I recently attended ICO Summit 2.0 and there were some great speakers. Overall, I would recommend this 1-day event to anyone within ~2hrs of drive or fly time. Here are my notes!
10:15am – ICO Airdrop Regulations
You cannot just airdrop security tokens to people, even for free, unless you are specified under an exemption.
All of these companies under StartEngine are regulated under Regs.
“Reg A Plus” and “Reg CF”
Look at the JOBS Act.
Disclosure obligations need a major tweak. If you’re airdropping a utility token and you need to do all of these disclosures, it impedes the ability to give away these airdrops.
Are airdrops the new ICO? It is a lot of the trend that these people are seeing. ICOs are raising all of their funds privately and hitting their hard caps before even having a public ICO, so they don’t even bother with a public ICO since they have accredited investors.
Given the trend of pre-sales, there is a very nice trend going on with airdrops working.
Are airdrops spam?
Yes, they already are. Its like spam in your email. There is nothing (right now) that stops someone for airdropping tokens into your wallet.
If you’ve been given something and you are able to resell it, that is a taxable event. ICO airdrops are taxable events in the eyes of the IRS.
Why do airdrops happen?
- Entice people to come to our Telegram by telling them we are doing an airdrop (to show investors you have people, yet those people are only there for something free)
- To increase adoption for the token
Equity vs Tokens, advisors these days will not work for just tokens.
10:45am – Sprocket (big player)
Hybrid model exchange platform that combines the idea of OTC with retail exchange practices, and combines them into a single wallet.
11:00am One Sphera Pitch (value chain marketing)
For advertisers and social action.
As people share, they create reputations on the platform. People who actually share the same interests, will be able to find all the other people who share it with them.
11:15am – Structuring an ICO 2.0 (a Legal Perspective)
5 panelists, legal, cpa, consulting, etc. (maybe look them up)
Are the terms ICO and SAFT changing?
Yes, they are changing. Securities token is coming, and in a good way. Some of the ICO companies got sloppy, which created uncertainty. Now in 2018 we are seeing the move toward the securities token. More companies are moving toward the securities token.
Talk to lawyers before you talk to potential investors. Lawyers would have to take “what you’ve said already” and stuff it into the Reg A.
- Talk to lawyer first
- Decide what you’re going to say
- Talk to public, raise money
Issuing tokens in an ecosystem IS a securities issuance. Most likely, there will be unaccredited people in their ecosystem.
Your job in an ICO is to develop an idea and work on the project, its software, etc. It is not to be a lawyer etc.
Anyone who launches and ICO that gets publicity or hype should prepare for a letter from the SEC. This means to ensure that what you have prepared is solid; you have your agreements setup, they ask for contracts with any advisors, strategic partners, who has major amounts of tokens, etc.
If you get a request form the SEC. Do not call them, talk to a lawyer ASAP.
Accounting – Short term and long terms pitfalls of an ICO
Short: Compliance. Clients haven’t done these sort of issues in the past, so they don’t know how to proceed.
Long: There is nothing that tracks this new tech as of right now, no “Quickbooks for crypto” per se. Nobody really knows how accounting rules are going to play with crypto.
How to set your tolerance for risk from the outset: No reason to be scared if you follow the rules. (nobody knows the rules, just play nice).
Most of these emerging companies don’t have a seasoned legal counsel or accounting procedure (CFO etc). Example: if you give someone a share, do you have to 10-99 them? What happens with airdrops. If you buy back a token from them, do you have to issue a share buy back form?
SOCK 1 Report: means a numbers guy goes through the business system and make sure that there are controls in place and are being audited. The company is doing everything correctly every time.
New SAFT Technique
SAFT is exercisable at the option of the holder. By making it this way, there is an argument that they can see where the law shakes up as it puts option in investor’s hands. If it is automatically convertible, then it’s most likely a security.
If you wait to issue the tokens until after the launch, then it has a better chance of being a utility token inside of the ecosystem.
1:15pm – Mark Suster – Upfront Ventures – @msuster
Regular databases are superior or just about every case that could be considered. However, when blockchain works for a use application, it works very well.
