Ambition Today Episode Transcript

Joe Daniels - Episode 33


 

What's up, World welcome to this episode of ambition today? We're just going to be a little bit different than normal so as someone who grew up in Buffalo outside of New York City and Silicon Valley. I used to use books blogs Twitter and podcasts to learn really anything I could about venture capital and started, and I'm grateful to those who took the time back.

Then to share what they were learning so when I started this podcast my goal was to share information that not everyone might have dated. Access to living in New York City and running fine recent New York gave me access to some of the best Founders and mentors in New York City and so up to this point.

I have shared their stories on this podcast. But there's more going on and more. I want to share and if you're listening from somewhere else in the world and not in New York City. You might not know the founders to New York has a meetup group actually run this group and it has about 7,000 New York City Founders right now and so this month.

We have incredibly informative event with Joe Daniels of McCarter & English. And we discussed the intersection of what's happening in the crypto currency world and the legal World Joe Daniels is the co-chair of McCarter & English as venture capital and emerging growth practice, and he's done a few successful ico's already and for me this event felt like information that needed to be shared it felt like something exclusive that has getting access to New York City, and I wanted to include on the podcast so hopefully could help those of you out there who need that information the slides the Joe is going over to.

During this talk are all up on the website if you want to follow along they're packed with information. I highly. Recommend checking them out there have been more regulatory changes in the crypto world than I and I honestly realized in recent months, and if you want to launch your own cryptic currency or token, then you need to do it the right way so take a listen.

I hope it helps and stay curious everyone.  These are the entrepreneurs creators investors and Builders who ambitiously change to the world explore the hardships and heroism of everyday life while we reveal the key moments to leave behind a lasting Legacy this is. Today with Kevin Cisco.  Alright, also.

It says. Hey. Everyone will want to get started here. Welcome to the founder Institute made up for January talk a little about cryptic currency ico's and the black chain and the legal ramifications of it in 2018 so we have a amazing one of our one of our best measures for Founders suit here today Joe Daniels to talk to us about it legal perspective sometime around plans for hours from our mentoring tonight.

To Joe is the co-chair of the current englishes a venture capital and emerging growth companies. Division so thank you guys for hosting this here. Thank you for the drinks and snacks and awesome time, so we're going to hear from Joe going to go through some of the legalities of crypto, and then I'm going to open it up for questions and answers at the end so we have any questions write them down, and we're excited to kind of dive into that and talk about it before I pass it off what I try and get a sense of the room.

How many people here own Baker. We have my own Theory. I people own like going very well in Rebel. Are you alone, EOS?  Okay, right right and how many people are thinking about doing an IPO themselves article are doing an idea of themselves how many people have already done an idea. Okay, right cool.

I'm some pretty good pretty good spread of the room there so with that. I would like to pass it off to gelatin big round place for Joe from the card English Bravo.

My Amplified hear your Amplified, right?  So I just put this together in the past week or so then do a lot of SAFT offering. A lot of work in the space in the past six to nine months, so let's just let's just start with it. / don't block a mom so first a little bit about us. You know like to welcome you to this vfi curtain Black Chamber event name is Jeff Daniels.

I'm the co-chair and a partner in the venture capital and virgin companies group group in the Carter English Carter is a full-service law firm of / about Nia partner 50 lawyers, and I offices across North America my team in the Carter focuses on finding and representing the best startups and technology and life sciences.

And includes a lot of crypto companies these days and of course the founder friendly BC's that invest in them specifically we all the service form initial form issue initial Equity develop emotional property strategies raise money Angel venture capital and other private rounds of financing expand through Acquisitions and Partnerships and revenue transactions basically actin easy outside general counsel to companies of course.

I CN 3i me and IPOs, and we help the funds form and they make their Investments and we recently. Fish hook in the top three firms.  Regionally in the top seven globally and nationally top six and Global early stage or completely VC deals 2017. I think that's just through September 30. We should probably end up.

You know higher up the league tables where sort of expanding rapidly as the example of what we did in the crypto space we worked on many SAFT and token offerings including San Cisco basic want stamp, which is raise Thirty million in its pre-sale and quasi. If you regulation a token offerings quantify think is number 88 on quanta market cap now about decide about 300 million dollar cap I personally to do this for about 22 years including eight and Silicon Valley and 13 years in New York here are some of the companies.

I've represented the past usually focus on high-growth sectors like fantech and crypto for example, and here's an example of some of the you guys read this all the way in the back by the way. Maybe with a bit with your phone or something you can check it out.  We're working to maybe 10-20. We think leading utility token Cubbies also security typical companies in their offerings, so that's us, so first.

What is Block Chain. You can't read this all what the boxes say, so I think this one right here interaction between between actors is being made using a protocol that will let them record the data about this transaction of the Block Chain. And over here the air actually gets verified by all of the actors and assent along this box right here the data in the data in the interaction is encrypted and packed together with data of other interactions and block, and then the new block is added to the chain the existing blog chain after being added as as an encrypted copy of all the previous blocks.

So the new blog just get added the whole chain right bringing use of transparency immutability or non changing substance low transaction costs and decentralisation.  The way I look at it mostly from my perspective is you know what are the different types of tokens or crypto? That's out there. I categorized into three groups the intrinsic tokens, which Kevin is just mentioned.

