Foundations of Transparency: The Prospectus

Thus far we’ve looked at the importance of clearly defining asset allocations prior to an ICO, and the importance of blockchain-enabled real-time performance tracking. Part three of our Foundations of Transparency series highlights the value of clear, open, accessible information that can help investors make better-informed decisions.

Crypto 2.0 platforms are already beginning to revolutionize the process by which owners of decentralized apps and other blockchain-based services can fund their organizations. The trend began in earnest in ecosystems such as NXT, and stands to be accelerated with the release of Ethereum. Meanwhile, efforts by entrepreneurs such as Overstock CEO Patrick Byrne to create cryptoassets are paving the way for future efforts by clearing regulatory red tape.

Cryptoassets hold incredible promise. For entrepreneurs, they can open a new route to raising funds. For investors, they can provide exposure to opportunities that were previously unavailable – opportunities that, for the most part, also provide exposure to the brave new world of blockchain technology. Yet, for all their game-changing potential, it’s crucial to remember that there are certain elements of the traditional stock market which are worth maintaining. In other words, let’s not throw the baby out with the bath water.

A prospectus can provide clear information for cryptoasset investors.

Photo courtesy of Simon Cunningham – flickr.com – CC-BY-2.0

 

The Necessity of Unambiguous Information

One common sight on Wall Street – and security markets in general – is the prospectus. Whether it’s used to provide detailed information on a mutual fund and its holdings or information on an upcoming IPO, a prospectus helps investors gain a clearer picture of the business, its plans, its performance, and the people behind it.

This type of information is just as pertinent to cryptoassets. To date, however, anything resembling a prospectus has tended to be presented in breezy announcement threads in crypto-related forums. This is not a prospectus.

Crucially, a prospectus pulls together all relevant information in one dated, publicly available document. This makes it far easier for investors to gain the insight they need to make an informed decision. A prospectus is especially important during the ICO stage, when a cryptoasset owner may be seeking funding for a project that has yet to go live.

What information should a cryptoasset prospectus contain?

Creators of cryptoassets should seek to provide the answers to a handful of very important questions:

  • Who is behind the organization connected to the asset?
  • How does the business or DApp plan on making money, and what are its goals?
  • What are the risks involved?
  • What are the terms of the investment. Is a dividend issued – and if so, how often?
  • What is the background and history of the organization?
  • Are there currently shares outstanding? What is the history of previous public offerings?

In the case of crypto-based funds that combine multiple cryptoassets – not unlike a mutual fund does with traditional equities –  a prospectus should also provide clear and unambiguous details on the fund’s holdings.

How detailed should a prospectus be?

At a minimum, the prospectus should answer the questions outlined above. The prospectus that Overstock recently provided to the SEC is an example of a document that goes into extreme levels of detail, outlining elements such as the distribution plan, risks involved in various aspects of the investment, and a healthy dose of legalese designed to satisfy the stringent requirements of the SEC. Proactive DApp owners will likely also want to consider the SEC when writing their prospecti, applying due diligence to the process and having an attorney thoroughly vet the document.

How often should prospectuses be published or updated?

For starters, any ICO should include a prospectus. Following an ICO, cryptoassets could seek to follow the mutual fund industry’s standard of an annual release schedule. Of course, a year is an eon in the fast-changing crypto world. An updated prospectus should be provided whenever meaningful changes are made to the business – for example, a change in the dividend amount and/or date, an increase in the overall number of shares or shares available for public trading (also known as float), or a major pivot in the organization’s strategy.

What’s to prevent asset owners from retroactively changing the prospectus to reflect changing business conditions and “moving the goalposts” in terms of financial performance and objectives? Here, investors can insist that asset creators utilize blockchain services such as proof of existence to timestamp the prospectus. Only the original published document will match the hash provided by the service, making it easy for investors to determine that the document hasn’t been altered over time.


To be sure, the prospectus is not a panacea. The document – matter how detailed and in-depth – could be packed to the gills with falsified and misleading information by a malicious actor. However, the publishing of this information gives the community an opportunity to discuss and vet the prospectus. If a stated fact – say, a founder’s background – doesn’t jive with reality, the collective knowledge of interested investors might shine a glaring light on that fact. Additionally, when combined with other elements of transparency such as genesis attribution, they can provide a much clearer picture of a cryptoasset’s potential risks and rewards.

For cryptoassets that have already ICO’d and have a track record of performance, the prospectus perfectly complements the information generated by real-time performance tracking. The prospectus puts forth the statement: “this is what we plan on doing.” Performance tracking and auditable, verifiable financial statements answer the question: “is the organization meeting its goals and generating revenue?”

A prospectus is not unique to the crypto world. However, these documents play a crucial role in helping investors make informed decisions. In our following article, we’ll delve into a transparency tool that is very much unique to crypto – and particularly the emerging world of decentralized applications.