We are in 1998/1999 in comparison to the Internet times. Everybody wants tokens and they invest blindly and don’t know why. Just like AOL was “not disruptable” eventually some company will begin overcoming the core concepts and will take over.
Internet 3.0 – The idea where everything can be open between each other rather than the centralized concept of Apple & Google charging a “30% tax” on each and every app that hits our phones. Or if Facebook decides whether or not it likes the news media, or they decide to ban something just because it doesn’t fit their agenda.
ICOs captured 6% of the market in just one year. Something people are trying to figure out is what we are actually buying when it comes to tokens.
ICO from inception: democratic fundraising, moral hazard risk, autocratic company governance (less oversight, less concentrated financial ownership)
VC from inception: more centralized control of financing, less democracy, more oversight.
If an ICO has a reason to incentivize people to invest in it, otherwise its just a method to raise money.
Slides available at UpFront website ??
1:40pm – Are ICOs disrupting traditional VC
Panel: Marissa Kim, Ark VC; David Hernand, Paul Hastings; Greg Gilman, Science Blockchain; Sunny Dhillon, Signia Ventures; Jeremy Gardner, Ausum Ventures; Joey Krug, Pantera Capital.
Are ICOs a fad, or here to stay?
Possibly a fad, questionable practices. At same time, a lot of very innovative tech.
Companies were pivoting to ICOs because they failed at raising VC.
Jeremy: So many advisory services, when the company really just shouldn’t be doing an ICO. He has found it his job to listen to the idea and then tell people that they don’t need an ICO.
Telling them not to issue a utility token that isn’t a utility. Why not just issue a token that is a derivative of the value of what the company is going to generate? Tokenized equities are a good thing!
Ultimately investors will demand tokenized securities. Utility token is “a suckers game” and investors will get smarter about this. Investors want rights, not just tokens.
ICOs don’t come with guidance or boards. VC doesn’t give millions up front, nor do they give up control on how to spend the money.
In Augur, if you don’t participate, you may actually end up losing a token. Subway tokens, chucky cheese tokens, etc already exists. The question is, will it be okay to issue these before the business exists?
Note: should have a utility token that is tethered to a fiat, and also a security token which returns a % of profits back to the holder.
Is this a world class team?
Are they solving a large problem?
If they solve it…
Why does this need to be decentralized?
Team is most important aspect.
Must have a reason for the token to exits or eventually it will blow up.
What is the level of engagement in your community who can’t wait to start trading and engaging with your product / service?
Problem with security tokens right now is that there is very little trading going on, as there are only 4 exchanges? In the world that allows trading of them right now.
2:00pm – Secrets to Managing an ICO 2.0
Panel: Brian MacMahon, Expert Dojo; Scott Purcell, CEO Prime Trust (Las Vegas!); Jor Law, VerifyInvestor.com; Dainia Jabaji, Crowell & Moring; Kurt Kumar, ICO * Blockchain Architect
Scott Purcell strongly believes that Tether is a “giant fraud.”
Dainia formerly worked at a large investment firm doing AML sanctions work. Knows compliance and regulations well.
Kurt helps ICO’s shrink down their timelines and budgets. Someone need to do your audit, governance, website, etc. He is the guy you go to for the ICO checklist. He helps you shrink your monthly burn. Typical ICO today is going to cost you $500k and up, that is where the typical ballpark is at.
Legal Team, Tax Team, Auditor, KYC, AML, and more.
Scott Purcel: A security is “a contract where you can reap rewards from the work of others.” People are buying it because they hope the value increases, not to even use it; that is a security.
If you’re doing money transmitting, then you’re going to be subject to requirements of the Bank Secrecy Act. You have to have an AML compliance program related to your risk. FinCen is imposing these sort of things on ICOs. Ask yourself early on, am I going to be considered a “money transmitter.” Provide investors with security, if a suit comes even your investors are going to be liable. The fact of the matter is that some day in the future, you’re going to need a bank account. You’re going to need to convert that to cash, and you’ll need a bank. A lot of banks are being careful and will even close down accounts due to cryptocurrencies. The key is to have a strong AML compliance program.
