Regulatory Arbitrage

To: Limited Partners of Grasshopper Capital Fund I LP
From: Ari Lewis and Sagar Rambhia
Date: 02/01/2018
Subject: Regulatory Arbitrage

Innovation or Regulatory Arbitrage?

In the early days of the industry we believed we were entering a wave of innovation. The concepts of blockchain and smart contracts brought with them facinating transformative implications. For the first time, we could program money or manage records in a trustless manner. Recently, promoters in the market began speculating on how ICOs and security tokens could provide new pathways for investors to get in early on the next Facebook. We disagree with this premise, and it is not why we started Grasshopper Capital.

People are confusing innovation with regulatory arbitrage -- opportunities to exploit loopholes in regulatory systems and strategies falling outside the purview of regulators. Arbitrage also exists simply because governments are only now defining rules for who can and cannot invest in private companies and funds. At the moment, there is a standstill as investors, inventors, and regulators position themselves in their repective corners awaiting clarifying moves. Regulatory silence is temporarily creating unrest. In time, regulatory agencies will wrap their heads around the notion of programmable money and smart contracts and create regulations appropriate for ICOs and security tokens. At that point, the regulatory landscape will take another step along its predictable path to maturity.

Portfolio

Fear.

We believe the powerful motivator of fear is driving the recent changes and volitility in the market. We expect to see fear further create opportunities as each party acts with predictable irrationality to drive hightened volatility. We are modifying our initial long-only thesis to take advantage of long/short fund strategy opportunities. We are identifying products to satisfy this strategy as well as our criteria for adequate liquidity. We expect to begin implementing this strategy in the coming days while there is still significant unrest in the market.

We are looking forward to updating you as significant news, opportunities, or changes present themselves.

Thanks,
Ari & Sagar