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Amy Wan:

So, tell me. What is your vision of what the security token industry can or should be, and how long do you think it'll take to get there? Do you want to start?

Allen Jebsen:

Sure. I'll start. Hi, everyone. Great question, Amy. I think Tatiana made some good points, especially about letting the market settle a bit. There's a lot of companies out there with big visions for what we want the security token landscape to be. I definitely envision primary issuance platforms like StartEngine, but also companies that are thinking of primary issuance with the secondary trading in mind, as that gentleman had a question about. So, that's probably where the industry is going, is how do we issue security tokens that are in compliance and in regulations, but more importantly, synced up with the ATS and the exchange systems out there for robust trading? Because we all know the ICO market last summer, it really exploded, and that was probably large in part because of the unregulated exchange, and the ability for anyone to make a quick buck off of these coins. So, if we can emulate that type of activity on the regulated side, on the secondary market, I think that's where the true vision is going to be.

Amy Wan:

Fantastic. Jor, vision and timeline?

Jor Law:

So, I think that unless we come into a process where we realize that the technology isn't quite there yet, I think that pretty much everything gets tokenized. And by everything, I mean, not just securities. People are thinking about the equity securities but also debt. And frankly, anytime someone goes and just starts a company, even if it's with three people, even if it's technically not a security, because they're the sole operator, I think that one day that just gets tokenized.

The reason I think that is because, if you think of how the world works today, which is largely some sort of hybrid form of either paper securities or digital securities. And then you realize that, if you agree that digital is generally better than paper, and then you agree that decentralized is better than centralized, then you've got a double spend problem, unless you're using some sort of blockchain or decentralized ledger technology. You've got some issues. So, if you've agreed that you've got to go digital, and you want to try to decentralize to some degree, then you kind of have to go blockchain. You kind of have to go DLT. And, I think, therefore, it will have to go that way. I think you'll start seeing early simple deals this year, next year. But the trend of getting every company in the world over, it's going to be decades.

Amy Wan:

So, the U.S. SEC has gone down a certain regulatory path, right? They said, "Okay, the Howey test applies. All our case law from the past several decades applies." And the U.S. right now, at least in the regulatory playing spaces, is a little bit lonely. Will the other countries follow suit, or are they going to exploit regulatory arbitrage? Where is all this going from an international or global perspective?

Allen Jebsen:

Yeah, I think they will follow suit. I think other countries are not interested in their citizens getting ripped off, potentially, with this unregulated market. So, I think it's in their best interest. I think the U.S. was particularly innovative in crowdfunding and JOBS Act regulations that, as we know, are used to help issuers raise capital from the public. But, that notion did start in Europe in the beginning. The U.K. has had those laws, and other European countries has had crowdfunding private securities laws in place before the U.S. So, in some ways, they're a little bit more advanced in that thinking. But I definitely think the larger countries, the larger GDP countries, are going to follow suit. I think there's always going to be the Cayman Islands or the Gibraltars of the world that are going to be a little bit in question. But for the majority part, I think they're going to follow suit.

Jor Law:

Yeah, I think so. I think you'll certainly get some jurisdictions that are going to be friendlier, right? They don't have to worry about protecting their citizens that much if all the investors are really outside anyway, right? So if they make their or their jurisdiction more friendly, then they'll attract some business, and we've already seen that. That being said, if the U.S. does something, a lot of people are going to pay attention, and they might fall in line. And you see some countries like Singapore which are starting to become a little bit tighter, even though they've been seen as the Switzerland, a little bit more loose. And that's getting closer to the U.S. stance. I do think that over time, the U.S. laws will improve. I don't think that they're necessarily wrong to take a hard stance now. And the same laws that they're applying to the blockchain are the same laws that built the largest economy in the world. So, they're not necessarily that bad.

Amy Wan:

I want to follow up on that comment. Because in blockchain, we often hear the words, "Decentralize. Everything is so decentralized. It's immutable. We're creating an entirely new paradigm." And yet, securities laws and all of these laws really apply to centralized organizations. Where do you see this U.S. approach of, okay, we're going to apply old law. We're going to have guidance and clarification. Then you see other countries like Japan where it's like, okay, well, we're just going to create an entirely new set of laws for all this stuff in crypto and blockchain. Do you have any comments on that approach? Do you think some countries are going to follow that instead?