You know big coin of theory and ripple. EOS Iota in there usually the top Cohen's inning like corn coin Market capitalist right, and then you have your application or utility tokens like file coin. As a great example mates maintain quality samper or two from my clients. I actually understand this model so I can actually talk about them file coin is an example of they didn't offer any about 250 million dollars in August, and what they do is they basically offer up the storage capability of a decentralized network people who offer up the storage mine, Falcon, and then you can use the file coin to use the storage and none of this is built yet.

It was actually Zach. I think it is fair you take about two years to build.  So what they did was the SAFT offering knowing that their token? You know was out fully functional and therefore his very likely going to be considered a security sort of the prototypical Securities offering of token.

There's also utility token and mates those are being offered right now the audio platform basically titles Enterprises to manage wearable devices and then people who participate in that in that economy get rewarded or bonus tokens for participating in it for using the augment platform, and they cost down.

It's interesting if you might have heard about the smart contract function. Audio cerium with with this basically allows for the smart contracts is fully executable transactions without any sort of you know written binding contract and having to go to court at this if it's that person is not performing for example.

Let's say we have a smart contract where I agree to perform a certain set of services in exchange for $10,000 and those Services can be can actually be delivered digitally. Right or some somehow proof of the completion of the services is can be determined digitally then upon with a smart contract my performance of the service they $10,000 is automatically transferred perhaps in some form of cryptic currency, so these nor contracts unfortunately are under the ERC 20 area reham protocol considered to be fairly vulnerable for instance.

I think the doubt and where there was a fifty million dollar hack. Yeah, very very sort of controversial and well-known hack in July last year that was ethereal base system, and so it was Sam does is a creative platform whereby a bunch of independent parties around the world and help to ought these smart contracts and identify Securities vulnerabilities you can so the one end.

The platform you're sort of introducing your smart contracts for review, and then they're evaluated by this decentralized network so the people who are evaluated auditing contracts are mining Quant stamp, and then people and even then they can sell that on an exchange of people who can then take Quant stamp to verify or to identify security vulnerabilities in their asthma contracts, and they recently raised Thirty million dollars that the Ethereal now.

That's worth about 60 to be worth 100 bye week, then you have these asset or security back tokens a lot. We're talkin about to me. This is this is basically the same thing as replacing an existing security with a with a digital toque with crypto currency so for instance what you have a real estate or private Equity Fund.

You basically usually create a limited partnership agreement and in the people who invest in that fund get limited partnership interests and said you might get something like a really cool. That's one of my clients there. They're issuing these tokens, which entitle the holder to the same types of Economics that you would get at a real estate investment partnership.

You know dividend distributions from income generated off real estate. You know gain from the sale the real estate. That's her. So three times tokens.  So what is it? What is ICO this this name is sort of band you about that is basically. You know a token sale company is generating a Blog chain component creates some digital currency and sells that thing to raise money they can take the form of the Saft.

We usually do that in the States now for reasons I can get into. Or simply being a future token so as to comply with us Securities laws in the past people have just been selling the token directly so first the company develops the technology with a specific use case based on Block Chain and instead of selling Equity to raise money, which of course.

I lose the ownership interests of the founders and management team in whatever their building the company issues part of the tokens or the Crypt of currency for sale usually a discounted price initially, and then as successfully higher prices. And then the company holds part of the token Supply in order to be able to have an effect on the market price like a sort of like the Federal Reserve Bank controls.

The money supply. They controlled token Supply spine demand and with the cash they get return for the issuance of the total came they can then cover the further or the complete development of the technology that that they're describing to people. Uh.  here's some ears of data on ICOs  or SAFT down so interestingly for 2014 to 2016 there was only three hundred million raised, but then in 2017.

I think it reach about 3.4 billion, which exceeded venture capital investment by to 3x in 2017. It's pretty significant.  Also, interesting is that the four biggest 2079 codes amounted to 1.1 billion of that? Following like I mentioned Tazo CEO spanked or CDs.  So in my estimation, I don't think there's any data on this probably.

3.2 billion these deals we're completely not complying with Securities laws police says as we understand them today. Uh, you know after the Dow reporting in the middle of last year and especially with a buncha case and you know recent guidance acc's out there making speeches and releasing reports and things and giving us a little Snippets of guidance so so wide how could they have done that I got they've gotten away with all that and we're all finding out about it now when it's too late for us to do the same thing right that's sort of a good question.

Well they may they took the position that these these tokens were not Securities that we could just refer to it as. Contribution to a foundation, or you know they just they change the words describing the investment of money in a common Enterprise that all that stuff.  And they just try to circumvent all these rules knowingly or not what knowing I'm sure they said it was not knowing and so that may creative you know significant problem for all the people that did all these token sales.

In the past in a non compliant manner for instance if their token price drops significantly right when when you hear when i p o and the price drop significantly often get these class actions Securities lawsuits against the people that conduct with the offering for the losses of the investors in the offering they invested $10.

It goes to have two dollars. They just lost eighty percent of their money, right? So what does it mean to be a security?  It's complicated. That's what about will give me a thinking about common stock trading on the New York Stock Exchange or NASDAQ for your typical technology company like apple or Intel.

That's just common stock ready entitles you to proceeds distributions Pro rata on all common stock proceeds on liquidation if Apple gets sold to to Google. And they pay a certain dollar price per share everybody gets the same dollar price for sure that's the basic security right, but there have been lots of other things investment contracts things people have created in order to basically raise money from people and put that to work call the investment contracts and that and the whole like theory of the investment contract.

Is is the one under which people have started to construe or in fact the fcc's evening concluded that tokens k. Security so what is that? What does that test how we test you may have seen this before so investment of money. People always lose on that part is you have to raise money to even be interesting right and it common Enterprise?

