Profit issue-23

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8 Weekly Roundup 12 The Savvy Planner 18 Pakistan’s first fashion Billionaire?

26 26 Planning integration KK Shahid 28 Craving for the cosmetic 31 The Bitcoin Craze: Should you jump in? Shahbaz Lalani

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33 CPEC impacts real estate sector across the country 38 Initial Coin Offerings: A Growing Method For Blockchain Startup Financing Robert Kim

Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Contributing Editor: Farooq Tirmizi l Business Editor: Agha Akbar Editor Reporting: Farooq Baloch l Reporters Aisha Arshad l Arshad Hussain l Usman Hanif l Syeda Masooma l Ahmed Ahmedani Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) Design & Layout: Rizwan Ahmad l Illustrator: ZEB Photographers: Zubair Mehfooz & Imran Gillani Publishing Editor: Arif Nizami Contact: profit@pakistantoday.com.pk

CONTENTS

“Solar energy has revolutionized the energy sector and maybe a game changer in Pakistan too” German Ambassador to Pakistan Martin Kobler

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BRIEFING

“Turkey sponsored 300 MW Bahawalpur Solar Power Project will be completed by November this year” Punjab Chief Minister Shahbaz Sharif

have been released by the government for development projects under its Public Sector Development Programme (PSDP) for the financial year 2017-18. The released funds include Rs 34.59 billion for federal ministries and Rs 14.767 billion for special areas, according to latest data of Ministry of Planning, Development and Reform. Out of these allocations, Rs 2.6 billion have been released for Communication Division (other than National Highway Authority) for which the government has earmarked Rs 13.66 billion under PSDP 2017-18. Railways Division received Rs 8.631 billion out of its total allocation of Rs 42.9 billion whereas Aviation Division received Rs 623.14 million out of its total allocation of Rs 4.348 billion. The government also released an amount of Rs 6.126 billion for various development projects of Higher Education Commission out of total allocation of Rs 35.662 billion. Water and Power Division (water sector) received Rs 7.35 billion out of its total allocation of Rs 36.75 billion under PSDP 2017-18.

Rs132.87b

increase was recorded in sales of automobile sales during first two months of financial year 2017-18, reported Pakistan Automotive Manufacturers Association (PAMA). Sales of automobile recorded a 28pc rise during first two months of new FY 2017-18, reaching 35,202 units against 27,317 sold in same period last year (SPLY). During August, the sales of automobiles including LCV’s, jeeps and vans were recorded at 22,000 units, registering an increase of 25pc year-on-year (YoY). Honda outsold its competitors by registering a 47pc increase in sales on a YoY basis, the highest ever sales increase recorded by the company, said Topline Security. It added this growth was fueled by the introduction of new Civic and SUV variant BR-V model. Indus Motors reported a paltry increase of 2pc in sales on a YoY basis reaching 5,541 units. Indus Motors focus of ramping up production of higher margin Fortune model paid off, as sales of it surged up by 284pc YoY. The sales of Toyota Corolla’s according to Topline Security, has increased in the wake of new models introduced by Indus Motors which saw sales increase by 5pc on a YoY basis.

28pc

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$19.493m worth of fruits were exported during the first month of the current financial year 2016-17.

According to data available from Pakistan Bureau of Statistics (PBS), during July 2017 about 32,702 metric tons of vegetables valuing $10.330 million were exported. During the period under review fruit exports decreased by 16.10 percent, whereas vegetables exports increased by 26.80 percent respectively, it added.

Meanwhile, wheat exports from the country also grew by 100 percent as 353 metric tons of the commodity worth $730,000 exported as compared the same month of last year. The country exported 58,555 metric tons of sugar valuing $27.584 million in first month of current financial year as against the same month of last year. During first month of financial year 2017, rice export grew by 28.49 percent as about 200,995 metric tons of rice valuing $107.896 million exported.

BRIEFING

“I believe the economy at this juncture, offers a lot of opportunities for businesses to grow and expand” SBP Governor Tariq Bajwa

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Rs42,569b

in taxes were paid by Pakistan’s telecom companies during the last five years. The major contribution in terms of tax payment came at Rs 10,358.3 billion during financial year 2013-14 from the telecom companies.The year-wise break up issued by Finance Division on Wednesday revealed that during year 2012-13 the amount of tax paid was Rs 6,419.3 billion, during 2013-14 Rs 10,358.3 billion, during 2014-15 Rs 8,286.9 billion, during 2015-16, Rs 8,149.5 billion and during year 2016-17 the mobile companies paid tax of Rs 9,335.3 billion.

loan approved by Asian Development Bank (ADB) is being been affected by bureaucratic hurdles and complex procedural issues.

ADB has only released a paltry $10m (1.1pc) out of $900m loan which was approved in December 2013.

This funding had been approved for the setting up of 660MW coal-fired power plant at Jamshoro. Another 660MW unit was also to be converted into coal. This funding was primarily provided by ADB to reduce reliance on furnace oil for power generation purposes, which seems likely to be missed now. Total cost of this 1320MW coal-fired power project was estimated around $1.5b and besides this $900m loan from ADB, Pakistan had also obtained funding of $220m from Islamic Development Bank (IDB). $870m of this $900m loan had been obtained at high interest rates and $30m on concessional rate from the ADB. Since the end of 2014, the country has been paying commitment charges for this loan despite non-disbursement.

$900m

was remitted by overseas Pakistani workers, up by 13.17 per cent in the first two months (July to August) of 2017-18, compared with $ 3,089 billion received during the same period in the preceding year. During August 2017, the inflow of worker’s remittances amounted to $ 1.954 billion, which is 26.78 per cent higher than July 2017 and 11 per cent higher than August 2016. The country wise details for the month of August 2017 show that inflows from Saudi Arabia, UAE, USA, UK, GCC countries (including Bahrain, Kuwait, Qatar and Oman) and EU countries amounted to $ 511.28 million, $ 440.38 million, $ 260.34 million, $ 249.14 million, $ 230.22 million and $ 62.75 million respectively compared with the inflow of $ 507.26 million, $ 401.18 million, $ 223.7 million, $ 192.64 million, $ 222.57 million and $ 43.5 million respectively in August 2016.

$3.496b

68pc

was Pakistan’s total tax revenue to GDP in 2016, said Asian Development Bank (ADB) in its published report. Pakistan’s tax revenue in 2005 was 10.1 per cent during 2010, while it declined to 9.8 per cent in 2013, however the tax revenue in 2015, increased to 11 per cent. The report added that in Bangladesh, India, Afghanistan, and Sri Lanka, the rate of tax revenue to GDP in 2016 was recorded at 8.8 per cent, 7.2 per cent, 5.0 percent, and 12.1 per cent respectively. Similarly, according to the report, the tax revenue rate in China, Australia, New Zealand, Malaysia, and Thailand was recorded at 17.5 per cent, 22.4 per cent, 29.3 per cent, 13.8 per cent, and 15.7 per cent respectively.

surge in palm oil imports was recorded into the country during the month of July 2017 compared to the same month of the last year.Pakistan imported palm oil worth $ 176.600 million in July 2017 compared to the imports of $ 104.771 million in July 2016, showing growth of 68.56 per cent, according to latest trade data of Pakistan Bureau of Statistics (PBS). On a monthon-month basis, the palm imports increased by 11.05 per cent in July 2017 when compared to the imports of $ 159.034 million in June 2017. In terms of quantity, the palm oil imports soared by 62.33 per cent by growing from 150,728 metric tons in July 2016 to 244,671 metric tons in July 2017.

12.6pc

BRIEFING

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“The locals in Gwadar are happy due to development in the region

by Chinese firms” Sindh Governor Muhammad Zubair

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35pc

of Stora Enso’s stake in Bulleh Shah Packaging (Private) Limited has been acquired by Packages Limited, making it a 100pc wholly-owned subsidiary of the latter.. This 35pc stake cost Packages Ltd $7.344m. Stora Enso, one of the world’s biggest manufacturers of graphic papers for newsprint and magazine paper had offloaded 35pc of its holding equity in Bulleh Shah Packaging Limited (BSP). The decision was taken amidst a fall in demand for graphic paper because of publishing moving online and the company’s decision to divert its focus more towards pulp and packaging board.

foreign direct investment was brought in by the telecom sector in July and August of financial year 2017-18. The telecom sector ended up being third highest contributor in terms of foreign direct investment (FDI) during July and August, reported State Bank of Pakistan (SBP). Pakistan received foreign direct investment (FDI) of $457.2 million in July-August 2017, up by 155 per cent or $277.8 million compared to $179.4 million in same period last year (SPLY). In August 2017, the country received inflows of $258.2 million in the head of direct investment, while investors pulled back their $23.7 million. In August 2017, the country received major investment in power sector of $154.3 million most of it from China in the development projects of CPEC ($130 million in Coal Projects), Oil and Gas Exploration that received $10.6 million and $35 million in Construction Industry, the SBP’s data said.

$92.5m

$2.601b 10.85pc $700m current account deficit was recorded for the first two months of financial year 2017-18. Despite all weak indicators, the SBP figures show that the country’s Gross Domestic Product (GDP) surged by 10.72 per cent to $ 56.784 billion in last two months compared to $ 50.675 billion in the same period last financial year. According to the SBP’s projection, full-year GDP would remain around 6 per cent in the current financial year. As a result of rising CAD, the foreign exchange (FX) reserves have been under pressure and are down by 9 per cent since June 2017 to $ 14.7 billion with the State Bank, which covers 3-months of imports. The import bills had touched $ 8.982 billion in past two months which is almost above the double of the local export’s inflows, the SBP’s data said.

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increase was reported in domestic cement despatches during August. Exports nosedived by 26.47 per cent, reducing overall sales growth to 5.05 per cent only. According to the data for the month of August 2017, Cement despatches in the month were 3.766 million tons as compared to 3.585 million tons in August 2016. In August 2017, the domestic cement despatches in the Northern region was 2.731 million tons against despatches of 2.495 in August 2016 whereas the despatches in the Southern region was 0.625 million tons in August 2017 against despatches of 0.532 million tons in the same month last year. Exports from North, were 0.307 million tons last month against 0.355 million tons in August 2016.

