First Day Trading: -8% Return for Public ICO Participants, +32% for Presale Participants
On September 11, we published our analysis (https://goo.gl/tKRaEr)(the Report) of the upcoming Kin ICO. Although we were optimistic about the potential for an existing business to implement a token strategy, we had several concerns. In the Report, we noted that there was insufficient disclosure about key technical and financial aspects of the ICO, and misleading statements were made by the project’s position paper and the company’s executives. Many of these concerns remain.
On Monday, the Kin ICO concluded and the token began trading today. As of writing time, public ICO investors have a first day loss of 8% while presale investors have a gain of 32% when considering the current exchange rate of 0.000000384 ETH/KIN on EtherDelta, the only exchange where the token is being traded. Since we published the Report, we have learned additional details about the project that raise new concerns and reinforce existing ones:
· Valuation Just Shy of $1B. In the Report, we took issue with comments from company executives about the initial valuation of the token, who used market capitalization as a proxy for Total Network Value. We now know Kin raised $99M at a Total Network Value of $990M. Its Free Float Network Valuation at current market prices is $112M, assuming 50% of the presale is locked up for a year. Please note that the ICO did not sell out as we expected initially.
· Tech Disclosures Still Lacking. There is still no white paper available for the token. The website’s link to “Download V1 WHITEPAPER” links to a document from May that is labeled “Position Paper.” Although we have now reviewed the 700+ lines of code of the ICO contract and audited the ERC20 token, much of its functionality within the Kik app remains unknown to us.
· Kin Used SAFT. Kin used Coinlist’s SAFT instrument to sell $49.6M to 50 institutions and individuals (https://goo.gl/Y1QgHU) in the presale round. The anchor funds were Pantera Capital, Blockchain Capital and Polychain Capital but they were far from being “whale” contributors. Reversing into their cost basis, the largest contributor appears to be $8.6M followed by $6.2M and $4.5M. It is unclear why Kin used a SAFT for the presale, using a registration exemption, but neither used a similar instrument nor filed for any registration exemption for the public ICO. Note that the public ICO did not get the blessing from Canadian regulators and thus was off limits to Canadian residents.
· There’s a Presale Lockup. Presale investors have 50% of their tokens locked up for one year according to Reuters (https://goo.gl/8J1vsL). We are unable to discern how the remaining 50% vests. This is something that should have been disclosed prior to the public ICO as it significantly affects Float Increase and Free Float Network Valuation calculations.
· Float Increase Calculations Jump Significantly. We previously took issue with the position paper’s supply schedule as it failed to incorporate basic assumption stated in the paper itself. Now, incorporating the updated lockup information, we calculate the first-year float increase to be 268%, and not the 30% stated in the paper. Note that this revises our initial calculation in the Report of 185%. Please note that CEO Ted Livingston’s 9/6 Medium post (https://goo.gl/BA6apq) was incorrect where he writes that “on the day of the TDE, there will only be 1.3 trillion” tokens in circulation. His calculation assumed no lockup.
· Initial Trading Returns Show Losses for Public ICO Participants, Gains for Presale Participants. We acknowledge it is still early and trading volume is low, but current prices indicate losses for public ICO participants and gains for presale participants. This is because a 30% price discount was given to participants in the presale.
Summary. There was a lot of hype surrounding the Kin ICO, and with good reason. It was the first multimillion user base (15M MAU) business to incorporate a token into its existing business. We like the idea of tokenizing existing networks but we continue to be cautious following the event. Significant technical, legal, tax, and financial questions remain. For professional investors accustomed to adequate levels of disclosure, the Kin token continues to fall short.