What does that mean so there's three types of commonality develop by the federal course as horizontal common alley, which means you have a bunch of people pooling money from multiple different sources into one pie and and that's meant to go do some even management taste. Let's go do something with that pool.

There's also a narrow commonality where the. Itself management team affect the return of at least one or individual people who have contributed my another something called broad commonality, which is where the management team affects the return of you know all of you pastors, so it's very complicated set of abstract definitions.

But this was easier to understand. And in him what when we apply this the facts you'll see what commenter price means usually people lose on this for two is led to expect profits so again really like I sentence makes an investment of money and common Enterprise let being led to expect profits solely from the entrepreneurial or managerial efforts of the promoter or a third party led to extent profits usually these days in the token context means you're out there saying you probably make ten times your money.

On the second cell because we're number one selling it at a 90 percent discount or 50% discount and secondly as we build out the platform. Probably where people can use in theirs fixed place that probably makes pressing to go up right. Anyhow obviously there's many different ways that you can type your offering.

And you know people who sort of gone to a new level and offering token sales in the past year to get those token sold so that's that's one of the major elements, and then finally ramps more most importantly. You know solely from the efforts of others.  So when with what does that mean so like an emoji case the idea was people were going to mine whatever the mushy Telecom is called for making reviews of restaurants in San Francisco, or you know wherever they began operating, and then those tokens could be used to get discounts this restaurants.

Right, but they hadn't developed that platform and nobody was really using. So that means that the value of the token went after it was purchased pretty much depends upon the bunching management team and the efforts of others for for the appreciation to occur so let me go back and we look at you know these five biggest ICOs 2017, and thank which ones of these were Securities right five point was definitely a security.

Thankfully they use the SAFT. And they comply with us Securities laws, which I'll get into and how people have to comply with that what they have to do tease us use something called The Swiss system, which is the foundation, and I think the deal was was that you know the tokens were sort of issue the people that bought them, but they were not released their helmet the foundation until platform became operational so I was sort of compliant with us Cruise laws at least in the beginning.

And then you had yo spank or and Status these are all direct token sandals. But before the tokens were actually functional for they had any utility independent of the efforts of others.  And probably an investment in a common Enterprise, and they were probably led to expect to expect profits, so these are these are questionable offerings, and if their tokens drop.

They get all sorts of issues, so I'm not going to get into the details unless you ask me about it.  So early in 2017 bunch of security lawyers began warning because utilities okay? Especially the asset bags inside of security token with short of promises a return of a certain amount you know some of the promised return you know per week per month for quarter.

Could be D of Securities, and you know we have start looking at this and trying to you know change the offering procedures, right?  And then in July of 2017 there was. Yeah, around that time fifty million dollars were hacked from the idea of the Ico proceeds of this decentralized organization called the down which is run by something called sloc it in Germany.

Sort of like sprockets you know on the SNL German you know they may get that no, okay, so disappointing the test they applied the same test. I just went through this commenter promised the Dow raise money for May sources. You know that horizontal. Way, I token sales engage in for-profit business which was to basically invest in things like that your Capital Investments and other Investments that were voted on by the holders so sort of marketed as so it's like a itself run like the holders of tokens can decide what were the Investments hearing ago, and that by majority vote or whatever.

It was they would direct the money. That was raised. The investors are also led to expect profits to him death the down marker the tokens saying that it would entitle the holders to distributions of profits from the from the Investments that were actually made.  And finally fourth prong you know derived from the entrepreneurial or managerial efforts of others slot get created forums to discuss the Investments was like a management team right.

They worked to resolve this fifty million dollar hack. It can resolve it was gone. There's nothing they could do, but they figured that out, and the kid they sort of created curators to control what proposals the token holders could vote on so Toca holders are not really running things lock it is sort of running where they where the investment dollars are going and then secondly the token holders can only vote on proposals pre-approved by the curators.

They couldn't negotiate the deals. They could not ban together to exercise any control over the curators Orbiter replace. They have no real government's so therefore the benefit to the downtown token holder over the value of token was being determined by this locket guys and not by the token holders right so in this prong that the test is generally always going to be failed by not completely non-functional tokens, and then and then there's sort of a spectrum of functionality so at some point.

You can you can probably pretty clearly argue. This is not a security because it hasn't the utility this completely independent from the efforts of others, right?  So little bit on the on the highway test the the takeaway from down report as they basically announced the world you took a bunch of it from Americans, and it was a security and a lot of exempt token offerings could have it could be Securities to civilian better watch.

OK person yep, the preferred method is direct sack early against that might be a little confusing the beginning. It's the first time I given this and so I'm not sure if low is perfectly, but you know you will get there so I always say they're basically three types of us Securities laws. You have to worry about being raised bunch of money like my client Quonset.

What race Thirty million dollars in two weeks. Is now building a platform namely number one you need an exemption from or to register your securities the US SEC right registration with us SEC on the typical IPO process like a six-month process very expensive you have to have audited financials very difficult especially for startup company.

And then there's regulation a which takes three months. It's also pretty strenuous arduous project throughout the state book finally SEC all this stuff. You know you have to get out of financials for that so most people they do with any kind of you know Securities offering for a start-up is they again exemption?

