From Crowdfunding to ICOs: Tips for Creatively (and Legally ) Financing Your Business Brian Edstrom David Duccini Shareholder & Attorney, Founder & CEO, Avisen Legal, P.A. Silicon Prairie Portal and Exchange, LLC TCSW – Wednesday, October 10, 2018
This presentation provides general information only. Nothing in this presentation, and nothing the presenters say during this presentation or at this event, is offered as legal advice. Raising money from investors likely requires you to comply with federal and state securities regulations, which are highly complex. This presentation does not cover all aspects of these, or other potentially applicable, regulations. You should consult an attorney prior to raising money from investors.
Overview What problem does an ICO or Crowdfunding solve? • Raising money is hard, especially for early-stage companies • You may be tired of: - bootstrapping your business - schmoozing with VCs or angel investors - trying to get a loan - asking friends and family for help • Crowdfunding and ICOs present an alternative to the above options… but • Doing it wrong could land you in trouble. Big trouble.
Overview Questions we hope to answer with this presentation: • What is (securities) crowdfunding? • How do I engage in crowdfunding legally? • What is an ICO? • How do I conduct an ICO legally? • Assuming I am fully compliant with the law, is a crowdfunding campaign or ICO right for me/my business?
What is Crowdfunding? Utilizing the Internet to raise money from a “crowd” of investors to support your project. Typically, money is only collected if a stated minimum target is reached.
Rewards vs. Securities Crowdfunding Rewards Crowdfunding Securities Crowdfunding • securities laws don’t apply • securities laws apply • mostly unregulated • regulated at federal and state level • the sky is the limit on $ raised • limits apply to the $ amount raised • you typically don’t “owe” investors anything in • investors expect something return* in return *Though you could be accused of fraud if you promise, say, a copy of your product in exchange for a contribution and then don’t deliver on that promise
What is Crowdfunding? • Reward-based crowdfunding : contribution is made in return for reward of nominal value– or nothing at all. • Kickstarter • Indigogo • GoFundMe
Rewards Crowdfunding– Success Stories • Oculus Rift - Raised $2.5 million through Kickstarter to create virtual reality headsets - Sold to Facebook 3 years later for $2 billion • Astropad (MN company) - Raised over $645,000 on Kickstarter to create Ipad app, Luna Display • Potato Salad Guy - Set $10 goal to raise money to finetune potato salad recipe - Raised $55,492 on Kickstarter… to make potato salad
Rewards Crowdfunding– (Not so) Success Stories Reality: • Crowdfunding does not bring the crowd to you. • Most successful (Kickstarter) projects raise less than $10k. • Over 63% (Kickstarter) projects fail to reach minimum target.
What is Crowdfunding? • Securities crowdfunding : Think Kickstarter, but where you promise investors equity or a financial return in exchange for investment • Regulation CF • MNvest • SCOR • Other State Regs
Securities Crowdfunding– Success Stories • Rustech Brewing (MN company) - Raised $62,500 through a MNvest offering to build a brewery • Tilion Brewing Co (MN company) - Raised $230,000 through a “SCOR” offering to build a brewery • Silicon Prairie Portal & Exchange (MN company) - Raised $254,000+ money to build its own crowdfunding platform!
Securities Crowdfunding– (Not so) Success Stories Reality: • Crowdfunding does not bring the crowd to you. • Around 40% of securities crowdfunding offerings do not hit minimum target • Crowdfunding issuers’ ability to repay investors is yet to be seen
How do I engage in crowdfunding legally? Three Initial Questions: 1. What do you give to or promise people in exchange for a financial contribution? 2. Are you engaged in a securities offering? 3. If you are engaged in a securities offering: - is the offering registered or exempt under federal law? - is the offering registered or exempt under applicable state law? More on questions 2 & 3 later...
