James Haft is co-founder of CryptoOracle, a VC and advisory firm offering media and financial services to companies pursuing businesses leveraging the decentralized economy and distributed ledger technologies. CryptoOracle is currently raising a $100 million tokenized, SEC-compliant, transparent, evergreen fund to invest in DAGs and other platforms which will be tokenizing. For the past 30 years James has been at the forefront of the global investment banking and Venture Capital industries focussing on the emerging markets and early stage finance in the digital, Internet, wireless and mobile media, technology and communications businesses. He is advisor to over 35 Blockchain, Internet and Venture-backed entities, has mentored in New York at 500 Startups and TechStars, co-founded of NXTPLabs.com, the most active early-stage investor and accelerator in Latin America, founded PALcapital, a NY-based Internet-focused merchant bank and founder and managing partner of an early-stage VC fund.
From 1987 to 1996, Mr. Haft was the Managing Director of Latin American Equity Capital Markets at INGBarings (U.S.) Securities, Inc., Managing Director of Emerging Markets Investment Banking at Furman Selz, LLC, and Managing Director of Asian Investment Banking in Hong Kong for Bear, Stearns & Co., Inc.
Mr. Haft is a co-founder and chairman of ClimateCoin (www.ClimateCoin.io,), which has democratized access to carbon credits as an environmental and economic investment, a founder and board member emeritus of Urban Arts Partnership (www.UrbanArts.org), a not-for-profit that provides arts education to public schools in New York City and Los Angeles, and the chairman of the USA of www.WeForest.org, a global organization which plants trees to reverse global warming. Mr. Haft received an A.B. in economics and Art History from Vassar College and a JD/MBA from Emory University.
Daniel Eisner is Co-Founder and CEO of OilCoin Digital Reserve, the world’s first legally compliant digital reserve currency backed by oil assets. An investor, attorney and banker with over 30 years of experience, Dan has developed expertise in the creation of innovative financial instruments and the implementation and management of pooled capital strategies. Prior to the founding of OilCoin Digital Reserve, Dan was well known as a leading corporate and securities lawyer with significant experience structuring and negotiating highly complex business transactions as well as counseling boards of directors and management of public and private companies and private equity and venture capital investors in a broad range of matters including securities, financing, capital markets, mergers and acquisitions and financial regulation. While practicing, Dan was partner and chair of the private equity practices of DLA Piper and Proskauer, a partner of Kirkland & Ellis, an Adjunct Professor at Fordham Law School and General Counsel of Arsenal Capital Partners, a NY based private equity firm. Earlier, Dan traded foreign currency options on the Chicago Mercantile Exchange and was an investment banker and private equity investor at predecessor firms of Credit Suisse and Deutsche Bank. Dan studied economics and business management at The University of Chicago and law at Northwestern University and is admitted to practice law in New York, Illinois and Florida.
Jamie Finn is the President and co-founder of Securitize Inc., one of the fastest growing companies in issuing security tokens. During his nearly 20-year career, he has worked in six countries with startups and corporations and participated in more than $750m worth of transactions including Kontera, Sansa Security, Jajah, Tokbox, RingRing Media and Zingy.
Before co-founding Securitize, Jamie helped grow Aki Technologies from $1m in revenue and eight staffers to one with more than 60 people and tens of millions in revenue. Prior to that, he held executive roles at Ericsson, Telefònica o2, and AT&T.
Securitize An end-to-end platform for issuers that are seeking to tokenize assets
Frank Hourigan, Co-Founder & CEO of Satis Group LLC, D/B/A Corinthian Partners, FINRA Registered Broker-Dealer.
Frank has 21 years of progressive leadership roles in Sales, Marketing, and Management. He spent the first ten years of his career in sales and sales management roles in the Pharmaceutical and Biotech industry. Over the past decade Frank worked on Wall Street and held senior roles in Institutional Equities at Sanford C. Bernstein, LLC, the premier equity research firm, and Needham & Company, a boutique investment bank focused on growth technology companies.
Frank has an MBA from the Ervin Haub School of Business at St. Joseph's University and a BS from the University of Scranton. Frank is a FINRA Registered Supervisory Principal and holds series 24, 7, and 63 licenses.
Frank's depth and breadth of professional relationships in both the cryptocurrency community and traditional equities investor base have given Satis a unique advantage in marketplace. Along with co-founder Emma Channing, Frank has built a high caliber team of credentialed capital markets professionals, each of whom have deep cryptocurrency market knowledge and expertise.