Jor Law:

This is interesting. I think that it's easier right now to obviously just play within the current paradigm. But there are some issues with it, of course. I think until everyone trusts the technology to replace incumbents that they know they can regulate, and they know they can enforce against, you might be stuck for the short period, at least here in the U.S., with going through the existing players and existing set of laws which will get changed. Unless the financial institutions that are coming in with the lobbying power choose not to change it, because they hold all the cards. It's hard to say.

Allen Jebsen:

Yeah, I think the U.S. is going to hold firm. I think the SEC is just trying to figure out exactly how to regulate this in the best way possible. But there have been new financial regulations that have been passed that are very innovative, like the JOBS Act. So, we're still in the early ages of companies being able to use those regulations in a much more innovative way. And, I think the SEC has pretty much laid a groundwork, a set of rules, for companies to follow. But the possibilities are endless if you can raise a large amount of money from the public in security token fashions the right way. I think it's still trying to figure out how do we use these rules that have just been created in the past five or six years, and use that as the innovative framework first before thinking of new types of regulations to pass.

Amy Wan:

So, if you guys had one regulatory wish, one thing that you could do to change our current regulatory ecosystem in this industry, what would it be? What does it look like? Are we talking about a regulatory sandbox or what? Use your imagination. What would you wish for?

Allen Jebsen:

Personally, because StartEngine is a primary issuance platform first, I think raising the limits and lowering the disclosure requirements for issuers being able to raise capital. That would be my two wishes. But, I think there's still some great frameworks in place. But, the ultimate goal of the SEC, and I think you heard it recently, is how do we help small businesses raise capital. And how do we give non-accredited investors, or the general public, access to better investment opportunities? So, as much lessening the regulations as possible, I think, is my main wish.

Jor Law:

This is going to sound weird coming from me. And I don't know that it's possible without a shift in education and mentality such that the second you lose money, you don't just go blame someone else and sue someone else. But I'd love to see, actually, the elimination of the accredited investor definition, and replacing it with some sort of thing where there's just one simple statement that everyone reads that says like, "No matter what someone told you, you're probably going to lose your money. You may lose your money. But if you go ahead and still do this, like don't come sue someone immediately." And obviously, if there's real fraud, there should still be lawsuits, but giving people the ability to invest in these types of things and take responsibility for their own actions, I'd love to see something like that.

Allen Jebsen:

And, they're already, they're doing that. They're trying to expand on the definitions of the accredited investor.

Jor Law:

They're trying to add some sort of sophistication, which would be fine if it wasn't just tied to a FINRA exam, which a lot of people aren't going to be able to pass.

Allen Jebsen:

Yeah. Right.

Amy Wan:

I think probably the point is, maybe a less litigious society, and less of a patriarchal attitude, right?

Jor Law:

Well, I think, one, you have to have education so that like ... Most of us that grew up here, we didn't learn to save and invest. And we didn't learn how to look at it. And then we didn't learn that, if something went wrong, we blame ourselves first, right? So now you make blind investments, you lose your money and then you immediately go sue someone. That sort of thing is ... As long as that's happening, there's always going to be pressure to protect the retail investors. And that actually ends up protecting not just them, but also the companies that have to deal with them.

Amy Wan:

So, do you think this new industry, the STO industry, presents an opportunity to change that at all?

Jor Law:

I think if there's adequate demand from the retail investors, then they might put pressure to get there. And also, because now you already have the JOBS Act, that gives some exposure to them. And it's clear pretty much everybody wants the JOBS Act loosened, a little bit higher limits, less burdensome. I think the combination of those two happening together could get there.

Amy Wan:

Interesting. So, right now we're towards the tail end of 2018, and ICOs, at least in the U.S., have pretty much been declared dead. But Director Hinman did have a speech a couple months ago in which he kind of laid a model or a framework for what a non-security token offering might look like. Do you think that will ever happen, and if it does, is that going to result in another boom?

Allen Jebsen:

I'll go. No, I don't think so. Again, to reiterate my point. I think there are pretty innovative regulations already in place that are still very new. And I think it's up to platforms like StartEngine and others in the space that are really trying to help companies raise capital. It's up to us to prove that we can do this from a large amount of public investors in a compliant manner. Show that when companies do go out of business or do fail, that we're not seeing a rise of class action lawsuits. That companies that are responsible for launching, or platforms that are responsible for launching these companies are doing their required background checks and due diligence checks in these companies. And as soon as we prove that the public is ready to make risky investments and learn from that. I don't think there's going to be a point where we're going to see the non-regulated offerings exist.

