David Gosselin is a partner in the audit and accounting practice at dbbmckennon, a PCAOB registered CPA firm with offices in Newport Beach, Santa Monica and San Diego, CA. David is in charge of the firm’s Reg A+ and Title III Regulation Crowdfunding efforts and has established himself and the firm as one of the top in the nation for JOBS Act related audit services. David has over a dozen years of experience working with clients that report before the SEC and is an expert in Reg A+ and SEC audits and reporting; working with companies that range from pre-revenue to having over $1Billion in annual sales. David has worked across many industries including but not limited to: technology, software, retail, service, and manufacturing.
Hey everybody, it's me again, Adam Chapnick Chapnick with the Security Token Academy. Thanks for being with us. Today I have a very special guest, super accountant David Gosselin. Thanks so much for joining us.
Thanks for letting me be here.
Alright, so accountants have suddenly assumed a very important role in this new tech wave that we're in. I think there's a lot of new consideration that people have to think about when they get in to this frenzy of investing. What do you think have been some of the biggest hurdles that people are encountering that are new for you?
I think in the securities token space the biggest thing for all these token ICO companies, whatever you want to call it, is there going to have to start going through regulation to do this legally. Right, and part of that is using a registration or an exemption for the tokens. So while people have talked about regulation a plus, regulation crowd funding, regulation D, some of those mechanisms require audits, review, accounting. The process of doing that is sometimes slow, sometimes difficult, and the companies that are built to break barriers, to expand rapidly are not always the best suited to take care of the historical accounting so it can be audited when the time comes.
Right. Yeah, absolutely. It's interesting because I had in my head that we were going to go in the all these crazy investors jumping in. I want to be in bit coin, I want to be in Ethereum, and all these things. And all the challenges that have come that way. You talked about the issuer. That's interesting. Because in the regulation crowd funding vs reggae plus for example. They have sort of different requirements that you have to have. One is an audit and the other is a review.
What is the difference?
So, a review is less than an audit. So, a review is, we look at the financial statement and we're doing inquiries and we're looking at analytics, right. So, do things make sense? Are they adhering to Gab? We ask the founders, the controllers, what's going on here? It's more inquiries and analytics; we're hoping to get to the root of any big issue. We're providing limited assurance on what going on in the financials. An audit is more of a deep dive. So we are actually testing transactions, invoices, confirming with third parties, to get more assurances. It's not absolute assurance, it's just, it's more assurance so an investor can rely on it, more so than they could on a review.
Interesting. So, what's the difference in expense that a company should not for what you charge, but is a-
Yeah, as a rule of thumb, that's been one of the hurdles in sort of regulation crowd funding and reggae plus.
Yeah. It could vary widely.
Yes, of course.
I've talked to people that I've bid a couple a thousand dollars for an audit, you know, maybe 7500 bucks...
...for a brand new company.
It doesn't happen often. They shouldn't probably be doing a reggae plus, but it happens. Up to six figures, you know, very easily. I would say that if I had to peg it to something, I would say that an audit is going to cost you three times the amount of a review, at least. At least on the bigger side much more. So, it's kind of paying three times on the lower end, but as you get to be bigger companies that variance is going to be multiplied even more, four, fix or six times, probably.
So, we have two different kinds of offerings that have been happening. There was the frenzy in 2017, the ICOs, like all kinds of craziness going on, some good, some not so good.
Are there perils that the companies from 2017 are going to be facing that they may be didn't take into account?
Sure. I mean, there is the obvious. There's the tax stuff, right? I hear all the time that some of the declines in bit coin and Ethereum and all that stuff, in April-
-were because people were trying to get cash out of their positions to pay their taxes, right?
But, I think for me, that the biggest part is when companies go through this in a regulated manner, which is really not any of the 2017 companies, it's be the 18 and 19 companies. It's not the first year that you go through it that's going be the issue.
I don't think that most of these companies are going to be inherently difficult to audit, so long as they have the proper controls in, the accounting's in place, their normal companies developing some kind of technology. The question is, in my position is always been at the hardest part is, do this token offering, it's approved. It's relying on an exemption, let's say reggae plus, then they take this security token and try to utilitize it, right? For gifts and services. There is no accounting mechanism that exists, software that can track a security and your position, and when it transacts at, for what goods and services, and we have to be able to audit it.
