(slow piano music)
- For the next panel, I'd
like to invite Laura Shin,
she's the senior editor at Forbes
and the host of the very
famous podcast, Unchained.
She will invite the rest
of the panel, thank you.
- And I will let you all
introduce yourselves.
We're gonna be discussing
legal structures,
which sounds really boring,
but the topic of the last
panel also sounded boring
and it's obviously a very exciting topic.
Okay, let's just go in order,
Matt why don't you start?
- Hi, Matt Corva, a lawyer for
a company called ConsenSys,
for those of you who don't know us,
we're a big company working on Ethereum,
we do a lot of enterprise consulting,
we do a lot of government consulting,
we do a lot of public
Ethereum software development,
incubate a lot of
projects within ConsenSys.
I've been at ConsenSys
for almost two years,
I was the first lawyer at ConsenSys
which you can imagine,
a company full of people
rooted in crypto-anarchy
and overthrow the world
is a fun place to be if you're a lawyer.
So I've got an interesting
perspective of people
that truly wanna change the world
but I've also learned that
the world is not a place
that immediately changes overnight.
And working as a lawyer
there is a lot about
following the rules and
doing things the right way.
- Hi, I'm Reuben Bramanathan,
I'm product counsel at Coinbase.
That means I look at things
like what products we can offer,
in which jurisdictions, to
which types of customers.
So everything from the types
of tokens we can offer,
the types of trading
platforms, and all the types.
So we look at Coinbase as a bridge
between finance 1.0 and finance 2.0.
So really, our biggest priority
is keeping that bridge open
and allowing people to move effortlessly
from fiat to crypto, and between both.
- Hi, I'm Josh Klayman, I
chair the legal working group
of the Wall Street Blockchain Alliance,
which is an alliance
of about 30 law firms,
or lawyers from law firms,
who are focused on the legal issues
confronting the blockchain space.
I also cofounded and colead
Morrison and Foerster's Blockchain
and Smart Contracts Group,
which has about 70
lawyers around the world
who among other things,
focus on blockchain,
smart contracts, and
cryptocurrency matters.
So right now I'm very
excited about token sales,
also about hedge fund
potentially trading crypto
and all manner of other
blockchain questions.
- I'm Karen Ubell, I'm an attorney
at Cooley here in Palo Alto.
We have worked primarily
with a number of ICO issuers
and helping them navigate
the regulatory landscape
and bring to that conversation.
About six years spent at
the SCC prior to Cooley
and the division of Corporation
Finance working with Bitcoin
at that time as we were
considering how to characterize it.
And I'm bringing that
experience to assisting clients
as they come navigate this
gray like regulatory landscape.
- My name is Lee Schneider.
I'm a financial services
and technology lawyer
based in New York City.
I'm at a law firm called
McDermott, Will & Emery.
I had the honor and
pleasure of working closely
with Reuben on the Coinbase's
securities law framework
for blockchain tokens,
which is the project
that really got me into this space.
There were a number of
other contributors to that
including Matt down on the other side,
and I just wanna say as
regards to last panel.
I thought they made a lot of great points,
and I was really pleased to
see the level of a vision
and ethics that was being
espoused on that panel.
It's not something you
see everyday the space
and it's very reassuring.
- Okay so in the minutes
before starting this panel,
I received an email saying
that consensus just announced
something in a blog post.
I actually brought my computer here to see
if I could read it but it's super long,
so I did not get to read it.
So why don't we have Matt
summarize what's going on.
- Sure so what Laura is talking about
is something internally at ConsenSys.
We've dubbed the Brooklyn projects
based on our office in
New York being Brooklyn.
We've see a lot of enthusiasm
over the past two years
involving token sales.
We think that token sales
are very valuable thing to
the future of technology, to
the future of decentralization
to the future of
democratization of society.
But token sales can be a
lot of different things.
You can have securities tokens,
you can have utility tokens,
you can have securities that
masquerade as utilities,
and you can also have
...we are in this industry
we're terrible at naming things.
So we came up with this
utility token concept
that nobody quite knows
what a utility token is,
So another thing we're talking about
most recently is consumer token.
So concerned that tokens can be anything.
It can be a software license.
It can be any consumptive consumer good,
and we fundamentally think
there has to be a way to sell
these goods to the public without going
through securities laws, if
there's a way to do that.
But the thing that's concerned
us over the past two years
is we've seen the market develop
and some of the concerns
that Vinny and Matt brought
up on the prior panel.
We've seen a lot of bad things happen.
We seen a lot of over-exuberance.
We've seen a lot of
people perpetrate scams.
We've seen a lot of fraud,
and we think that we need
to get back to our roots
of who we care about.
