Ontario pension giant OMERS is pushing further into the rapidly expanding cryptocurrency business through the creation of an Ethereum-focused public company that is planning to raise $50-million.
The pension fund, the first in Canada to invest sizeable amounts into Canada's technology sector following the 2008-09 recession, has already made a handful of small bets on crytocurrency– or blockchain-related companies. Its latest move is an attempt to build a meaningful business around a platform known as Ethereum, which was invented by Canadian Vitalik Buterin.
The company it is backing will be called Ethereum Capital, and is being partly financed by Purpose Investments, a fund management firm led by industry veteran Som Seif and partially owned by OMERS. Mr. Seif will be chairman and co-chief investment officer of Ethereum Capital, which is aiming to raise $50-million from investors and become a public company through a reverse takeover of a TSX Venture shell company.
"We believe in the long-term future of the blockchain as the technology that will be underpinning business and we are optimistic about the technologies associated with it," said John Ruffolo, executive managing director of OMERS' platform investments arm, who will join the startup's board. "We believe Ethereum is going to be one of the foundational building blocks" in the blockchain space.
Ethereum is a blockchain platform used for applications and facilitating transactions across the internet without an intermediary. Ether is the system's unit of payment. Ethereum has emerged as the technology of choice for digital token creators, fuelling the boom for initial coin offerings. The system has also been given credibility by the Enterprise Ethereum Alliance, a group of blockchain supporters including Mastercard, Microsoft, J.P. Morgan and Bank of Nova Scotia.
Ethereum Capital's strategy is to buy control stakes in Ethereum-based businesses, but since such entities "are still in a very nascent stage," Mr. Ruffolo said the fund will also invest in the ether currency itself. He said the bet is "not currency speculation" but rather on the "underlying entrepreneurial businesses" that will grow on the Ethereum platform.
The company was created by OMERS along with Purpose, an OMERS-backed startup called Citizen Hex that buys and sells Ethereum digital tokens, and L4 Ventures, a Toronto blockchain incubator advised by Mr. Buterin. Mr. Seif said the idea to create Ethereum Capital stemmed from conversations he had with Citizen Hex CEO Ben Roberts last year after Purpose, OMERS and Version One invested in the startup.
The idea, Mr. Seif said, was to build a "a technology company that is the central hub of business on the Ethereum network," which led them to court "key individuals" in the space to serve as advisers.
Ethereum Capital boasts some of the top names in the young North American cryptocurrency technology and investment space on its board, including: Mr. Roberts; Joey Krug, co-chief investment officer of early San Francisco blockchain investment fund Pantera Capital; respected Vancouver venture capitalist Boris Wertz of Version One Ventures, an investor in cryptocurrency exchange Coinbase; L4 co-founder Liam Horne; and Michael Conn, managing partner of Quail Creek Partners, a Los Angeles-area adviser to hedge funds, fintech and blockchain firms, who becomes Ethereum Capital's CEO.
The proposed deal is similar in some ways to last year's aborted $100-million offering by NextBlock Global Ltd., led by Alex Tapscott, which was also set to invest in private blockchain firms and cryptocurrencies until news reports revealed that its marketing materials misidentified advisers to the fund who had not agreed to serve in their purported roles.
In both cases, CIBC and Canaccord were hired as underwriters and followed a similar go-public strategy by way of a reverse takeover of a public shell company.
The NextBlock deal was quickly pulled in early November after the embarrassing revelations about its advisers. By contrast, Mr. Ruffolo said the Ethereum Capital advisory group was "very carefully selected," adding: "We all know each other."
Ethereum Capital's proposed path to a public listing – by way of a private placement of 20 million subscription receipts sold for $2.50 apiece by the two Canadian underwriters and a concurrent amalgamation with publicly listed B.C. shell company Movit Media (investors will receive one share of Movit for each receipt when the offering closes) – is the latest in a wave of cryptocurrency and blockchain-based ventures to come to market by way of reverse takeovers of a range of public companies, particularly on the TSX Venture Exchange, allowing businesses to skip the cost and regulatory burden of creating long prospectuses.
Some were previously junior mining companies or other businesses; Movit started as a capital pool in 2009 that merged with a home-workout and golf-tutorial DVD maker and later acquired an app maker that eliminated roaming fees from incoming calls. By last September, it had no active business, $41,400 in assets and an accumulated deficit of $16.8-million.
The great crypto rush has fuelled concern by financial system and market regulators. Earlier this month U.S. Securities and Exchange Commission chairman Jay Clayton warned that public companies "with no meaningful track record" in blockchain activities or changing their names to reflect a cryptocurrency tilt would be scrutinized to ensure they were onside with securities laws.
In Canada, it is expected provincial securities regulators will monitor the cryptocurrency space more closely this year and demand higher transparency and disclosure from initial coin offerings.
In a presentation to prospective investors, Ethereum Capital notes the "uncertain and evolving" regulatory and legal frameworks surrounding blockchain technologies and digital assets as a risk.
"There's a lot of hype and confusion in this space as it's getting figured out," Mr. Seif said.