In addition, Frank has cultivated a best in class network of founders, investors, and advisors that have created a deal distribution network which will build the bridge between traditional capital markets and the rapidly evolving cryptocurrency asset class.
Brian Wirtz is Chairman of the Blockchain Advisory Group, which provides highly-technical and principled strategic advisory services, to both crypto core teams and traditional management teams, across the full suite of financial products to include utility and security tokens, equity, M&A, and high yield debt.
Mr. Wirtz founded Credit Suisse’s Bitcoin / Blockchain / Cryptoasset Investment Banking Practice in 2013, and is known as Wall Street’s first “Bitcoin Banker”. His previous Wall Street experience includes software M&A advisory at Harris Williams, and healthcare investment banking advisory at Cowen & Company. Prior to practicing Wall Street finance, Mr. Wirtz served as a captain in the U.S. Army as a signal officer (25A).
Mr. Wirtz holds an MBA from Carnegie Mellon, and a BSBA from Wentworth Military Academy / University of Central Missouri.
We have Daniel Eisner, Brian Wirtz, Frank Hourigan, Jamie Finn, and James Haft.
Good morning, guys. We’re here to talk about what it takes to do an ICO. We’re lucky here today to have a panel that is representing an issuer, OilCoin, here, a platform, Securitize, an advisor, Satis, and independent banker Brian Wirtz.
What I thought I would have us do is I’m going to let each gentleman explain who they are briefly, mercifully briefly, and then we’re going to go into a story mode and let Dan tell the story of his ICO so you can see from the inside. Then from that, we’ll move on and start talking about the issues that affect someone trying to accomplish an ICO from the perspective of the different support providers. First, introduce yourself.
Sure. My name is Dan Eisner. I’m a career attorney. I spent about 25 years practicing law, recently reformed and started a company called OilCoin Digital Reserve. OilCoin Digital Reserve is an asset-backed cryptocurrency where each token represents and is backed by a barrel of oil.
Jamie Finn. I’m the president and co-founder of Securitize. We’re a primary issuance platform, so we would help do the technical aspects of a project in order to issue a security token.
Frank Hourigan, Satis Group. We’re set up as a boutique digital investment bank focused on digital assets and helping people raise capital. My team and I ... we co-founded the firm with Emma Channing, who I worked with at a previous firm, where our team issued and ran three of the first security token offerings last year. Happy to be here.
Hi. My name’s Brian Wirtz. I’m the chairman of the Blockchain Advisory Group. I was Wall Street’s first investment banker for bitcoin, the first bitcoin banker. About 60 days ago I left with a team to start Blockchain Advisory Group. We’re a full-service digital asset investment bank across the lifecycle.
Great. I’m James Haft. I’m the co-founder of CryptoOracle with Lou Kerner. We’re a community-first VC focused on the development of the technologies that need to come into existence for the decentralized economy to work.
We’re also the founders of CryptoMonday. If anyone really wants to learn about crypto and about ICOs, look at Meetup and go to CryptoMonday and come visit. You’ll be with 150 other people who are just as curious and passionate in an open networking space with no pressure.
All right, so let’s start with Dan. You have OilCoin.
Tell us, what was the thought that made you wake up one day and go say, “I have to do OilCoin,” and what’s the journey been like?
Sure. I started OilCoin about a year and a half ago. I had been a happy corporate lawyer. I ran a large law firm’s private equity group. We were number three in terms of volume. I have done probably $100 billion worth of transactions in my lifetime. I’m a securities lawyer and an M&A lawyer and a funds lawyer, and these are things that I’ve spent a lot of time thinking about.
One of my friends and clients is a fellow named Darius Brooks. Darius ran for a while the energy and commodity business at TPG, a large private equity firm, and then went off to create essentially a fund that owned energy interests. He and I have been talking about a range of things over a period of time.
It wasn’t lost on us back in the beginning of 2017 that the ICO craze hit. We looked at them and looked at them critically, and it was very apparent to me, regardless of what my former law partners and others said that, to quote Jay Clayton, “I haven’t seen an ICO yet that’s not a securities offering.”
It was very clear to me that these tokens ultimately were securities. The implication of being a security, and nobody really had focused on this back in early 2017, is that in order to trade the token, the permission must be in place either through an exemption or a registration. We decided that what we would ultimately do is put together this token that would be registered.