And we care about consumers,
we care about protecting consumers,
so we had some success earlier this year
with something called the
Enterprise Ethereum Alliance
where we build a consortia
of enterprises focus on,
all coming together and building standards
about a Ethereum technology
using enterprise,
and we thought why don't we do this
with best practices in token sales again.
So we started a little bit on this
with a coin base framework last year,
and that the idea of the Brooklyn project
is getting to a place where token sales
better protect consumers.
So Vinny talked about a
couple of things right
like transparency in
pre-sales, that's a big thing.
No one should have a 10,000% discount.
People shouldn't be
flipping tokens on consumers
and things like lock ups,
things like restrictions
on trading to reduce the
chance of speculation
to reduce harm to consumers.
So what we're really
focused on there is building
an alliance with other
blockchain companies, law firms.
There's a couple of
interesting law schools
that are interested.
We hope Berkeley is gonna to get
involved as well and regulators.
We've had some talks with some
folks at the SCC about this.
We've had some talks with folks
in other government agency
certainly people all around the world,
like the monetary authority of Singapore
where people have seen
value in these things.
But we need to call
come together as a place
to try and create more clarity and try
and create best practices.
So that's what Brooklyn project is.
I encourage you to read the blog post time
for the next two months
consensus is allocating
a ton of resources to this project.
We've decided to divert attention away
from token sales for the time being,
and get to a place where we
think we can do token sales
in a healthier way and
a more sustainable way,
and it starts with
protecting the consumer.
- Okay do one of the
points that maybe slipped
in there at the end was like
you're basically pausing your token sales.
Is that?
- Yeah, I would call it less of a pause
and more of a re-allocation of resources.
So we constantly survey the market.
We constantly pay attention
to what's happening
both on a consumer front
and the regulatory front.
We noticed, I mean it
would be hard not to notice
increasing attention from the SCC.
We think that they're
increasingly concerned
about what's happening with consumers.
We also think that protecting consumers
is a very important thing.
They're consumptive goods,
they can be regulated
by many agencies including the
SEC or the FTC or the CFTC.
But bottom line is if
you protect consumers,
you root out all the fraud,
and we think that's a valuable thing.
And that's why we're going
to allocate resources there
before we get back to token sales.
- Okay so let's talk a little bit about
how things have changed this year.
Vinny obviously reference this earlier
where there was a period
like a year ago, last winter
where there might be one or two
big headline ICO a month and then it was
like one or two a week.
And then it was like one or two
that weren't even
headline once every hour.
So you know even in that time,
you started with this framework
that you guys put together
with Coinbase and it was thinking like,
oh how do we do this right.
And then suddenly it's now this
big proliferation of things
that may be don't follow that framework.
So what do you think has changed?
How has the legal thinking
changed in the past year?
- So I'll go first, but I'd love to hear
from everybody else on it.
I think one of the things
that changed frankly
and not to pile on the VC bashing
was the arrival of venture capital.
The stakes got much higher,
the interest got much higher
and all the sudden
became mainstream media.
You saw token sales go from 5
in 10 million to 200 million
and the stakes just got
much higher for everybody.
So that was one of the things
where it was just a bunch
of crypto-anarchist trying
to figure out how to do
these things and get people
interested in their projects.
It became a mainstream vehicle
and I think that enough
is cause for hey let's
make sure we're doing this
the right way now that the
other stakes are higher.
- Maybe I'll just jump in.
I agree with you Matt that
that's been a big part of it.
Anytime there's popularity in an asset
and then you're gonna see
lots of different participants
come into that asset.
One of the things that I like
to remind everybody is that
blockchain assets are
not homogenous assets.
You can structure a blockchain
token in many different ways.
It can be a representation
of the physical asset.
It can be representation
of an intangible asset.
It can be a natively digital asset,
and so when you're thinking
about all of these things.
I think it's important to
remember that there's lots of
different regulations that may apply.
Blockchain is not an industry.
Blockchain is a technology,
and as a technology it gets applied
in lots of different industries.
So you can't just say,
oh let's figure out the securities laws.
Oh they don't apply, hey
we're done no more regulation.
That's not the way the world works.
In the world, we regulate
based on the context
in which the activity is happening.
So if the blockchain application
is in the healthcare world,
you gotta worry about
Healthcare regulation.
The blockchain application
is in the energy sector,
you gotta worry about
energy sector regulations.
We can go on and on down the list
but I think that aspect of
things is also changing the way
people are approaching
it in the marketplace.
- I think another thing,
I mean it's been said
a number of times is it when
people were first starting out.
A lot of people thought
of things as the Wild West
and I think one of the things
is changed over the past year
is it more and more token sellers
are seeking legal counsel.