How do I engage in crowdfunding legally? To conduct a lawful Securities Crowdfunding offering, you MUST: 1. Conduct the offering through a registered portal (some exceptions apply) 2. Prepare a disclosure document and other required information to provide to investors 3. Comply with applicable geographical restrictions 4. Comply with applicable limits regarding the total $$ raised through the offering 5. Comply with applicable limits regarding $$ raised from individual investors 6. Comply with applicable restrictions on advertisements Failure to meet the above, and other, requirements will expose you to civil, administrative, and (in a worst case scenario) criminal liability
What is an ICO? Initial Coin Offering: The sale of cryptocurrency “tokens” to raise money for a business venture or (usually blockchain-related) project. • “Tokens” can represent different things, not always equity in company • Investors may be able to invest using US$ or other cryptocurrencies • Different from Initial Public Offerings (IPOs), which involve sale of stock in the company
What is Blockchain? A distributed public database that keeps a permanent record of digital transactions. • Each “block” is a record of a specific transaction, which are linked together and secured in a “chain” using cryptography • “Transparent” and decentralized • Resistant to modification • Not only used for cryptocurrencies
What is a Cryptocurrency? A proposed medium of exchange that is created and stored electronically in the blockchain. • Use cryptography to record and control transactions • No physical form • Cannot always be exchanged for other commodities • No inherent value • Not insured • Not controlled by a central bank or other authority
Cryptocurrencies - Examples • Bitcoin • Ethereum • Litecoin • Monero • Ripple • Dogercoin • Sia • NZT • ZCASH • 2GIVE
ICOs – Success Stories • Protocol Labs, INC. (Filecoin) - Raised $257 million via two offerings in 2017. - Filecoin represents data storage on a decentralized storage network • Wenn Digital Inc. (KODAKCoin) - Raised $6.75 million in 2018. - KODAKCoin is used for payments for licensing photographs • Telegram Group Inc. – Raised $1.7 billion(!) via two offerings in 2018 - Telegram already has messaging service; now aims to create Telegram Open Network that will become an alternative to credit cards
ICOs – (Not so) Success Stories • REcoin Group Foundation and DRC World– SEC Fraud Charges/ Asset freeze (9/29/2017) • PlexCorps – SEC Fraud Charges/Asset freeze (12/4/2017) • Munchee Inc. – SEC Cease and Desist Order (12/11/2017) • AriseBank – SEC Asset Freeze (1/30/2018) • Cherubim Interests, Inc. – SEC Trading Suspension (2/16/2018) • PDX Partners Inc. – SEC Trading Suspension (2/16/2018) • Victura Construction Group, Inc. – SEC Trading Suspension (2/16/2018) • Centra Tech – SEC Fraud Charges/ Injunction/ Penalties (4/2/2018) Source: https://www.sec.gov/news
SEC Actions Involving ICOs • NYTimes: Subpoenas Signal S.E.C. Crackdown on Initial Coin Offerings (2/28/2018) • CNBC: SEC Subpoenas TechCrunch Founder’s Cryptofund Amid Broader Investigation into Digital Coins (3/2/2018) • EBIT News: SEC Issues 80 Subpoenas to Cryptocurrency Funds (3/5/2018)
What do Regulators Say? SEC Chairman Jay Clayton: I have instructed the SEC staff to be on high alert for approaches to ICOs that may be contrary to the spirit of our securities laws and the professional obligations of the U.S. securities bar. Source: https://www.sec.gov/news/speech/speech-clayton-012218 I believe every ICO I’ve seen is a security. Source: Comments in a 2/6/2018 US Senate hearing
What do Regulators Say? Financial Industry Regulatory Authority (FINRA): Where [cryptocurrencies] are securities or where an ICO involves the offer and sale of securities, FINRA may review the mechanisms—for example, supervisory, compliance and operational infrastructure— firms have put in place to ensure compliance with relevant federal securities laws and regulations and FINRA rules. Source: https://www.finra.org/sites/default/files/2018-regulatory-and-examination-priorities-letter.pdf
What do Regulators Say? North American Securities Administrators Association (NASAA): The recent wild price fluctuations and speculation in cryptocurrency-related investments can easily tempt unsuspecting investors to rush into an investment they may not fully understand. Cryptocurrencies and investments tied to them are high-risk products with an unproven track record and high price volatility. Combined with a high risk of fraud, investing in cryptocurrencies is not for the faint of heart . Source: http://www.nasaa.org/44073/nasaa-reminds-investors-approach-cryptocurrencies-initial-coin- offerings-cryptocurrency-related-investment-products-caution/
What do Regulators Say? Minnesota Department of Commerce: The Minnesota Department of Commerce is urging Minnesotans to proceed with caution and understand the potential risks of any investment or transaction involving a virtual currency such as Bitcoin. Source: https://mn.gov/commerce/media/news/?id=81448
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