Jim Verdonik

JFV@WardandSmith.com

(919)277-9188

(This article first appeared in WRAL Techwire on March 5, 2018)

After Initial Coin Offerings (ICOs) helped young software companies raise more than $4 Billion last year, the SEC began doing a full court press to shut down the ICO world. Over a dozen SEC enforcement actions have been announced and many other investigations are already under way.

ICO Battlefield

In a jurisdiction battle between the SEC and the Commodities Future Trading Commission (CFTC), the head of the SEC has declared all blockchain Utility Tokens to be securities. In a very unusual step, the SEC has even threatened to disbar attorneys who disagree with the SEC’s opinion that all Tokens are securities. This take no prisoners approach is a warning to businesses to abandon ICOs.

To the extent the SEC wants to ensure that investors receive full disclosure, we agree with the SEC. However, as we explain in the linked articles below, normal securities laws transfer restrictions will kill the usefulness of Tokens – what good is a currency if investors can’t spend it without complying with expensive SEC rules?

This is a battle that will take years for the courts to decide. Does any business want to battle the SEC in court for several years?

In the meantime, how do we use the power of blockchain technology to finance innovation?

Tokenized Securities Solution

Our FINTECH team has worked with a client to develop new types of securities offerings – tokenized securities are the logical extension of recent software, financial and legal changes.

Our new capital raising product combines a new type of equity security with an automated stock transfer system that is powered by a Smart Contract recorded on the Ethereum Blockchain Network.  Our new type of financing has two basic objectives:

  • make ICOs fully SEC compliant.
  • harness the power of Smart Contracts and the Ethereum Blockchain Network to provide investors with a cost efficient way to resell all or part of their investments in private companies

Here’s a link to an article in INVESTOPEDIA about our client taking this groundbreaking new approach.  https://www.investopedia.com/news/equity-ethereum-firm-offers-real-stock-through-ico/

Our new capital raising product combines a new type of equity security with an automated stock transfer system that is powered by a Smart Contract recorded on the Ethereum Blockchain Network.  Our new type of financing has two basic objectives:

  • make ICOs fully SEC compliant.
  • harness the power of Smart Contracts and the Ethereum Blockchain Network to provide investors with a cost efficient way to resell all or part of their investments in private companies

What real world problems are we solving?

The SEC is cracking down on traditional ICOs.  Literally dozens of companies are being investigated.  Enforcement actions have started.  We desperately need an SEC compliant alternative to ICOs.  We think tokenized securities offerings are a solution.

An older problem is how do angel investors who don’t want to wait for an IPO or company sale resell stock on a cost efficient basis?

Blockchain Smart Contracts facilitate peer to peer transactions without intermediaries that charge resale commissions and without draining the time of the company’s management arranging transactions.

This approach won’t provide the same liquidity as public markets do, but private companies that are growing their businesses will generate some investor interest.  We think this makes sense for:

  • Investors in successful companies who want to exit early,
  • Investors who missed the boat when the company first raised money and now want to jump aboard and
  • Company management who can offer impatient investors who want liquidity an alternative to selling the company

How do we do all that?

Here are links to several articles we have written that explain.

Our first article describes the changes to Delaware’s corporate law that permit companies to use automated stock transfer systems. https://gatewaycapitalx.com/2018/02/16/delaware-law-on-blockchain-and-other-automated-stock-transfer-and-records-systems/

Our second article describes why it is difficult for companies that do traditional ICOs to comply with the SEC’s post-offering transfer restrictions.https://gatewaycapitalx.com/2018/03/01/securities-re-sale-restrictions-the-achilles-heel-of-icos/

Our third article describes the specifications for a Smart Contract that will comply with SEC transfer restrictions.https://gatewaycapitalx.com/2018/03/02/designing-blockchain-smart-contract-securities-transfer-systems-that-comply-with-securities-law-re-sale-restrictions/

After the Supreme Court decides the question of when Tokens and COINS are securities and when they aren’t, it may be safe to jump back into the ICO waters. Until then, however, Tokenized securities offerings make a lot of sense.

Even then, ICOs are limited to companies than can create Tokens and use Tokens in their business model.  That’s primarily software companies.  Tokenized securities are a long term solution for businesses in any industry.

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