And also there seems to be
less regulatory arbitrage
because now countries around
the world have spoken out
and said, hey we have laws
too and they may apply.
And also with the enforcement action
that focused on the DOW.
The SCC made clear that
even if you launch a token
sale overseas such as a DOW,
which was launched out of Switzerland,
that you still have to be mindful
of the U.S. securities law
and of course other laws,
if you're marketing, issuing
and selling to U.S. persons
and the token happens to be a security.
- Actually a little bit more about that
because that was just one of the really,
it's probably actually the
number one biggest regulatory
event that happened this year.
What were some of your other.
For other panelists,
what were your big
takeaways from that report?
- For me, one of the
takeaways obviously was that
the SCC was thinking about this,
and that even though
there wasn't necessarily
a way for them to provide
in the 21A report.
I think was a way for them to
give some guidance to folks
without necessarily providing hard lines.
It reassured us that thinking about it
from the Howey test
perspective was the correct
perspective facts and circumstances test.
Even though it's a 1946 case.
It's really still the applicable law here,
and how we're all thinking about it.
So I think understanding
from that perspective
that people at the SCC were
aware of what was going on.
They were monitoring
it but I think for me,
it also signaled that
we're playing in the space.
We're aware of it, we're thinking about it
and that first step.
- And one thing I wanted to
ask about was when I read it.
I felt that okay, one thing that's clearly
not included in this is this
issue of utility tokens.
Everybody is trying to
structure their token
like a utility token.
And for those of you who maybe don't know
hopefully you do but like an example of
a security is something
where you're selling it.
It's investment, there's
an expectation of profit
and that profit is dependent
on this external third party.
But with the utility token,
I guess you can compare it
to maybe like buying an apartment.
I think they are actually some cases
and maybe the SCC will correct me later
if I'm wrong about this.
But let's say you buy a condo in Manhattan
and obviously you couldn't
expect maybe that some day
you will earn some profit from that.
But I think some previous
court cases have said
oh, but you knew you're
probably purchasing this
not for that reason but for the utility.
And so maybe an example
of a token like that
might be something like
the basic attention token
where you're purchasing it.
So that you can use it to pay publishers
or whatever and not have to view ads.
So what do you guys
think of this argument?
Do you think it's something that ICO
should be trying to
structure their tokens as
or do you think that this is something
where the SCC will say this isn't,
You guys are making this up
that you know these are not securities.
- So maybe we'll let the SCC answer that
when they speak later.
So I won't try to speak for them,
but my basic view and this
is my personally held view
is that because blockchain assets
can take pretty much any form right.
It's just the digitization of an asset,
and I think people forget that.
That look Satoshi Nakamoto was trying
to solve the double spend
problem with digital assets.
Right he was trying to make a way.
He or she or they were
trying to make a way
for digital assets to be traded
so that you didn't have to worry about
whether or not you were
getting the real one right.
And that real one could be anything,
so when your example I
think the Supreme Court case
you're referring to as foreman.
Your example about the
apartments in New York.
You could see how you
could digitize an apartment
but wouldn't it be so
much easier to have to
worry about getting title
insurance when you buy your house?
If it's just sitting on a blockchain,
everybody knows the prominence of it.
Right so these are amazing technologies
that will make the digital
world accessible to everybody.
And so yes, you can
structure a token in a way
that is not a security.
You can structure a token that
represents an ounce of gold.
You can structure a token
that represents an identity.
Somebody's identity right,
that's what the civic guys are doing.
You can structure token
that's hospital records.
Can you imagine how great it would be
if you could just transfer
your hospital records
to your doctor or your insurance
company on a blockchain?
These kinds of really cool creative things
that people are coming up with
as applications of the
blockchain technology
are opening it up and are
going to be situations
where the securities law just don't apply.
- In response to your question
about whether people should
be structuring tokens as utility tokens.
I think they should if they do that,
seek legal guidance right,
and many of us on the
panel here or our firms
have been working together
to try and provide guidance
that we think is reason
for how one might go about
determining whether a
token is a security or not.
So I think many of us in the
industry at various firms
in various companies
including those on this panel
are thinking really hard about this.
So if someone wants to pursue that path,
we're all talking to each other
and we're trying to find
out the best approach.
- Let me just add one thing.
So every time I hear the phrase,
a utility token is not a
security, I cringe a little bit.
We made the argument in the
paper released last year,
this time last year that
if a token has utility,
and the purpose for which
it is sold is that utility.
Then it's less likely to be a security.
Having said that there's
really no bright line
as to when something is a
utility token or it isn't,
and even something has utility.
The way that it's marketed,
the way that it's promoted.