Kurt Top Tips:
- Do not just blindly rely on someone. i.e. Don’t just ask a single professional a questions such as “where should we domicile” or “where should we have our bank accounts” Learn the pros and cons of each jurisdiction on your own and do your own analysis.
- Do not hesitate too much, or it will trickle down and effect your investors.
- The more meetings, conferences, etc you have the more money you will burn. Get to your terms of service as quickly as possible.
Focus on the product. If your product is good, then people are going to come and talk to you, don’t worry. Give it a few months and you can tell if people are gravitating towards it or not.
Audience Question: Why would anybody include the USA in their ICO right now? Additional costs, ongoing reporting, regulation, etc.
Answer: Same laws that are being applied now are the same laws that are being applied always. The cost of compliance really isn’t as much as people think, its fine. If ICOs turned around and just started complying with the laws, that the USA isn’t really that unfriendly; its really a great place to do business in or we wouldn’t be where we are today.
2:30pm – tZERO Security Token Offer (Pitch)
tZERO is a holding company for a divers basket of 8 companies under the tZERO umbrella: t0 technologies, blue ocean, speed route, verifyinvestor.com, dataiFX, pro securities, tZERO advisors, and REV4.
VerifyInvestor helps the process of vetting for accredited investors for the raising of funds for an ICO.
OverStock acquired tZERO a few years ago.
He recommends against doing an “ICO” and in fact has a “swear jar” where if someone says that phrase, they put a dollar in the jar. They are staying away from utility tokens right now, says they are kind of scary.
Note: Regarding money raise: Cap tables have limits to them with different requirements. Example, 99 investors or less is a Reg … while under 2000 investors is a Reg …
3:00pm – How to Market an ICO
Panel: Kai Sedgwick Bitcoin News Journalist; Justin Wu, Growth Hacker; Darren Marble, Crowdfundx; Andrew Torba, Founder GAB; Jake Vale, tZERO Marketing Manager.
*Important Note by Darren: The proper term is “security token offering” or STO; DO NOT USE THE WORD ICO!! ICO is associated as a dirty scammy word.
Jake: If you can explain that you’re not an ICO to Facebook, you can run ads. What they don’t want is those promising high returns, and ICO is associated with fraud. The SEC will not allow your company to call your issuance a “coin” as its associated with a currency. Calling it an STO and calling it a regulated offering is the way to go.
Darren: There is a huge amount of people that want to invest, but there is no way to reach them. CrowdFundX just launched a new site called Issuance?? Where investors will be paid to join and share the type of offers they’re interested in.
Justin: With the loss of Facebook, Google, MailChimp etc crypto marketing has flipped back to content marketing and value driven marketing. Vinny said that he doesn’t want to participate in a project where most of the money is going to marketing.
Darren: If you want to attract quality advisors, pay them cash. No need to pay them $100k or even $10k. Give them a few thousand bucks and thank them for their time. Advisors tend to NOT be looking for compensation in tokens.
If you have advisors who invest in your project, see if they’ll invest. If they really truly believe in you, they’re going to put something in with you. Get them to have skin in the game and they’ll be 10x more motivated to help you. Sell them ¼% to ½% (tokens? equity?) and watch them work.
*Personal note on above: Give the advisors a special price or deal. The whole point is to have them with skin in the game. They should be entitled to a better rate than anyone. An advisor can accelerate the process and push everything forward in the right direction.
You want a mix of investors. CrowdFundX is connected to over 300 funds with over $50m to $500m of funds under management. A perfect Reg A Plus is you have a big $25m institutional lead, then a crowd behind them. The retail brokers (syndicates) are the “flippers.” Reg A+ allows practically anybody to invest.
Multi channel marketing: PR, ads, influencers, etc. A lot of marketers are failing at the post-raise marketing and keeping the investors engaged, involved, and interested.
$300k-$500k minimum to do a Reg A between legal, marketing, and …
For investors, its more important to get people signed up with their intent by inputting their checking account or payment info in preparation for the ICO, than to do something simple like a whitelist and reservation of allocation.
“If you think you’re going to raise $50m online only then you’re crazy” You need investment banks, hedge funds, etc to help push your raise.
$8m online, $10m syndicates, $6m elsewhere was raised for a recent project. Quite balanced.