From the federal Securities laws, and the exemption must people use reg D. 506 be or 506 E. Reasoning being these are geared towards and offering their. Holy made to accredited investors credit investor the United States the person that has at least a million in net worth excluding the equity in their house for net income of two hundred Grant if you're single three integrated remarried in the last two years.

and you know the reason why most people use these exemptions is because. Accredited investors have those with money that you want to raise from yeah. I mean you want people about some success raising from fucking 10,000 people who contribute $5,000 the way is wisdom. What is 10000 * 5000 Kevin. She said that much writes like Michael ebook.

Sorry I was ready to question so maybe to it, okay, so and then so it let's talk more about five person B, or C so if he just came out likable years ago the first jobs act 506 be. Did apply you have to make the offering only to accredited investors, and then you can only sell it to accredited investors, and you get the good news.

Is is you just have to get them to sign something technical. Hopefully before they even receive the offer like he'd like if someone goes on your website. You should have them confirmed by checking a box on this type of accredited investor. I have this net worth. I this kind of income you have to double check it.

You know have to do and I'll kyc. You just have to have them check box, and then you show them the offering materials, and then when they. They have to reaffirm their credit as the way people used to do it and and but that's not the way people most people do it now because most open hand SAFT offerings are off basically popularized through the internet on a bunch of a bunch of websites, and that constitutes what we call the General solicitation, right?

In other words your soliciting across a broad spectrum of individuals whether or not they are accredited. You know by publishing the offering to everybody. And that's 506 E. And the insert of the added burden if I was succeed is that on the back end before you close on the money. They're supposed to have a third party like an accountant in fact only accountant a lawyer or a broker-dealer verify that person is accredited status, or you have somebody in here team.

You know collect their tax returns look at the bank statements and verify the same people verify like two thousand people that way and before they can invest. And we're before they they might even wire the money, but you have to you know excuse me check these details before you can actually start using the money or closing on that offer.

And as we do these deals all the time get most of the token of SAFT deals are 506 E offer. It's not that hard right if you think about it what I just said is not that big of a deal, right?  Anybody now that big deal right seems hard why? I mean you have been around for a long time. You're already ate you presumably already announced anyway, so it gives competitive advantage to others.

I mean since it's such a Greenfield territory. You don't know whether you'll end up getting a yes or no from govern and govern against me. Forget that you don't have to send anything so governing entity said That's you don't have to register with the SEC is that yes, so saying you avoid the registration by going this fight with six B, or C route, and you just even if you do a full-blown General solicitation.

You just have to verify that these people are credited before you take and start using their money. That's why living video you think about and there's all kinds of like third-party people that offer service offline, so we'll check it for you. Verify investor sound like something like a company, but just has a catchy name ok so two to three more.

There's like three issues right from the US Securities laws the second one is even if you have an exemption.  For registration which is good, and if you fail if you raise Thirty million dollars, try to build your platform for a couple years your team. You know fights with itself and can never make a decision for whatever reason he doesn't get built the way that you describe its way to be.

And you marketed that it that way in the middle of the offering everybody gave you 30 million bucks thinking you're in a bill this that their tokens are going to worth a lot of money. Okay, so very often in those circumstances the people that just lost their Thirty million dollars will sue the company for the thirty million dollars.

Maybe more and if the company does have any money. They'll try to go after the directors in the officers which probably you.  And that maybe that's what director and officer insurance is for. Um and identification agreements and that is exactly what is this fact that you should get that especially if you raise 30 million, but.

how can you avoid the Frog planes being successful in this and this Market? I never recommend this in like your typical venture capital or Angel offering for a technology company or Life Sciences company because these people are supposed to be big and they understand the risks. They know what they're dealing and they very seldom frankly very subtle Sue.

When I was all about fish Capital firm doesn't go around suing the people that you know burning it. They had seen on the board. They have the reputation was on the line. Just as much as the company easily. I don't see the companies that lost all their money right but in this and this Market. You know where your token buyers coming from so I recommend generally something called the PPM.

And not a big full-blown Goldman Sachs reportedly p.m.. It's like this thick and you know rooms of lawyers and bankers and accountants you know poor through for two months, but rather 16 Pages mostly consisting of risk factors most of which are boilerplate. Which is explained that basically you're just totally risking your money here.

We have no idea for everything build this thing even if we do this a zillion competitors that more resources. You know on and on. And then it becomes difficult for those people that gave you 30 million bucks fail to go into court because you say you were right. I told them about all the risks in advance right here exhibit, right?

And then finally this is sort of complicated one the resale issue OK United States. Don't I can tell you why there's policy reason? Why that originated back in 1933? Which was the ninth was that the 20th century right before World War Two quite some time ago. The basic idea is is that if you sell in one of these private placements in her five to six Securities to have much token holders in the US before anywhere there.

They can't resell those tokens into the United States for one year. Okay, what happens in all these tokens sales like 5.5 going but he s for example. They sold this opens a lot of them were sold people overseas a lot of result in the US some of these new token exchanges picked them up and listed them on the exchange without even doing anything trying to make an application or anything right others like crack in bit tracks.

He owes applied to be listed there, and they might even request legal opinion that said that they're not a secure. And some you know probably yeah person not very well versed in Securities laws game that right and they began to trade because because they're freely trainee on these changes that means any us person can buy those tokens and the problem with that is that ink lets it.

Let's say they still can start $7 at the Ico, and then when smart guy decides liquid soap in position. He bought in the SEO cells that 100. 10 Americans by those tokens that 100 right then it drops to 50 and those Americans lose half their money.  Those Americans can then sue the seller of not token and the company for rescission.

I want my money back. No one hundred bucks back for token Grant. That's the rule.  So how do you fix all these problems and still conduct a token offering in today's environment do I go through the munchy thing? Much, there's much e.  Well, I'll tell you the solution before I gave you the problem.