Jor Law:

I think well, first, well, they're all regulated, right? Just maybe not by securities laws. I think that definitely you could do a non-security token sale. Not necessarily like an offering, but you could definitely do a non-security token sale. If you do, though, the question will be are you under some other regulation? Are you under FinCEN, you know, money transmitter? And that could be worse. Probably is worse.

But, if you're McDonald's, and you created tokens for people to buy Big Macs, but instead of giving out physical tokens, you gave out digital tokens. And they were redeemable for Big Macs, well then, maybe that's okay. And that's a purely utility token which wouldn't be illegal probably, right? And they did do that. They just didn't make it digital. But had they made it digital, then the same analysis would have applied, and probably they wouldn't have had any trouble.

Amy Wan:

Yeah, interesting. A lot of technology in this STO space really is just good old fashioned RegTech, right? And a lot of technology does need to be built out. What RegTech do you think is the most critical that we need to have built out in this space right now?

Allen Jebsen:

It's a great question. Something that we're working on, as well. I think the most important aspect is the security token that's going to represent equity or any type of investment contract with a business. It has the proper code built into it that meets those requirements. So, not just, if you raised under Regulation D or Regulation Crowdfunding, you can't trade that asset or that token for one year. But when that one year comes up, is there a proper transfer agent code built into it, or Rule 144A volume restrictions, or daily restrictions, when those exchanges or ATS markets come available? So, I think, adding that next layer of thought, not just this equity or this investment contract is a token. But going next step, I think, is probably the most important thing.

Jor Law:

I would tend to agree with that. I think token design is extremely important. And then also, more service providers and better service providers. Right now there's a distinct gap between the professional advisors and the people building out this technology. And they're talking past each other. So, I think you're getting a lot of people that are building out bad token smart contracts. And one of the things is that most of the work now in the space is bespoke things. Anytime you have to hire a bunch of developers and a bunch of law firms and it takes several months and hundreds of thousands of dollars to go launch something, you're not going to get mass adoption, right? So, there has to be technology and services out there that drop the cost down and drop the pain points down, or else this industry's never going to take off to that extent. We're all early movers until the masses can use it.

Amy Wan:

Fantastic. So I think we have time for a couple of questions. Do we have any questions in the audience? Yes. I can't ...

Speaker 1:

I like what you said about basically infantilization of Americans as we weren't taught how to balance checkbooks in school. I was a teacher. I know. It wasn't taught. So that leads to an ignorant population. And therefore, we have to be protected by father figures, which is ridiculous and crazy and stupid, and goes against individualism.

Thank you. And the ability to invest in what you want. Poor people's only investment is the lottery right now. So, my question for you then is what states or what organizations are fighting for reducing regulations so people can become wealthy if they have a couple of extra dollars to buy at a bitcoin ATM, for example? Without the ATM provider violating Securities and Exchange laws?

Jor Law:

Almost every supporter of the JOBS Act, almost every supporter of the crowdfunding industry, a lot of the issuers, especially smaller issuers, are fighting for this. The issue is going to be the balance of promoting capital markets, but also preserving investor protections.

But one of the issues is, everyone always wants to go for this unaccredited investor, this retail investor. But the reality is that there is a market today where people can invest, right? You can walk out the street right now to The Grove and go out and ask people, "Hey, what's your favorite company?" They'll say Apple. They'll say Nike, whatever. Then your next question can be, "Did you know you could buy this publicly?" Then they'll usually, they'll say, "Yes, I knew that." Then you ask them, "Did you buy it?" And most of them will say, "No." And that's the coveted unaccredited investor that everybody wants to go after. But they won't even buy stock in their favorite brands. Why are they going to buy stock in a private company?

Speaker 2:

Because they need a Charles Schwab account and they may not even have a bank account.

Jor Law:

Well, I mean, here they probably have a bank account and they're still not buying.

Allen Jebsen:

And, quick shameless plug, go to StartEngine.com. You can invest in a token offering for as little as $100, if you're a non-accredited investor.

Amy Wan:

Okay, next question. Henry?

Henry:

Yes. Thanks, Amy Wan. So I was curious. Since March 2017, we've seen the industry sort of split into utility tokens and security tokens, with utility tokens having traditionally relied on some sort of tokenomic system for a value thesis. And security tokens, securities in general, typically rely on equity, or the debt, or the commodity underlying it for value. But we saw, during this transition, a lot of people took tokenomic models, basically utility tokens, and sold them, subject to securities laws. Do you see that being a realistic plan, when these utility tokens' value relies on their network effects, and the ability of them to be traded freely, when now they're subject to 144 laws or transfer agents, all that stuff?

