side and basically make a market around the projected outcomes.

You know, the idea of what they tried to do is they were going to do a decentralized project. They were going to issue a majority of these tokens to the community through what's called a Dutch auction. You know, and a Dutch auction is in theory meant to help find a market clearing price. What ultimately happened is their ICO was kind of botched. They only ended up selling $12.5 million worth at, and it was 5% of the tokens was sold, meaning that NOSIS and their equity owners, which is consensus, NOSIS and consensus still own 95% of the tokens, and the community only owns 5%. What was laid out in the white paper was that this token was going to be integral to their prediction market.

So effectively, anybody, including ourselves, anybody who decided to buy these, you were trying to bootstrap a prediction market. What's happened over the last three years is they've created about seven ancillary products before they created the prediction market. They just launched the prediction market a few months ago. And the NOSIS token is not utilized in any of these projects that they've created. So effectively, you know, if you think about what it means as a token holder, we gave NOSUS money to do something that they promised, and those promises have gone undilerved.

So, oh man, there's kind of so much to dig into here. I distinctly remember that 95% threshold because I remember seeing it and thinking, what happened here? I mean, something has gone terribly wrong in terms of actually distributing, especially for any project that's endeavoring to be community owned or anything like that. So can you just briefly explain why only 5% of the tokens were sold and, you know, what would have had to happen to issue more? tokens initially? Sure. So, you know, when you think about what a Dutch auction is, right? A Dutch auction is meant to find a clearing price for all of the tokens that sold. So they had a, they had a amount of tokens that they were planning on selling.

And in theory, there would be different demand at different prices, right? You'd expect lower demand at higher prices and higher demand at lower prices, you know, similar to any microeconomic supply demand curve. What happened was because in 2017, things were just flying, was that a very small percentage of people or investors just gobbled up all the tokens at a super high price, which meant that not nearly as many tokens were sold as should have been. And as a result, they ended up kind of capping their raise at that $12.5 million number with a very small amount of tokens at a very high price. So they're actually victims of their own success in that instance because there is so much demand. in dollar terms for the raise. 100% yet.

I don't fault them for the outcome of what happened, right? This was a money grab from both sides, right? It was a money grab from issuing companies in 2017 because they knew they could just throw something out there with a loosely worded white paper and raise money. It was also a money grab clearly from, you know, investors who were just thinking that whatever you buy you can make money on. And so their mistake was not actually capping the size of the raise,

was capping the size of the raise in dollar terms. if they'd, you know, allowed more dollars to flow in and opened up the throttle there. They could have effectively released more tokens to the market. Yeah, or really just, I mean, look at the evolution of this asset class of the last three years. I mean, they've had three plus years to now make amends, right? They could have done anything to get more of those tokens out to the public, right? Or to reward their community, there's a number of different things they could have done after the fact. Again, to your point, they were a victim of a gold rush when they did it.

But that doesn't excuse what has happened since then with plenty of opportunities to fix this problem. Now, because the float is so low, was there ever, are those 95% of tokens that are still held in their kind of reserve? Are those considered to be circulating or are those just effectively considered to be off market? Or is it some sort of weird twilight situation where no one's really clear? It is so they are locked. You know, certainly we'll get into the Twilight kind of question with regard to what they are transparent about it, what they're not. But in this case, you know, there was a total supply of 10 million tokens. The auction that they did was designed to either raise $12.5 million or sell 90% of the supply.

And obviously the 12.5 million happened well before the 90% of supply. So the other 460,000 of the 10 million tokens were sold. That's what's circulating. And the other, you know, nine and a half million plus tokens is sitting in their treasury and it has a lock where, they are not allowed to distribute it, you know, subject to certain investing rights. So there are employees of NOSIS who have received tokens in response to their efforts working on the company. But other than that, the other Treasury tokens are sitting there locked.

So when you talk about the market cap of Gnosis, are you referring to that roughly 5% float? Or are you referring to the whole 100%? Just the float. We feel the market cap is just what they sold, right? The token holders who backed their project and gave them the money, that's 460,000 tokens is what we consider the circulating supply. Okay, understood.