The returns that are
promised could still make
that thing a security.
So I think we are really
focusing too much on
trying to create a bright
line around utility tokens.
When you really have to look
at the rights and obligations,
and the way that each token
is marketed separately.
- I'm sorry Matt, I just
wanna take issue a little bit
with something that Reuben said
about the way that it's marketed.
There are lots of things are marketed
as an investment that are not securities,
and we should just be
cognizant of that fact.
Just because something is an investment
doesn't mean it's an investment contract,
which is the term of art that's used
in the 33 Act and the 34 Act,
and is the basis on
which Howey was decided.
So we should just be
really careful about saying
oh hey this is marketed as something
that's going to appreciate in value.
There are lots of things that you know,
Franklin Mint in my lifetime
has marketed many coins
that they say they're going
to appreciate in value.
And I'm pretty darn sure
that the SCC is not going
after those guys 'cause
those are to say that
those are securities.
So I just wanna be really
cautious about that.
- It's a good point but I think that
if you're designing a token sale,
and you wanna create it in a way
that's least likely to be a security.
You may emphasize the
potential future network value.
The participation rights
that you have in the network
over any returns that you're
gonna see in the short term.
I think you see those
really sketchy ICOs saying,
it's really this thing is
gonna go up 200% in next week.
- And I'm saying that
you should ignore that
altogether as a factor.
I'm just saying that if you say,
oh they're saying that's an investment,
it must be a security.
That not the right answer.
The right answer is wait, slow down.
Let's look at the way
the token is constructed.
What its features and functions are,
and then let's figure out
if you got a security.
- I think I can address both of these
and get back to the SCC Dow report 0.2.
One, we didn't mentioned why we have
the Brooklyn project right.
So make sure that people
are following best practices
and not misleading consumers
'cause we care about
people being protected.
'Cause if you don't protect your consumer,
you're going to be over-regulated
or perhaps appropriately regulated.
On the SCC Dow report point.
We were thrilled when we read it.
I don't know if you guys were as well
because it looked a lot like
the Coinbase free market.
It cited a lot of the things that we cited
and it was a reaffirmation
that we were thinking
about it the right way
as I think Lee mentioned.
But perhaps the best thing in there,
and sort of why you're
seeing this is the best thing
is the SCC reiterate it.
In the U.S., we take a facts
and circumstances approach to things.
There are no bright line rules
that utility token is not a security,
and a security is always
yeah whatever it is.
That's really important as Lee mention,
these assets are not homogenous.
They're sold in different ways,
and the fact that we can analyze them
on a case-by-case basis is really helpful
in sorting out things that are potentially
unregistered securities or
fraud or whatever they are
from things that have a lawful purpose.
- Yeah, I agree with you Matt.
I also I guess agree with everyone,
with some of what's being said.
I think a matter of sale
is one of the facts and
circumstances right,
so it is important to Reuben's point
but it's not the only thing
to Lee and Matt's point.
- From this point I wanna switch over
to the controversial SAFT.
We are talking about like here's something
that's a security and then later maybe,
it can be a utility and
earlier in the previous panel,
they were saying that
if you sell at the point
where you know it's
close to having utility
that makes it or that's the
best time to have a token sale.
So I wanted to get your opinion.
Like Marco Santori was one of
the top lawyers in the space.
He wrote a paper with protocol labs
and they were saying basically
if you're gonna do the sale before
the token is utility
then that's a security.
And then it later when the network is live
then it's no longer a security
and some critics were
saying, "Oh how can that be?"
That's something that security
one point magically turns
into not a security later.
So I'd like to get your opinion on this
and you know what you think of this stuff?
- I worked on that.
I worked on SAFT project with Marco
and with Fauklin for the labs.
I think that we talked a lot
about the consumptive use
and I liked the idea of maybe
they were taking the new
(indistinct talking) to
the consumptive token
or things like that.
And I think that we
also saw that discussion
on the idea of when does a
token end up in the hands
of a retail user, a retail
holder if pushing that out
to that real true consumptive use.
Where people we believe are buying that
for the purpose of using
it to redeem for services,
and things like that.
At that point, we applying the Howey test.
It's a different analysis as opposed to
when you're prior to that point.
There's a lot of risk and
there's a lot of development work
that still needs to done by the founders,
by the company.
There's a lot of build out
and taking on that risk
and relying on the idea of your founders
and the company to look at that
development up and running.
We think factors into the
Howey test in a different way
so that SAFT as folks
mentioned is based on the safe
that's commonly used here.
The white company your safe,
but essentially it's
agreement for future tokens
and forward contract as
an investment contract.
And again I think the space
where there really wasn't
a lot of guidance and as you heard
from our first panelist.
