SPiCE VC is Tokenizing Venture Capital Investments in Blockchain Startups

About SPiCE VC

SPiCE VC is a tokenized Venture Capital (VC) Fund that invests in blockchain startups. The Fund has its own security token, SPICE, which gives token holders a direct economic interest in the companies that SPiCE invests in.

The Fund’s tokenized nature aims to solve the illiquidity problem in the current venture capital model. Traditional VC investments are essentially locked up for 7-10 years until the portfolio companies exit through an acquisition or IPO, for example. Shares in VC funds are generally not tradeable during the lockup period, which makes these investments highly illiquid.

SPiCE is a closed-end fund that makes equity and security token investments in their portfolio companies. Returns from portfolio companies’ exits are distributed to token holders when exits occur. The Fund does not appear to pay interim dividends to token holders.

SPiCE also improves the traditional VC model by tokenizing VC investments:

  • Tokenized VC investments can be traded on licensed security token exchanges. This creates liquidity for VC investments;
  • The SPICE token is asset-backed since token price is derived from the value of the companies and security tokens in the underlying fund.
  • Investors participate in the exit returns of the VC’s portfolio companies. Since the SPICE token represents a stake in SPiCE’s portfolio companies, token holders’ share of returns is proportional to the number of tokens they hold.

SPiCE VC is incorporated in Singapore and is regulatory compliant in most jurisdictions globally.

SPICE Token

SPiCE raised $15 million in their 2018 Security Token Offering (STO). The STO was regulatory compliant under the SEC’s Reg D. Rule 506(c) and raised money from qualified investors. This fundraise marked the first closing of the fund. SPiCE confirmed that they are in the process of raising the rest of the fund, up to a target of $100 million.

The value of SPICE tokens is determined by the value of the Fund’s portfolio companies. Since SPICE tokens derive value from underlying companies’ performance and assets, the token is likely to be less volatile than other tokens and cryptocurrencies.

As of 30 September 2018, the SPICE token value was $1.37. This figure is an unaudited Net Asset Value (NAV) per token and was disclosed in SPiCE’s Q3 2018 Quarterly NAV report. The token was initially sold to investors at prices between $0.8 and $1.

SPICE is traded on the Open Finance Network (OFN), the first regulated U.S. platform for tokenized trading. Non-US investors have been able to trade SPICE on OFN since 19 November 2018, while US investors will be eligible starting March 2019. In the US, only qualified investors will be able to trade SPICE tokens. Investor restrictions vary outside the US but for the most part only qualified international investors will be able to trade SPICE tokens.

A key characteristic of the SPICE token is that it gives token holders a direct economic interest in the fund’s portfolio companies and ensures that proceeds from exists are returned to token holders. Whenever there is an exit, proceeds will be distributed to tokenholders on a pro-rata basis and tokens are repurchased directly from token holders and burned. This reduces the token supply and the process continues until there are no tokens left in circulation.

The implication is that since proceeds from exits are returned to token holders, token holders do not have to trade the SPICE token on secondary markets to make money. However, they have the option of doing so if they choose to. Not having to rely on secondary market liquidity for tokens is very attractive for token holders at the moment since there are not many licensed exchanges and marketplaces where security token trading is possible.

SPiCE Investment Strategy

In the short to medium term, SPiCE will focus on the following investment categories:

  1. The security token ecosystem. The Fund will invest in security token issuance platforms (e.g. Securitize), security token exchanges, real estate tokenization platforms (e.g. Slice), commodity exchanges, custodians, etc.
  2. Companies that conduct an STO. For example, the Fund has invested in companies like RNDR and GraphPath who will issue their own security tokens.
  3. Core blockchain companies and platforms that can compete with Ethereum or provide value added services like KYC.

SPiCE invests for the long run and evaluates multiple investment decision criteria such as:

  • Company stage and leadership team
  • Growth and market share prospects
  • Business model and potential for major profits or exits within 7 years

According to their Q3 2018 Net Asset Value report, the Fund had over $15 million of assets under management, of which 39% was still not invested.

 

Benefits for SPICE Token Holders and Startups

Greater Liquidity and Secondary Market Trading

Since the SPICE token, which represents an underlying pool of companies, can be traded on exchanges, investors are not limited by the typical 7-10 year lockup period seen in traditional VC investments.

SPiCE has also partnered with the Bancor Network to increase secondary market liquidity for the SPICE token. The Bancor Network allows users to swap one token for another across blockchains. This integration will allow SPICE token holders to swap SPICE tokens for other tokens including ETH. In future, SPICE tokens may be convertible across blockchain networks as well.

 

More Funding Sources for Startups

Since SPiCE’s tokenized fund effectively eliminates the lockup period of traditional VCs, SPiCE’s portfolio companies can potentially attract funding from a larger investor pool that values liquidity. This has the potential to attract more Angel and institutional investors.