Yeah. And the float adjustment is a challenging problem in the crypto industry, period. And there's so much kind of arbitrariness in terms of treasury-held tokens. You see this all the time. Sometimes with BNB, though, for instance, one example where employees take compensation from the treasury, which, you see this all the time. you might consider inert, those then get introduced to the open market. So I guess the float increases over time. Well, right. And that goes back to what we said. They were victims of a hot

market, but there was plenty of ways that they could have started distributing tokens to the community thereafter, right? You know, over the last three plus years, in addition to the 460,000 that were sold, there's now 763,000 total outstanding because they have distributed about 300,000 to their team. And again, like, we applaud that. That's fine. We're certainly not trying to, you know, we believe that anybody working on a project deserves to be paid in their own native token because they should be aligned with token holders. So some of that supply is coming out to their team, but none of it has gone to their community since that initial 2017 ICO.

And I do remember that the original objective was to create a prediction market. I think obviously, as we all know, the prediction market space kind of floundered over the last couple of years. Auger never really took off. I guess Kodonosis was a fast follower of auger's. and they've only just launched. We've seen other venture-backed startups, building prediction markets fail.

What were the ancillary products that the Gnosis team made in the intermediate period? What did they work on? Sure. So the first thing, they've had some successes and some that we would call lack of success. They've been working on a decentralized exchange. Originally, they did one called Dutch X.

Again, this was straying from the original white paper. This was not in the original white paper. They actually updated their white paper six months later without much disclosure and added that in there. But they built a Dex called Dutch X. That never got off the ground, so they scrapped that. And then they redid it a years later and called a defusion protocol, which has now been redubbed, rebranded recently as NOSIS protocol. So basically three different efforts to create a decentralized exchange. Again, none of the NOSOSOS tokens are utilized in this exchange at all.

They did get the prediction market out, as we discussed, although there's challenges just in terms of product market fit. You know, this is well beyond blockchain. You know, decentralized or prediction markets have been tried for 20 plus years, all to a very little success. But then they've also had plenty of other things. They built the NOSIS safe wallet. That's arguably their most successful product. I think, I believe they have a billion dollars in that safe wallet product now. But once again, it doesn't accrue any value to the NOSUS token, does not utilize the NOSIS token in any way,

which they have also done things that I don't even know how these fit in. You know, they've been spending money on a NOSIS ecosystem fund, which is meant to give out grants to people who are building within the NOSIS ecosystem, but they haven't made a grant in well over a year. They sponsored a conference in Berlin. They have a huge co-working space that they pay for. I just, you know, again, in theory, meant to bring more participants to the NOSIS ecosystem. But, but but none of them were laid out, none of these things other than the prediction market were laid out in the white paper. And as we said, unfortunately, none of them even used the NOSISO. I think this is why it's actually such a fascinating case study because they have had some success in these alternative product lines,

in particular the multisig product, Knosis safe, which seems to be actually quite popular within the Ethereum community as far as I can tell. But these are just not delineate. They're not described in the white paper. How would you have felt if, you know, let's say they'd undertaken some totally distinct product lines as, you know, as compared with what was laid out in the white paper, but they had built in some value cruel mechanics to Gnosis. Maybe these, you know, projects were fee generative and ended up, you know, burning the Gnosis tokens or something like this. would that have sort of felt sort of less illegitimate if they had been stewards of the Gnosis token but not not in the way that they'd initially described or forecasted? Yeah, I mean, look, if you change course, which every successful technology company in the history

of the world has pivoted at some point, right? Changing course is not the problem. But if you choose to change course, you need to communicate it properly. You know, you need to talk to your community and your token holders and your investors and talk about what you're doing and why you're doing it. In Nosis's case, they just changed course without ever updating the community properly. And they're treating their personal balance sheet as if it's their own piggy bank that they can just do whatever they want with. I mean, I run an asset management firm.

I've run a technology company prior to this as well. If I just started building greenhouses, you could argue that I'm doing something that is for the greater good. But that's not what people signed up for when they gave me money to manage or when they gave me money to build my other product. So I think nobody, there's not really nobody out there who questions the nosis management team in terms of intelligence, integrity, and what they have done for the Ethereum community. We definitely see that they have done good things. But that doesn't excuse them from doing them without communication or permission from the people who gave them the money in the first books. So it seems like, and we'll get into it in more detail, but in terms of the way that you kind of see the world, It seems like there, you believe that there's effectively an implicit contract being made with token holders when, when that sale occurs, some of which is specified in the white paper, but some of it is kind of unspoken, unwritten, but it's still very much exists.