Allen Jebsen:

No, I don't think it's a realistic plan. That's probably the last thing that you want to do if you've really built out a utility token and token economics model. Because as soon as it becomes utility, and you want to use it within the platform, well now you're subject to, okay, well, who's my transfer agent? And how do I upkeep the records of that security? And it doesn't really work. So you need to figure out a way to maybe do a two-token system, something that we call RATE, which is Real Agreement for Token and Equity, where you're securitizing the equity for the company. But if and when you build this utility token, you might offer it as a perk. But Amy Wan's question, and what Jor Law described is, yeah, you can give a utility token, but as long as you're not raising money from that, you can just give it away and it can be used within your system. But you don't want to call that a security. And you're not doing yourself any favors by naming it a security, because then you're subject to all these restrictive laws that securities are.

Jor Law:

Yeah, and I think if they were able to come up with some good guidance, or a new rule that very clearly let the public know when a security token can become a utility token, that could be powerful.

Henry:

Thank you.

Speaker 3:

Hi. So I guess my question is, who's going to bring the investors? It seems like there's great technology rolling out for security tokens. There's great platforms. But up to now, we haven't seen investors coming over in droves. And so what's the value proposition going to be for them? And is it going to be investing in individual assets? Or is it going to be investing in funds?

Allen Jebsen:

I think the investors will come when there's true liquidity. We saw that last year when I signed up on Binance and Poloniex and tried to trade Crypto Coins, crypto-assets. Right now if you're a company, you're raising capital, just like you would any other way. You have to attract the investor. You have to create an attractive offering. There are platforms out there like ours that will help companies do that. But it's just like raising capital for a business five, ten years ago. It's up to the founder to really drive that interest.

But what's going to drive true public interest is if there's multiple exchanges out there, and word of mouth gets around that, "Hey, I just bought and sold this security token asset for 3x in over the span of a few days." That's what really drove in the public interest last year was, I can just jump in on any of these coins, and in a week, I can make a quick buck. So as soon as the players in the security token space can create a true exchange and ATS system, and then make a market where there's true volume, there's going to be investor interest.

Jor Law:

Yeah, and I think, obviously, there has been investor interest in some of this stuff. That will diminish because of this year and diminish because of regulations, et cetera. But when the technology gets to the point, which probably requires some sort of centralization, where people can invest without having to know their private key and things like that, you'll get more people in the market. And I don't necessarily agree with statements where people say that blockchain was designed so everyone could invest. Blockchain was designed to be decentralized. No, I just think blockchain is a technology, like Excel is a technology. How you use it, and what group of people chose to use it in the beginning may have had that philosophy. But that's not necessarily the defining philosophy of blockchain, right?

So I think some of the early adopters, some of the projects that I'm working on now, they're actually just going to bring their own investors into the deal. And at least it's still a little bit better than what they had before. A little bit better because they've maybe provided the hope of liquidity, even if it's not there as easily today. And they're getting the hope of that. And also, in some cases, they're going to actually be able to reduce costs by cutting out some of their vendors, or negotiating their prices down.

Amy Wan:

I think we have time for one more question.

Speaker 4:

I think it was Jor that mentioned earlier about the affordability of blockchain and security token technologies, and how it needs to be applied to the masses. But aside from affordability, how do you educate people who have already left the school systems? Young people today, kids, have iPhones, iPads. Everyone's a lot more tech-savvy than maybe we were when we were their age. How do you then make it a federally regulated part of the economy if 85% of the country doesn't know how to use it?

Jor Law:

I think it's tough. I'm going to be in the minority here, but I think that instead of ... A lot of the legislation is like, well, if they're sophisticated, then we should let them invest. And then, because there's no way to tell if someone's sophisticated or not, then they start pointing at FINRA and say, "Well, if they've got a FINRA license, then they must be sophisticated." But I don't think you need to be that sophisticated to make investment decisions. And, in fact, most of the people that I know hold these licenses, they suck. They're horrible investors, right?

So what if it was a simple test that they took, that didn't have to be administered to that level, that had basic concepts that we should know, like, how do you judge investment returns? How do you know if something's true or not? If someone says this, how would you diligence that? Maybe something like that. If you were able to pass a simple test like that that anyone could take if they really wanted to. And then be able to invest, and kind of be accredited out of sophistication, that's where I personally would like to see it. I don't think that test is hard to build. I think it's something that could be administered in like two hours, and then kept up each year with a minimal upkeep. And at least you train someone to not be an idiot.

Amy Wan:

All right. Thank you so much, Allen and Jor.