It's the it's the simple agreement for future token + PPM right the simple agreement future token if you treat. It as a secure Asaf treated as security. You sell it only to those accredited investors, and you get the appropriate verification and certification in the back of the front end as appropriate.

Then you take care of Securities laws issue number one PPM you take care of to resell you just make sure that the SAFT cannot convert until the later of one year after the date that you first sell this aft or platform launch.  Or you commit you can make it the earlier if you want so then went to put you know basically you get to decide if I think this soap is is fully functional has utility completely independent for me and my team.

And I can go to the SEC and say this is not a security. They're going to agree or I'm going to someone to give me a legal thing you do that really in-depth analysis and and sort of shore up that position, then you convert this app, and you don't have a resettle issue because people are not reselling a security and United States.

They're just selling a token like the kind of you get the video game arcade something wrong with selling video game arcade tokens in the US right.  So the staff is sort of a solution to to all three these problems. That's why I was used in phone call. It was engineered specifically for follicle, and it's very much caught on in the US capital markets and now anybody who's who you know wants to at least be you know there's slightly risk-averse is usually want to use this out.

Either offering Saft usually converts at a discount to the eventual Ico price, but usually at the Ico when you're doing it this way you just sell another staff. You just sell it at full face value so in other words the in the presale you sell us out with like a 50% discount to the Ico price, and then sell it the full Ico price in the ICL is still the same staff.

Take picture.

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To take the test and find out today and now back to this episode of ambition today visit ambition today online at Cisco and follow the show on social media at ambition today, okay, so here's the superfood honorable SEC chairman Clayton overnight said. So first I have the Dal thing in July right so then November ninth the chairman comes out and says there's a distinct lack of information on the exchanges and Ico offering platforms about the tokens there are trading on those platforms.

What does that mean why is he trying to regulate the exchanges like cracking and bit tracks? I thought about that I said he probably is, but the thing is if they crack me a bit for XR only Trading. Tokens that are not Securities then the SEC chairman has no jurisdiction.  So he's basically telling us that down the road they're going to start you know my enforcement action or by case law or by even worse rulemaking setting forth guidance that most opens our Securities right?

He's going to expand the realm of Securities to include a lot more so that so that when when they are traded on an exchange. There has to be more publicly available information about because in order for a token to trade on any kind of exchange whether it's a licensed exchange or NASDAQ Nur you have to at least file an annual report every year, which has no financial information less information about the issue.

That was sort of a you know a change, and then you get the munchies season desist order on December left. This is basically all just confirming what I was saying that you should basically use a sack. Solving problems so much. She was this california-based company selling tokens to raise money to develop its block chain based food review service like I said reviewers would be rewarding for reviews and restaurants can buy advertising with the tokens there are so the reviewers sell their to munchie tokens on cracking to the restaurants they they use those tokens pay for advertising a much.

Separate idea you know this is sort of small Market. I don't know why anyway they just wanted to raise 15 million bucks until cancel. They did it as a direct token sale. This is on December 11th.  To suggest a little while ago to improve same purpose was to improve his iPhone app to get more users, and you know get people starting to review.

In the middle of token sale the SEC became too much and propose and then when she agreed to an order to basically a sort of an agreement that it was offering him selling unregistered Securities without an exemption from registration. It was selling it to everybody not just to accredited investors, right?

And then they have a healthy offering and then they have to get all the way back. I don't know how much they raised, but you know probably seven million bucks is my guess. So why did the SEC concluded hisoka securities?  I'm just thinking about to my elements of the test.  Yeah, just go back.  It was basically.

This element was definitely satisfied and these two were hit on it pretty hard investors were led to expect profits, and then it was non-functional. So me when she emphasized they quoted the SEC report emphasizes investors could expect that efforts by the company and others would lead to an increase in the value of tokens.

Hey the more use our service the more of the tokens going to be value you might want to hold something reserved. Yeah, whatever they were they have people like really sales e-marketing people on the team it also emphasized that we take steps as much it would take steps to create a support a secondary market for the tokens so to them.

Freely trading D. Tokens any aftermarket within that restrictive one-year period that I talked about what sort of important their business model.  So they said no you can't do that and finally was non-functional. You know you couldn't yet take your token that you mind from doing a review one time and then sell it to somebody who wants to advertise on much ready to just wasn't it wasn't there yet?

That's what I confirm. What everybody was taking started back in January and announced Korea's laws are pretty pretty clear. This is this is what you these are the best practices right you do a sound and a PPM you use 506, PC. Yeah, 560 again requires you to have investor self certify that they are accredited before they even see the offering materials right and then for C.

You can do a general solicitation of the entire world widows and orphans people who are not accredited.  But before you take any money you have to verify the people you're getting money from our. Uh, you know the fraud issue has those risk factors. I talked about and with the resale issue is addressed by basically delaying the delivery of the tokens for year or at least until you know for sure.

It's not a security whether you get a big l'opinione to that effect or maybe the SEC issues guidance that I'm staying explaining the rules that you better know this on security by that time. And it does sort of put a damper on you know some people's plants because they want to you know raise twenty Thirty million bucks, so let's not cracking immediately, and then they can dump over their advisor tokens and even if they don't ever both platform.

They just made millions of dollars for this then sort of creates problem with that right, but if you really want to build the company. Then this is the app you can also register the offering with which is a shorter period of time than one here right you can use reg a sort of a short form up to filling 50 million bucks that takes about three months.