So it seems like what you're saying is there is an obligation to token holders, even if it's not explicitly what laid out in the white paper, that obligation still exists. Yeah, I mean, I mean, look, governance was not built in to. white papers during the land grab of 2017, right? We've seen, again, in the evolutionary process of this ecosystem, you have seen in the last two years and especially really in the last six to 12 months, that governance has really started to be built in, right? Companies have been focused on giving back to their community. It wasn't there in the beginning. And with regard to implicit versus explicit, I mean, you know, part of the reason nothing is explicit is because there's no legal precedent here. You know, we think there will be one day. We may be eventually

a part of that explicit legal structure. But for right now, yeah, it's implicit simply because, you know, to me, this is this is fairly obvious from a transparency, governance, and fiduciary capital standpoint, is if you take money from someone and tell them what you're going to do with that money, you have an obligation to do what you said, right? Traditional finance has a lot of these mechanisms built in with regard to investor protection. We don't have that yet in the space, but that doesn't mean that we shouldn't be striving for. So I guess this is one of the big debates is, you know, we're currently in the stage where

we're still as an industry grappling with the notion of what it means to be a token holder. And I guess the big question is, what should token holders have rights to? And maybe it really depends. But in your view, what would an ideal, you know, balance of power between token holders and token issuers look like? I mean, what should be specified in an ideal kind of contract if one were to be written? Well, I think they have been written. I mean, that's kind of what we're getting it. I think these were written.

What I see it in very simple forms is you have an obligation to your token holders to create value. Now, value does not have to be monetary. Value can be through utility. That's the whole question mark that everyone has, are these utility tokens? And that's fine. I can get value from things that are not monetary. But we have to do one or the other, right? You either have to create financial gains for the early token holders

by creating value for others who want to buy it from you, or you have to create utility, which makes me want to own it to use it. You can't do neither. And that's the issue we have here, right? Is you have not created financial gain, nor have you created it, you have not created financial value, nor have you created utility. So, you know, I think from our standpoint, this is just about, stewardship. You know, it's easier to solve these issues earlier in the maturation process of an

industry, and that's what we're trying to do here. You know, we really believe that we are an agent for positive change, not just with noses, but, you know, across the entire industry. You know, I was recently reading a McKinsey article that was talking about how activist investors are, can unlock blind spots for companies. And in fact, they encourage companies to roleplay and say, like, what would an activist investor do here to change what we're doing? Right? Because that thinking like an investor rather than thinking like a company helps to uncover, helps to unlock value and helps to align the companies with their token holders.

So we've seen plenty of examples of companies that have both equity and tokens on their balance sheet, or in their capital structure, rather. And, you know, a lot of these are centralized companies with board of directors, but they are doing good things to service both their equity holders and their token holders. I think where we come out on this Ginoza situation is they are not, right? They are accruing values solely to their equity holders, which is themselves, and not at all to token holders.

And more importantly, they don't seem to care. They've never done anything to engage their community and try to create that value. And again, that value doesn't have to be monetary. It can be through utility. So in terms of the utility theory of tokens, I mean, this was the predominant. and maybe theories giving it too much credit, but this was kind of the predominant view, kind of theoretical lens within the crypto industry,

I don't know, but from 2014, maybe to 2017, at least for a certain class of tokens, was that if you created effectively, you know, a token giving you the right to use a certain digital product or service, then that some,

individuals that would want to use that product would have to hold the token in a kind of working capital context and that would be a constant source of buying pressure for the token which would cause it to accrue stable value over time. You know, I think there was definitely a class of tokens under which that was kind of the best theory for the value cruel. Do you believe that that promise has been borne out since that kind of theory was developed at all? Like, it, it, it, you Is there still a case to be made for the utility theory or have kind of subsequent events debunked the effectively the utility thesis of tokens? I think the utility thesis is strong and I think it's well beyond digital assets.

I mean, this is, you learn this in microeconomics courses, right? Like the utility for one person might be different than the utility for someone else, right? If I am, you know, if I was buying airline miles, I might value that higher than somebody else, right? So the utility value is real. If you are creating value for someone, you know, no different than people who buy ETH tokens right now, right? If you buy ETH and you're really active in DEPI, you might value ETH higher than somebody who's buying it and doing nothing with it.

So that utility value is subjective, not objective, but I think it's real. But at the same time, again, if I were purchasing airline miles and then I showed up to use my airline miles and the airline told me to pound sand, they're not good anymore, or even worse, we never intended to use them anyway. I think, you know, anybody who purchased those airline miles would have a right to be upset. And I think where that's where we come out is like, you know, it's not like, it's not like, it's not like, it's not like we don't like how the NOSOS token is being used. It's not being used at all. They have not fulfilled that promise.