We’ve started on a process to go through a registration with the SCC. We’ve had the opportunity to speak with a number of the commissioners, including Jay Clayton. One of my partners is Bart Chilton, and Bart was a commissioner of the CFTC. Got another fellow who is the COO of the CFTC and a branch chief of the SCC. We spent a lot of time thinking about the securities matters.
The other piece of this is, from the perspective of energy, the energy markets are very, very deep. They’re very, very large, but they’re also tough to play in in that when you think about rolling futures, there are certain people who control those markets.
One of the things that you really can’t do in the current circumstances of the energy markets, unless you’re an energy trader, is essentially buy and hold spot. None of you are, I assume, spot oil holders. Through the token and token economics that we’ve devised, we basically set up a way to allow people to hold spot oil as an investment, and that’s a very unique thing within energy. That’s a far better instrument than what you might hold with oil ETFs in a way.
You’re setting out to democratize access to oil as an asset-backed commodity?
Absolutely, and with the added point that we think we’re creating something that doesn’t exist. Through this technology, we think we’re creating a device that allows you to hold a spot commodity. If you think about it, you really can’t do that otherwise.
Brian, Dan walks into your office, gives you a story about, “I’m going to democratize oil. I’ve got this killer team. I’ve got commodities covered, I’ve got trading covered, energy market covered. I’m a lawyer.” How do you assess whether this is an interesting opportunity as an ICO?
I’ll give a little bit of background here, but first of all, I think that a lot of us has started off in bitcoin and then blockchain and then ICO. We saw the three ways evolve like that. It was one of my thesises way back when they were covering coins that asset-backed securities would be a thing.
When Credit Suisse came to me a long time back and said, “What is this crypto business that you’re building?” I said, well, I’m going to look at three things. I’m going to look at things that are securities, security tokens, and really there had been four or five at the time.
Two, things that are asset-backed, in other words, they’re not algorithmic, because I don’t think that Wall Street or the buy side is ready for algorithmic things quite yet. I spent a lot of time teaching investment committees what bitcoin was back in the 2013-’14 timeframe and I knew that this was a long road to hoe.
The last thing that I looked at with pertaining to OilCoin was things that would produce very large fees for Wall Street. I think that the OilCoin was an interesting innovation because they were at the forefront of those three themes, a very, very large entity that was very, very structured, had a great team behind it, and that buy-side investors would appreciate.
So Lesson Number One is, it’s all the same as the old markets. There’s no such thing as a small deal, there’s only small fees when you’re talking to your broker.
Frank, when someone walks into your desk at your office, what are you thinking about in terms of the perfect ICO? Who is the team that you’re looking for? What’s the opportunity?
Just to take a step back, because it’s not just an ICO, we’re set up as a registered broker-dealer and we’re in the business and we’re licensed to help people raise capital. A project comes into our office, everyone’s looking to raise money. The first thing is, okay, so tell me about your project and tell me about how much money you’re looking to raise, and who do you think your addressable investor universe is, and then we back it in from there.
We could look at doing a straight private placement, we can look at steering them into a crowdfunding platform to do a Reg CF to raise a million bucks to get started. We could go down the route of, is this truly an underlying blockchain use case/business model that could qualify as utility token in the current global regulatory environment, and in which jurisdictions could we issue that? That’s the ICO piece. It’s not something that we’re allergic to, but in the current environment in the US, that’s on hold.
Next is this new vehicle, which is a security token. We can issue a token, an ERC20 token or a number of other blockchains. We have tech partners who can do that, and we can then take that to market as either a Reg D type, as potentially Reg A+, and bring that to the current investor base that may be interested in that type of instrument.
I would probably ask, first of all, why a token, and if that’s where you’re coming in, why a token, and who do you think’s going to buy it, and then we can back into it from there. Also I have instruments like reverse merger shell, IPO, RTO. In Canada, that sort of instrument is another way to raise capital where there’s a lot of appetite for blockchain at the moment. That’s how we view the lens when somebody walks in.
It’s interesting. It’s been said a couple times already today that this is not something different. This is just the next iteration of the capital markets, and so all the things you’ve seen previously, they’re all going to be involved in this next phase as we go forward, and all the different derivatives and other products that come in and ways that people create liquidity are going to be exercised against this market, just like they’ve been exercised against all other financial markets over the last 100 years.