You know in the best-case scenario and about six months for an ass one which is same thing that people use for my PO. And if you do register your offering then the tokens will become freely tradable, but then my question becomes a I'm saying people out to acquire with the exchanges. They're out there.

There's no qwabe in China. There's all these different exchanges will those exchanges list a token that is registered as a security in the United States.  Because they're not supposed to be training registered us securities. Winner unlicensed in the United States.  There is a they're violating US law qwabe is when weather allowing that to happen so registering your offering is not necessarily going to be the most tracks in either.

You know if we have to mention that if you have the Saft converting one year after the issuance then the only way you comply with this this. Uh one year, you know restricted period you still have to publish some public information something something it can to an annual report, but that's so much less than being a full public company.

Also if you register your offering on you know for May or S1 usually can't beat the NASDAQ Grande y Su listing requirements, so you can't go on a real US exchange, so this means you could potentially be cut out of the black unlicensed exchanges and the Nationalist exchanges you can't trade. So what's the point so that's I think why people are trying to create t0 and the alternative trading system gasser t0?

T0 is an alternative trading system is not as fully regulated as National Securities Exchange as being created by something. They got the people with the found it overstock.com. Hear that your remote for soft com okay?  And I think it's going to I think they're Saft offering is going to save offering actually an equity offering is launching on January 18 if you want to reserve some safe or finally you just do it open cell just like all these other people did last year, but you better be sure to security or you might end up looking bunch, and then how do you determine if you have to apply the how we test?

And there's a chart out there on the internet that actually quantitatively rates utility tokens created by Chadbourne & Parke and Fred Wilson and all these other people you know quite some time to go now before all this SEC guidance, which suggests that a lot of utility tokens would not be Securities under a pure quantitative.

You get five points for this and 1.4 that but I'll be very very skeptical about the results of that quantitative analysis in light of the new SEC enforcement actions. That's really all I've got that sort of the bare-bones. I want to talk about a couple of other. Yourselves sometime yeah, yeah, yeah other regulatory issues associated with crypto.

I guess that's talked about you know where can working the tokens train another thing is is that if you do a token sailor you SAFT conferring, and you have more than 2,000 purchasers keep in mind that when you do this after I'm from the US only to accredited investors. I forgot to mention you can actually sell to non-accredited investors outside the United States.

Photo something called reg s totally forgot good that per station with and that is true. You can do it you can do a foreign offering to as many people as you want whether or not their accredited, and you have to offer to under 506 PC in the US the same time if you do that it becomes Chinese money of PRC Hong Kong Singapore even South Koreans probably trying to get their crypto there are Theory and Bitcoin outside of South Korea now, they're looking for a place to park there everybody.

So it's very easy to get 2,000 token holders if you do then you have to register as if you're treating the token is a security you have to register under us rules anyway if you have 500 foreign purchasers who are non accredited.  Then you have to register as well, so there's that you know High number of token buyers concern you should think about and then you have the issues for the fund type issuers, which make people may not understand like if you.

If you're if you're going to do a real estate investment token where he's raised like 100 $1,000,000 to invest in income properties in the northeast or in Phoenix or in Miami or something right so it's pretty good.  That's fine except. You're an investment fund, and then you have to be regulated by this thing called the 1940 act and to apply it become an investment advisor and things like that so when you start running a fun.

And Sokka nice you have these these Investment Company concerns.  There's also a lot of unlawful broker-dealer activity in the token space crypto space. There's a lot of people offer doing the token offerings giving people tokens to help them raise money from other investors.  Adviser tokens just handed out of people.

Oh, you're just me that guy that invested five million into Theory, and thank you very much. Here's I dont thousands, Okay, so? You know they got the issues are complicated. There is anybody ever seen this movie called American Hustle.  A couple people right I mean that was pretty good. That's pretty moved.

Who Amy Adams children Sharon?  So in American Hustle the basic idea was I think it was Amy Adams pretending have a British accent and to be some kind of English aristocrat who's hanging out with this guy that had hair piece. We're like Isaiah, and the deal was was that he gave them fifty Grand they would they would help you race hundred right?

Or 250 right so then of course the people would give them because they thought that they were you know English Aristocrats, and you all these people with money everything they give them the 50 Grand and then they would never do anything to help them raise money. They would take 50 Grand and they run away and has anybody ever encountered somebody like that, New York City.

Perfect.  there's an entire economy of finders and Brokers and investor relations and public relations people who get these payments for helping you to raise money because you don't have a reason money.  And you didn't think that's me how to raise money, so you just you know families people and then side a little grain of the says they get three percent of the dealer 5% of dealer 10% of whatever.

They raise and fortunately if they're not licensed by something called finra. Financial institutions regulatory Authority in the United States, then if the investors who the unlicensed finder introduces you to. Don't like the way the Investments turned out they have a right to get their money back from that finder and from you the company they rescission, right?

So that means if you you know blow out your offering by giving tokens away to 55 yrs all around the world, then potentially a lot of my erase all those people in the token drops the price because say give me my money back because you have the sun licensed broker-dealer that sort of issue right now.

It's all great at the total gives going out. It's all perfectly fine if they total keeps going up so maybe if you just build the best platform. There is they just keeps going up no problem. There's also this AML. Kyc issue now a lot of people think you see when you look at the file Coy offering.

You look a lot of other offerings that are done through licensed broker dealers, and those guys care about their license, so they want to comply with anti-money laundering and know your customer rules which apply to the US financial institutions like broker dealers and Banks. They have to comply with that so they have to.