The exports from the South stood at 0.103 million tons in August 2017 against exports of 0.203 million tons in August last year.

have been awarded as damages by International Centre for Settlement of Investment Disputes (ICSID) to Turkish entity Karkey Karandeniz for the case it had filed against Pakistan over the rental-power plant fiasco. The ICSID on August 22nd had placed this notice on its website regarding the awarding of damages to Karkey to the tune of $700m. According to sources, the tribunal had given a decision in March 2016 but reached to the amount of penalization which converts into Rs74b which Pakistan would be liable to pay. Sources revealed the awarding of this penalty had been kept under wraps by the incumbent government to avoid embarrassment, as Karkey was also requested to keep silent about it.

BRIEFING

By: Syeda Masooma hen Aamir Mazhar graduated with a Master’s degree in banking, finance and marketing, he had no idea about what to do with his life. His first job at Bank Alfalah as lockers’ in-charge, and then as consumer banker, gave him financial strength but at the cost of hypertension and depression. To have a change of landscape, he went over to Dubai as a contracting finance person in Mashriq Bank – where his boss told him he would be better off outside the world of finance.

Returning back home in 2007, he launched his own event management company – Savvy PR & Events and launched his friend Mehrbano Sethi’s Luscious Cosmetics – with a deadline of six months to

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make it work or revert back to entering the job market and surrendering to life as it was.

A decade down the line, operating in a high-stress field, his hypertension is under control and he sleeps in peace. With a workforce of five people in Pakistan and four in Dubai, among others, he runs events – signature weddings, brand launches and fashion shows – in highbrow international locations as the various US cities, London, Beirut, Bahrain and Singapore. Having arranged events with Abu Dhabi’s royal family in audience, and turned down government projects because he didn’t want to do them, everyday he wakes up happy with life.

Over a cup of coffee, Aamir shared his story, full of anecdotes, with Profit. Here are the excerpts: “I never looked forward to my job at Bank Alfalah. I started gaining weight and

then I was diagnosed with hypertension. In the mornings, I used to curse myself. For a while I thought this was how my life was going to be. But then I thought there has to be something more to it.”

When he was still studying he was offered a job at Evernew Concepts – an advertising agency, in 2000 for a ‘pretty-decent sum then’ of Rs15,000. But his DIG father advised against it. “Shareef bachay advertising mein kaam nahi kartay. Now I am glad, because it closed down a few years down the road. Life had other plans.”

Quite supportive when he decided to move to Dubai, his family was ‘unpleasantly surprised’ when he launched his agency. Well versed in abiding by the rules while finding a way to do what he wanted, for Aamir though, event management was not something new. “With a decent social circle, I used to arrange club nights with friends who used to get together, throw a

themed party and sell tickets to people we knew. And that I did despite strict family restrictions: no nights out, actually back home by nine at night.”

Aamir frequented to London in summer holidays with his maternal uncle, where he went to clubs and parties. Bringing the experience back home, he made dough in the process. The experience came handy when he embarked on his business, despite no family support. “When I started Savvy, my total paid up capital was Rs6,000.”

In 2007, the concept was new but the market was opening up. Having launched Lotus, QYT was perhaps the only one by way of competition. First few clients were friends and acquaintances, and following the launch of Luscious Cosmetics, Aamir arranged a big-do wedding. “Saleena Warda was a famous brand in the early 2000s, and it was Warda’s wedding. Different colored themes, chocolates flown in from Dubai, exotic food chiffon curtains – it had it all.”

Changed market dynamic hough market dynamics have changed over the last few years, with quite a few PR and event management companies around, Aamir’s marketing still relies on word of mouth – by satisfied clients. Never pitching himself to a potential client, Aamir also does not follow anyone who takes a quotation. Believing that clients choose event managers after looking at a number of options, he says: “I am secure enough to know that I am going to get what I am going to get. Some clients are very loyal, they wait for your dates, and they only work with you. Recently one client client called, asking me to keep Oct. 5 blocked. No discussion, no details – they know it and I know it too, they will only work with me.”

Working with close friends as clients on regular basis is something Aamir advises against. “Having worked for my friends here and there, when friends become like family, it is always advisable not to work with them. It messes up the relationship, as money matters and high expectations are involved. One has good and bad days. If it is a bad day, it hurts and spoils relationships.”

Despite their revenue potential, he is not enamoured with weddings. “You have to deal with 20 people – the parents, the bride, the friends, uncles, aunts. You can’t make

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Aamir Mazhar, Proprietor, Savvy PR

ENTREPRENEURSHIP

them happy at the same time. A lot of effort goes into decorating a marquee and not much of it is visible to the eye. Weddings pay a lot but that also means 10 sleepless nights. Launches are a lot easier – a normal one, a week’s work, visit site, arrange flowers, petitions approved and you’re free soon and go home on time. There is no burden of looking into security details either.”

In Aamir’s opinion, in weddings, Zareen Khalid is on top of the totem pole while J&S (Jalal Salahuddin and Omar Satti) breathing down her neck.

Aamir’s work is not without its ups and downs, financially and in terms of his relations with the industry. He had a famous row with QYT in 2011, though now he brushes it off as a misunderstanding. “In Dubai I applied for my license and had to stay there for a while. One national television it was spread that I had fled to Dubai owing to pending cases. Having wizened up by a friend, she and I laughed it off. Then I thought that for people and clients who don’t know me, it was serious. So I asked the TV channel for an apology which wasn’t forthcoming. I went the press club to put point of view across.” Now QYT and host of that show are among Aamir’s friends.

No forgiveness for errant clients imilar forgiveness he doesn’t have in his heart for the clients who wrong him. “Friendships entail emotional context while business needs logic and there is no room for putting behind a bad experience.” His way to deal with conflict is simple: ignore it. Refusing to acknowledge the presence of anyone with whom he has had a bad brush, Aamir makes resolves not to walk the same road again. To Aamir, this approach has

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‘I AM SECURE ENOUGH TO KNOW THAT I AM GOING TO GET WHAT I AM GOING TO GET. SOME CLIENTS ARE VERY LOYAL, THEY WAIT FOR YOUR DATES, AND THEY ONLY WORK WITH YOU’ Aamir Mazhar, Proprietor, Savvy PR

helped in dealing with bad clients, there being no dearth of them.“Since nothing is in black and white, nothing written in proper contractual form, so non- or delayed payment is frequent. Some pay up but hold back Rs10,000 just for the heck of it, on silly excuses like two snap chats promised for the event, only one was posted.”

Though refusing to share earning details, despite such setbacks, Aamir still makes a nifty sum. “Average revenues are comfortable. Some months are good, while in some you make do.” The Muharram and the summer are the low points. No events, launches or fashion shows take place in the first ten days of Muharram or from June until August due to heat and humidity.

The unpredictable expenditures coming from nowhere are his biggest bugbear.

“When you have paid the vendors, if something cancels or delays the event, like a terror attack, you suffer. Since we spend before we receive, it is not at the client’s expense. We don’t ask for the money back because it’s in bad taste.”

Most vendors are not educated enough to understand that and also for them, such as the flower or tentman, it is not a contract but daily wages. So we don’t ask them to pay back Rs500. So, either we make a new date or we let them have it.”

“Not keeping a watch has its costs too. Once I paid for six dozen fresh flowers and later found out that only one dozen real one’s were supplied while the rest were artificial.” Then there are also people asking for kharcha paani (illegal gratification) when he arranges events near a government site. At one event for Fashion Pakistan Lounge near LDA Plaza, the road was under construction. Though the part used by people was already constructed but when they saw that people are coming, they blocked it, asking for money to clear it.”

Sometimes his clients can also cause extra expenses. “PRA has put 16% tax on our revenues but sometimes clients refuse to pay that additional amount. Then there is a monthly return for that. So we pay the money and then suffer the hassle as well.”

“People are standing on your head to ask for their payment. Money comes into your hand and before it can go into your pocket it’s gone. But I actually enjoy doing this. There is always the excitement. If I get my share of good clients, there has to be some not-so-good clients as well.”

‘A DECADE DOWN THE LINE, OPERATING IN A HIGH-STRESS FIELD, HIS HYPERTENSION IS UNDER CONTROL AND HE SLEEPS IN PEACE. WITH A WORKFORCE OF FIVE PEOPLE IN PAKISTAN AND FOUR IN DUBAI, AMONG OTHERS, HE RUNS EVENTS – Outsourcing the key SIGNATURE WEDDINGS, BRAND LAUNCHES avvy PR outsources its décor completely. “When I started this, we did AND FASHION SHOWS – IN HIGHBROW everything on our own but the storINTERNATIONAL LOCATIONS’ age costs were too much. A lot of it

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used to get spoiled or lost during monsoon and transit, so now we outsource everything. We have permanent vendors. Not just suppliers, I have everything permanent. I would even take the same road to work every day and if it is blocked, I feel uncomfortable taking a different route. I have the same hair-cutter, the same masseur, the same photographer, and if something changes, then it bothers me.”

Despite being prepared to work without proper paperwork, Savvy PR is not open to a short notice booking. “Anyone who comes to us is for the end-product – the general hype, media coverage or guest list. This cannot happen overnight. So you need to come to us with at least a fortnight’s notice.”

Aamir personally prefers working with corporates than governments. “It is a personal choice. It is very difficult to keep everyone happy with government jobs. I have had opportunities to work with the government but I stayed away. Corporates can also be sometimes tricky with payments but for me that experience has been better.”

One of his favorite clients is the Nishat group, and one of his fondest memories is the launch of MCB in Dubai. “Mrs Mansha is one of the most professional people. She is loving and caring. I would rather work for someone who respects you and make you feel empowered. So I like people like that.

The launch of MCB that we did at Burj Khalifa is also one of my favorite projects.

That was the first time I was meeting Mr Mansha. The royal family was also in attendance, and so were the dignitaries, ministers from Pakistan. So managing such an event in the ballroom of Burj Khalifa is something that still raises the goosebumps.”

