Crypto Equity via ICO Self Regulation


#1

Use to discuss how the ICO comnunity can self regulate.

See this post for background:


#2

We should track all the ICO’ and look at how they are

  1. use of proceeds
  2. governance

lets begin to create a framework we can then judge each CIO and move the sector forward


#3

Good idea, check out this thread - I need to merge them - and the Google Sheet I started:


#4

Hi. Our budding startup (udifi Inc.) is looking into using an equity-based ICO built on the ERC20 protocol to raise funding with each token representing a relative pre-defined percentage ownership of our company. We can monitor daily ownership to determine the specific percentage of our company held by the holder (number held x days held) in order to accurately share profits with the holder. This structure is identical to the stock/dividend model with the exception being time held is also taken into account (as should be if it were possible in the traditional stock model). It appears we can get an exemption from SEC registration if we perform the initial ICO under the “crowdfunding” exemption set forth by the SEC which limits funds raised to $1 million. Do you have any thoughts on this concept or any suggestions to avoid SEC prosecution? We are running a legitimate business (IoT/AI products) pushing the bounds of what’s possible in the technology realm and would also like to push the bounds of the traditional funding models. Thanks for your time and thoughts!
Sincerely,
Jack Neil
https://www.linkedin.com/in/jack-neil-b34b4984/


#5

Hi @jackusc

Interesting approach. First, IANAL, so please go to SEC source:

https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm

Assume you have done this.

A few thoughts:

$1m limit makes sense for early stage. Unlimited raises are a haven for scammers.

Like use of ERC20.

Bureaucratic rules on investors mandated by SEC: don’t love them but that is the rules.

Like that you have posted your LinkedIn profile - seeing background of founders is key.

The question is what you get by using an ICO vs traditional crowdfunding. I think the answer is liquidity. In which case you may consider launching on a platform like Lykke. What do you think @tempus?

The combo of regulated + ICO for CryptoEquity is interesting. Regulated may impose some constraints – but that’s life – but if it is Title III regulated for a $1m raise, audited financials are essential. If you combine that with ICO, you also get liquidity. Audited financials + liquidity = why we like publicly traded equities.

The key then is making sure that audited financials a) cannot be gamed (cough, Enron) and b) are not too expensive. A combination of cloud based ERP (Xero etc) with STP from transactions to accounting and b) automated governance (like what you are talking about and like what Koreconx offer) could make this the modern answer to Sarbanes Oxley (regulated + efficient/digital). What do you think @oscar


#6

Thanks for the thoughts Bernard!

I’ve read the SEC source link above and that’s what I’ve attempted to structure some of the concepts around.

I would like for our offering to be SEC compliant (as much as it can be with the some of the limitations encountered applying their regulations to cryptographic token ownership). We want to push the bar … not break it :slight_smile:

The reasons for going the crypto-token market route are multiple, which for us include (you mentioned many of these above):

  1. immediate liquidity with early open market valuation
  2. access to capital (we aren’t in Silicon Valley, NYC, or Boston … nor are most startups)
  3. better equity ownership tracking, therefore more accurate profit-distribution, information-sharing, and (potentially) shareholder voting (which could be weighted by shares held x time held)

#7

@jackusc The 3 bennies you mention are clear. 2 is simple but maybe the most critical. 1 is a question of evolving markets, which will get better over time - at moment it is only for people who know how to trade crypto on crypto specific exchanges but that is Ok given low current volumes.

3 is the most complex and where @oscar should really comment. This is the back office of equity ownership and (seen from other side) Investor Relations. Making that simple, efficient and transparent sounds like it is plumbing but could be a game-changer as it increases confidence and brings more players into the market. But there is complexity here methinks.

  1. better equity ownership tracking, therefore more accurate profit-distribution, information-sharing, and (potentially) shareholder voting (which could be weighted by shares held x time held)
    [/quote]

#8

USA

  • I would advice anyone doing any ICO to not allow American Investors to invest at this time. The semi-light warning by the SEC is telling you that if one company screws up they will come down hard and fast as they have done in the past.

If you are going to do an ICO in the USA here is what you must do to be on the right side of regulators with your ICO

-perform KYC on all the investors investing
-track AML
-make sure they are accredited investors
-be transparent with your information
-have a plan on how you are going to manage the shareholders/investors
(under US law any company with 500 or more needs to have a Certified Transfer Agent) our company works with many private companies providing this.
-have a plan to report to shareholders/investors

The SEC is basically letting you know they see those investors purchasing ICO as shareholders/investors and hence the reason for the early warning.


#9

Hi @oscar that is a daunting list for an early stage entrepreneur. I am sure it is all needed, but unless there are tools and services to automate all those things it will be impossible for an an early stage entrepreneur. Unless good tools and services emerge the message to early stage entrepreneurs is either forget about crypto equity or forget about US investors. Both would be a shame (for both entrepreneurs and investors).


#10

Thanks guys. Awesome thoughts/responses. And thanks Oscar for the specific ideas re: attempting to make the SEC happy.
@oscar It is your consensus that even though we’re a US based company it would be better to “not allow” US investors at this time? In your opinion, is it enough to ask the investor to electronically sign an affidavit stating he/she is not located in the US?

Also, in your experience, do you think it would be helpful to send the SEC a copy of our plan re: the ICO fundamentals and execution strategy ahead of time to get their feedback? Or should we simply do our best to comply and let them find out after the fact?

Again, our hope for the initial ICO is that we can fit under the “crowdfunding” guidelines.

Y’all are amazing. Thanks for the discussion! Awesome stuff! I really hope the SEC doesn’t let the rest of the world get ahead of us by simply attempting to close the door on the crypto-equity market. I believe the potential for innovation is too great to be ignored.
-jack


#11

@jackusc Jack.

I would block USA investors all together.
if you are using US Jobs Act regulations
such as Title III ( you are limited to a max raise of $1M and you must use a portal that is registered with the FINRA

if you want to do a 506 © on your own Reg D, unlimited capital raise but you can only sell to Accredited Investors.

ICO are not allowed in these exemptions at this time in the USA

As an USA company I would block all USA traffic
and for other perform
KYC
AML
as USA company you will still be reporting to the SEC so even though you did not sell anything to Americans they still require you to vet investors

What I am indicating are safeguards to protect you and your company.

If you submit your ICO to SEC they have no way of doing anything with it other than DENY.
but that been said ICO are happening the key to a successful ICO sector is to create standards so when the regulators do come knocking you are ready and you have complied voluntarily


#12

@oscar and @jackusc
Sound advice on how to stay out of trouble. Anecdotally I know that a lot of wealthy US based investors have offshore vehicles and they can use those as needed if “US investors” are blocked.

If it is possible to comply with dancing through ridiculous hoops or spending a fortune on lawyers, it will be a competitive advantage at some stage.


#13

Again AWESOME advice guys. Great discussion.

Question:
Suppose we went the route of a 506 © since going through a FINRA registered portal won’t work. We “vet” the investors to verify they are accredited … but then once the ICO is complete the tokens will inevitably hit crypto-exchanges. At that point, no longer would there be any verification of their accredited investor status. Since that isn’t “our” doing, do you think we would be “off-the-hook” for that happening? And with that happening immediately following the completion of the ICO, the verification step seems … useless. No?

Edited to improve readability


#14

Unfortunately the answer is NO. Verification must be done in advance. If you can find an FINRA broker dealer to do an ICO under 506 © let me know.