The ICO craze in light of the JOBS Act Crowdfunding Regulations
(originally published on LinkedIn)
A few disclaimers as some confuse my ramblings with expert advice. I have non but seek a lot:
- This is not investor advice
- I probably stole some of these thoughts from Maureen Murat, Esq, Amy Wan, Lewis Cohen and the always loveable Irwin Stein. Mostly cause of comments on LinkedIn post but also because in the securities law arena its been pretty static since 1833
- I am not a lawyer. I had the sense to drop out after the first semester. If you need a lawyer, see the good folks above
- I’m writing this on my phone, on the ferry from Helsinki to Estonia. Going to pickup my eResident card. So forgive the lack of citations
The Jobs Act — literally stands for Jumpstart Our Business Startups. While it has failed to do so since it went into effect May 16th, 2016 what the 680+ pages detail is crowdfunding. Crowdfunding in its various forms:
The JOBS Act (aka Reg CF) also provides context to Reg A, D and some other variations of 1833 Securities flavored law. And yes, I know the Securities and Exchange Act was in 1933 but it might as well have been 1833, as both predate this thing called the internets. The world wide webs (aka the internets) have fundamentally altered the reality of how business is conducted. Both in the sense of information available to the public, ability to conduct due diligence and methods thru which consumers consume information. Snapchat anyone? This is important because only as of April 2017 could an entrepreneur legally use the internets to advertise IntraState crowdfundings offerings, using a portal. Which in this instance means their own website. To help provide clarity, it meant that for regulated intra state crowdfunding you couldn’t use the internet, until April of 2017. Regulatory brilliance hard at work.
“So What”, right?
“The idea behind ICOs is that instead of seeking an initial public offering, businesses can seek low amount seed funding without the due diligence, regulatory requirements, time, or fiduciary permissions a traditional IPO would require.” — some LinkedIn post
I do think this is true in the case of securities. I’d also like to add,
Why don’t startups and entrepreneurs just use crowdfunding?
Initial coin offerings are #crowdfunding 2.0. Too, for many types of blockchain based initiatives, issuing “tokens”, reward based crowdfunding is the ideal method for getting users. Tokens should be all about lower customer acquisition cost. (Tokens = utility tokens. Which are consumptive by nature) If you have what you think is a utility token, run a Rewards Based Crowdfunding campaign and lower your Customer Acquisition Cost (CAC). Too, it enables you to clearly designate your good/product or service as a DONATION or at worst, a presell on an item or discount. If that is confusing, go see how Kickstarter or GoFund me works.
However, if your business model isn’t depended on consumptive use of your token, to add value to the enterprise, then you’re issuing a coin. Coins are securities. As from a 1833 regulatory perspective all the facts and circumstances must be taken together to determine if a thing is a token or coin. Once done, more than likely the SEC would find your erroneously designated token is in fact a coin. Instead of being cute and trying to avoid regulations and disclosures, consider going the Reg CF Equity Crowdfunding route. Raise $1M and use that as a proof point to do a Reg A+ for $20M.
There isn’t a single factor that designates a blockchain initiative as generating tokens or coins. In this case the lawyers win, cause either way you’ll need one to bless whatever you think you’re doing. And if it goes thru and well! Hoozah! The lawyers have a feather in their cap and can charge the next customer more. If it fails and you end up in court with the regulator, Hoozah! Your lawyer gets to bill more hours. See, the lawyers are the real winners of the ICO craze.
But! Using existing regs you can greatly reduce your startup expenses. As if you have a great good, product or service money will come find you.
Money Ain’t Free
Last point to keep in mind — no one is going to give you money for free. On the low end for Reg CF, with your Form C and financial disclosures you’re looking at ~$16k. On the high end $100k+. Legal on a Reg A raise are probably going to run you $200k. If you think you’re going to raise millions of dollars for free, I’ve a few bridges for sale. Great ROI.
In all of this keep in mind the single thing that increases the odds of a fundraising campaign being successful is ADVERTISING. You fundamentally need people to a) be aware your good, product, or service exist and b) be motivated to give you their hard earned money. Marketing and advertising isn’t free. As a matter of fact, it’s down right expensive. Whether it’s Reg CF or a “traditional” ICO — they both rely on money to drive awareness of your offer. So before you run off to “revolutionize the world, with game changing” widgets or platforms, go get yourself either an advertising budget or a community of ~30,000 who believes in you enough to invest.
There are some devils in the details of course. But if you need help with whatever you’re doing, drop some time on my calendar and we’ll chat. www.axesandeggs.com/#schedule-a-chat
My name is Samson. I’m a human and an anthropologist. If you like it, share it! Feel free to hit me up on Twitter or Instagram @HustleFundBaby or connect with me on LinkedIn. Finally, I would say thoughts are my own but I probably stole them from a woman.