‘ANYONE WHO COMES TO US IS FOR THE END-PRODUCT – THE GENERAL HYPE, MEDIA COVERAGE OR GUEST LIST. THIS CANNOT HAPPEN OVERNIGHT. SO YOU NEED TO COME TO US WITH AT LEAST A FORTNIGHT’S NOTICE’

‘IN 2007, THE CONCEPT WAS NEW BUT THE MARKET WAS OPENING UP. HAVING LAUNCHED LOTUS, QYT WAS PERHAPS THE ONLY ONE BY WAY OF COMPETITION. FIRST FEW CLIENTS WERE FRIENDS AND ACQUAINTANCES, AND FOLLOWING THE LAUNCH OF LUSCIOUS COSMETICS, AAMIR ARRANGED A BIG-DO WEDDING’ On Savvy’s competitors ith regards to competition in the market, Aamir believes that Bilal Mukhtar and QYT are his closest competitors, along with Imtisal Zafar and Lotus at times. But he has cordial relations with all his competitors and doesn’t mind asking them for help or extending some himself when asked. “I meet with them every fortnight or so, share trade secrets, and ask each other to do something here and there.”

Regarding his market positioning, Aamir doesn’t have any particular category of customers. “I have done events for as few as 25 people. There is no minimum for me, but there has to be some scope for creativity, free hand to operate and mutual respect from the client.”

Aamir frequently comes into contact with celebrities from Pakistan and from

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across borders. But by now the famous who’s who are just like any other friend to him.

Sharing one instance of a celebrity moment he said, “Dostana had just come out. I had seen it twice and was totally under the Desi Girl spell when I met Priyanka Chopra. I went up to her, wanted to talk to her but nothing came out.” Eventually he was able to overcome that and had a conversation with the Desi Girl.

At another time, after making a potential client wait for 30 minutes for a meeting about his mehndi and walima functions, Aamir asked him if anyone has ever told him that he looked a lot like Atif Aslam, to which he replied, “I am Atif Aslam.”

Aamir said that after many such silly mistakes now he has become more confident and more experienced. “I am 37-year old. I still make mistakes, but now I am confident enough to face the consequences.”

Improvising, the name of the game In a charity event in London in 2008 for the IDPs, rehearsals were behind schedule, the hall was evacuated by the security for their fire drill.

“A black tie event, I was making the last-minute arrangements in my shorts when I slipped on the marble floor as the Pakistani ambassador walked in. He looked at me lying supine, but still asked me where the ballroom was? All I could say was: Aren’t you early? Ticked off, he turned back, my friends running after him. Meanwhile, a model came, saying, another model had run away with designer clothes, with the designer also walking out of the show. There were other gaffes: partition between male and female models fell, burying models under it, and the host came up, calling it off, saying, she had never done live hosting. A friend from Pakistan came backstage to ask if everything was okay. I handed her the microphone to check if it was working. While she was checking it, I slowly pushed her on-stage, telling the stunned lady to improvise!”

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COVER STORY

What’s next for Khaadi? An IPO in the works? Is the husband and wife duo ready to take Pakistan’s largest retail clothing brand, to the next level and, in turn, take their collective net worth to a billion dollars?

By Farooq Tirmizi he year 2017 is the first time the Pakistani clothing market hit Rs1 trillion in consumer spending (according to an analysis conducted by Profit based on data from the Household Integrated Economic Surveys, published by the Pakistan Bureau of Statistics). It is also the year the biggest brand in the industry – Khaadi – learnt about both the benefits and the costs of being the market leader, with a very public labour dispute and a string of negative stories published about it in the print media.

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RETAIL

In the nearly two decades it has existed, Khaadi has gone from being a small store on the corner of a narrow street in Karachi’s Zamzama commercial area to become the industry-defining brand in Pakistan’s retail fashion sector. On the way, it has created, expanded, and conquered market that was virtually nonexistent prior to Khaadi’s launch in December 1999. Yet even as it stands as the clear champion of a rapidly growing market, Khaadi’s future has never been more precarious. In the next year or two, the actions of Khaadi’s management, particularly founder and CEO Shamoon Sultan, will determine whether it becomes a true national (and possibly global) corporate icon, or whether it will wither and fade away into obscurity.

This article examines the journey

Khaadi has taken so far, the market conditions and socio-economic context that allowed it to succeed as much as it has, and the opportunities and challenges the company faces in the years ahead. Our analysis is based on publicly available data, as well as published interviews of Shamoon Sultan, going as far back as 2003. The Khaadi management, in particular Mr Sultan, refused repeated requests by Profit, over several months, for an interview.

The wealth of family resources n successfully starting his business, one of Shamoon Sultan’s biggest assets was his family: his father is a wealthy businessman in Karachi and owns Millac

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‘IN MANY WAYS, SHAMOON IS EXACTLY THE KIND OF CEO ONE WOULD WANT TO SEE AT A PUBLICLY LISTED COMPANY: A CHARISMATIC FOUNDER, STILL PASSIONATE ABOUT HIS COMPANY AND ITS BRAND, BUT ALSO HUMBLE ENOUGH TO RECOGNIZE THAT THE BRAND AND COMPANY SHOULD BE BUILT TO OUTLAST HIM’ 20

Foods (Pvt) Ltd, a manufacturer and distributor of dairy and other food products. The family business started off in 1967 through a joint venture with Horlicks, the British maker of a malted hot milk beverage, which began production of the product at a factory in Jhang. By 1970, the family was able to buy out their British partners and expand into other products, including Comelle, a brand of sweetened, condensed milk.

As Shamoon pointed out in an interview with Newsline in 2003, his family did not have very many creative people and so one may have expected him to follow the long line of scions of wealthy Karachibased families to a business degree at the Institute of Business Administration (IBA) followed by joining the family business. But in Shamoon’s case, the “not many” turned out to be just enough, since he is the nephew of legendary Chicago-trained architects Arshad and Shahid Abdulla.

In 1990, the two brothers, along with several other prominent citizens of Karachi, set-up the Indus Valley School (IVS) of Art and Architecture in Karachi by moving the iconic 100-year-old Nusserwanjee building from its old site in Kharadar, part of the historic older part of the city, to the new campus being built in Clifton, then still a newer

neighbourhood closer to the beach.

Three years later, in 1993, a young Shamoon, enrolled as a student at IVS, a decision that would change his life forever.

His teachers from that era remember him as a bright student who was somewhat of a slacker, though he began working hard towards the end of his time at IVS and did particularly well on his thesis, landing a job with Noorjehan Bilgrami as a result.

Indus Valley was a critical time in Shamoon’s life, and he remembers it with fondness, and remains even now an actively involved alum. This is perhaps not surprising. IVS gave him his two great loves: Khaadi, and his wife Saira. He acquired a passion for weaving cloth during his time as a student at IVS, and it was a trip to India during his time at IVS that first planted the seeds of the idea for Khaadi in his mind.

And he met Saira at IVS, where she was also a student, two years his junior.

Shamoon worked at Bilgrami’s company for a year before realizing that her style of work was clearly not for him.

“Noorjehan works on a different level from that of Khaadi – she has a very select clientele. When I was working with her, I realised that this was not the direction I wanted to follow,” he told Newsline in 2003.

In early 1998, Shamoon decided to set off on his own and use his family’s considerable resources to bear to set up his own business. He was determined to create a retail brand for hand-woven khaddar clothing.

He started off with Rs3 million in capital, granted to him by his family. He acquired handlooms and set them up at a factory his family owned in the SITE industrial area in Karachi and set up a shop in Karachi’s Zamzama commercial district, also on a prop-

‘FROM THERE BEGAN A JOURNEY OF EXPANSION, THE LIKES OF WHICH PAKISTAN’S NASCENT RETAIL SECTOR HAD NOT YET SEEN. SHAMOON AND SAIRA INITIALLY UNDERESTIMATED THE SPEED WITH WHICH CONSUMERS WOULD BUY THEIR PRODUCTS, SELLING OUT IN A MATTER OF DAYS AND HAVING TO CLOSE DOWN THEIR SHOP UNTIL THEY COULD RESTOCK IT’ erty owned by his family. His early operating costs were reduced by the fact that his father did not charge him rent on the first Zamzama shop. He then hired his first designer: Saira.

From there began a journey of expansion, the likes of which Pakistan’s nascent retail sector had not yet seen. Shamoon and Saira initially underestimated the speed with which consumers would buy their products, selling out in a matter of days and having to close down their shop until they could restock it.

Expanding locally, and globally hile Khaadi clearly started as a passion project focused on selling khaddar clothing, it did not stay that way for long.

Shamoon and Saira may have an artistic passion for the products they create, but they are clearly commercially focused as well, launching women’s clothing lines, pret, and lawn. The company sells both readymade garments and unstitched fabric.

The company began expanding its presence, first within Karachi, then on to Lahore and Islamabad, followed by eight

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other cities across Pakistan. By 2010, Khaadi felt confident enough to make its first foray into international retail, setting up a in Dubai, followed quickly by a store in Abu Dhabi. In 2013, Khaadi began opening stores in the UK. Khaadi currently has a total of 54 stores, of which 42 are spread across urban Pakistan, eight stores in the United Arab Emirates, and four in the United Kingdom.

While the company does not publish its financials, sources familiar with its financials who spoke to Profit on the condition of anonymity stated that it had revenues of close to Rs16 billion in financial year 2016, of which Rs14 billion or so was in Pakistan and another Rs2 billion was from its foreign locations. That number makes it the largest fashion brand in Pakistan, having overtaken the export-oriented Gul Ahmed Textile Mills’ domestic brand, Ideas.

While the company operates across many business lines, over 90% of its revenue comes from just two of them: pret and unstitched cloth. In each of the remaining business lines, even people inside the company acknowledge that they face stiff competition. In particular, their high-end women’s clothing line – Khaadi Khaas – is widely seen by consumers as being bested

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by Sana Safinaz. And in men’s wear, Junaid Jamshed remains the leading brand.

Nonetheless, what distinguishes Khaadi from its competitors is not just the quality of its products, but the buying experience itself.

Khaadi currently operates the largest fashion store in Pakistan, the 22,000 square-foot flagship store in Dolmen City Mall Clifton, in Karachi. And it plans to acquire the flagship space in virtually every single new Class A mall that is being built in Pakistan’s new mallbuilding boom. Its success has inspired some not-so-subtle copycats, including Kapray and Beechtree, which lay out their stores almost exactly like Khaadi.