And that is why, you know, I think that's, that's why we have rights here. And, you know, I think, again, it's, to me, it's fairly cut and dry. If you don't provide utility, what are your token holders supposed to do? You know, if you do provide utility, this is a non-conversation. So leaving eth aside, would you say there are these pure play, are there examples of pure play utility tokens, which you believe are, you know, have found that kind of sustainable niche where token holders are effectively satisfied? I think there's a lot of examples, but more importantly, there's a lot of examples of management teams and project owners who are trying every day to tweak their tokens to make sure that they are valuable. Right. And, you know, like, let's take Binance, for example, because I think finance was the, was the easiest of all the pioneers in the space, right? Because finance is an exchange. So every single person who uses the finance product by definition knows what a token is because there's nothing else to do on finance except trade tokens. So the Venn diagram of people who understand what a digital asset is and the people who are customers of finance is, you know, basically just two overlapping circles, right? It's the same people. So when they issued their token and said, this token is going to be used in our ecosystem, that is right away a utility, right? Now, you can argue that

it is a hybrid security, right? It is both a financial security as well as utility because they also have basically given dividends or done burns and buybacks and things like that. But the core utility is you can use their token to get discounts when you use their platform, right? That was built in to the token design. You know, you can say the same thing, you know, Uniswap is a great example. I mean, look how fair the launch was of uniswop yesterday, you know, compared to anything we've seen before. And again, this is just the maturation and the evolution. Uniswop gave tokens to anybody who's used their product over the last few years, as well as to people who are providing liquidity on their platform, right? It is a reward to your customers.

You are bridging the gap between investing and between investors and customers. You're making them all one person. So I think there's plenty of examples where, and then think about what that Uniswap token is going to be for, right? It is going to be a governance token where the owners of these tokens then get to participate in how fees are disseminated in what you can actually utilize and do with these tokens. So there's plenty of examples across what I would consider security tokens as well as utility tokens where there is clear-cut value mechanisms as well as clear-cut use cases. And nois is one of several that just has not adapted to where we are in the life cycle of the

digital asset ecosystem. Yeah, I very much agree that, you know, the thoughtfulness of the kind of rights and entitlements the token holders have has dramatically increased in the last few years. With the latest wave, is effectively we're seeing a deconstruction of the features of equity and selected features are getting bundled back into these tokens, including, you know, even cash flow rights of a sort and then, you know, potentially control rights, although you could always, you know, point to the distribution of these things and question how much control token holders really have. But I do agree that there's been dramatic advancements there. From the BNB situation, I've actually been fairly critical of them.

Actually, for a reason you mentioned where B&B changed the white paper. and they've actually been fairly ambiguous with regards to what token holders are entitled to and to whether they're buying tokens on the open market or not or just burning the tokens held in their treasury or whether those kind of tantamount to the same thing. What would you say the difference is there? Is it just that they've been far more engaged? And you can sort of forgive a little bit of lack of transparency given that Binance itself has really tried to do right by its token holders?

Well, yeah. I mean, first of all, when I mentioned Binance, I was simply providing an example of something that clearly has utility, right? I wasn't speculating on whether or not I think Binance is doing well or not. But I will say that to your point, yeah, yeah, they have ways to go as well with regard to transparency, right? It should be more clearly laid out what the value of that B&B token is and how you're going to, you know, create that value and or, you know, use your, use your profits to pay it down. So I think they can certainly be more transparent.

At the same time, I don't think anybody would argue that management is aligned with token holders, right? They own a ton of the tokens and they work towards trying to create value for the tokens, either in the form of utility or in the form of financial gain. So I think while there's certainly improvements that they could make, you know, there's at least been an effort and has been a fair amount of a token holder alignment. So let's get to your actual proposal to Gnosis. I guess the first question there would be, how did you, what was the inspiration for this idea?

I mean, were you just looking at tokens with a high, quote unquote, book value relative to the market cap? Or, you know, had you just been following Gnosis? What was the kind of genesis of this idea? Yeah, I mean, ARCA is a, you know, we have a very fundamental research-based strategy. We are always doing very deep, heavy due diligence on companies and projects in the space. And we do it from the top down, right?

