When Swarm Fund starts its token sale September 7, its founders believe it will change the financial world, one individual investor at a time. One of the main ideas behind Swarm Fund is to truly democratize investing.
In the world of high-return finance, where private equity and hedge funds generate returns of 20 to 30 percent per year, access to capital is critical, and often costs a lot of time and money.
For smaller investors, the problem is these desirable asset classes have high minimum investment thresholds, usually $5 million or more, and long investment lock periods that can range as high as 10 years.
But for the funds themselves, there’s another problem, as well as a reason why they have those high minimums. Namely, it’s a lot easier, and less expensive, to get $5 million from a single investor, than $50,000 from 100 different people. Most funds don’t have the processes, legal structure or administrative abilities to deal with that many unique investors.
At the same time, funds often struggle to find enough investors who can meet that $5 million minimum. Investment bankers can help, but they charge a 2 to 5 percent commission, or more, for their services. If they do find investors, lawyers on both sides then wrangle over the specific terms of contracts — ones that are often structured very similarly – while their legal fees eat into more of the potential investment stack.
So, that’s the market you have today: high investment minimums for investors, and high administrative and acquisition costs for funds, with lots of middlemen who nibble away at potential profits.
Which is where Swarm Fund comes in.
Swarm is a decentralized capital marketplace that brings investors and fund managers together, at a fraction of the cost. It lets smaller investors bundle their money and invest as a group to access high-return investments, while opening up an additional capital stack to fund managers that they’ve never had access to before in an affordable, manageable way.
In other words, Swarm democratizes access to high-return, institutional-style investments for smaller investors, while bringing the collective investment assets of the crowd – which could add up to trillions of dollars — to private equity and hedge fund managers, with much lower expenses than it would take to manage those accounts in the current financial industry.
For smaller investors, getting access to those asset classes could make a huge difference. For example, while the S&P 500’s annual average return over the last 90 years is around 10 percent – and only one in 20 mutual fund managers beats the market in a given year — private equity and hedge funds offer more than twice that, with returns in the 20 to 30 percent range.
The advantages for funds are clear, too. Swarm’s solar energy fund, one of several pilot funds seeded on the platform now, is a great example. The fund’s manager sees more opportunities he would like to invest in, and has chosen to expand his capital base by working with Swarm. But in doing so, he only has to add one additional investor – Swarm – to get there. Swarm handles all the administration, like getting token buyers validated, collecting and converting their assets to and from crypto currency, and then depositing the proceeds into his fund.
Because Swarm is a decentralized platform where anyone can join and invest – dependent on local regulatory rules – fund managers won’t need investment bankers to raise capital, even if they still choose to work with them for larger, institutional investors and ultra high net worth individuals. At the same time, because Swarm uses smart contracts — a fundamental aspect of blockchain technology that automates the terms of a legal contract – they won’t need as many lawyers, either.
That alone is a game changer. Today, if you invest in a private equity or hedge fund, you’ll get a mountain of paperwork in the mail that you’ll then need to fill out and run by your lawyer. This is true even on many of the modern crowdfunding platforms such as FundRise, SeedInvest and MicroVentures. Smart contract automation just hasn’t been built in.
Using smart contracts not only streamlines the process for onboarding individual investors and pooling their assets, it also helps to enforce the terms of the contracts themselves, since they’re built into the code. For example, if an investor elects to commit a certain amount of crypto currency to a fund, the smart contract underlying that transaction makes sure that crypto currency is debited from the investor’s account, and credited into the fund’s account, at the agreed upon time. There’s literally no more waiting for checks in the mail, or for the wire to hit your account.
That’s the power of the blockchain: you get automation on the legal side, and automation on the actual value transfer, the deposits, too. Today, those are two major bottlenecks for any investment.
Which is why Swarm Fund will benefit a third constituency beyond fund managers and their investors. The platform itself, since it’s been set up to create crypto currency tokens backed by real assets, has the potential to act as a bridge for mainstream investors looking to get their head around crypto investing. Those real assets include the solar energy fund I mentioned earlier, as well as a distressed real estate fund and a crypto hedge fund piloting on Swarm.
Additionally, because all transactions are recorded on a distributed, open blockchain ledger, the results are public for anyone to see, creating transparency and trust. The ledger must always be in agreement across the thousands of computers it runs on around the world. That means in order to hack or tamper with it, you would need to change the code on every computer it’s stored on around the planet, which would take an enormous amount of computing power. That’s the security of the blockchain.
During Swarm’s initial coin offering from September 7 to September 22, its tokens will be classified as utilities – not securities – and will give holders the ability to participate on the platform itself. A second token will be released later, Swarm’s SUN token, which will be classified as a security, and can be used to invest in the actual funds connected to the platform.
While anyone can buy onto the platform with the utility token, qualification for SUN tokens will take place on a case-by-case basis to ensure compliance with local security laws, following Swarm’s Know Your Customers and Anti Money Laundering (KYC/AML) policies. For instance, in the United States, the initial funds would only be open to accredited investors, or those with $1 million in assets and an income of $200,000 or more per year.
While that rules out many smaller investors on those specific tokens, it still drops the high, $5 million minimums of most private equity and hedge funds down substantially for investors who qualify.
As a decentralized platform, the network will eventually be run by its members through a virtual voting system. Swarm members will also be able to pick managers based on socially-generated reputational scores. Members will be able to propose new investment ideas through Swarm’s decentralized “liquid democracy” governing system, a topic that will make up a future blog post.
So, what is Swarm, and what problem does it solve?
While there have been a lot of recent token offerings focused on specific asset classes, I haven’t seen the kind of automated market infrastructure, backed by a team that has years of experience on both the crypto and finance side of the equation, that Swarm makes possible.
Swarm’s key strength and differentiator is the 100 percent focus on using the blockchain to automate all the different processes that are related to any kind of investment, crypto or otherwise, at a fraction of the cost. It opens up what, to this point, has been a highly exclusive class of investments to a broader range of people, while ensuring that the security, and eye on regulation, are in place to allay the concerns of traditional investors who may be entering the realm of crypto investing for the first time.
Once it’s up and running, I think people will instantly recognize the answer for themselves.