But Khaadi is also not the kind of retail dinosaur that invests in bricks and mortar without giving thought to its online presence. Through its website, Khaadi boasts one of the largest e-commerce presences in the country, beaten in terms of online revenue only by specialized e-commerce businesses like Daraz.pk.

Yet even as it invests in the physical and technology infrastructure to sell its products, Khaadi’s management remains cognizant of the fact that it is first and fore-

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most a fashion company, and hence managing its talent pipeline is critical. It helps that Shamoon and Saira have remained actively involved at IVS, and have cultivated relationships with the faculty at IVS – now widely recognized as one of the top two art and design schools in the country. Faculty at the institution help the couple identify some of the most promising students before any of their competitors have had a chance to see their work, giving Khaadi an inside edge at getting access to some of the most widely sought-after talent in the country.

The evolution and expansion of Pakistani fashion hile Khaadi has been remarkably successful, its success needs to be placed in a broader context: the rise of the Pakistani middle class, specifically the rise of the working woman, who has enabled families to rapidly expand their household incomes and move out of subsistence living and towards a truly consumption-oriented economic existence.

Pakistan’s female labour force participation rates have increased dramatically, from 16.2% in 2001 to 23.4% in 2015, the latest year for which data is available from the Labour Force Survey conducted by the Pakistan Bureau of Statistics. As a result, household incomes have risen to Rs34,707 ($333) per month, according to data from the 2016 Household Integrated Economic Survey. That represents an annualized increase of 9.3% per

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year over the past 15 years (5.7% in US dollar terms).

As a result of rapidly rising incomes, Pakistani consumers are no longer spending the majority of their incomes on food, and have more capacity to spend on other items, including clothing. In the fiscal year ending June 30, 2017, Profit estimates that the average Pakistani household spent Rs3,462 per month on clothing and shoes, which represents 9.3% of their incomes. That is up from just 5.4% of a much smaller income in 2002.

Spending on clothing has risen much faster than spending on other categories, rising by an average of 13.5% per year for the past 15 years. It is becoming increasingly clear that Pakistanis are now beginning to buy clothes not just because they need to, but also occasionally because they want to.

The rapid rise in spending on clothing also appears to be causing a shift in patterns of what types of clothes Pakistanis buy. In 2002, according to PBS data, more than 68% of total spending on clothes went to buying unstitched cloth and other accessories and only 13% of spending went to readymade clothes. In 2016, the proportion of consumer spending going to readymade clothes was 33%, with unstitched cloth and accessories going down to 50% of total spending.

Readymade garments are, by far, the fastest growing segment of consumer spending on clothing and footwear, growing at an astonishing 24.2% per year (20.1% in US dollar terms) over the past 15 years to reach a market size of Rs356 billion ($3.4 billion) in fiscal year 2017, according to Profit’s analysis of PBS data. The overall clothing

‘BY 2010, KHAADI FELT CONFIDENT ENOUGH TO MAKE ITS FIRST FORAY INTO INTERNATIONAL RETAIL, SETTING UP A IN DUBAI, FOLLOWED QUICKLY

BY A STORE IN ABU DHABI. IN 2013, KHAADI BEGAN OPENING STORES IN THE UK’ market, as noted at the beginning of this article, has reached Rs1.1 trillion ($10.3 billion) during that same period.

IPO rumours, and the next stage of growth eing the most successful player in this large, and rapidly growing, sector of the Pakistani economy makes Khaadi an extremely desirable company from the perspective of investors, who have been salivating at the prospect of its initial public offering (IPO)

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on the Pakistan Stock Exchange (PSX) since at least 2011, when rumours of a potential listing first started doing the rounds.

But is Khaadi ready for the scrutiny that

‘BUT HERE IS WHERE THE KHAADI MANAGEMENT IS WRONG: THEY CAN EITHER BE THE NUMBER ONE RETAIL BRAND IN PAKISTAN, OR THEY CAN BE AN OBSCURE COMPANY IGNORED BY THE MEDIA AND THE PUBLIC, BUT THEY CANNOT BE BOTH’

comes from being the top player in a highly visible industry? Is it ready for the kind of professionalized culture that international investors would expect and demand of a publicly listed company? The short answer?

Not yet.

The two sides of Shamoon Sultan n many ways, Shamoon is exactly the kind of CEO one would want to see at a publicly listed company: a charismatic founder, still passionate about his company and its brand, but also humble enough to recognize that the brand and company should be built to outlast him.

Unlike other Pakistani fashion CEOs who are keener to seek the limelight, and frequently create eponymous brand names, Shamoon is very private, and seeks to promote his brand before himself.

“One day I will die but the label has to live on,” he told Maliha Rahman at Dawn in 2016. “People don’t need to know about me; they need to know about my brand.”

And he remains actively involved in the management of the company, personally taking on the project of opening the new flagship store at Dolmen Mall in Karachi. That level of passion, and focus on the brand rather than the personality of the founder, is exactly the kind of trait that long term investors would look for in a CEO. But there are other aspects to Shamoon’s management style that are less than flattering. In his bid to emulate Zara, for instance, Shamoon has begun handing down near-impossible deadlines to Khaadi’s factory workers in Karachi, resulting in reports of poor working conditions at their factories, including allegations that the

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company restricts the number of times its employees can use the bathroom or even drink water, and that it is actively seeking to ban unions at its factories.

Matters came to a head in May when allegations began to surface on social media that Khaadi had fired 32 workers for trying to form a union. Khaadi issued the most unconvincing of denials, claiming that technically, it never fired anyone since the workers were employed by a vendor and not Khaadi. However, an investigative report from The Express Tribune indicated that the factory that is technically a vendor may, in fact, be a Khaadi-owned entity going by another name, TexMark.

Khaadi’s reaction to these allegations was less than encouraging: first the non-denial denial, followed by defiant statements and press conferences, followed by an announcement that it had accepted the demands of labour rights activists and the fired employees, followed by what appears to be noncompliance with the demands that it had earlier accepted.

This is shoddy management at best and reflect an attitude on the part of Shamoon that he thinks that if he just rides out the storm, it will all go away. But here is where the Khaadi management is wrong: they can either be the number one retail brand in Pakistan, or they can be an obscure company ignored by the media and the public, but they cannot be both.

With leadership comes scrutiny, and the sooner Shamoon can realise that, the better it will be for his own net worth.

‘BUT IS KHAADI READY FOR THE SCRUTINY THAT COMES FROM BEING THE TOP PLAYER IN A HIGHLY VISIBLE INDUSTRY? IS IT READY FOR THE KIND OF PROFESSIONALIZED CULTURE THAT INTERNATIONAL INVESTORS WOULD EXPECT AND DEMAND OF A PUBLICLY LISTED COMPANY? THE SHORT ANSWER? NOT YET’ Then there are the allegations from several employees who spoke to Profit on the condition of anonymity that the supposedly professional management structure is somewhat of a façade. As one employee put it, “most of the heads of de-

partments are either family or friends of the founders,” which does not serve to create the impression that this is a professionally-run company. Perhaps more distressing to some employees is the fact that the head of human resources is Saira’s

‘INDUS VALLEY WAS A CRITICAL TIME IN SHAMOON’S LIFE, AND HE REMEMBERS IT WITH FONDNESS, AND REMAINS EVEN NOW AN ACTIVELY INVOLVED ALUM. THIS IS PERHAPS NOT SURPRISING. IVS GAVE HIM HIS TWO GREAT LOVES: KHAADI, AND HIS WIFE SAIRA’ 24

cousin, and not seen as a neutral arbiter by most employees of the company.

In short, Khaadi may have grown too fast for its founders to notice that they are not really the insurgent startup anymore and need to start putting in place management structures more becoming of the industry leader that it is.

Doing so is quite obviously in Shamoon and Saira’s best interest. According to sources inside the company, the CEO is targeting taking its revenues to Rs50 billion over the next few years, which would mean that the company – and thus its founders and existing shareholders – would likely see their collective net worth rise above $1 billion, provided the company can be seen to have resolved all of its outstanding issues with respect to labour relations and management structure.

If they fail to resolve these issues, the founders may find themselves in a downward spiral, where bad press results in a difficulty in recruiting good talent, which results in an even more frazzled top management, and even more impossible deadlines, and even more stories about bad working conditions, and so on. If Khaadi gets trapped in this vicious cycle, it will find that Rs50 billion revenue target a pipe dream, and the much-anticipated IPO may never even happen.

How this plays out will depend on which Shamoon decides to take control: the one who wants a brand that outlasts himself, or the one who bungles his relationship with his labourers? The former will become Pakistan’s first fashion billionaire. The latter will sink into oblivion.

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OPINION

KK Shahid Crude AwAkening

Planning integration Where would IEP take Pakistan? ast week’s announcement of Pakistan inaugurating a steering committee dedicated to integrated energy planning (IEP) – with the US support – is both a critical development on the power front and a diplomatic anomaly if recent developments between the two countries are anything to go – but we’ll get to that in a bit.

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US Ambassador to Pakistan, David Hale chose to hint at the timing of the announcement as well, but arguably for completely different reasons, when he said the development came at a very “opportune” time. Perhaps he was hinting at the electricity and natural gas shortfalls, that have never been more acute in the country.

But what is Integrated Energy Planning, and how does it plan to solve Pakistan’s energy woes?

Pakistan is not the first country to be at the receiving end of an integrated energy plan: the idea has been afloat since at least the year 1985 and has been implemented in many developing countries, including South Africa.

The Pakistan Institute of Development Economics (PIDE) presents the idea in a simplified manner in their flowchart, implying that

KK Shahid is Energy Correspondent, Profit

effective integrated energy planning simply entails an efficient balance of the supply and demand of energy in any given economy.

The International Atomic Energy Agency (IAEA) agrees with the core concept, elaborating further the complexities involved in devising an effective energy plan: energy must be provided across all economic sectors, be they agriculture, transport, industry, commerce, public administration, or private consumption and should aid in the acceleration of social progress, including a rise in income and making education and basic amenities like health care, clean water, and sanitation more accessible to the common person.