First, we think of themes. You know, what are we looking for that we think is going to, you know, grow in the next three to ten years? And then we try to find ways to express that theme at the individual company level. And then we have to go and say, okay, do we actually trust management? Do we actually think the token will accrue value in that case, right? So it's a very methodical fundamental process that we're doing all day, every day on hundreds of companies and tokens this ecosystem. With regard to NOSIS specifically, you know, it started with, you know, these guys are having a lot of success in certain areas, right? Like you mentioned, they have,

you know, they've been around for three plus years. They have the safe wallet. So that was what gravitated us to them in the first place. But as we, in the course of our, you know, years of due diligence, we just kept uncovering more and more problems with what they were doing with, from, from like I said, switching their white paper to ancillary products that accrue no value, you know, to very simple things like, you know, why do they have 65 employees when they generate zero revenue and burn $7.5 million a year? So, you know, there were just a lot of things that we uncovered along the way that made us pause. You know, and then when we realized that, you know, they didn't have, they don't have a huge treasury balance because they've been earning money.

They have a huge treasury balance because the price of ETH has gone up six X relative to the price of noses, right? So if I give you $12.5 million worth of ETH and you give me back $12.5 million dollars worth of NOSIS. And then three years later, that treasury is worth 70 million, but my tokens are not. Like, you know, that's, that's not through anything that they did correct. That's just through a currency fluctuation. So that is why we started talking to them and said, look, you know, you have basically, you know, the word we use is you borrowed money from NOS's token holders to create products that we're supposed to accrue value. You have failed to do that. Let's, you know, get us, put ARCA on the board or let ARCA help you, you know, cut costs and rethink about the way you're doing things

and otherwise give the money back. And, you know, at first the conversations were constructive. They became less constructive over time. And now, you know, I think the ball is in their court. You know, we have a real proposal out there. We said you're not utilizing the NOSA token in any way and you're not communicating with your token holders. Therefore, give the money back.

And if you give the money back at the book value of what your balance sheet is, you're not your balance sheet is, you're going to create a 300% gain to token holders. If you're not going to give the money back, then you need to formally respond to us and tell us what you are going to do and come out with a forward-looking plan that includes NOSUS token holders in that plan. So talk me through the specifics of the proposal because you're not actually proposing that they buy back, that they distribute the entire treasury, which is considerable to the holders of of Gnosis tokens pro rata. And you're also not suggesting that they, you know, retain that entire treasury and, and stay on their current trajectory or, you know, try and slightly tweak their

strategy. What's the, what's the precise proposal that you kind of have out to them? Sure. So as mentioned, you know, this is a company that produces no revenue right now. So the entire, you know, value of the company from a financial standpoint right now is just the value of their cash on the balance sheet, which is a combination of US dollars from sales they've made of Ethereum and the Ethereum, the ETH itself that they own. So right now, as it stands today, that balance sheet is worth $70 million, which is $60 million worth of ETH and $10 million worth of cash. So that value alone divided by the $460,000 of tokens that were sold in the initial ICO, that would be worth $153 per Nosis token. And the token is currently trading at 58. So that's where we get to three times.

game. What our proposal is, though, is not to, you know, liquidate the company and force them to online. We said, okay, let's, let's, you know, you have a $7.5 million annual cashpering, which is egregious, but let's just say that it, you know, let's let's let's let's take that out of the $70 million dollar balance sheet. And now you're down to, you know, roughly $62 million. And on top of that, we will, you know, we want to take care of your employees, right? The people who have been working there, they deserve to get paid as well. So we included all of the tokens that are owned by employees, we added that to the 460,000 token balance, and that gives you another 300,000 of tokens. So if you take the $70 million of cash,

minus enough runway for them to run their business without any interruptions, and you give back money to all the token holders and the employees, you still get $83 per Nosis token, right, which is a 43% gain over current prices. And are you envisioning this as a special dividend, kind of a one-time thing? or are you actually proposing that they wind down the token and do this exchange for the cash on the balance sheet? So we, I mean, look, we think there is a case to be made for just winding down the token because, again, they haven't integrated it into anything they're doing. But, you know, we know they disagree with us, and that's fine. If they want to, you know, keep the noses tokens outstanding and figure out a way in the future to give it value, that's fine.