I think people really wanted
to find a way to be compliant.
I think that's why has there
been a lot of frameworks
that have been developed,
have been published
in order to try and
help issuers find a way
to try to be compliant in the absence
of any real specific guidance
from regulators to hanging their hat on.
And this was something that
we thought really navigated
that and it in a way that made sense,
and also was really consistent also
with a lot of the policies
behind SCC structures.
Putting that risk with larger investors,
sophisticated investors
before the launch of the token
where you can actually use it.
It really fits into that
idea of allocating risk
and to the folks that are
able to assess that risk,
and a bear that risk.
Disclosure as well as
something that we also,
it's part of the SAFT process,
providing that disclosure to investors
so they understand what the risks are
that they're getting through.
And again we thought
there was a way to align
with many of the policies of
the securities regulations
while also helping issuers
manage that risk as well.
- So I think first I would
what Cooley with the SAFT
and protocol labs is great
'cause they started a discussion.
We really started it all
through Cordoza law school
and then some criticisms on the SAFT.
We think the SAFT is not
necessarily a good thing.
We don't think it's consistent
with our interpretation
of U.S. law as we talked about earlier.
Facts and circumstances,
no bright line rules.
This idea that functionality
is your bright line rule
seems dangerous and misleading to people.
And some of the people on
their earlier panel mentioned.
We think the SAFT creates
misaligned incentives
between projects and
consumers and their packers.
So if you are a venture investor in a SAFT
and make no mistake,
that's who the SAFT is targeted for.
It's targeted so the big
Silicon Valley VC firms
can participate and say
that they're not engaging
in something unscrupulous,
because they know what they're buying
as a security and that's fine.
That's what they're use to,
but when their only incentive
then is to get a project
through a token sale and
they have no lock ups
and they can flip their
tokens on the market.
You know who's not gonna do well there?
The consumer, it creates
misaligned incentive
between projects and people,
and stuff like that is what
we need to look out for.
It also creates a false sense of security
among projects to say
like hey I did a SAFT,
everything must be good.
When again, we haven't heard that right.
We've heard facts and circumstances,
and we also disagree with
the functionality point.
There are lots of things
that have been sold
throughout time before
they were fully functional.
By the way what's
functionality in software?
Can anybody tell me when
something is functional?
I don't know what that means.
I don't know that anybody does.
- You know but also I
have in certain software
that I use, I wonder whether or not--
- Yeah like Apple right,
if you have new OS,
you're probably a little
worried about that.
But the there's so many
beloved in this geography
by the name of Elon Musk,
and Elon Musk just pretty
sold however many Teslas
that he'll deliver to
you four years from now.
And you won't have that functionality,
and by the way, building a
Tesla seemed a lot harder
than building softwares
as proven the model 3.
But you can plop down 250
grand for the fastest car ever
that he's saying which is
an interesting proclamation,
'cause who will be the
fastest car ever in 2020?
I don't know.
When it's actually released
but the point is that
none of this is really
grounded in precedent.
We haven't seen that,
so it rang some alarm bells
for us to start seeing
that this is the bright rule.
We haven't seen Elon Musk
prosecuted for unregistered
securities by selling
Tesla's before they're ready.
And as far as we can
tell they only difference
is that now we have a fundable market.
There's now a secondary market for goods
and that's what blockchain enables.
These trustless transfers
but as Lee mentioned.
They'll be lots of
things on the blockchain,
your health records,
various software licenses.
If you can buy a Photoshop license
and be able to transfer
that to other people
that might create a
more efficient economy.
So just the idea that
there's liquidity now
seems scary to us to say just
because there's liquidity
means that everything
must be speculative.
Everything must be
investment and therefore,
we must treat everything like a security.
We don't wanna jump there,
and we didn't see case law
that makes us jump there.
We think that there's a facts
and circumstances approach to everything.
- Just as curiosity,
I wanna take the temperature of the room.
Okay everybody who does
not have an opinion
on SAFT raise your hand right now.
Okay, now I'll put your hands down
and anybody that didn't raise your hand.
Raise your hand if you think
the SAFT is a good model.
Okay that's like what 15%-20%,
and then raise your hand
if think the SAFT is a bad model.
Oh, think it's the same number of people.
Okay, okay, alright.
(audience laughing)
Alright I was curious but
what did you wanna add?
- Sorry, maybe let's just
steer the conversation
a little bit away from this SAFT
because although it's, I
applaud Marco and Karen
and the folks at IPS for what they did.
'Cause I think again, it's
advancing the conversation here
in really important ways,
and they didn't come out and
say this must be the log.
This is how everybody should do it.