I think that that’s something that Frank’s crew has been focusing on is really offering a portfolio of solutions, because what everyone really just wants is liquidity at the end of the day. Jamie, when someone comes to you, what’s your criteria? What are you looking for in a company?
You could start with liquidity. We get a lot of deals that come in and they tend to be a little bit smaller, and there’s just not going to be a market for that, and they want to do a Reg D offering to raise 10 million bucks, it doesn’t make any sense. We’ll start to look from there.
Obviously, one of the things we should point is, as a company, we’re a technical platform, so we run the issuance on the technology side. We don’t raise money. We don’t advise on deals. A lot of customers come to us and say, “We need you to do everything.” That’s not practical. We can’t execute everything. We have to focus on doing one thing.
For us, it’s all about figuring out, if there’s going to be secondary market liquidity, is it an interesting deal? Obviously we’re looking at the team and the advisors that come with them, it’s super helpful, but are these guys really going to raise them money? Because you can want to raise $100 million, but you still got to get $100 million, and that’s not easy.
Dan, how long have you been at the process so far?
We started in June timeframe last year.
So it’s almost a year.
I guess a year.
Yeah. Now, during that period of time, we’ve built a lot of the things that others have talked about, so a fully permissioned system, all on chain. As we think about issues around compliance in the next step, we’ve done that work ourselves. It might have been easier to-
We started the same way.
... to talk to others.
We tried to do it [crosstalk 00:12:09] fund and couldn’t find a solution.
Yeah. We just started building.
I think an interesting story, actually, would be to talk about how Securitize spun out of SPICE VC.
Sure. It was last summer, same exact time window. Carlos Domingo, my co-founder, came to me and said, “I want to do a tokenized venture capital fund,” and I said, “Ah, sounds great.” He was like, “Great. Can you give me money to do it?”
Tim, the co-founder, and I, did the seed capital into SPICE. Carlos being a product guy went out and was like, “I need a platform,” couldn’t find one, decided to build it himself, and then in November we spun out the new co-created Securitize and started onboarding with our first customers, but I can’t actually talk about their names. It would seem as endorsement.
Really, Securitize was the solution to your own problem inside of SPICE VC, right?
Which is I think that that’s how I’ve seen over the last 20 years focusing on startups. Most of the great ideas that become significant opportunities as investments are management solving their own problem, and then using that problem to be the kernel of their business that ends up solving other people’s problems. I think we’re seeing that a lot in the blockchain space.
What’s interesting is that a lot of the barriers to starting a new company, a lot of the barriers of going from an idea to a business had been lowered significantly. There’s never been a point in time in history we could have this low a capital expenditure to get to a business that could possibly reach hundreds of millions of people without significant capital. It’s really an interesting opportunity now to see these leveraged opportunities.
Frank, what’s the process look like? The guy walks in, the widget works, 100 million people are going to want to eat this up, you know that the institutional buyers are going to want it. What do you tell them? How do they have to prepare? What do they need to walk in the door with to be ready for you?
It comes in all different stages. Some people come in with just a white paper, and it could be this killer app protocol with three coders or programmers that have this idea, and they need help from start to finish. In that case, we have to start with outside counsel and assigning the right tax counsel and working through the process that way, with the ultimate goal to get a PPM in place within a month or two and go to market. We have a six- or seven-stage process, but ...
One thing I could probably just speak to from an experience standpoint, just to give some more color around the fund model that you mentioned, to me, one of the barriers to the Reg D or security token instrument for ICOs, because we get a lot of this, too, people are coming to us saying, “Well, I want to do an ICO, and you guys are a broker-dealer, so you can do that for me, right?”
It’s like, well, if it’s truly a utility token that needs liquidity on Day One, where it has a use case on a platform, it may not fit that security token bucket, for a lot of reasons. One, you have a 12-month lockup period, so that’s not very attractive, and the majority of the top 50 crypto hedge funds that are in existence have no interest in buying in the liquid instrument. Your buy side in that regard is pretty limited.
The buy side for security tokens is very nascent and it’s tending to be some of the more progressive, large-family offices that want some crypto exposure, but the funds token seems to be the most attractive at the moment. It’s a little bit more limiting in that when you have a pool investment vehicle, you’ve got a limited number of investors that you can have in the US and there’s some other hurdles, but what we’ve been finding interesting about it, because we ran three of these last year successfully and we have two running live right now, is that in a VC or private equity funds, the lockup period can be five, seven, ten years.