Fine every person is some of them. You know nydia copy the passport to verify that it really is that person you know whatever information they require to verify a person's identity, and then what they do is they do some checks in the background. They check it against the ofac list the office of foreign assets control sanctions list because as you know I mean we sanctioned it much people like Russians, North Koreans Iranian syrians ya Rockies.

Around the world involved in you know well what the government has deemed if Arius activity whether it's in money laundering human trafficking arms dealing invading other countries genocide. You know whatever it is right, so you don't want to take money from those people because then you're criminally exposed like you've taken money from a criminal and you're laundering their money.

Right so okay, so an operational company Billy's of software like prepaid software selling tokens as prepaid software isn't that probably intending doing money longer right and so therefore there's not a set of Regulation that requires the software company to do, and I'll kyc, but it probably makes sense.

If you a little bit of that you know to get to verify the where a person is coming from and then just have somebody check the effects because if you transact if you receive certain types of currency especially US dollars from someone on the ofac lists, then you can be you know held criminally liable now usually they don't go after people like you.

Is this a good news right? They go people are really money laundering a lot of people's money, but when you're offering gets to be fifty million dollars. You might look like my laundry.  And that's all I've got any questions for them a big round of applause for join.

Take it out of Excellence so first question down here. I'll bring the mic over so everyone could hear.  hear you.  Thanks, Jill. That was great. Especially since things are changing so much yeah. Well, okay, so now versus last summer if you have a utility token offering and you decided last summer, okay, I'm going to sell it not as a security and Etc versus kind of the best practice.

Do you give now? What's the difference in cost and speed so you know? I think most of the work done to get these get the money raised is not impacted. These changes in Securities laws because before you do the token silver suit something called the token sale agreement and now you something called the staff and you have to make decisions about like what's the price in the presale going to be with pricing and they any Ico or that you know the final sale would be and things like that.

It was a discount going to be going to get bonus ok, but all those questions are still the same right how am I get Market the offering? Who do I talk to their life patient front of what Forum so I go to pizza. Those are all not affected by this right because again most of the people that they go to those forums that you would be pitching to that you want to pitch to you are accredited.

So I don't think it really significantly impacts and what it may impact the staffed with a one-year holding period concept is going to be more attractive to sort of Adventure style investor, or a person who's just trying to diversify out of the currency of their country like people in the PRC for example.

Or in Russia they just want to move their money overseas as opposed to short-term Traders, right we were trying to get there the presale I kill a discount on the flip it in the aftermarket cracking within team wants. That was that's a game. That's been played sort of done at least by Americans right now.

Yeah, so it's another words that the difference is is that if you have me as long as you have sufficient demand. From sort of the fundamental investors Adventure type investors and safety, but the legal coffee percent.  And about the same yeah, but same maybe less, maybe less in the long run. Yeah, well, okay specific.

Yes after itself is going to be standardized enough so that it so yeah, it's it's not super legal intensive. Yeah, yeah, you should know listen to the quotes of like 250 for an eye cup to Nikki Kaye for Aiko or even even. You know probably more than 50. I would say some people are still doing that, but you should know if I that right we got another question here in the back of the room.

I've sorry I Cameron a little bit late is a great presentation from assault question. I have is the best of your knowledge. How is the SEC treating offshore issuance AZ of whether utility tokens or Securities are not directed toward the US investors. Yeah, various wouldn't really apply if it's an initially an offshore offering, and then I guess the question has made the answer to this may be obvious.

I can part is what happens then when a USA Point exchange begins trading in those same Securities off the secondary Market, but I think I think your first question is how is the shc treating sales of tokens to people overseas pursuant to Reagan and the answer is that is basically that's out of their jurisdiction, and that's why they don't really treat.

It as a very much at all what they what they're concerned about is resales. Back into the United States within one year and unfortunately given the sort of. Watching basis for crypto currency is very difficult to put the typical types of restrictions on retraining into the US that you put on you know common stock or preferred stock is traded on an exchange because in you know in the Contemporary paper-based system there all these controls that like actually put physical engines on the stock certificates that prevent them from being traded back into the US and people at the exchange and the broker-dealers that execute the trade will spot down and low and they will not.

Execute that trait, but with it with a overseas and change.  Like I said if people can sell their tokens their back into the US within one year and nobody really even knows about right not to match it. What was your second question?  question. I'm over the wreckage Qantas case where you have a offshore entity non-us entity that is restricted totes October.

Yeah, so so the US doesn't care the US doesn't care about the domicile, or you know the residents country of the issuer it cares about the. Uh where the sales made before the offers made so in other words if you have Cayman company or Gibraltar Swiss or Singapore company selling tokens into the United States and everything I said worse apps for that matter against the United States that everything I said still.

Right next question right here front.  What do you said she would be to do to kind of tokens who kind to each it token to sell it to say nited States and the security kind of token to sell everywhere else that it makes any sense. I really know what that means that. There's no problem, but issuing different types of tokens to different regions you know doing if I smart contract and she and geolocation you can do whatever you want.

I'm not sure if an exact thing that you mentioned works. I think it would want to issue the security token in the US and utility. Also, what you typically use SAFT offering here in the states, and then you can do a simultaneous sokun offering overseas, and then it's really the company's issue as opposed to me the US lawyer as to whether or not they're complying with the rules of other countries, but yeah, generally token offerings continue to be made.

