Company History.

Now here’s where it gets tricky (or trickier).

Neo and Bee held its IPO (and I am using the term loosely) on the weird and obscure Exchange of Havelock Investments. This platform claims that its owner and operator The Panama Fund is regulated under Panama’s SEC (SMV). A claim that I was unable to verify, I could not find any registered entity that goes by the name of The Panama Fund in SMV’s public records I have submitted a request with SMV and I am waiting for their reply.

At this stage it’s only speculative but according to hearsay upon hearsay, Neo and Bee managed to raise around 10,000 Bitcoins from its IPO in September 2013. 10K Bitcoins loosely translated to 1million USD at the time, by December of the same year 10,000 Bitcoins would fetch 10 million USD. So for all purposes intended mr Brewster had in pocket a sum of between 1-10 million USD.

The company embarks on a massive PR campaign with billboards, TV adds, conferences, Neo Reps appearing on Television and between the months of January and February 2014 hires staff and opens its flagship branch in Nicosia Cyprus.

Their TV add moniker “who is neo?” is now the subject of a cruel joke among Cypriots who ask “where is neo?” laughing.

On March 18th the Cypriot parliament invites Mr. Brewster and his team to attend a Q&A session, the Central Bank of Cyprus and CySEC were also in attendance. Things did not go down well apparently as one after another MP’s exiting the session called for new regulation expressing concern. CySEC went one step further by releasing a warning to consumers on Bitcoin’s use, the same day. This announcement while not stating it openly is a thinly veiled warning to consumers not to use Neo products.

March the 18th is the last Day Mr. Danny Brewster made a public appearance, at the beginning of April we learn from news sources that he is gone missing leaving staff and creditors unpaid. At least two people have emerged claiming that Neo and Bee defrauded them of money. Soon thereafter Neo and Bee legal representatives stop representing the company and one by one all employees quit. As of today their Nicosia offices are abandoned and no one from the company answers calls by members of the press.

Warning signs

The prospectus contains a number of inconsistencies.

Neo and Bee was going to offer 3 and 6 months fixed term deposit with a yield of up to 6% or 10% respectively.

Now this gave me loads of problems. The customer will deposit 500 or 1000 euro with Neo, Neo will then convert them into Bitcoins hold these bitcoins for the specified time frame and then the customer will be able to withdraw his initial deposit plus anything up to 6% or 10%. And as Neo&Bee say in their prospectus

“guaranteed redemption of at least the original purchase amount by the end of the term”

I am going to say this once, Neo and Bee were an ETF, basically their performance was linked to Bitcoin’s value, therefore such guarantees are absurd and impossible to uphold. What happens if Bitcoin loses its shine? Will Neo&Bee cover the loss out of pocket or would they incur damages on the customer? No other ETF has ever made such guarantees and why should they? They inform their customers of the risk and if the customer is willing to accept the risks then it’s a deal.

A few lines further we read this :This being essentially an option agreement, we will need to be equipped with a relevant license from CySEC to offer it, as mentioned below.

This had me wondering. What he described a few lines above is emphatically not an options contract by any stretch of the imagination, so the question was: do Neo&Bee know what they are doing? Though I must admit I did welcome their intentions to seek regulation at the time.

Euro-Pegged Wallet

Another Neo Product that drew my attention was this. In essence the customer deposits X amount of euro with Neo&Bee which is converted to bitcoins (of course) and if bitcoin appreciates vis a vis the euro Neo pockets the additional amount. If however on the other hand Bitcoin depreciates; “ Bitcoins will be added to the customer’s wallet from our reserves if the exchange rate decreases”.

This begs the question, what reserves? Who provides the necessary liquidity for this operation? Am I to believe that Neo had ample capital buffers to cover for such fluctuations? Then why did it go belly up in just 25 days after launch without a cent going towards creditors and employees?

Since all their transactions and accounts are held in bitcoins any bitcoin price drop will decimate their profits and swing them into a loss without fail. So in order to cover for these swings (since they say they guarantee the principal amount) they either need to have very sophisticated hedging strategies (which again is not 100% fullproof) or adequate capital buffers to get them through rough times. Neither of which is anywhere to be found in their prospectus only that vague mention on reserves.

To summarise this was an obscure company with no clear objectives, no product, no clear vision and most importantly its own CEO didn’t know what he was doing. I queried Danny Brewster online about his intentions and he wasn't able to explain what Neo was aiming for. In the end I got the cold shoulder:

do’ers innovate. A world of commentators would have kept us in our caves. Happy to show you what we do 121 so u can commentate.