Now you’ve got an instrument where you can have liquidity after 12 months, which to the crypto crowd is like 12 years, but to the private equity and VC world, that’s pretty good and it allows you to have liquidity. The other hurdle, and this is another reality that we ran into with three last year, is a lot of the institutions or family offices are just not ready to hold the token yet.
It’s a real problem because their custody solutions weren’t in place, and we were also at a point a year ago where there were no ATSs or liquidity platforms with any type of regulation oversight. Now there are, and you guys probably don’t know, there’s three or four that are here today that are either there or very close to being there.
That’s exciting, but the other issue is, can we hold this thing? Can a corporate, can a large Fortune 500 company hold crypto on their balance sheet or to run a node or some of the things that are required with these projects? The answer is still sort of “Not yet,” but we found some other solutions on the fund side where, if you don’t want to hold a token, you can hold a certificate that gives you a right to that token, so maybe we’ll custody somewhere else for you and you can hold a piece of paper that looks like a stock certificate. That’s been palatable. We’re working on these solutions deal by deal and literally week by week, but we’re making progress.
All right, so you talked about Reg D, you talked about some of the lockups, security token, utility token. There’s a lot to unpack there. I’m going to go to Brian, on the end, with telling the story of how he got from the first ICO where a guy just lit something and sold it to anyone, and it was the easiest thing since sliced bread-
... to where we are today where we’re basically waiting, right?
Sure. Let me again, a little protective as well, come from the bulge side, on the banking side. I’ve probably two handfuls of IPOs, actually. There’s a little bit of a difference between an IPO and an ICO even when we talk about security token offerings. Let me just break that down for a second.
When you do an IPO, you usually come to an investment banker, you’ve had a very long relationship with venture capitalists in A round to B round to C round, et cetera, et cetera. You typically have about $100 million in revenue run rate and probably a growth rate of about 30% usually to hit the IPO market nowadays.
Let’s juxtapose that against the type of entities we’re dealing with right now in this current token market. These are usually ideas or concepts, and they’re usually either what I call Type 1 crypto companies or Type 2 crypto companies. Type 1 crypto company is a native company, which is the first time they have not burning experience is going to be crypto, digital. Type 2 is something that’s had an operating history and that wants to be crypto in the future.
Especially in the first type entity that is really an idea, you really need to in the very early stages get with an advisor that’s a registered Series 79 advisor. Why is that? Because what you’re doing is you’re actually designing an incentive system, not a business model but an incentive model.
That takes a very sophisticated, a very experienced process to be able to model that out. You’re not just slapping mechanisms together and releasing into the public, which is not the way it should be done. It should be very carefully considered all along the way.
I think that’s one piece to consider when you’re thinking about security tokens is that very early in the stage, you should be engaging with a registered FINRA adviser very early and work with the lawyers to say, “What makes sense from a mathematic standpoint? What makes sense from a regulatory standpoint?”
Jamie, talk about the difference between being inside the United States and being outside the United States. Because you straddle that world, right?
Yeah. Our customers are raising capital in a variety of markets. We spend a lot of time with lawyers to figure out what people can and can’t do in the different markets.
I think, obviously, each environment has its own nuances to it, so keeping track of those things over time, like what does accreditation look like in Europe versus the US, can you self-accredit, could you have retail investors in Europe. All these nuanced pieces are components that you have to understand and that, when we’re speaking to a customer, we have to educate them on what they can and can’t do in their markets.
We spend a fair amount of time clarifying that, but then, there’s all sorts of new things we’ve been learning about, because as we started to take tokens to market and started to work with open finance, for example, we realized how much, like a wallet can equal the person, that doesn’t work architecturally. You realize other things like, how do you manage flow back? How do you prevent that from happening? Because if you’re selling in a Reg S, that can’t come back into the US. What happens after a year? Who can buy that token?
All those questions are things that we have been learning and building into. Actually, some that we released just the other day, which is our protocol for managing second market liquidity, because we saw a humongous problem there. In order to manage that piece, you really need a bunch of smart contracts and code to do it. Otherwise, it’s going to be horrible for the investor.
If you make decisions today, are you locked into those in the future, or do you think you have the ability to flexible and take advantage of shares?