With so many variables in play, the process, naturally, is not an easy one. It involves the “production, conversion, transformation and distribution” of energy, in an environmentally efficient manner – i.e. according to a plan that ensures the production of minimal harmful by-products – that can be utilized for as long as efficiently possible.

Indeed, the factors are aplenty, which means that the planning is excessively complex. Hence, the need for an organized committee to devise and run an “Integrated Energy Plan”.

Even though the details might make integrated energy planning seem like a very cryptic notion, for a layperson, the concept can be explained as: it is, quite simply, a plan to provide a country with longterm, economically and environmentally efficient energy solutions.

It is, indeed, the need of the hour, and the importance of the United States’ aid on this front can-

not be stressed enough.

Pleasant surprise In the wake of US President Donald Trump’s threatening remarks against Pakistan, first in August this year and again in late September, the help offered by the superpower to the developing nation on the energy front might come as a pleasant surprise.

That is, until they realize that the MoU for the current collaboration over integrated energy resource planning was signed between the United States

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Agency for International Development (USAID) and Pakistan’s Ministry of Planning, Development and Reforms, back in November 2016 – under the Obama administration.

Would the Trump administration go through with the required support for a plan promised under the Obama administration? This is a huge question-mark.

Under the said memorandum of understanding, the United States Department of Energy and the Pacific Northwest National Laboratory have undertaken to provide Pakistan with “technical expertise and experience to work with ministries, provincial governments, and others to improve energy planning in Pakistan”.

The US government also claims to have encouraged private investors to invest in Pakistan’s energy sector through “two large investment conferences, new energy sector guarantees through private Pakistani banks, and helped distribution companies, such as K-Electric, adopt commercial practices”.

The United States’ end of the agreement entails the provision of technical expertise to Pakistan, with the goal of devising feasible policy and resource options in collaboration with Pakistani experts as well as policymakers, in mind.

Understanding impact of various policy options The USAID seeks also to “help policymakers understand the impacts of different energy policy options” through this pro-

‘WITH SO MANY VARIABLES IN PLAY, THE PROCESS, NATURALLY, IS NOT AN EASY ONE. IT INVOLVES THE “PRODUCTION, CONVERSION, TRANSFORMATION AND DISTRIBUTION” OF ENERGY, IN AN ENVIRONMENTALLY EFFICIENT MANNER’ gramme, in the words of USAID Mission Director John Groarke.

The Pakistani side of the equation, on the other hand, may seem simpler: make the best use of the technical personnel provided by the United States by training local staffs under their guidance, and using the former’s expertise to devise efficient integrated energy plans, that cater to the needs of the Pakistani public and private sectors in the most effective way possible.

However, such a goal is easier articulated than espoused.

While lack of local technical personnel and funds may seem to be the biggest challenge in the path of efficient energy planning, relevant education and political willpower on the part of policymakers is the real hurdle that has held Pakistan back on this front.

Currently, the Ministry of Planning, Development, and Reforms and the Planning Commission of Pakistan has a threepronged leadership: The Chairman is the Prime Minister of the country, Shahid Khaqan Abbasi, who is followed by the Minister for Planning, Development, and Reforms, Ahsan Iqbal – who is now the interior minister as well – and the Deputy Chairman of the Planning Commission, Sar-

taj Aziz, who was also the former Minister for Planning, Development, and Reforms.

Of the three, none has an all-encompassing educational qualification in the matters of energy production: while the prime minister is an electrical engineer by profession, the Minister holds a joint degree in mechanical engineering and business administration, while the Deputy Chairman majored in Development Economics back in 1963.

While it is true that all three have been educated at prestigious universities of the United States – George Washington University, University of Pennsylvania, and Harvard University, respectively – this very commendable fact does not make up for their lack of requisite technical expertise on the subject under consideration, which could prevent them from understanding the importance of efficient energy planning – one of the key goals set by Director John Groarke.

True, Prime Minister Shahid Khaqan Abbasi has frequently dappled with energy projects, beginning with his years of employment in Saudi Arabia in the 1980s, yet his forte is an area that Pakistan – and the world – needs to steer well clear of at the moment: non-renewable energy resources, particularly oil and gas. His recent moves in favour of importing LNG from Qatar to make up for the energy deficit in Pakistan more than illustrates his worrying frame of mind on the subject of energy production, favouring a combustible source to produce electricity in the country, instead of a number of feasible renewable options.

And having handled the Ministry of Petroleum and Natural Resources for four years before turning to the Ministry of Energy recently, it can be safely assumed that Shahid Khaqan Abbasi is very firmly in the driving seat when it comes to taking decisions on the energy front.

Without requisite political willpower, no amount of technical expertise from the United States or China can help eradicate Pakistan’s renewable energy woes. n

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By: Aisha Arshad

uring his five-year stint at Glasgow University as underand post-graduate in telecommunication and Master’s in Business Administration, Naveed Azhar – presently the director of portal just4girls.pk, an online cosmetic store – often travelled back home loaded with cosmetics as gifts, mostly meeting requests from the females of the family. This is where an idea sprouted in his fertile entrepreneurial mind.

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After he was done with Glasgow University after five years, Azhar found employment at E-Bay. “The idea found nourishment there”, and after discussing it with a few friends of similar bent, the venture was initiated in 2011 by the four partners – Fariha Bhatty (chairperson), Saqib Ali Kazmi (CEO), Arbab Khan and Azhar himself. Just4girls.pk is an online cosmetic store that deals in 100% guaranteed original cosmetic products that are otherwise not easily available to a large customer base in Pakistan.

“Whenever I was coming back home for vacations, the female family members would request to bring over cosmetics which I had not even heard of but in Pakistan, they were aware of them,” says Azhar.

“People here are aware of the high-end brands. They want to go for them but since these products are not easily accessible, they have to settle with whatever is available. We thought, why not cater to that market by making them accessible here,” says the 35-years old entrepreneur.

The four partners also run a software house under the title Innovarge, offering technology-based consultancy to firms and this is where the initial investment for Just4Girls.pk came from.

“We never went around seeking investors... never had an angel helping us. We did it on our own, and we came in very heavy,” said Azhar, when inquired about where the seed money had come for such a cash-intensive venture.

The first of its kind ue to the founding foursome’s expertise in digital media and e-commerce and their intent to cater clientele countrywide, the cosmetic

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Naveed Azhar, Director, Just4girls

store had to be based online. With that decision made, the quartet began the research on the market it was going to tap into.

“It was untapped yet niche market and we saw the potential in it,” says Azhar. “We did research and in 2011, we launched our online store – the first of its kind in specialized category website on e-commerce,” he reflects back.

With a total of 25 persons in the team and the TCS onboard as the startup’s official delivery partner, Azhar looked after marketing; the US-based Bhatti acted as the procurement honcho, and is replenishing the stock to date, whereas Ali and Khan both took IT and operations under their wings, which is not to mention everyone volunteering for numerous other responsibilities to provide a spur to the venture.

However, pioneering anything means going into uncharted territory, with swimming against the tide more of a norm than exception. At the time the venture was launched, e-commerce was not really a developed medium for businesses and entrepreneurs were basically starting from scratch to not only build their startups but also creating the tools of the trade and awareness in the market on its own.

Three main aspects here was no 3G or 4G at that time and when we marketed ourselves as an e-commerce store people generally assumed that we were expensive than the conventional market, so the first challenge was to create awareness in masses,” says Azhar,

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talking about the initial challenges.

“Of course if we were selling a makeup palette for Rs8,000-Rs10,000 and a customer had to pay online, we had to give them the surety that it was original and good quality,” says Azhar, who believes safety, security and awareness were the three main aspects Just4Girls.pk had to look after.

However with the launch of 3G and 4G in the country in 2014 and the emergence of various local and international online startups, the momentum gathered pace for the cosmetic store in its infancy period.

It took around three years before Just4Girls.pk’s team could finally build a clientele of its own and find a stable standing

E-COMMERCE

for the venture in the exponentially growing national e-commerce space – now hosting as many as 60 million internet users.

From 2014 onwards, the venture has tapped a large portion of this originally untapped market and now the company receives over a 100 orders per day from areas as far apart as Northern Pakistan, interior Sindh, and the hinterlands suburbs of Punjab.

“Sometimes orders from Panu Aqil or Badin are as sizable as Rs10,000. This reflects awareness of all these products in such remote backwaters, the only issue for the natives being accessibility. I mean fair sex all over the world loves to indulge in makeup, we just want to help them by providing the best product, the one that they desire at their doorstep,” says Azhar.

Nothing but the original egardless of the considerable basket size Just4Girls.pk receives from the boondocks, the three major cosmopolitans – Karachi, Lahore and Islamabad – remain top of the ladder in terms of ordering, with patrons from all backgrounds gradually opting for the e-commerce site to order their desired products – some of them even belonging to the category who really are not that keen to splurge big sums on cosmetics.

“Our commitment with our patrons remains that, regardless of the price tag, we shall deliver nothing but the original. It doesn’t necessarily mean that we are expensive. Some items have prices as low as Rs299, but even so the product would be original and of good quality,” said Azhar of

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‘IT WAS UNTAPPED YET NICHE MARKET AND WE SAW THE POTENTIAL IN IT’ Naveed Azhar, Director, Just4girls the varied price range that has enabled the startup to tap a significant niche in the cosmetic segment.

To enhance customer service and provide ease of home shopping to their clientele, Just4Girls.pk offers the option to its clients to order from Amazon. If a certain product available on Amazon is preferred by a customer, she or he can order at the local venture and it would procure and deliver it.

The constant endeavour with regard to providing 100% original product with freereturn-policy in case the product does not meet the expectation level of the buyer has

Partners, Just4girls

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‘JUST4GIRLS.PK IS AN ONLINE COSMETIC STORE THAT DEALS IN 100% GUARANTEED ORIGINAL COSMETIC PRODUCTS THAT ARE OTHERWISE NOT EASILY AVAILABLE TO A LARGE CUSTOMER BASE IN PAKISTAN’ now brought its rewards, and won serious global recognition to the company.

It reflects in top-of-the-line brands such as Maybelline, Garnier and L’Oreal making the e-commerce portal their official partners in Pakistan and Makeup Academy London – a renowned international brand – has appointed it as its official distributors in the country.