What we are proposing is that they do a tender offer. So in the traditional finance world, the tender offer is we are going to come out and say, yes, at that $84 per token price, we will buy back any outstanding tokens who want to sell to us. And anyone who doesn't sell to us, you get to keep your tokens and we'll move on. So the thought process is if they really believe that they're creating value like they, in theory say they're doing, even though they haven't been explicit about it, if they really believe that there's value to this token and that they're going to create value, they should be happy to tender at $84 per token. Give token holders like ourselves who are frustrated a chance to get out of the token and get our EF back and get, you know, give other token holders who are more long-term believers in what they're doing. Give them the chance to hang on to those tokens with a lower supply and ultimately benefit from future accrual that NOSIS comes up with. And I think I think the big point here is, you know, a lot of people are like, this is just a hedge fund looking for financial gain. And that's not the case at all here. You know, ARCA did this because we have the financial resources and the people to do a deep dive due diligence. But that doesn't mean that there aren't other independent token holders out there who feel the same sense of frustration that we do.

So we feel that this movement will become mainstream over time and we're already seeing it happen where all token holders feel like they have a voice. And if that happens, again, which we're seeing, we're seeing it in the Nosis Discord. We're seeing it on Twitter. We're seeing it on telegram. A lot of NOSUS token holders believe what we're saying is true. And I think we are trying to empower and give that voice, not just from ARCA to noses, but from all token holders to noses that, you know, do the right thing. Tell us what you're going to do or give us the money back.

Yeah, I think that that comports with the corporate governance literature, which holds that larger shareholders have that incentive to surface information relative to their companies and to be activists or to be more. engaged because fragmented shareholders, they just fundamentally don't have enough exposure to the company for it to be worth their time exerting governance. So I think that makes sense. I mean, I know a lot of people are pointing to this as activism. You know, obviously this is not traditional activism like you would see in traditional finance, right? We're not we're not doing a proxy statement here. We're not, you know, trying to take over the board and get rid of management. What we're

trying to do here is is is is force change like we said and men have nosis uh you know do better uh with regard to their token holders and ultimately to hold them accountable um you know both from internal protocols to governance to cash balances etc but really to me this is this is very similar to the esg move right for anyone who's familiar with environmental social and governance that movement to uh of investors to invest in things that are socially responsible and helping the environment you know in that regard, it's very similar, right? What are they saying? Huge investors like BlackRock are basically telling management teams that we are not going to buy your equity or you're dead if you don't start being ESG conscience. If you don't start doing things that help more than just shareholders,

that you actually help all stakeholders, right? Stakeholders meaning employees, society, their own cities and jurisdictions. And that's a real big pressure point, right? Because now you have the biggest investors in the world basically telling companies, we're not going to help you with your cost of capital. We're not going to help you raise money unless you do the right thing. And that is not a legal argument. That is a societal pressure argument. And I think that's where we come out as well. That's the movement that we are pushing or trying to get people to speak up. A lot of people think there's no legal precedent there for you to stay quiet. But if we disagree with that, we think you have a voice in the same way that ESG investors have a voice, do the right thing or don't be in this

space. Yeah, I found it curious to see that was maybe the one of the, the, the, the, most popular reactions to this was, well, you know, token holders have no rights, so this is a doomed campaign. But that just kind of made me think, well, hang on. I mean, what's the point of a token if you're selling something that has absolutely no right and where you're maintaining that you've no obligation whatsoever to the token holder community that seems completely incoherent? Why sell it in the first place? Well, I think we know why they're selling it. They're selling it for a money grab. The question is, why would anybody buy it? Why would anybody buy it if there is no rights. And I think that's what we're arguing for. And more importantly, like,

wasn't this the genesis of digital assets in the first place? The idea of democratization and giving a voice to the people and giving value back to the people. It was actually, you know, it was interesting to see the negative comments from what we've done as much as the positive comments because the negative comments were to your point. They were either just saying, you have no rights or what did you expect when you buy a token. And we're trying to say, like, that makes no sense. This entire ecosystem was built on the idea of democratization and giving people a voice. why shouldn't we fight for that? So not to be crass, but what would you say your primary leverage is here if, you know,

these tokens have no formal rights to, you know, compel change at the board or corporate level? What is your primary leverage? Well, I think the first form of leverage is that any project or company in this ecosystem is nothing without their community and their holders, right? So if you are speaking on behalf of token holders and you get the majority of people to agree with you, Ultimately, companies have no choice, but to do what their constituents want. So I think there is definitely a social movement and pressure from that standpoint. Conversely, again, it's not that token holders don't have legal rights.