They came out and said hey here's a model
that people should be thinking about,
which is very important.
I signed onto the Cardozo paper.
it reflected a lot of the things
that I have been talking about it
and my contributions to it.
But let me just move to address
a slightly different point
because there's been
both on the last panel
and a little bit on this
panel some bashing of VC
and speculation in the marketplace.
And let's just all be
clear that speculation
is not necessarily a bad thing.
Speculation happens in all different
kinds of markets all the time,
and in fact there are lots of products
that we would never see if
somebody didn't speculate on
whether or not they
would be good products.
And maybe I'll just take an example
from what might be the
old world, which is books.
Right in the old days,
book retailers would
speculate on how many copies
of a book they were going to buy
because whether or not
that book would be popular.
Nobody knew and that kind of speculation
is an important part of the economy.
So we do need speculators in the market,
we do need VC's in the market.
I'm not saying that VC should
be entitled to super profits
or I totally understand
the ethics arguments
that were made on the last panel.
But I also just want to caution everybody
that if you're always pointing fingers
at the "bad speculators",
you're going to miss out on a huge part of
what goes on in the economy more broadly.
- May I say something too?
I also signed onto the Cordoza
blockchain project report.
I think one thing though
I wanna point out here
is one of the reason I
think it was important
to have a report like that is that
when Cooley released this after
project and the white paper,
as was noted it was to promote discussion.
It was to say here's
a potential viewpoint,
let's build on it, let's
get your reactions.
And I think what was happening sometimes
is it people in the market
either didn't hear that
or didn't want to hear that.
And so they were taking the form
which was intended to be a suggestion,
a possibility not the final,
not the one and using it,
or coming to lawyers such as for example,
people had come to me and said,
when I would mention something.
Somebody say well you need to
get smart on this SAFT right.
So pushing back and saying, hey no,
this is not settled law, this
is not a settled perspective.
Here are some other concerns,
here are some other thoughts.
We thought that was very important
just to avoid over-reliance,
so in no way are we trying
to bash anyone at all.
- Another thing, I think just
to mention overall is yeah.
I a hundred percent
agree that was the point,
and I think that was the point
and also of the Coinbase framework.
And is providing some guidance
for people to think about
and as they move forward and
then certainly not bright line.
I think the other thing
to talk about since
this is the legal penalties.
None of this is safe.
All of this as you're
proceeding through this
is fraught with various risks
and whether you use the SAFT
or use something else in there.
We don't know the regulatory
landscape six months from now.
We don't know how things
are gonna be treated
and how do you market it,
and how you do these things.
I think that that is
hopefully a major takeaway
and I think probably people
are already aware of it.
In general but the idea here is
that there are frameworks.
We have issuers who are
going to be compliant,
we have law firms and advisors
who were trying to help them on that path.
But there's no there's no risk free,
safe path that says okay,
I've got the golden ticket.
And I'm all set.
- May I just say one very last thing?
I just wanna be clear also,
some of us perhaps not all of us
who signed on to that response report.
Some of us believe that
you could have pre-order
and pre-sales agreements,
and that you can use those.
So it's not to say that
you can not use those.
- So I actually think the
SAFT is really good model
if what you wanna do is raise
money from a bunch of fees
or early investors who
will deliver you value
in the early stages of
software development.
I think where it may fall down
is at the later stage is
where you actually try
and kick start your network,
and you need a wide
variety of participants
who are also incentivize to
participate in the network.
You need to distribute your token
to as many people as possible,
and what you're really
promising them is saying,
when this network is up and running.
And to Lee's point like
where functionality is a match point,
where functionality is
not a bright line either.
But when there's actually
value in the network
then you have value as a
participant in the network,
but until then I will give you this token
or you can buy this token that
would represent that future value.
So if you actually wanted
to kick start the network
and solve the chicken and egg problem
then maybe the SAFT isn't
the best model there.
A model that allows you to
broadly distribute your tokens.
- I just wanna add too,
I think we have talked
a lot about the 1000%
discount and no lock up.
The SAFT is a negotiable instrument.
The SAFT project did attach a form of SAFT
but now it having done
the number of these.
I know that they take a
number of different forms,
typically there is a discount or bonus,
but I would say more often than not.
We are seeing a lock up and I think again
just remembering that there's
no set terms of a SAFT.
No one's prescribed those
as a negotiable instrument
that the the issuer can you
think about the various.
How it's gonna work for them,
and what things they need
and what make sense for them
for their personal investors.
- So one thing also that
I wanted to bring up was
Republic Crypto recently
launched an offering
that enables ICOs to be compliant
and also sell to non-accredited investors.
They're using jobs and regulations.
