A very high-profile rug pull on the relatively young platform.
As most people know, Crypto has been at the forefront of modern investing culture for most of recent history. There are the Ethereum’s and the Bitcoins of the world, but there are tons of smaller projects looking to get a taste of that success. With a market cap of over $400bn, even getting a taste of that could make people prohibitively wealthy. On the flip side, crypto can generally be completely untraceable and, as such, has resulted in thousands of blatant scams using the technology. Also, projects in their early years require a significant following and advertising, so if they don’t take off relatively quickly, most die out quickly.
Obviously, this has led to varying opinions about crypto itself being a complete scam in its entirety, to complete optimism around the technology. Within Equity Crowdfunding, there has been tons of debate because they are working in the regulated world of normal securities combined with the unregulated wild west of Crypto. The law is still unclear in many aspects, which means portals are inherently taking risks when they get into this space on both the selling and buying side.
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StartEngine used to be heavy into Crypto but slowly went away from the technology as the risks became too high relative to the payoff. Since then, it seems Republic has stepped up and had an incredibly successful run in the space. They list “vetted” projects and then raise funds from VCs, Retail, and a host of other money sources in these raises, which often results in these companies raising tens of millions for these various projects.
Is the Party stopping?
However, many raises on Republic have become increasingly controversial with a number of high-profile public debacles. Anytime someone's money is involved, and things go poorly, there is going to be backlash. However, Republic does claim all projects on their website are “Highly-vetted” and when this is used to solicit investments, oversites of massive issues can be a big deal.
Investors rely on things like this, and that's specifically why most crowdfunding platforms don’t claim to vet their projects but rather harp on the “Invest at your own risk” mantra. Obviously, all platforms vet the projects and companies on their site but don’t represent to investors its “highly vetted” because when things go south, it can spell legal trouble for the platforms.
One of the biggest debacles prior to Parastate, was Intellivision. Intellivision raised $11.5m from Republic investors and several more millions in pre-orders only for the company to constantly delay production, lose millions in a botched manufacturing deal, and is currently sitting on the brink of bankruptcy.
Now, Parastate did an Initial Coin Offering (ICO) on Republic and raised a massive $8.2m. Now, with that much money on the line, if things go poorly, people will be upset. However, this has been a pretty brutal one for anyone that invested. After raising the $8m, they listed their token on Uniswap so people can trade… and it immediately plummeted. After 1 day, anyone that invested likely lost as much as 90%.
As a side note, stop buying pre-sales in tokens (for those wondering, no, I did not invest in Parastate). It’s a recipe for disaster. If you invest in an ICO, and they say “We want to list at 2x what we're doing pre-sales for” and they raise $8m, at least a small portion are going to cash in immediately at 2x… causing the price to go down. After that, people get scared and start selling and taking profits, then people start selling at a loss to get their money back, and it just keeps dropping. Fair launches are generally the best way to go if you want to list or invest in new tokens.
Now, it's important to note the big drop was actually on the first day of trading. Prior to that, there were no trades or volume, and that's just the time between the token being created and listed, and Ethereum dropping in the meantime. I also checked that on EtherScan and you can see the big volume spike below the drop.
All of this has obviously left the Republic investors incredibly upset with several speaking out against the company, talking about suing, and more on their discord server. Like any innocent company, instead of addressing investors' concerns, they simply froze the chat so people can no longer talk about it.
Various screenshots from the Republic Discord from concerned investors
The backlash caused them to be delisted from the main centralized exchange they were listed on, and the story has only been getting worse as time has gone on. Obviously, investors are unhappy, threatening to sue, and so on. Now, there are a few issues at stake here.
Were there Bad Actors?
With an increasing number of high-profile blunders coming from the Republic platform, this doesn't look particularly great. However, the real question here is, “Are there bad actors involved” or are these just bad investments?
It's important to note that roughly 90% of all startups fail, and while no one is going to be happy when one fails, but that is just part of the industry. If there were scams, however, that is a much larger issue. This could be the founders selling off or Republic not actually vetting the projects to a sufficient level that they claim.
Bad actors in Parastate?
It's hard to audit a crypto project and find whether a bad actor was involved because the wallets are untraceable. I tried looking into whether there was a direct link between the massive sell-off and the Dev wallet, and I couldn’t officially come up with anything. However, that doesn’t mean anything because it's easy to lose tokens. For example, just prior to launch, the dev wallet transferred nearly 10% of the total supply to centralized exchanges and to the wallets of thousands of investors.
However, I have no way of confirming how many of those wallets that Parastate transferred tokens to were investors in the Republic raise or how many were secret dev wallets used to sell. All I know is the dev wallet transferred tokens to thousands of investors and several hundred of those sold off on the first day. However, it very well could be the case the Devs took private wallets to sell off during the launch just in case, it's impossible to know from blockchain data.
Similar to what I will get into later, the CEO here… does have a history of failed projects, though. Michael Yuan is the project lead, and along with the failed Parastate, he led “CyberMiles” which is now basically dead.
Were there bad actors in Republic?
This is a bit easier to analyze because there are a number of screaming red flags with this project:
Over 90% of the token is owned by the devs
Dev had a prior failed project
The business plan was terrible
First, it's hard to argue whether this is a red flag or not, but a dev owning massive amounts of a token can be a massive red flag. Why? Well, if the Devs decide to sell, they can tank the entire project extremely easily and there's nothing the community can do about it. 90% in one person's hands is enough to tank any project completely and still own the majority of the token. Ideally, the dev isn't going to rug pull, and if you can’t trust the dev then that's a red flag within itself.
However, this isn’t Mr. Yuan's first crypto project, and the last one went just as poorly.
He led CyberMiles just before this, which launched too high then subsequently plummeted and hasn’t recovered years later.
Republic isn’t new to the crypto world, so having a prior failed project along with using the same business plan… is questionable. Not to mention, using the fact that this is a DAO (Tokens have voting rights tied to ownership) but in reality, the CEO owns all the tokens, and nobody has any voting power is further questionable.
The Business Plan
Even if you know nothing about Crypto pre-selling tens of millions of dollars in tokens then listing it with no new demand… the token is going to flop. There will always be 1 person happy with doubling their money, and if no new demand was created, it's going to sell off. Republic and everyone else knows this.
So, if they knew this was going to happen but didn’t care, that means they either were reckless and didn't care it would sell off or didn't actually vet the business plan.
Is there a suit here?
Honestly, who knows. It would require a lot of discovery to find out what really happened, but there presumably could be a number of suits derived from this. Another aspect is that equity crowdfunding, similar to crypto, is such a new industry that it's impossible to know how any of these cases would come out.
At the end of the day, investors knew the risks of investing, so it's an uphill battle either way.
While it's unclear what really happened, if it was a bad investment or bad actors, it definitely doesn’t look good at all. This is a relatively recent event, so it's unclear what will come of this, but people should always do their own due diligence before investing in any speculative investments and know the risks.