It's that they've never been established. There has been no legal precedent yet. I think we do have a case here. We gave them money for a specific purpose. They didn't provide that purpose, and that money still sits there. I think there is a legal argument that we have a claim on that. So even if this wouldn't be your first choice, could you imagine that there would be recourse to a potential legal action? I can't speak for what a court decision would be.

I also, I think it's obvious that going to court is never the first choice. I think ultimately we have a case, as I mentioned, and I think that that will eventually, whether through us or through somebody else, I think that will eventually be precedent set in a court. For now, I think, again, the Nosis people are not bad people. They're builders. They're good people. They want to do right. I think it's just they've never, no one's ever pressured them to do it.

This is the first time. And I also think that there's no reason why they shouldn't be doing it before someone pressured them. But be that as it may, now that we are, I hope they do respond in a positive way. If they don't, then we will explore other options. So the best outcome for you, though, would be an extrajudicial one in which, effectively, the court of public opinion and of their constituents specifically compels them to do right by their token holders. I think that's the answer for this case, but also every project that's this entire ecosystem,

right? You know, we are not, you know, we're not looking to go to the SEC or to the CFTC or to the courts to make a stink, right? We think that the whole ethos of this digital asset, asset class and movement is for token holders to have a voice and to have control. And I think that is the optimal outcome here would be that NOSIS and other projects in this space recognize that and work with token holders to achieve that. So maybe just to wrap this conversation, I think it's been interesting to see kind of the barbell approaches to tokenized equity or tokens which bear stronger protections than the previous vintages. So on the one hand, you have genuine formalized and

kind of full disclosure exempt registrations like INX and block stack where the issuers went through that full process. And I guess ARCA as well, I mean, it's different, but you tokenized treasuries and went through a full SEC process there as well. And then conversely, you have tokens which give you a strong claim on some on-chain cash flows and some control rights, but they're issued in a kind of a fair launch manner. You know, they're issued through liquidity mining and so on. But the, the protections or at least the rights that accompany those tokens are fairly robust, at least compared with previous generations.

It's kind of interesting to see these things happening in parallel. What do you make of the developments here? And, you know, which of these do you prefer? What do you see? Do you see a convergence there? Do you see something like Hester Pierce's proposal gaining traction? I mean, clearly investors are more focused on investor protection. today than they were three years ago.

Which of those avenues do you think is kind of more promising? Yeah, I mean, one of ARCA's core missions is to bring the best parts of traditional finance over to digital assets, right? We don't see this as a black and white, you know, there's digital assets which are lawless and then there's equities in debt, which are, you know, highly regulated. Like, we think a lot of the best practices from traditional finance can be brought over to the space. And what we'll do is we'll cut out the fat and the unnecessary middlemen and other things

that have been clogging it for years, right? So I think there is absolutely appetite for both. You mentioned Arcoigne, which is a product that was issued by ARCA Labs, which is a SEC registered bond fund where the shares are distributed as peer-to-peer tokens on the Ethereum blockchain, right? So that is an example where this is an explicit contract where the bonds sit in a trust and you as an owner of those tokens have a direct claim, an asset-back claim on those bonds. But the tokens are registered with the SEC.

You have the same 1940 Act bankruptcy remote protections as you do would with an ETF or most mutual funds. But you have the ability to use the technology, right? You mentioned INX and Blockstack as well. You know, similar, right? They're trying to break down barriers here and try to converge those two worlds. But I also think that there's merit for the unregulated world where these tokens are, you know, more or are not securities and they really are utilities. And again, I think what Uniswap did yesterday is a great example of that, right? This is no longer 2017 where you raise money with tokens and then hope three years later that you do something with it.

Uniswap has been around for several years, has already proven product market fit, already has customers, and then they issued a token later. And that token is immediately decentralized because of the fact that they issued them to everybody who's ever used their platform. So I think there's room for both. You know, I certainly don't think you have to go through the regulatory route. I think we did it and it was expensive. It was a lot of time. It was a lot of work. And we applaud other companies who do the same thing to get regulatory approved products in the space.

But I also think there are ways to do it without that. And when you do it without that, it doesn't give you the right to just run amok with the money. You still should have accountability. And that's really all we want. We want better communication, transparency, accountability, regardless of whether or not the law protects stakeholders. Jeff, this is. been fascinating. Thanks so much for coming on and stating your case and best of luck with the negotiation. All right, Nick, thank you for having me. It was a pleasure and I look forward to doing it

again.