All this combined also has enabled the company to achieve 5-7% annual growth – also reflecting on the overall growth of online cosmetic purchases. The online cosmetic sales are now worth Rs150 million and expected to grow twofold in the next two years – making it the fourth largest category among the e-commerce platforms.

Azhar does believe that the growth is still slower than the potential – with the conventional cosmetic industry a hundred times that at Rs150 billion. He hopes that the startup can notch an annual growth of 10% or more in the years to come.

Now, for a startup, that would be success worth savouring. n

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OPINION

Shahbaz Lalani

The Bitcoin Craze: Should you jump in? nless you’ve been living under a rock for the past three years, chances are you must have been acquainted with the recent surge in the price of cryptocurrencies – more specifically Bitcoin. If not, here’s four-year price chart depicting how the price of a unit went from $66 to $4316 – an unprecedented 65 multiple increase.

To put things into perspective, a mere investment of a Rs100,000 in Bitcoin in 2010 would have made you richer than Malik Riaz today. For comparison purposes, tech giant Google’s parent company, Alphabet, went from $54.21 to $925 – a 17-time increase, in more than three times the time period. Such astronomical returns should raise some eyebrows. We will get to that in a bit. But let’s first understand how cryptocurrency works and what drives its value.

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An angry response to global financial crisis he concept of Bitcoin was first proposed around 2008 by a group of anonymous people as an angry response to the global financial crisis. The idea was to put out a transparent decentralized currency that would simply connect the payer and the payee without the hassle of a bank or a government.

Each transaction on the blockchain (the network that would power the transactions) would be recorded in a public ledger (https://blockchain.info/) that could be seen by anyone, thus creating a tamper-proof system.

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Shahbaz Lalani is a former crypto-asset trader and fin-tech enthusiast currently pursuing a CFA charter

FINANCE

‘TO PUT THINGS INTO PERSPECTIVE, A MERE INVESTMENT OF A RS100,000 IN BITCOIN IN 2010 WOULD HAVE MADE YOU RICHER THAN MALIK RIAZ TODAY. FOR COMPARISON PURPOSES, TECH GIANT GOOGLE’S PARENT COMPANY, ALPHABET, WENT FROM $54.21 TO $925 – A 17-TIME INCREASE, IN MORE THAN THREE TIMES THE TIME PERIOD’ The network would be powered by the computing power of thousands of individuals on the network known as miners, with each miner receiving a reward in the form of a bitcoin. The design was such that the coins would be limited to a supply of 21million, but they would never really reach that number as the transactions would get harder to process as more mining took place.

That’s all well and good, but the real question is: what’s driving the value? The answer: Nobody knows for sure.

What’s driving the value of the currency?

ome say it’s the extensive adoption of the blockchain platform in the recent years. A quick google search reveals just about a list of 100 companies that currently accept BTC. And if adoption was the real cause, PayPal would be worth much more than any other payment platform. A more plausible theory is its use as an alternative investment. Countries with strict capital controls such as China highly regulate the outflow of yuan from the country. Investors looking to use their money in some other part of the world have to go through bureaucratic red tape to convert their money.

Instead of all that hassle, they could simply purchase a couple of bitcoins and send them to the other end of the world in less than seven seconds. Another key point driving Bitcoin’s value is its positioning as the point of entry for cryptocur-

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rency. Most exchanges don’t even have a dollar pairing for smaller crypto-coins but would still hold a bitcoin pairing.

So, nobody really knows what’s driving the value of the currency, yet bitcoin worth millions of dollars are transacted every day on currency exchanges. Sounds familiar to the pre-dotcom bubble era doesn’t it? The largest IPOs at the time, including Pets.com, went bust when people realized they are overvaluing the potential of e-commerce by a huge margin. Similar things happened during the housing bubble of 2008, when herd mentality and greed managed to blur common sense. History is definitely not on bitcoin’s side.

Fundamentals go against the principles hough the fundamentals of bitcoin investing tend to go against all the principles of value investing, the

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prospects of such huge gains did manage to garner a lot of attention. The Winklewoss twins of the Facebook fame own about 1% of all the bitcoin supply in the world. Similarly, many high net worth individuals are dedicating a proportion of their portfolio to the cryptocurrency. And that’s another problem I see with the currency: such huge holdings mean that big market players have the power to manipulate its market cap at will. And unlike stocks which have the SECP penalizing such maneuvers, all is fair in the big bad crypto-world.

But that’s not to say you should avoid bitcoin investing completely. The currency can be used for hedging purposes thanks to its negative correlation with fiat currency and hence, world events. Price hikes during the Greece economic crisis, Brexit and Donald Trump’s ascension to president serve as proof.

You could also benefit off the huge spreads and volatility through day trading

‘SO, NOBODY REALLY KNOWS WHAT’S DRIVING THE VALUE OF THE CURRENCY, YET BITCOIN WORTH MILLIONS OF DOLLARS ARE TRANSACTED EVERY DAY ON CURRENCY EXCHANGES. SOUNDS FAMILIAR TO THE PRE-DOTCOM BUBBLE ERA DOESN’T IT?’ or applying a simple holding strategy and wait for percentage gains before cashing out. Whether the bubble bursts before your exit is in most parts luck. Just remember not to go all in. I would personally advise dedicating less than 1% of a portfolio to account for the extremely high value at risk.n

FINANCE

Already getting hotter, as the Chinese influx strengthens with CPEC gaining traction, the property prices and rental rates across the country are likely to skyrocket By: Usman Hanif

REAL ESTATE

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o be able to do away with the hassle of shifting rented houses now and again, Nouman Younus is in search of a place to purchase. He is aware that the influx of Chinese in Pakistan is going to take it way beyond his reach in case he was not able to lay his hands on a property soon.

Having been made to leave four rented places in the last five years for one reason or another, he and his family now wanted to buy a place of their own. These last five years – from January 2012 to December 2016 – have also coincided with a surge of about 180 percent in house rents based on average per Marla rental price of one kanal houses, according to data gathered by Zameen.com – Pakistan’s largest property portal.

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As the Chinese influx grows eal estate experts say this rise is going to see an even sharper spike when more Chinese come over in connection with the China Pakistan Economic Corridor (CPEC) and need to be accommodated. According to a Reuters’ report, about 71,000 Chinese nationals that year visited this country in 2016 – a 41 percent increase on 2015. And 27,596 visa extensions were granted to them the same year, suggesting more are staying in the country for longer.

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“In few years you will see Chinese people roaming the streets without any fear,” says Ghazanfar Mehboob, General Secretary Pakistan Real Estate Industry Forum (PREIF).

Compared to the Pakistanis, Chinese have higher buying power simply because 100,000 Chinese Yuan ar is roughly equal to Rs1.5m. So, the natives are going to be pushed out of the market, just because the Chinese have fatter wallets.

Initially Chinese lived in upscale gated-societies like the Askari Housing Scheme, the Army Housing Scheme, the Creek Vista and others. But with ever-improving law and order situation, they are now getting out of those select, protected communities are increasingly found renting houses in areas like the DHA and Clifton, making it quite likely that they would soon be moving to other posh and less posh colonies, like Gulshan and Nazimabad, says Gazhanfar.

Ghazanfar says he saw a Chinese woman in Nooriabad. When he tried to help her, thinking she might have lost her way.

Her response was surprising for Ghazanfar.

She was not lost at all but was actually looking for patrons on the street to sell cellular phones to make some dough on the side, having tagged along with her husband who was here to work on a CPEC-related project.

“In the next few years we might see the Chinese sitting in the Saddar area selling mobile phones on a plastic sheet spread on

‘IN THE NEXT FEW YEARS, WE MIGHT SEE CHINESE SITTING IN THE SADDAR AREA SELLING MOBILE PHONES ON A COTTON SHEET SPREAD ON THE FLOOR’ Ghazanfar Mehboob, General Secretary Pakistan Real Estate Industry Forum (PREIF) the sidewalk,” said Ghazanfar.

Realtors say presently only government officials are coming but when they go back and speak around about opportunities in Pakistan, other Chinese will also make a beeline to Pakistan for investment, and their coming over in droves shall make the prices in the real estate sector hit the roof.

Housing shortage further exacerbated ccording to State Bank of Pakistan, the country already needs 12 million houses. Increasing demand in this scenario is a natural phenomenon, says Saad Liaquat a chartered accountant engaged by Abdullah Estates as CFO. Another factor exacerbating the situation with regard to the provision of new housing units in the rest of the country is that most big builders and real estate hot shots have shifted their focus to Gawadar, expecting huge windfalls as the recently-developed port and the city become the CPEC’s main outlet.

The yearly rent, Ghazanfar says, should increase by only 0.5 percent of the property price. But over here it was skyrocketing, indicating massive demand.

In residential areas, the last five years saw rent in Karachi, the highest in the country, went up by 189.84 percent, while in the same period Lahore also saw a rise that was less but only marginally – about 179.44 percent. Islamabad was third, with 95.92 percent in residential rents while Peshawar stood on 61.81 percent increase.

Although Quetta witnessed the upward push of about 30 to 40 percent in general, but value in areas where Afghans are in ma-

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jority decreased by as much as about 40 to 50 percent. The scenario is likewise in Peshawar mainly owing to Pakistani law enforcing agencies’ crackdown on Afghan refugees.

According to Nouman Younus, the tenant, the reason for dislodgement from all his previous four rented residences was the owners asking him to do so. When the tenant remains in one house for over a year, the rent tends to increase according to the contract, which is usually around 10 percent.

But the landlords occasionally feel that could get a higher jump in rent. Hence, they ask the tenant to vacate so that they could get a bigger increment on rent.

Switching and shifting houses is a cumbersome business. Apart from giving one the nomadic feeling, the effort and the cost is quite demanding. For instance, shifting to an average house worth Rs20,000 in terms of its monthly rental, could cost the tenant at least Rs60,000 – in broker’s commission, transportation costs and enhanced advance or security deposit.

Besides the costs involved, there are other issues too. First of all, finding a new house is in itself a challenge, then landlords prefer smaller families, they also check their community and some even some inspect their sect too. And while during transportation of household belongings the labourers don’t care and damage valuable things.

