Arca to Gnosis: Show Us a Turnaround Plan or Give Investors’ Money Back

8 September 2020

Hedge fund manager Arca is stepping up its campaign to overhaul Gnosis, claiming the decentralized exchange and prediction market platform has deviated from its original mission.

  • Over the summer, Arca discreetly asked Gnosis to make a tender offer for all circulating GNO tokens, giving investors the opportunity to cash out. Those who declined the offer should be rewarded with a 10-for-1 token split for sticking it out while Gnosis gets its house in order, according to an August slide deck outlining Arca’s proposal.
  • In a blog post published Tuesday, Arca Chief Investment Officer Jeff Dorman wrote that while his firm never intended for its feedback to Gnosis to become public, he’s glad it has generated a discussion regarding token holders’ rights. The implication is that a token issuer has an obligation to these investors to stick to the business plan for which they signed up.
  • The post is Arca's first public comment on the simmering tensions between the firm and Gnosis. It comes at a time when decentralized prediction markets like Gnosis are struggling to gain traction.

The post describes Gnosis’ $12.5 million 2017 token sale (which valued the project at $300 million) as an “interest-free loan.” After borrowing the money, the team “failed to deliver the products laid out in its fundraising [white paper],” Arca contends. The products Gnosis created generate value only for its management, Arca claims.

  • Luckily for all involved, the balance sheet has increased fivefold, as a result of ether (ETH) appreciating, leaving Gnosis with ample resources ($55 million worth of the second-largest cryptocurrency and $10 million of cash) to repay investors, Arca said.
  • Dorman wrote that Arca often works with management teams throughout the lifecycle of an investment to achieve the goals of the community, which he described as a typically productive and mutually beneficial process. This was not the case with Gnosis, however.
  • “Despite our constructive engagement, Gnosis did not take any necessary steps to remedy issues we’ve uncovered throughout our continuous due diligence and research process,” wrote Dorman. “In fact, the very first time we heard of ANY steps indicating that Gnosis is willing to remedy the issues we uncovered was as a promissory quote in the Block article, where [Gnosis founder Martin] Köppelmann commented on redoing the tokenomics of the GNO token”

In that article, Köppelmann is quoted as saying Gnosis “had already been working on an alternative path for the GNO token, which we think is much more appealing. Our own proposal includes a Gnosis DAO and gives much more ownership to GNO holders. It will be presented to the community very soon.”

  • To Dorman’s mind, that quote suggested that Gnosis was open to the idea of changing its setup to better align with token holders, but was strident about what steps needed to be taken.
  • “Token holders like us should not have to beg a company to disseminate a plan, nor should we have to continue to wait for promises with no details,” wrote Dorman. “For this so-called plan Mr. Köppelmann alludes to, give us a date, give us an outline, give us specific details so that the Gnosis community has the chance to provide feedback.”
  • Lacking that specific feedback, Dorman stood behind Arca’s call in the slide deck for Gnosis to repay its “loan” by tendering for outstanding tokens “at the book value of its balance sheet (ETH + USD), which at current ETH prices would return over $74 per GNO token to token holders and Gnosis employees, even after reserving a generous amount of runway so that Gnosis can continue to run their business uninterrupted.”
  • If all holders of the 460,000 tokens in circulation took such an offer, the payout would total $34 million. And if all the money Gnosis has on hand were returned to investors, it would come to $140 per token, or $65 million, according to Arca. Either deal would handily beat the $46.46 level GNO currently trades at on the open market.

Attempts to reach Gnosis for comment Tuesday were unsuccessful.

Big picture: The situation suggests that in addition to cash and cachet, institutions are bringing activist investing strategies to crypto.

  • DigixDAO, an early initial coin coin offering (ICO) that faced a situation where its treasury was more than its market cap, faced similar activist investor behavior when it offered a question to the community – dissolve the treasury or continue making grants?
  • In Wall Street parlance, a tender offer is a public solicitation to all shareholders requesting they tender their stock for sale at a specific price during a certain time. The investor normally offers a higher price per share than the company's stock price, providing shareholders a greater incentive to sell their shares. Arca is adapting this concept to the crypto world.
  • Activist investors buy up large shareholdings in companies to acquire board seats and agitate for management and strategic changes. They have become a staple of Wall Street over the last decade, ballooning from $12 billion under management in 2003 to the activist asset class topping $112 billion by 2014.

Read more: Prediction Markets’ Time Has Come, but They Aren’t Ready for It

Correction (Sept. 8, 23:20 UTC): An earlier version of this article overstated the proceeds from Gnosis’ 2017 token sale. They totaled $12.5 million, valuing the project at $300 million.

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