Our smart contracts are all upgradeable. We’re actually in the middle of reissuing a few of the first security tokens on our platform for that reason exactly. It’s messy. You’ve got to go in, you’ve got to burn all the existing tokens and then reissue them. It’s messy.
Is it ask for forgiveness as opposed to asking for permission at this point or ... ?
With our platform, the issuer is actually the company. It’s not somebody else. They need to manage the liability on that side and then manage how they want to deal with it.
Interesting. Dan, a year ago, you’ve gone through the whole title wave of changes in the market. When you first started in June, it was light your token, sell it, and read about yourself in the paper. Tell me a little bit about what the regulatory environment’s been like for you. What changes have impacted you, and how did you react?
Sure. One of the things about being a senior partner at a massive global law firm is you have a lot of resources, and because I know the people who practice in a wide variety of areas, I was able to reach out as friends and partners and pull in a very significant amount of information, and because I know how to unpack these things and think about these things and because I’ve done lots of securities deals over my lifetime, I’ve had a way to think about this.
The resource that was available to me isn’t really available generally. You can’t call up me as a lawyer and a firm and get the same kind of access that I had. I think that was absolutely critical in terms of positioning what we were doing to ultimately be the first registered token if we can get through the problems with the SCC.
Now in terms of what’s happened in the last year from a regulatory perspective, it’s dramatic. What you say is correct, and it was the sort of thing, you could take a token, sell it, collect money. We’ve had a deal with a range of fraud ... my white paper’s been copied three or four times. Some people use my name, some people change the names. [Inaudible 00:23:42] I guess got involved-
That’s called open source.
That’s right. We’ve had to chase down some fraud issues already, but the market obviously has changed dramatically from a regulatory perspective, but I think where I anchor, and this is where I’ve been from the inception, somebody on the last panel or maybe everybody on the last panel got to the point that if you look out 18 months, two, three four years, you’re going to be able to buy these tokens through your TD Ameritrade account, and we think that’s actually what’s going to happen.
The notion of pairing the token with a certificate is something we’re looking at with a very large custody provider, and that may be what winds up happening. It’s a good idea. I think it’s probably the way things get done.
Ultimately, we’re going to windup moving under existing law. We’re not rewriting laws. There’s really no sense anyone has that this is going to get rewritten. The securities laws are really clear. Jay Clayton couldn’t have been more clear in terms of the things that I think he’s said and he’s meant and he’s going to stick with. Then it’s really just a matter of following the path.
Now that path has a problem in it. The first problem is, when you think about some of the projects that you’re working on, they’re smaller in scale and very hard to do a public offering, which in the old world requires $100 million of run rate revenue, and now you’ve got businesses that are just ideas, very hard for most companies like that to raise substantial amounts of capital.
From my perspective, in order to get secondary market liquidity, other than ATSs, and they’re not optimal ultimately. They’re good for funds. I think the fund security tokens trade well in ATSs. Other sorts of tokens won’t trade well in those markets. You now need to ultimately be registered, be a reporting company so that you’re able to sell.
What we really haven’t heard anybody really talk about, but to me it’s obvious, all these projects are going to need to become reporting companies. Just like companies that were public companies need to file periodic reports, I just think that’s where the market’s headed.
Now maybe during that interim period, before the token is issued, you can find other ways to trade. Maybe you can trade in a limited way on ATS markets, but the projects that are going to get done at scale, they’re essentially going to look like public companies, and the sorts of custody, transfer agent, settlement kinds of solutions that you’re going to see aren’t going to look a whole lot different than what you see in the current securities market.
They’ll be tailored, but the SCC is going to essentially force that there is a viable custody solution, that there is a transfer agent, that every single trade is ultimately supported by someone. What’s really interesting to me, thinking about crypto currency, I didn’t approach this as an anarchist by any means, it’s just not my orientation, but when you look at this, you’re going to wind up with something that is so far from the original concept of what crypto currency was, because they’re essentially just going to be tokens trading like securities and ...
I think most of the projects that I’ve spoken to who are building their tokens out this way, they’re fully permissioned, they’re fully recorded, you’re going to know every single person who held every single token for time immemorial. You move from being this currency that people can hide value to something that’s completely transparent to the government.
A couple of projects have talked about things like dividends and distributions back. I would just encourage you all to make sure you’ve thought through the tax consequences of doing that, because if you’re paying out these dividends, ultimately you’re going to have to deliver 1099s or K1s or something to the holders of tokens.