Lahore, business community’s favourite metropolis n the other hand, Lahore seemed to be popular city among thebusiness community as in commercial property rents, Lahore topped the list with a surge of 129.28 percent based on the average per marla rental prices of 5marla commercial properties, according to Zameen.com.

In the same category, Karachi was sec-

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ond highest with 108.77 percent increase in the last five-year span – compared to Lahore around 20 percent less while Islamabad witnessed 98.94 percent hike and Peshawar 40 to 60 percent, an agent told Zameen.com.

All the cities saw rates increased with the exception of Quetta, which experienced a 40 percent to 50 percent decline in commercial properties rent due to weak law and order situation, an agent told Zameen.com.

But realtors forecast that decreases in Peshawar and Quetta are temporary, as it is due to government’s decision to repatriate Afghan refugees, and prices may again see upward movement.

This steep inflation in raise in rents may not have singularly come with the influx of the Chinese, but CPEC definitely is a factor in reinforcing the trend.

In the rest of the country in near future, the real estate sector is likely to see the gap between supply and demand widening – the Chinese realtors are aware of it, so they are also looking to tap this sector too, says Mohammad Hassan Bakshi senior vice president Association of Builders and De-

‘REALTORS SAY PRESENTLY GOVERNMENT OFFICIALS ARE COMING OVER BUT WHEN THEY GO BACK AND TELL STORIES OF OPPORTUNITIES IN PAKISTAN, OTHER CHINESE WILL ALSO HEAD TOWARDS PAKISTAN FOR INVESTMENT IN THE REAL ESTATE SECTOR WHICH WILL MAKE THE SITUATION TRICKIER’

velopers of Pakistan (ABAD).

A delegation of Chinese companies recently approached ABAD, seeking to establish a real estate chamber of commerce to conduct joint ventures.

The Chinese looking at a share of the pie he Chinese companies have hired people who are also researching the Pakistani real estate market.

China has huge conglomerates, their one steel mill – China Steel Corporation – can provide steel equivalent to our whole industry or their one tiles-manufacturer can produce equal to our entire production, he says.

Local businessmen are aware of the enormous challenges that the Chinese entrepreneurs and conglomerates. That’s why the government has been asked that foreign companies should only be allowed on condition of a joint venture with local companies so that the local businessman could learn from them.

The Chinese and local investors are showing a keen interest in the $180 billion real estate market of Pakistan. Eventually, the combination would fill the gap between demand and supply in the market but it may take a decade or more. Meanwhile, middleclass people like Nouman Younus perhaps cannot do any better than laying their hands on a property of their own to beat the fastapproaching spike in the sector. n

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REAL ESTATE

Ali Qamar, Aqeel Merchant

Ali Dada, Tahir Sharif

3RD PAKISTAN INTERNAL AUDIT SUMMIT 2017 Pakistan Internal Audit Summit 2017 took place at Faletti's Hotel, on Wednesday, September 20th. The event organised by TerraBiz featured presentations and panel discussions by industry experts, industry leaders, and Securities and Exchange Commission of Pakistan (SECP) officials.

Muhammad Talha

Ali Altaf, Abdul Hai, Zulfiqar Causer

Arooj Shehzad Yousuf, Asad Feroze

Amina Aziz

Panelists and speakers

Hamza Hashmi, Tahir Sharif, Sohail Zindani

Syed Imran Zia

Siqandar, Qazi Faheem

Syma

Waheed Ansari, Arif Ansari

Tahir Khurshid

OPINION

Robert Kim

rather than of conventional shares of equity. The company offers its own digital currency, created specifically for the ICO (an “altcoin,” short for “alternative currency,” a digital currency other than Bitcoin), directly to the public.

Advertising and releases of information occur on the company’s website and on online forums such as Bitcointalk and Reddit, with some offerings reported by cryptocurrency news websites. Investors purchase the altcoins with Bitcoins or other digital currency in most ICOs. Secondary markets obert Kim is a Legal Editor with Bloomberg BNA. He for the altcoins exist on numerous digital currency previously worked for the Securities and Exchange Comexchanges, where altcoins can be bought and sold mission and the Department of the Treasury's Financial for Bitcoin, other altcoins, or fiat currency.

Crimes Enforcement Network. In 2017 there has been a These characteristics have made ICOs esperise in publicity on so-called “ICOs” (Initial Coin Offercially useful to small blockchain startups. For startings), a method for raising capital used by blockchain ups unable to find an angel investor or venture startups. These fundraising campaigns, whose name indicates their capital firm interested in their business plans, and passing resemblance to IPOs, are sales of digital currency made directly far from being able to consider the effort and costs to the public, using blockchain technology to bypass conventional capiof an IPO, with disclosure requirements and other tal markets and regulatory systems and requirements. obligations under securities laws and regulations, They are comparable to the use of blockchain technology for Bitan ICO may be the best alternative. coin and other digital currencies, which bypass conventional financial Any small startup familiar with digital curreninstitutions and fiat currencies. Like digital currencies in 2013-14, ICOs cies can create a digital currency, and selling them are currently growing in usage and public attention. They also carry in ICOs has become a do-it-yourself method of raisconsiderable risk of frothiness and fraud and the likelihood of increasing capital. An ICO can serve a purpose similar to ing regulator attention. that of equity crowdfunding, as authorized in the U.S. by Title III of the JOBS Act and its implementing regulations issued by the Securities and Exchange Commission (SEC) in 2015.

An ICO is an offering of digital currency issued by a company The characteristics of ICOs also create downsides for offerors, however, since they result in regulatory uncertainty and lack of disclosure that have Robert Kim limited the appeal of ICOs outside of digital currency fanatics. An unreis a legal editor with Bloomberg BNA. solved and looming issue has been whether the SEC will consider altcoins He previously served as a senior issued in ICOs to be securities and ICOs to be offerings of securities, which counsel on the Securities and would subject ICOs to the requirements of the Securities Act of 1933 and Exchange Commission staff, manager secondary sales of their altcoins to those of the Securities Exchange Act of of the Bank Secrecy Act regulatory 1934. Companies conducting ICOs have sought to avoid U.S. securities regenforcement program for the ulation by registering in foreign jurisdictions, among the most popular being Financial Crimes Enforcement Singapore, one of the first jurisdictions to adopt a regulatory sandbox and Network, and Deputy Treasury other regulatory relief initiatives for fintech companies, and Switzerland, Attaché at U.S. Embassy Baghdad whose “Crypto Valley” is a major center of blockchain startups, but foreign

Initial Coin Offerings: A Growing Method For Blockchain Startup Financing

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Characteristics of ICOs

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registration does not exempt offerors of securities to U.S. persons. Some have structured ICOs to fit within U.S. securities law exemptions, such as the Regulation D exemption for accredited investors and the Regulation S exemption for offshore investors. Regardless of legal status, disclosure in ICOs generally has been limited and lacking verification by disinterested parties.

As a result, liquidity in the market for ICOs has been limited, and ICOs have mostly been small. Before 2017, most ICOs were measured in thousands of dollars, and an ICO raising single digit millions of dollars was considered large.

The Rise, Fall, and Rise of ICOs The first ICO occurred in August 2013, during the period when Bitcoin first rose in price to over $200 and emerged as a subject of mainstream media attention, and the use of ICOs has risen and fallen following the value of Bitcoin and the trendiness of investing in blockchain ventures.

The first ICO, which issued the altcoin Mastercoin, raised approximately $600,000 (5,122.08613664 Bitcoins) for a project to create a Bitcoin exchange and platform for other transactions. ICOs raised an estimated $25 million in 2014, then fell to $10 million in 2015 after the collapse of the price of Bitcoin in 2014.

In 2016, ICOs rose to an estimated $225 million, after a resurgence in the price of Bitcoin and a surge in interest in blockchain and Fintech. (These figures are from the research firm Smith + Crown.)

A landmark ICO was that of Ethereum in 2014. The second largest ICO to date, it provided startup funding for the development of the Ethereum platform that has become a significant factor in the market for development of business blockchain applications.

Ethereum originated from a white paper published in late 2013 by 19 year old Russian-born programmer Vitalik Buterin, who had dropped out of a university in Canada after receiving a Thiel Fellowship. The white paper proposed the use of blockchain for smart contracts,

decentralized autonomous organizations (DAOs), and other applications beyond the initial usage for Bitcoin. Ethereum incorporated in early 2014 as Ethereum Switzerland GmbH and conducted an ICO issuing the altcoin Ether (ETH) from July 20-September 2, 2014, raising approximately $18.4 million (31,529.49 Bitcoins), the largest amount raised by an ICO up to then.

Early funding from the ICO enabled the development of the Ethereum platform, which has become one of the leading platforms for development of blockchain applications by both startups and large established businesses. The Enterprise Ethereum Alliance, a nonprofit organization formed in March 2017 to facilitate the development of open source standards by Ethereum users, included Microsoft, Intel, JPMorgan Chase, Santander, and other leading technology and financial industry firms at its launch and has recently added 86 more members including Deloitte, the Illinois Department of Financial and Professional Regulation, ING, Mitsubishi UFJ Financial Group, National Bank of Canada, Samsung SDS, and Toyota Research Institute.

The largest ICO to date also involved Ethereum, but soon afterward it became the largest failure of an ICO. The fate of this ICO and the response to it demonstrate two significant problems inherent to ICOs and digital currency generally: the special vulnerability of blockchain-based financial transactions to cyberattack, and the arbitrary nature of the valuation of digital currency.

In April-May 2016, an Ethereumbased project called The DAO conducted an ICO to capitalize what was intended to be an investment fund without a manager, in which all investors would participate directly in investment decisions using The DAO’s Ethereum blockchain application to communicate and coordinate – a DAO, as envisioned by Ethereum’s founder. The ICO raised approximately $150 million, the most by far of any ICO to date and approximately two-thirds of the estimated volume of ICOs in 2016. The funds raised represented approximately 15 percent of the then-market value of Ether in circulation, an indication of the significance of the project to Ethereum investors and

adopters. Problems soon emerged by mid-June 2016 after a hacker exploited a software vulnerability in the smart contract of The DAO and succeeded in stealing over $40 million (3.6 million Ether) from The DAO. The theft brought the project to a halt and caused the value of Ether to plummet from over $19 to below $12 in four days.