What do you think are the pros and cons
of going this route?
- We've studied the Jobs
Act quite extensively
for a number of things but
I think to Lee's point.
The solution isn't always
just treat everything like a security,
and you may create some
problems for yourself.
If you take consumer good and
you try and stuff it through
securities crowdfunding laws.
The Jobs Act is lots
of great things in it.
It has lots of things
that need work right,
for those that have
looked at the Jobs Act.
A lot of the things are just
inefficient for companies
like you're gonna jump
through all these hoops.
You're gonna spend five million dollars
to raise seven million dollars.
Does that make much sense?
There are things like regulation A+
that make a ton of sense,
and I think we're going
to see a lot of projects
gravitate towards that way,
but not all tokens are created equal.
If you have a token that
is just network-based token
is a protocol token and
your business doesn't have
underlying things that you would want
in an equity instrument
like profits and dividends.
Trying to classified as
security just to be safe
for crowdfunding when maybe
you don't need to do that
doesn't necessarily make a ton of sense.
If your blockchain business
has a revenue model
and you wanna pay dividends
to a token holder.
You wanna issue profits to a token holder,
doing a security is the
only way to do that legally
in the US as far as I know,
so things like A+ are interesting.
The problems that you run into right now
that people are trying to
solve is the secondary market.
So where can these things trade.
So like they're gonna show
up on NASDAQ right away.
Their projects like the
D0 project and some others
that are working on
blockchain based exchanges
that can trade securities tokens.
The good thing about things like A+
and some others is that
you do get decentralization
of purchasing that you don't have
as accredited investor restriction
that we're not bringing over the woes
of the traditional public markets.
Where lots of VCs get rich on Snapchat
and then it hits the public,
and the public gets hammered
over the head with it.
There are lots of opportunities for us
to do this in a better way.
- So let's actually quickly move through
the last topics here.
So let's look at legal structures.
Obviously there's like
the foundation model
but then we've also got things like
what Vinny is doing with civic work
or in a consensus where there
is a more for profit model.
What do you think is the best
structure for different types
of tokens in what should teams think about
when they are determining that?
- I don't know that there is a best model.
It really depends on in
particles of the team,
in part the way they plan
to structure the business,
in part the way they think
they're gonna best be able
to get access to the marketplace.
So I think there's a whole
host of considerations,
- And what are the pros and
cons of the different models.
- I'm sorry?
- What are the pros and cons
of the different models?
- So maybe I'll just say
what I think is the biggest
con on and I don't mean that
in the purely pejorative sense.
(audience laughing)
The biggest potential
negative by using a non-profit
or foundation which in most
U.S. states with nonprofit laws
and I think in many
jurisdictions around the world.
You're not allowed to use a non-profit
to enrich other people and
so if you are giving tokens
for "free" to people who
worked on the project.
And it's being done through
a non-profit or a foundation,
you just have to be really careful
about that enrichment prohibition.
- You might run into some
governance problems too.
- To the list of considerations,
I think tax plays a big one
because for a lot of these
off shore non-U.S. potential structures.
If you have owners have
equity of the token seller
that are based in the U.S.
I'm not tax lawyer but
our tax lawyers advised us
that U.S. tax will still matter
particularly when you have
to bring the money back in.
So I think that should be a big driver
especially now that we know
that many jurisdictions
around the world have spoken out,
about having their own
securities laws and framework.
With respect in particular to
this Swiss Foundation model,
just to build and what was just said.
One of the challenges as I understand it,
just having spoken with our
Swiss consult friends is that
part of the biggest strengths
of the Swiss Foundation model
is one of it's biggest
challenges which is,
It's very hard once formed
to change the purpose of that envy.
That may be a good thing,
that may be a bad thing,
similarly it may be a good thing
or it may be a bad thing
that it's very hard
for founder's to get profits
out of the foundation,
because they're actually is a
contribution to a foundation.
There also is as I understand it,
not being a Swiss lawyer.
There's some complications sometimes
if you're going to have a pre-order
or pre-sale for SAFT agreement.
There are questions as
to the enforceability
of being able to bind a foundation
to do something in the future.
So you say in the future,
the foundation will
deliver to you X tokens.
My understanding again, not a Swiss lawyer
is the most you can do is
really make a recommendation
to the Swiss Foundation
to sell those tickets.
- Having said all that
and I agree with that.
One red flag that I have
seen a few times now
is you have an existing
full profit company
doing an ICO and bringing
the proceeds of that
into the existing companies.
So maybe they've done a
seed round, a range around,
and then okay we'll do an ICO
and we'll kick start
the business that way.
That doesn't make sense.
You're supposed to be
raising funds to be funding
the development of this
distributed network
or this decentralized application.