 

Early Equity and STO Investments

The best early-stage startups enjoy a period of explosive growth after Seed round or early-Series round investments. SPiCE often invests in companies at this stage, or companies that are about to launch their own STOs. Therefore, SPICE token holders could potentially have a stake in companies poised for rapid growth.

Since the SPICE token is traded, token holders can enjoy both liquidity and capital appreciation during this high-growth stage.

 

Due Diligence and Diversification

Investing in early-stage blockchain companies is risky. Yet, this is exactly what ICO investors did in 2017-18, often with disastrous results. Individual company investments are very risky, and investors often have limited ability to conduct proper research before they invest.

The SPICE token represents ownership in a growing pool of blockchain startups, which diversifies risk to an extent. SPiCE, as a venture capital fund, can also conduct more rigorous research and due diligence than most investors. Furthermore, SPiCE does not invest in ICOs or utility tokens.

 

SPiCE Portfolio Companies

SPiCE currently has eleven companies in their portfolio. Many investments are equity-based, but the Fund also invests in portfolio companies’ security tokens on occasion.

The fund has invested in 4 new companies so far in Q1 2019: Bakkt, InvestaCrowd, Archax and IOB. More investments are likely to be announced soon.

 

SPiCE portfolio companies (as of Feb 2019)

Securitize

Securitize is a platform for issuing and managing digital securities on the blockchain. Its DS Protocol ensures that securities issued on the platform are traded compliantly across exchanges and marketplaces.

Securitize CEO Carlos Domingo is also a SPiCE Co-founder. He started Securitize in part to establish a security token issuance and lifecycle management platform for SPiCE.

 

Bakkt

SPiCE participated in the Series A round for Bakkt, a digital assets security exchange company created by ICE, owners of the New York Stock Exchange (NYSE). Bakkt is developing an institutional-grade digital asset trading platform for that will include Bitcoin futures trading. Bakkt also aims to bring crypto into the mainstream by allowing consumers to use crypto for everyday purchases.

Bakkt was formed in partnership with Starbucks and Microsoft, to enable consumers and institutions to buy, sell, store and spend digital assets with trust and efficiency. It will offer a consumer digital wallet integrated with Microsoft payment products as well as Starbucks outlets. Yes, you can one day pay for your coffee using crypto. Bakkt will also offer an institutional-grade custody vault.

The association with ICE gives Bakkt a strong regulatory advantage since ICE has history of working closely with the SEC, CFTC and US Department of Treasury.

Companies promoting institutional and mainstream crypto adoption are vital for the future of the industry, which makes this a significant investment for SPiCE. “We believe this is one of the more credible and important efforts in the digital assets market,” Tal Elyashiv, Co-founder and Managing Partner at SPiCE, told us.

 

Archax

Archax is an upcoming institutional-grade digital securities exchange based in London. The exchange is designed specifically for professional investors who want to trade security tokens and is built using proven and scalable exchange infrastructure. Founded by a team of financial markets professionals used to working in highly regulated markets, Archax aims to create an exchange that captures the confidence and trust of institutional investors while bringing large capital inflows into this nascent industry.

 

InvestaCrowd

InvestaCrowd is the leading Singapore digital securities investment platform. The company enables tokenizing and trading of  real estate, private equity and venture capital investments. InvestaCrowd is licensed by the Monetary Authority of Singapore (MAS) for dealing in securities and will offer both primary issuance and secondary trading solutions its tokenized securities.

“We are excited about this investment as one of the leading investment banking platforms,” said Elyashiv. “In light of the strong expected growth in tokenizing assets through digital securities, InvestaCrowd is set to be one of the fastest growing platforms in the region. We believe digital securities will become a global market with strong local players who have connections to local investor communities. Singapore is also a major Asian financial hub, and SPiCE will gain exposure to this region through our investment in InvestaCrowd.”

 

IOB

IOB is US-based company committed to providing a complete record and analysis of all market activities to all market participants worldwide who are involved in the stock, commodity and financial futures markets, and the nascent digital assets market

To understand the value of market transparency, consider that cancelled trade orders are many times more than the number of reported trades. Cancelled orders are never intended to be filled but still move the market, often to the disadvantage of many participants. IOB, with its PoET (Proof of Enquiries and Trade) protocol, will promote market transparency and reduce the scope for manipulation by permanently recording all orders on a distributed public ledger, whether the orders are filled or cancelled. Current financial markets (stocks, bonds, etc.) do not report cancelled orders, which can enable price manipulation.

“We believe that IOB has significant growth potential with a set of products that is applicable to the securities, digital assets, and security token industries,” said Elyashiv.

Saga

Saga is developing a stablecoin for global adoption. Saga, supported by banking and institutional partners, wants to complement the traditional financial system by creating a compliant and low-volatility cryptocurrency for financial transactions. Saga’s stablecoin (SGA) will be pegged to the International Monetary Fund’s Special Drawing Rights (SDR), which is a basket of currencies including USD, EUR, RMB, JPY and GBP.