Since Ethereum was a significant venture whose digital currency was at the time second largest in total market value behind only Bitcoin, it undertook corrective action to enable investors in The DAO to recover their funds. In July 2016, Ethereum executed what was called a “hard fork,” which replaced the original Ethereum blockchain with a new blockchain which reversed the theft. The original blockchain remained in existence, however, and many continue to consider it to have value and hold and trade it under the name Ethereum Classic. The “hard fork” split the Ethereum community and a minority of the community continue to support Ethereum Classic and give it value. The original Ethereum continuing to have market value even after its creators discontinued it is an extreme example of the arbitrary nature of digital currencies and their valuation, already demonstrated by the more widely known wild volatility of Bitcoin in 2013-17 .

Despite the issues demonstrated by The DAO, ICOs surged in 2016 and have advanced further in 2017. As of midMay, ICOs raised more than $150 million in 2017, according to Smith + Crown.

Moreover, more established and sophisticated issuers and investors have become involved in them in 2017.

Blockchain Capital, a small venture capital firm founded in 2013 that specializes in blockchain projects, used an ICO to capitalize a new investment fund in April 2017. Blockchain Capital conducted a $10 million sale of an Ethereum-based digital currency named BCAP on April 10, to fund the Blockchain Capital III Digital Liquid Venture Fund, named for the ability of investors to liquidate their investments by selling BCAP through digital currency exchanges. Showing a higher level of awareness of U.S. securities laws and regulations than most predecessors,

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Blockchain Capital designed its offering to ensure that it would be exempt from registration with the SEC, making it to U.S. investors under Regulation D and to offshore investors under Regulation S. Tezos, started in 2014 to create a blockchain competing with Ethereum by Arthur Breitman and Kathleeen Breitman, formerly of Goldman Sachs, Morgan Stanley and Bridgewater Associates, is planning an ICO after already obtaining venture capital funding several months earlier. Polychain Capital, an investment fund focused on blockchain ventures started in 2016 that received $10 million in funding from Andreessen Horowitz and Union Square Ventures in December 2016, announced an investment in Tezos in February 2017. Tezos then planned an ICO of its digital currency Tez (XTZ) which was scheduled to launch on May 22. Venture capitalist Tim Draper of Draper Fisher Jurvetson and Draper Athena, an early investor in Skype, Baidu and other successful tech startups announced in early May that he would participate in the ICO as a purchaser of Tez, an announcement that generated considerable media attention.

Tezos announced on May 22 that it was delaying its ICO until June because of issues created by overwhelming demand at the regulatory authority of the Switzerland-registered Tezos Foundation, so the results of this ICO remain to be determined.

Risks of ICOs The rise in ICO investments and publicity about them has begun to evoke comparisons to the 1999-2000 dotcom bubble, but that concern may greatly understate their risks. The overvalued IPOs of that period had at least some grounding in existing financial industry business practices and securities laws and regulations, while ICOs fundamentally depart from them. As a result, ICOs have recapitulated the risks that the U.S. financial industry has spent over 80 years addressing since the Securities Act of 1933, with additional risks created by their unique characteristics. They include:

Frothiness The rapid rise in ICOs in 2016-17 shows

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some of the typical characteristics of a bubble, with a rising pool of assets chasing investments whose actual value often is difficult to determine and may often prove to be nonexistent. Two trends have converged during this period to drive up the number of ICOs and the assets invested in them: n Rising interest in blockchain technology development in the financial industry and other economic sectors, accompanied by regulatory sandboxes and other regulatory relief initiatives in the United Kingdom, Singapore, and other jurisdictions, has increased the number of blockchain startup companies seeking funding for the early stages of their development. n Bitcoin and other digital currencies rose in market value, increasing the value of assets likely to be invested in blockchain startup ICOs. The market price of Bitcoin rose from below $450 to over $1,000 from January 1, 2016 to March 31, 2017. Ether, despite the crisis and “hard fork” resulting from The DAO, rose in market price from 95 cents to over $45 per Ether during the same period. Each has soared further since March 31, with Bitcoin exceeding $2,400 and Ether rising above $220 by June 1.

These rising values, possibly bubbles themselves, have greatly inflated the dollar-denominated value held in digital currencies that is likely to be re-invested in

blockchain startup company ICOs. As a result of these trends, ICOs have placed high valuations on some startup companies that appear arbitrary and disconnected from any actual economic value of the startup – classic behavior in a bubble. For example, these ICOs in the second quarter of 2017 each raised over $10 million in a single day for a company with a questionable value proposition, with the amounts raised escalating: n Gnosis, on April 17, raised $12,250,000 for development of an Ethereum-based platform for prediction markets, selling Gnosis tokens (GNO) whose purpose is to generate Wisdom tokens (WIZ) by locking GNO tokens into a smart contract, with the Gnosis platform to accept payments in WIZ, Ether and Bitcoin. n Aragon, on May 17, raised $24,750,000 for development of an Ethereum-based system for managing decentralized organizations in a decentralized jurisdiction, that will “disintermediate the creation and maintenance of companies and other organizational structures” and eliminate “intermediaries and third parties such as governments” that “decrease the output of those organizations by imposing restrictions and creating complex regulatory frameworks.” Aragon Network Token (ANT) holders will be able to par-

ticipate in decision-making by the Aragon DAO. n Basic Attention Token, on May 31, raised $35 million in under 30 seconds for an Ethereum-based digital advertising platform, using Basic Attention Tokens (BATs) as tokens for obtaining services on the platform.

Possibly further increasing valuation risks in some ICOs is that the value of a digital currency does not always correlate to the value of a company and its blockchain. Altcoins issued in ICOs are not shares of ownership in the company, like conventional equity, and they vary considerably in how they relate to the company and its blockchain, as shows by the examples of Gnosis and Aragon. The impacts of variations in equity ownership structures are familiar and understood, but how variations in digital currencies relate to their worth is a risk factor that is new and not well understood.

The apparent frothiness has occurred while conventional investments in blockchain startups have risen. Venture capital investments and acquisitions by technology giants such as IBM and Microsoft and large international banks such as JPMorgan Chase and Santander are making ICOs less necessary for many startups with commercially viable projects. This trend may make ICOs attractive more to startups on the fringes of digital currency fanaticism and economic viability, with a high likelihood for value destruction.

Fraud ICOs have unsurprisingly proven to be subject to the same flaws of human behavior that gave rise to the characteristics of existing financial markets and their regulations. Lack of disclosure and reliable information is a significant issue, with offerings announced and advertised on unsupervised online forums in which potential buyers can have little confidence in the reliability of information. Fraud has inevitably become part of the ICO market, with accusations of inaccurate information and false promises following some ICOs. As a result, there has been at least one instance of a digital currency exchange emulating a stock or commodity exchange by “delisting” an issuer accused of fraud.

Cybersecurity Cybersecurity, of increasing concern to all businesses, is an especially significant problem for ICOs. The ICO of The DAO is the most noteworthy example, involving the loss of approximately $40 million worth of digital currency and an existential crisis for Ethereum as a result of security weaknesses in the smart contact of The DAO, not in the Ethereum platform itself. The lesson of this experience may be that ICOs avoided exploitation of their vulnerabilities while they were small, but becoming large enough to be worth the attention of cyber criminals makes their inherent reliance on technology into a potentially significant liability that requires a high level of security precautions and auditing that will drive up the cost of larger ICOs.

Regulatory Risk Regulatory risk is a further concern for ICOs. ICOs have not been the subject of any actions by the SEC or other regulators, but scrutiny by regulators in the United States or abroad is likely, especially if ICOs continue to grow in scale or cases of alleged fraud emerge. ICO sales of digital currency may fall under the Securities Act of 1933, and the ability to resell them on digital currency exchanges could invoke the Securities Exchange Act of 1934. The Investment Advisers Act and Investment Company Act of 1940 may be relevant in the event of investment company involvement in ICOs. The SEC and FINRA, among others, have issuedwarnings about the risks of investments in Bitcoin and other digital currencies; , and they and other regulatory and law enforcement agencies may decide to focus on ICOs if they become a significant part of the market for investments and a triggering event occurs.

Companies issuing digital currency in ICOs, digital currency exchanges, and investment companies attempting to invest in ICOs all could become subject to regulatory and enforcement action.

To address the regulatory uncertainty surrounding digital currency and blockchain technology, in March 2017 a broker-dealer/fintech company submitted

a request to the SEC that it clarify its position on the regulation of issuers of digital currency that may be deemed to be securities. The SEC has not yet responded to this request.

Blockchain startup companies generally are aware of the possibility of regulatory scrutiny of ICOs. As a result, digital currency issuers often avoid calling their actions ICOs and instead call them “crowdfunding,” “token sales,” “presales” or other names that do not suggest activity similar to that of regulated financial institutions. Mere terminology would not protect them from scrutiny in the event of interest from the SEC or other regulators, however, so taking into account U.S. securities laws continues to be a necessity whenever U.S. persons are either issuers or buyers in an ICO. Startup companies using ICOs have only begun to figure out their regulatory risks and how to address them. In April 2017, Blockchain Capital used the approach of designing its ICO to make it eligible for the Regulation D and Regulation S exemptions to the Securities Act of 1933. The applicability of these exemptions and other provisions of the securities laws and regulations to differently structured offerings remains to be determined.

How ICO issuers address the possibility of regulatory scrutiny, and how they and buyers react to the market correction that is likely to be inevitable, will in large part determine whether ICOs become a significant factor in raising capital for technology startups or prove to be a fringe and possibly short-lived development. As long as the risk that digital currency may be considered to be securities exists, issuers of digital currency in ICOs will have to take precautions in order not to risk potential liability under the securities laws of the U.S. and other countries. Moreover, ICOs have yet to demonstrate that they can raise large amounts of capital without the currently rising and apparently artificially high valuations of Bitcoin, Ethereum and other digital currencies used in them.

The resolution of these issues will determine whether ICOs end up being a shortterm fad or a long-term development. n This article originally appeared on bna.com

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