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Understanding Arca’s Request for Change at Gnosis (GNO)

Jeff Dorman, CFA
Sep 8, 2020
For the past few months, Arca has been working privately with Gnosis (GNO) and their incubator/investor, Consensys, to suggest changes at the company that we believe would enhance the value of Gnosis and its GNO token.  Recently, a private presentation with our proposed changes was leaked via the Block.  
 
As value investors and members of the larger digital assets ecosystem, we feel it’s important to be active participants in assisting other companies in the ecosystem to create optimal value at both the company and token level. Optimizing growth and value allows the entire digital assets industry to expand, mature and become more sophisticated over time. 
 
Every system needs checks and balances.  In finance, investors are part of that checks and balances process to ensure companies follow best practices and live up to their fiduciary responsibilities. 
 
The digital assets industry is booming and has grown beyond many people’s wildest dreams, but it has also been plagued by bad practices and negative press.  It doesn’t have to be this way. As investors in this new industry, we feel an obligation to be stewards of responsibility and transparency, and to hold companies and project leaders accountable for their actions.  When promises go unfulfilled, spending is irresponsible or misreported, or new endeavours are started and stopped without discipline or recourse, we as token holders can and should demand answers. 
 
In the last twelve months, this asset class has seen questions change from “What are digital assets?” to “Should I invest in or use digital assets?” to “How do I invest in and use digital assets?”  We want to instill positive change for companies and projects for decades to come, so that the next wave of digital assets adopters and investors have confidence to embrace this exciting technology.  
 
Arca is not alone in this mission. Great organizations like Messari, the Block, Delphi Digital, the Blockchain Transparency Institute, and the Chamber of Digital Commerce have been pushing for positive change through transparency as well, and these actions have been received positively by token creators, project communities and investors alike.
 
Although we did not intend for this presentation to end up in the public domain, we're glad it has brought forward the discussion about token holder's rights and investors’ responsibilities to ensure a company stays on track. It is also important that other token holders benefit from the deep research and analysis that investors like Arca complete on the companies in which they invest. At Arca, we invest in a company’s tokens because we believe in the management, their vision, and the value drivers of their token. Often, we engage with the management teams throughout the lifecycle of our investment to help them achieve these goals for their community, and other investors.  These are typically very productive and mutually beneficial processes. But in this case, 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.  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 Mr. Koeppelmann commented on redoing the tokenomics of the GNO token. 
 
"However, we 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 that end, we are encouraged by Mr. Koeppelmann’s response to the article which indicates that Gnosis is now in the process of redoing their tokenomics to better align with token holders.  We're happy to be the catalyst for that change.  That said, 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.  For this so-called plan Mr. Koeppelmann 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.  This base level of transparency should be proactive and forthcoming in real-time, all year, every year without provocation.
 
The facts are as follows. Gnosis: 
 
  • Took out a 3+ year interest-free loan from token holders and failed to deliver the products laid out in its fundraising whitepaper
  • Quintupled the size of its balance sheet due simply to positive price fluctuations in ETH
  • Launched products that accrue value only to equity holders (Gnosis management)
GNO token holders have nothing to show for these actions taken by Gnosis to date.
In lieu of tangible details surrounding Gnosis’ “new plan”, it is still our belief that Gnosis should repay that 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 the entire balance sheet was utilized for just token holders, it would yield over $140 per GNO token.
 
If Gnosis is so convinced that they can rework the tokenomics themselves and deliver value beyond this tender price, then surely they would be thrilled to have the chance to buy GNO tokens at $74, and those that also believe GNO tokens are worth more will have no reason to tender. If any token holders decide not to tender, we hope Gnosis comes up with a new plan for remaining and future GNO token holders that better aligns the token with their product suite.  Should Gnosis release actual details of a new plan, and token holders like ourselves agree that it generates more value and utility than a tender offer, we would happily withdraw our proposal.  
Token holders have rights. As token holders, we expect companies to deliver a usable product to accompany the tokens that they sell to us, or create financial gains for early token holders as new users demand the tokens to utilize themselves. Or both.  Creating neither is unacceptable.
 
We’re glad that our communication with Gnosis helped serve as a catalyst for change. We hope that this first step empowers the Gnosis community and all digital asset communities to demand fairer treatment from the companies in which they invest. Stand up for your rights and request change to occur at Gnosis and other digital assets companies that are not delivering on their promises. 
 
Jeff Dorman, CFA - Chief Investment Officer
 

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