If it is pulling those funds
into your existing business,
that's a huge conflict of
interest and a huge red flag.
- And I just encourage
people, don't be cute.
I don't know maybe I'm the only one.
I love operating in the U.S. right.
I trust our courts, I trust our laws,
I trust what we can do here.
We try to operate within
the boundaries of that.
I am here, not because I love
talking how that may seem
but because I wanna hear
what the SCC has to say.
I think we wanna find
a way to do this here.
The last token sale we did
was the Delaware Corporation,
we're paying U.S. taxes.
We employ people in the United States,
if your sole purpose of
creating a Swiss Foundation
is you think it's gonna create
some regulatory safe haven for you.
I think you have probably
another story coming for you.
We've seen a lot of great reports
from a lot of regulators and
jurisdictions around the globe.
As I mention monetary
authority of Singapore released
it a very informative report
on how they'll treat tokens.
I think the thing that
we're thrilled to see most
and they were case studies.
This issue of do they think
there's utility token,
they've said yes we do.
We haven't seen that in the U.S.
I don't know if we'll ever see it
and I understand why we might not see it,
but things like that are really helpful
to get people feel
comfortable in a jurisdiction.
- Okay so we have only little bit of time
before we're gonna do a very quick Q&A.
So let's just do a lightning round
where each of you maybe gives parting tips
for any entrepreneurs who are thinking
of doing a token sale,
and anyone can start.
- I say the most important thing to do is
have a really good well
thought white paper
and really have focus on
what your crypto economy is.
Without all of that stuff,
it's really hard for us
to do the legal analysis.
It's gonna be hard for other lawyers
and other countries to
do the legal analysis.
It's gonna be hard for tax accountants
to do the tax analysis,
and help you with your structuring
and all that other stuff.
So if you come to the lawyers
to create something for you,
I think you're gonna be
disappointed in the results.
- I would agree with that
and I think it's part of that
white paper process is really
having a clear understanding
of what the technological
development pieces
are going to be for you.
Do you have the current resources?
What do you need to get there?
What's your timeline?
And those are the things
that are gonna to help
your lawyers and your other advisors.
It's just your navigating through.
- I think to that I would
add finding the right team,
outside of your individual entity,
that could mean your legal
team of hopefully people
who are experienced in this space.
Also people who can can
help you do things like KYC,
AML, accredited investor tax
if that's something that you're gonna do.
If you're going that route,
people who can audit your smart contract,
look at your white paper and
make sure that it's readable.
- A slightly different direction,
I think it's important to
keep in mind the distinction
between protocol and
infrastructure level projects,
and then application level projects.
I think we're still so early in the space
where we need protocol development,
we need infrastructure like
exchange, identity, reputation.
All these things low down in the stack
before we can really
build the applications
that blockchain technology promises.
I think so many of these
decentralized projects,
are like a train rolling along.
Trying to build the
railroad in front of them
as they go along and I
think that coincidentally,
some of the protocol and
infrastructure little projects
are more likely to have utility
then some of the applications.
- One, hire good lawyer.
Two, Lee I'm going to steal your line
since you didn't say it.
Don't commit fraud.
(audience laughing)
Number one, and three build
a good team around you.
For a lot of people that
are first-time entrepreneurs
or even second time entrepreneurs.
The thought of having 10,
20, 30 million dollars
in a bank account overnight
lead to a phenomenon
I liked about token fever
where rational people
make very irrational decisions.
All in the name of selling a token.
Having a good team around
you, good legal team,
good advisers will keep
you on the right track
and keep you on the right side of law.
- Okay so we got one minute
maybe for one question.
Why don't you go.
- I imagine you have
many client reaching out
just seeing this as a
potential source of capital
whether it's appropriate or not.
So how do you experience
and a consulting with them
and then situations where
you're perhaps advising
that a traditional equity
or debt fundraising
of the safe or otherwise
is more appropriate
until you know the
companies closer to we're
as the spectrum of a utility token.
So I guess just how
have you been responding
to those sorts of inquiries.
- Patiently.
(audience laughing)
- Yeah, I mean obviously,
we get a lot of inquiries
with people that think this
is a quick fast cash opportunity,
but for folks that maybe
the equity or a debt
or some kind of note.
I mean fortunately that's what we
have actually specialize in 4 years,
so I have been since
been working with them.
But a lot of people unfortunately
are really focused on that idea,
and we don't (indistinct talking).
We wanna work with people,
like the folks here
that are really trying to be compliant
and (indistinct talking).
- Okay so I think that's
actually all the time
that we have so thank you all very much.
(audience applauding)
(slow piano music)
(uptempo drumming music)