So, I think, personally, the failure of a lot of the companies going through the security token is not going to be in 18, it's going to be 19, 20 when they have to report audited financials for the first time.
That is fussy.
I don't think that they'll be able to do it.
That is so interesting. So, if I'm hearing you right, does that imply that the most, sort of responsible, forward thinking companies are going to separate out a token and keep it security only and if they need some sort of utility, like a second-
Some of my attorney friends have definitely suggested that.
The question is, my question always is, are you sure that utility is going to be a utility and not also a security?
That's kind of the hardest part. But, yeah, I think if you are doing it completely by the compliantly and you want to continue to be reporting and be auditable, you have to issue that security just like a share com stock or a preferred stock or whatever you want to call it. You can't bring it back through your company for gifts and services, because there is no mechanism to audit that yet.
So, the question as an entrepreneur, putting on an entrepreneur's hat, let's put it that way, is the issue that there needs to be a mechanism?
Or is the issue that there isn't one and there shouldn't be one?
There's-no. I think there should absolutely be one. So for this space to really take off you're going to need, you know, one of the exchanges, right? That everybody talks about, like T zero.
That's one thing, but you're also going to need kind of like, service providers, wallet providers, whatever you want to call it, to ensure that the transactions happen the right way, the same way, every time; that's reportable. They're going to have to go through what the biggest companies in the world go through, which is like service organization or control reports, right? So auditors coming in, testing controls, so like when you get you fidelity accountant, you rely on it, because you know it works, right? That's because the controls have been tested and tested and tested. So these service providers, technology providers, they're going to have to go through this same thing. So, people like you and I can rely on their output someday.
Amazing. So, what about on the other side, for the average Joe who got himself an account on coin base and then started day trading for six months and then got out? You know, did he, but he's flat or he's down?
The tax audit?
Yeah! What happens there?
Or what are the concerns?
You know, the concerns are really track ability and accurate reporting. So, people have come to us with an Excel file with 10,000 transactions. It's like, what do you want us to do with this? It is extremely difficult. Even many whole lot less transactions could be difficult.
So, I know that there are people, people at this conference that are working on the software where you can input the data and it'll tell you what your taxable gain is. That needs to happen because it's not happening like it should, quite yet.
Is that all, just to get a little wonky, is that all based on the first in first out principle? Meaning, whatever you bought first and whatever you sold first, that counts?
There's different acceptable bases in the ways to calculate that. So, it's going to depend.
Got it. Got it. OK. So, looking ahead, we like the crystal ball, knowing what you know about ICOs and their sort of freewheeling past and STOs, I guess, of security tokens-
-offerings or security offerings. I guess two questions. What are they going to start calling them? Then-when do you think there's going to be more uptake of security offerings than ICOs?
I do think that it'll be an STO.
You do? OK.
Right, I think that the real value to me, in the securities token offering, is the potential for liquidity. As you probably know you invest in a private company, you're locked up for five to seven years til that have a liquidity event, or they go BK and their gone. Right? I think that STOs can be such that'll allow an investor, if they want to pull their money through an approved exchange, they can be able to sell that like they could sell a share of common stock through their normal brokerage account.
So, I think that is the true utility of the security token, kind of in the longer terms, that is that liquidity part of the equation.
Yeah, absolutely. Yeah, that's definitely one of them. They talk about some others but that's, for sure, the overshadowing one. What do you think-when do you think we're going to see more security offerings than ICOs?
I think that once you have a basis of what the FCC will approve, and what they would want to see... I know that we're working on one that I believe will be one of the first, hopefully approved, you know, going through the FCC, now there're no assurances. It may or may not happen. There's definitely hurdles to be had and they may or may not be able to get over. But, until there has been a path, you know, a path where somebody can follow, we won't have a lot. As soon as someone sets "Here's the parameters of how it can happen," I think you'll see people that say "They did it, so can we." That'll kind of release the flood gates.
Got it. Alright! Well, from your lips to God's ears, as we say. Thank you, super accountant Dave Gosselin for being with us again.
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