 

Slice

Slice is a blockchain platform that allows foreign investors to participate in US real estate investments. Slice is working on tokenizing American real estate and easing investment barriers like required minimum investment and lockup periods.

Slice currently has over $1 billion assets under management with $240 million in private equity raised by their partners.

 

RealOneX

RealOneX is creating an exchange for real estate security tokens for institutional investors and is in the process of obtaining a full exchange license from the SEC.

 

INX

INX is developing a regulated asset and security token trading platform for institutional investors. INX is in the process of becoming a FINRA, SEC, and CFTC-regulated broker-dealer and an Alternative Trading System (ATS) for digital assets and derivatives.

 

Graphpath

GraphPath is a startup integrating artificial intelligence with data analytics to create knowledge graphs. Companies can use knowledge graphs to turn big data into actionable business insights.

 

RNDR

OTOY started RNDR to create a token-based GPU rendering system. People part of the render network can sell their spare GPU capacity and earn RNDR tokens.

 

Other Security Token Funds

SPiCE is joined by a handful of prominent VCs and funds who invest solely in blockchain companies. Not all of them are direct competitors since they have different business models and investment methodologies.

 

Blockchain Capital

Blockchain Capital is a VC firm investing in blockchain tech companies. They have financed more than 70 companies. Blockchain Capital automatically utilizes part of the exit proceeds to purchase tokens to increase their price so holders can sell them.

Blockchain Capital’ tokenized fund is an evergreen fund, meaning that they cotinuously reinvest investment gains. The fund’s lifespan is undefined, but the Partners can redeem with investors and close the fund after 10 years.

Blockchain Capital’s security token, BCAP, gives tokenholders an indirect economic interest in the fund’s portfolio companies. In essence, these tokens don’t have any distribution rights. When a BCAP portfolio company exits, the fund first reinvests a portion of the proceeds. It then has the option to use the balance to repurchase BCAP tokens and burn them, thereby increasing the value of the remaining tokens. Therefore, token holders can profit when they sell their tokens on the open market at a higher price.

SPiCE, on the other hand, is a 7-year closed-end fund, which is the more common VC fund structure. The SPICE token also gives tokenholders a direct economic interest in portfolio companies. All net proceeds from exits will be returned to token holders.

Pantera Capital

Pantera Capital is a hedge fund and venture fund hybrid that invests in blockchain companies, tokens, and cryptocurrencies. It functions almost like a traditional venture fund with a 10-year investing period. Pantera buys into companies in the pre-ICO stage, helps them find a productive network and flourish. They launched their third crypto fund last year and have raised $71 million and reported a 10,000 percent return over the last five years.

While they also invest in the space, they largely invest in cryptocurrencies and utility tokens, making them quite different from SPiCE.

Digital Currency Group

Digital Currency Group (DCG) is a VC investor in blockchain and crypto. The group started out investing in Bitcoin, Coinbase, BitPay, and Ripple. DCG is a partnership between Genesis Global Trading and Grayscale Investments and is an active seed investor with over 100 investments in 30 countries. DCG is also the owner and operator of CoinDesk.

 

SPiCE VC Team

L-R: Tal Elyashiv, Ami Ben David, Carlos Domingo

SPiCE’s core team has an established track record in investing, entrepreneurship, or have held senior positions in Fortune 500 companies.

SPiCE has three Managing Partners. Tal Elyashiv is a former Chief Information Officer at Bank of America and Capital One. Ami Ben David is a serial entrepreneur and Co-founder of Securitize. Carlos Domingo is also a Co-founder and the CEO of Securitize.

SPiCE’s advisors include Mozilla Co-founder Brendan Eich and Eyal Herzog, Co-founder of Bancor, among others.

 

Conclusion

SPiCE has expressed commitment to investing in the STO ecosystem and blockchain companies in general, to further the tokenization of real-world assets.

ICOs have lost their luster. The SEC recently fined two unregistered ICOs and forced them to issue refunds to investors. In truth, it was only a matter of time before regulators took action against unregistered ICOs, but STOs can provide the level of compliance that ICOs lacked, while still delivering many benefits of tokenization.

One thing to note is that there are restrictions in many jurisdictions on retail investor participation in tokenized VC investments and other tokenized securities. Different jurisdictions have very different approaches to regulating tokenized securities as well.

The young and evolving regulation in this area will slow down the spread of security tokens in the short term at least. However, when regulations evolve and if retail investors ever are allowed to participate in investments limited to professional investors, companies in the security tokenization space could become very popular indeed.

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(This article has been updated to include SPiCE’s investments in Bakkt, Archax, IOB and InvestaCrowd. The ‘SPICE Token’ section was updated to describe how exit proceeds are returned to token holders. The ‘Other Security Token Funds’ section was updated to contrast Blockchain Capital’s fund structure from SPiCE’s structure.)

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