I was going to accept the offer for a one to one with him because after this conversation my suspicions grew.

Lack of any and all financial reports in the prospectus

It is quite unusual for startups to launch an IPO as they are a tough sale. Usually they raise capital through venture capitalists that offer startups capital and expertise in successfully launching a business. When the company grows, owners may opt to launch an IPO in order to raise more capital and expand further. This was the case with many well known tech companies including Twitter and Facebook.

However this was not the case with Neo. Capitalising on Bitcoin euphoria, Neo and Bee opted to go straight for an IPO in an obscure Exchange without having a product, no detailed strategy, no piece of financial reporting available. The Exchange choice is no accident. An IPO in a regulated exchange (be it Cyprus Stock Exchange, FTSE, NASDAQ etc) would require Neo under law to produce financial statements and detailed analyses of various aspects of the business to better inform investors. A prospectus like Neo’s would have been thrown out the window by any and all regulators across the world.

Compare Facebook’s IPO prospectus to Neo and Bee. Even at Havelock there are a lot of companies that have provided investors with some form of financial statements.

Danny Brewster on the 17th of March said on twitter that Financial Statements with all the appendices were going to be released later that week, but they haven’t. By then it was already too late. Financials should have been ready before the IPO anything else is unacceptable.

My jaw literally dropped when I realised that Neo and Bee were selling shares OTC. Therefore the actual sum that investors lost may never be accurately known. There was a shareholders list on Neo and Bee parent LMB-holdings.com. The webpage has been taken down.

Both CySEC and the Central Bank of Cyprus FAILED

CySEC made a veiled attempt to dissuade people from using Neo products but that wasn’t enough nor satisfactory. Their main (and quite frankly pathetic) excuse for refusing to investigate the company was that bitcoin is a digital product and not real money (CySEC wording) therefore it is not their jurisdiction.

Neo and Bee operations neatly fall under investment services. It is absolutely inconsequential whether Neo and Bee invested in gold/silver/corn or any other commodity. At the moment bitcoin behaves much like a commodity, its price relative to other currencies either goes up or down uniformly unlike let’s say the euro that can strengthen vs the dollar and weaken vs pound sterling, Bitcoin price is driven solely by supply and demand dynamics. In fact the Central bank of Finland has declared bitcoin a commodity allowing bitcoin services in the country to take hold.

The only problem with this solution is taxation but the legislative workaround is very simple unlike the UK’s position that Bitcoin is a private currency and as such it has to be regulated with its own set of laws creating unnecessary headaches.

For all purposes intended Neo&Bee aspired to be an investment company (despite what they wrote in their prospectus) with all the risks and benefits that entails. As per MiFID and banking laws Neo and Bee would have been obligated before opening its doors to have in place various safeguards including investor protection schemes and a license to operate from relevant authorities. Since we are talking about an investment firm that authority is the Cyprus Securities and Exchange Commission, before granting the relevant license CySEC would scrutinise Neo&Bee this would have exposed the fraud.

In memoriam

There is absolutely nothing wrong with people trying to innovate and create new fascinating products and failure is part of the game. If the human race never took risks we’d still be living in caves (Brewster’s words) cowering at the sight of lions and tigers and bears oh my!

Whether I am elated with the outcome? Emphatically not. People at Havelock have lost money with Neo, however they are not without sin, it is partly their fault, they should have recognised the dangers and sought advice from more seasoned investors. Again quoting Warren Buffet.

“Risk comes from not knowing what you’re doing” and “Never invest in something you don’t understand”

Still, I can readily understand why people would place blind faith (because that’s what it was) in a company that was flashy, hip and fresh, not least because it had backing from authoritative figures in the Bitcoin community.

It is no exaggeration to say that self proclaimed bitcoin investor and economist Tuur Demeester lent credibility and status to Neo as did Andreas Andonopoulos who was the company’s technical advisor.

Neo and Bee is a failure on multiple levels?

I will not go into the discussion of whether Neo and Bee were honest about their intentions and this is merely a startup failure led to the ground by an overenthusiastic CEO. They were emphatically dishonest! The obscure nature of everything the company did and their CEO’s disappearance leaving behind a mountain of debt and unpaid workers is inexcusable and quite telling of what the plan was from the very beginning.

It could have been prevented every step of the way.

Regulators should have gotten off their throne and examine the company, investors should have closely scrutinised Neo and demanded more information before handing them their money. As for Demeester and Andonopoulos. They should have acted protectively to safeguard their own reputation instead of being willing to endorse everything under the bitcoin sun. If they are both serious about bitcoin then they should try and cleanse the system.