Time Magazine features the “Person of the Year” on its cover page.

Normally, that’s an important and controversial decision.  Selecting the “person of the Year” remains a big deal in spite of the fact that few people bother to read Time Magazine anymore.

For 2017 (and perhaps many future years), “Person of the Year” takes a back seat to technology of the year.

IEEE’s Spectrum magazine’s cover below says it all.

Blockchain World

Blockchain and related COINS  and TOKENS are “fintech” products.  Until a few years ago, “fintech” was the domain of a few computer Geeks.  Few people cared.  Now, everyone is hopping on board the “fintech” train powered by Blockchain and COINS and TOKENS.

Blockchain has enabled businesses to literally print their own money.  You can raise lots of capital without incurring debt or diluting ownership of your business.  ICO’s where investors purchased COINS or TOKENS exceeded venture capital investments for the first time in 2017.

Financial products and software are merging.  As hackers use the Internet to bring giant corporations to their knees, Blockchain has emerged to protect records and the integrity of transactions.

In talking with people about Blockchain and COINS, we know the following:

  • Lots of people are interested in what appears to be free money.
  • Most people don’t understand it.
  • History tells us that when lots of people invest in complicated financial products they don’t understand, prepare yourself for a bumpy landing.

But the same was true of the Internet. The Dot Com bubble burst at the turn of the Century, but the Internet keeps getting stronger and stronger.

Talk to us about how you can use Blockchain and COINS as tools.

Here are some basic principles we use to navigate this situation.

Here are some basic principles we use to navigate these troubled waters:

  • COINs are Crowdfunding on steroids. Its literally a worldwide Crowd with little or no initial regulation.
  • Watch what government regulators are doing.
  • After-offering trading is usually a bigger business than securities issuances are.  SEC issues create problems transferring newly minted COINS and Tokens.   See our Tokenized securities solution described below.
  • Watch out for liquidity traps.  If you can’t resell it, does it really have value?

Trouble in COIN World

Government regulators are all over the place. China has outlawed COIN trading markets, but Japan is encouraging trading markets.

Europe is leading the U. S. The American SEC is scaring Europeans away from dealing with American companies and investors.

Its much easier to buy COINS than it is to use COINS to buy something else.  BITCON may have a large trading market, but COINS created by small unknown companies have the same problems that small cap stock have – the primary problem being that if an investor tries to re-sell a lot of COINS, the market price may fall dramatically.  That’s why institutional investors usually don’t invest in small cap stocks.  They try to avoid liquidity traps.

When investors find themselves in a liquidity trap, issuers often suffer.

Small companies that have sold COINS may not be able to raise more money because of potential liabilities caused by investors trapped in illiquid investments.  Therefore, COINS issuers should make sure they have a plan to create liquidity for investors before jumping to sell COINS.

Beware of the SEC

The SEC has determined that some COINS are securities.  Pre-COIN sales are usually securities.  The line between what is a security and what is not a security is murky.

The SEC has already initiated many enforcement actions and dozens of investigations were under way in Q1 2018.   State securities commissions have also been active.  Class action lawsuits by plaintiff law firms are just a matter of time.

Prudence is Required – Develop a Strategy Before Rushing into the Minefield

Businesses that want to sell COINs and Tokens to should conduct their offerings under the assumption that the SEC will treat them as if they are selling securities even if they have some arguments that their particular COINS or Utility Tokens are not securities.    That means full disclosure either

  • Registering the offering with the SEC
  • Making sure you have an exemption from registration.  The JOBS ACT Crowdfunding exemptions are the most likely choices for exemptions.
  • Conducting offering entirely outside the United States in a country that has laws that facilitate COINS offerings.

Registering the offering is expensive and the SEC review process will be difficult for the first registered COINS offerings.  The JOBS ACT Crowdfunding exemptions are the most likely choices for exemptions.

SAFTS (Simple Agreements for Future Tokens)

Proponents of SAFTs make reasonable arguments that Utility Tokens issuable on conversion of SAFTS are not securities.  The problem is hat the SEC vehemently disagrees.  Who wants to fight the SEC for years while your case makes its way to the Supreme Court to decide whether Utility Tokens are securities?

Offshore Offerings

Transaction costs for offerings outside the U. S. can be high.  Foreign financial institutions are often leery of facilitating offerings that draw SEC scrutiny even if the offering is offshore.  The SEC has many arrows in its quiver.

U. S. persons who make decisions about off-shore offerings where the COINS are repatriated to the U. S. investors or where the U. S. business benefits from the COINS offering may find themselves subject to liability for off-shore offerings.

These considerations make it advisable to obtain good advice before you start a COINS offering and be extremely careful how you execute the offering.

The key takeaway is that you should not pretend to be off-shore.  The entire offering must be offshore.  And it has to stay offshore after the offering closes.  We explain why in linked articles below.  You must take action to ensure that COINS and Tokens that are securities are not resold in the U. S. soon after the offering is over.  See SEC Regulation S for guidelines about ensuring securities are not resold in the U. S.

Tokenized Securities Alternative

Because of all these problems with ICOs, we created an alternative to ICOs that we believe is SEC compliant.

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 developed by a client. 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 the first company to use our new approach.  This company developed its Smart Contract with our advice.   https://protect-us.mimecast.com/s/b9MHCBBnGpsNx69hzQ9mH?domain=investopedia.com

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 ad many more are expected.  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.

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/
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/
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/