Hard to imagine, other than in a fund context, where it’s really not a big deal to do. The tokens don’t really move, they’re just issued that way, but once you get these projects running at scale and you think about how you’re going to have to deal with tax reporting, in my case commodity pool reporting, very complicated, but it’s going to look a lot like the market did before crypto currency.
I think brief historical interlude here. The reason these crypto currencies came into being in the beginning was actually to allow peer-to-peer decentralized, democratized access and transfer between individuals, with a dream of having it be potentially not regulated or at least not paying attention to the regulations, and I think that’s what Dan was alluding to, and that this idea of creating these tokens as security tokens and shaping them to be compliant to existing securities laws, which is what the SCC is saying now, they’re not going to create a new class of asset, they’re basically going to treat these as securities and force them to be regulated as securities, is antithetical to the original reason that these tokens came into existence.
There’s going to be a battle going on as we go forward. One of the interesting places that’s going to happen is whether the United States maintains its position as the lead capital market in the world. I’ve done emerging markets investment banking for 30 years. I took public the first company in China to list in the New York Stock Exchange in 1989. Back then, the Chinese government came to me and said, “IPOs are illegal. We’re not getting paid enough money.” We had to find a way for them to tax it so they can get money and they can control the flow, and then it allowed IPOs to go forward.
The US was able to impose their laws on China because, back then, 70% of all the equities in the world were owned by US institutions. If you want to sell to US institutions, you had to go through the SCC. One of the battles that’s going to go on right now is between the United States and the rest of the world to see if the SCC remains as the policeman of the capital markets globally.
That’s just the edge of my political thought to you guys. These guys are laughing, as they all know me. Brian, talk a little bit about this tug of war.
Yeah, I think it’s important to frame it like this is that, typically, technology and capital flows are like water. When you grab water, it flows to the areas that are least restrictive. I think that the regulations from my standpoint have done a very good job of remaining somewhat hands-off with these new technology and these new innovations in capital-raising.
I think that there’s over seven billion people in the world. Only 320 million of them live in the United States. I think these next several years, the next 12-18 months will be very interesting to see how regulators approach this both new technology and new capital-raising, and we need to invite this innovation to remain here in the United States, so let’s stay hands-off.
Frank, you have an investment banking background and you’ve seen these changes over time. How do you see this tug of war going on between the US and the rest of the world?
Look, to date, the majority of the buyers of ICOs have been outside the US. Asia is two or three years ahead of us. Now, we’ve seen the regulatory environment in the US around the utility token market essentially put things on hold for good reason, because there’s a lot of fact-finding going on. There’s a couple hundred subpoenas out.
There’s good reason to believe that there’s been fraud and scams and retail investor abuse and market manipulation and things that a lot of us that have been in the financial services world have seen many, many, many times through the last several cycles, so this is a new asset class and it’s being whipped around and it’s time to just put the brakes on and see who’s who and what’s what.
I think the existing securities laws obviously apply and, as Brian said, I think they’ve done a nice job of leading with fact-finding and then leading with some enforcement for the worst scenarios. I think that’s been enough for people to take a step back and figure out what’s the right approach. You guys are filing an S1. That’s-
That’s amazing, right?
That’s amazing. That’s one example. There’s other people that say, “You know what? Forget it. We’re just going to go offshore. This is a real protocol to utility token. I’ll just avoid this jurisdiction.” For now, I think that’s a problem for us. That can hamper innovation.
We’ve seen other countries like, in Switzerland they issued the FINMA guidelines, which are basically a playbook for how you can do an ICO, and there’s a pretty liberal process in Germany and a few other places. Korea goes back and forth with whether or not-
We’ll find out in a few days.
... they’ll do it. Yeah. Then in China, it was on and off. We’ll see I think months or years here in the space, so by the end of the year, maybe we’ll have more clarity, but for now I think it’s just lead with best actions.
If we do this right, this could be the next 20 years of growth and innovation, small businesses, they alluded to earlier. If we just are thoughtful about the way we regulate the space, let the innovation grow, just like we did the internet, this will be a great tool for small businesses’ freedom across the world.
It’s unimaginable that we as a country would not be supporting this.
I’ll tell you, when I first saw this opportunity, and I’m an Irish citizen and an American citizen-
We love you anyway.
When I saw this, I saw capital moving from the US, because startups outside of the US haven’t been able to get access to traditional funding, which just doesn’t happen.