The other countries without any significant regulatory action teams.  so I actually have a question certain what situations would you recommend that a Founder does this goes this route over traditional venture capital or Angel vessel?  I've seen it come up in a number of instances where you know for instance they company although it has great ideas is gravitating towards watching watching is perfect for there.

Their software, but they just can't raise venture or Angel because of Any number of Nea the various numbers of reasons why they have difficulty doing whether they can't pitch to they raised a bunch of money as super high valuation nobody wants to give them a shot and then because they were spent all that money and then and then also if you just want the various benefits of this.

And still achieve effectively the same outcome, which is you're not selling Equity. You're not deleting your own ownership, but you are raising the money required to build your project and that's really what it's like. It's like project Finance right you're getting investors. Just in your in that.

In a platform for that project. They don't know anything of your company, but at the same time.  When you raise money in that way how do you integrate some kind of a cash flow stream back to your company from the platform right and a good example, and I think an analogous company is red. You know Linux.

They created this open source operating system like X and then they they have they charge like on a freemium basis. We're you know basically premium basis like. Add-on modules and now they have something really Revenue, so they both this latest thing this free three open independent platform, you can play around with them do it if you want here's seven hundred million dollars worth towns.

Maybe that's how you have to think about I think have to take about that in advance before you just like build a platform that doesn't make any money for you right now great example of limits next question.  Follow up question. If you were conducting an offshore offering of the night of a token or encrypted asset.

What jurisdictions in your view are best suited to do that or have been doing that that are easy to work with I usually is go for Global offering excluding, PRC, South Korea. Iran Syria Russia you know these North Korea The Usual Suspects because those are the countries that we have restrictions on yet many many different sorts of transactions with.

Um can you talk about the scenario or math or when the coin or a criminal? You don't you make it, and you don't have to go through I feel like. Because I know one of my friend here. He made an acquaintance, but he just went directly onto a challenge, and he said that way you can avoid some legal issues.

I just want to know like what which way is better. Yeah, you mean like already has something investors up from you because you know we some white paper. I saw some Icy oil company. They already have a bunch of investors that already invested, so why do this you risk to raise money if they can just start with the exchanges stand-ins you you know, maybe if you're already fully funded and you can build your platform with the money that you raise your if you already sold your Equity, or you know borrowed money through dad.

And that's already done. You can just airdrop. I think is the concept your tokens and create a market with your platform using a service without ever conducting a Securities offering, and then of course you aren't voting the risks that offering so it's just up to you if you want to raise additional money with a token offering or not that works fine.

Video he said.  Well if like on blogs and even more and more of your credit always being created the New York. You are still raising money like. You're letting more people buying your crypto than you know what I mean. I think what you're saying is that if you if you ignore more people are using the platform, and so therefore the demand for the token of tires.

Do you like raising the money to go up? Yes, yes, and if you have some work Quinn circulating focus on yourself like in the management team or the stockholders then then you're creating value in your own token. But that there's no cash going to the company right from from an increase in the value of service right she's saying maybe depends how the how much the management team held onto and starts selling once after the draft Yeah management team Raven you got me itself could have tokens in the treasury.

Yeah, I don't know I'm thinking about that one some are saying that could also present some some trouble in the future. I know that's currently the best practice. What set up. You still recommend when you have at least let's say the foreseeable future you would be considering accredited us investors, but also International investors with the staff still be.

The the proper structuring Fort yeah, I just said that ok you can use you can you can sell this apps to accredited us and then Asaf also to not accredited or anywhere the any foreign purchaser, and it when you say that people have identified problems with it in the future. Yeah, I'm pretty confident those problems will be resolved and the key is that all the current problems are solved.

In my mind good. How's it going? Now? I've got a question for you. So what would you recommend for a company that has already a built out platform it might there? Yeah, I mean you can still do it direct token sale if you're absolutely certain that your token is not a security under these new under the under the guidance provided by these new enforcement actions like munching and the Dow.

And they have a sheriff's report, but you have to you know you should be really confident. I think what most people do is they get legal.  Very expensive legal opinion because yeah highly qualified people pick this event really what is it worth and then and then keep in mind that when you do that kind of direct open?

Cell it is immediately then tradable.  so then you're going to have a public float, and you know like I have some companies that sent me every blog post every tweet every press release for review because. They don't have writers yet, and you know they want to be manipulating the market in row tokens, which has a 300 billion dollar market cap much like a small cap public company and a snack right so you take a lot of Burden that way very quickly and this in any of the aircraft thing that she was talkin about that's also.

It's also possible with your model. Right we have time for one more quick. Yeah follow graphic.  that case portable 3 Asia.  over here. Yeah, you can you can do a token this you know that we call it a SAS, but if you if you didn't token sale and part of the. Terms of that sale where that we're not going to give you tokens for a year for the earlier of the Year platform launch or later of the Year platform, then you're achieving sort of the same thing right so as many different deviations from the most conservative pathway, I provided, but that's the basic idea.

Right we have time for one more question who wants that anyone? Yeah, go forward, and we see any deals that could or iced tea and Ico issuance Tech and competing with like this traditional securitization markets like mortgage-backed Securities auto loan securitizations, yeah. I see a lot of those.

Thank you should write. Thank-you so with that. I want to say a big. Thank you to Joe Daniels from the cotton English one more round of the product. Thank you going to hang on the front Jennifer by 10-15 minutes. If you do any questions feel free to come out up about legal notice here by funder stupid here, and thank you for coming.

Thanks for listening to ambush. Today be sure to visit Cisco to get all the information from this episode and more great content until next time stay curious everyone.