I spent six years in the UK talking to all the venture funds and what have you, I’ve been to Malta, I’ve done all that stuff. There is nothing there. There’s no capital. When you compare it to the US for startups, it’s just totally not there.
It’s a humongous missed opportunity if the US makes it so bearish that the capital moves, but I can tell you, with our customers at least, when they raise money today, it’s primarily not the US. I think SPICE had three US investors. Tim and I were two of them. The US is not a huge market for this yet.
Which is interesting, because historically, we’ve been the ones who have been the engines of change. We have 10 minutes left. Brian, we’ll start with you. What would you like to say? If I was an aspiring entrepreneur with a kick-ass idea and I don’t know where to start, what do I do?
Start with Medium. Start reading on Medium. Avoid the public press right now. Typically they’re going to their old networks, their old-world networks, their old-school finance network. You see some of the old guard in the public press railing against bitcoin and other things. Time will tell, history will tell who is right on those things.
I would say, if startups move fast and break things, Wall Street does not. Wall Street plays by the rules. We both need to come together. I would say seek advice early from a registered representative, and also a lawyer.
I would echo that, and to your point earlier, Brian, about just doing the math. As an entrepreneur startup, figure out exactly, don’t look at last year and say, “I saw these ICOs had $50 million falling out of the sky.” That’s gone.
Look at what you need and stage your projects. Do you need a million to get yourself set up for the first year to pay a small team? Do you need five million to build some tech? Do you need 20 million two years later, or maybe you can wait two years to issue a token?
Stage it out. Seek the right advice. Either start with an advisor, registered broker-dealer, or with qualified outside counsel that has expertise in securities laws, and go from there.
Just a thought that came up when you were talking. Is VC and private equity and tokenization, are these exclusive or are these things that you see working together?
I think the smart VCs are understanding that tokens provide great liquidity, new business models. There’d been a trend for many years that the IPO model is seemingly broken, have been many of them. They don’t make money for Wall Street, really. To say the truth, they’re loss leaders many times.
Many of the entrepreneurs that are running these institutions, these companies, they’re staying private for longer and longer and longer to avoid public markets. I think this is a great innovation so they bridge the gap.
Many of our customers are actually venture-funded businesses. They’re not upstarts. We have spent a lot of time understanding what this means to the cap table, how all those pieces fit together. What happens if somebody wants to buy the company later? Those are all pieces that can be managed, but they have to be thought of before.
So it’s as much an exit strategy as it is an initiation strategy?
I look at it as the beginning of getting the entity the capital it needs to fulfill its mission. It’s still yet to be seen what type of liquidity event may occur. Could some of these token entities IPO later on? Absolutely. Will they all need to? Maybe not.
There might be something that I call network acquisition, which used to be called M&A, we’ve all heard of this, my group calls it network acquisition, where along the growth path, when you’ve reached your plateau and organic growth, you could start to see these networks combine in an M&A-like manner. That’s out in the future. We’re already starting to think about that. My team is starting to think about that, so we’ll see.
Dan, your advice to the guy looking for an exit or the guy with the startup. How do you start down this road?
I’ll maybe say something, answer a different question. What’s really interesting about this entire journey in space ultimately is that the notion of tokenization has just completely ripped apart the basics of capital markets in the sense that, prior to crypto currencies, any sort of capital raise was done in a geography in accordance with the laws of that geography.
Now all of a sudden, through the issuance of coins, you have an access to global markets. What’s huge about, I was going to say “humongous,” but you took that word, what’s huge about the idea that you can raise capital globally is that you’re no longer bound by a nation state.
This global access to quality projects and things that are going to be very transformative as time passes are in existence now. When I think about some of the financial engineering and new products that I’ve developed over time, I guess I’d created the first US company sold into Canada through an income trust, it’s interesting, and what it really showed was that you can access capital across border, and this is 15 years ago.
I think now we’re headed in a vastly different spot. What that will wind up doing is creating global capital markets. Now in terms of whether or not the United States has a role to play, once you get past the top 20 crypto currencies, the size of the market is relatively small. It’s I think $20 billion in total, which really isn’t a lot of money across a vast number of projects.
Going forward, what I do expect to see is really this proliferation of tokens and then the financialization across a very broad range of instruments that are brought on, so it’s going to be vastly different.
Interesting. All right, guys. I think that’s it. Thank you.
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