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Expert Webinar: Learn the Essentials of ICOs
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Expert Webinar Transcript


 

Adam Chapnick:

Hello again everybody and welcome to ICOInvestor.tv's Expert Webinar on learning the essentials of ICOs. I am your host Adam Chapnick along with my talented cohost, the multi-hyphenate Amy Wan. We are here at ICOInvestor.tv where we strive to bring you all the latest news and information regarding initial coin offerings, regulations, cryptocurrencies, and so much more.

Amy Wan:

In this special ICO Expert Webinar, we are calling on experts from around the US to explore the basic foundations of ICOs. We'll bring in participants from Los Angeles, New York, Washington DC, as well as Southeast Asia in the Philippines for an update about ICOs in Southeast Asia. Also, if you want to test your ICO knowledge, you can visit our website at ICOInvestor.tv to take our ICO IQ challenge. We're moving at a fast pace, so hold on. So Adam, what is the overview for today's webinar?

Adam Chapnick:

Amy, today we're going to be working our way through the fundamentals of ICOs then on to ICO basics. After that, we'll dive into ICO regulations and discuss what AML and KYC are. Finally, we'll wrap up with a global ICO update from Southeast Asia as you mentioned. As we cover the basics of ICOs, we'll be drawing upon an outline from our ICO Learning Center, which you can check out at ICOInvestor.tv.

Amy Wan:

Before we get into the basics of ICOs, we need to cover two background topics, the difference between cryptocurrency investing and ICO investing, and the difference between traditional investing and the new world of ICO investing. Now, learning the basics of ICOs can be really daunting for people. So, these two background topics will be very useful.

Adam Chapnick:

Later in our core section today, we're going to cover the basics of ICOs. This draws upon five dimensions of ICOs that we cover in our learning center. Today is just a high level overview, but future in-depth ICO boot camps will provide a deeper dive. You can register at our website to find out more about upcoming boot camps and the webinars. Today, we will cover ICO solutions, tokens, organizations, processes and regulations, and then we're going to finish up with that global ICO review focusing on Southeast Asia.

Amy Wan:

First, let's begin by welcoming our guests here in our Los Angeles studios. We are joined by Jor Law and Howard Marks. Jor is a founder of VerifyInvestor.com and founding shareholder of Homeier Law PC. In addition to his focus on ICOs, he's also well-known for his expertise in alternative finance, securities transactional law, and verification of a credit investors. Sitting next to Jor is Howard Marks. Howard Marks is the founder of StartEngine, a California company that has been actively raising money for innovative startup companies. In 2017, the StartEngine platform also began helping companies with their ICO offerings.

Adam Chapnick:

Joining us via fiber from New York are Ed Maguire and Paul Menchov. Ed Maguire is founding and managing partner at Bluemont Partners. He's also the Insights Partner at Momenta. Ed is a finance professional with extensive experience in equity research and investment banking. Paul Menchov is the co-founder and CTO of CoinList and managing director of CoinList Capital. Paul is also the co-founder of Republic. Paul is previously the head of fundraising infrastructure at AngelList where he built the systems and processes to support over $700 million of online startup investments in nearly 2,000 companies. Welcome gentlemen.

Amy Wan:

Speaking of specific ICOs, we should note that ICOInvestor.tv is not an investment adviser. We do not recommend investing in any specific ICOs or even in ICOs overall. If you'd like to learn about specific ICOs, you can check out our weekly ICO insight shows with ICO spotlights and expert interviews.

Adam Chapnick:

Great. So, let's get started. So to begin, let's take a look at what leaders in the industry had to say about a few key ICO background points that people need to know about.

Adam Draper:

We've got all these Bitcoin and blockchain-related startups and retroactively they're all launching ICOs.

Speaker 4:

Right.

Adam Draper:

So, we have to figure out a way in which ... We invested in them, we should-

Speaker 4:

Equity. You invested equity in the company.

Adam Draper:

We invested equity in the company.

Speaker 4:

Then, they said, "Hey, let's do-"

Adam Draper:

Then they said, "Hey, we're going to do a token."

Speaker 4:

Right.

Adam Draper:

We technically as investors early in the company should own a piece of that token, and so that's the latest issue that we're dealing with. We're talking to our companies to figure out what the right fit is.

Gil Pechina:

So, instead of flipping a bunch of things on its head, you don't own equity. You own a token, which is this weird thing. Companies don't have income. They just have balance sheets. A lot of things normal investors are looking for don't exist in this model.

Lou Kerner:

I went down the crypto rabbit hole for about nine months in 2013. I did it long enough that The Wall Street Journal quoted me in a story as Wall Street's Bitcoin expert. So that was fun to be that for, but I described it that kind of I looked at the light, and I looked at the light, and I looked at the light for nine months and I didn't see it.

Steven Hatzakis:

Hi. This is Steven Hatzakis and I'm here at Crypto Mondays NYC where ICOInvestor.tv is interviewing people about their thoughts about cryptocurrency, blockchain, and ICOs, and here's what folks had to say.

David Weild:

But the technology itself is going to create a disruptive revolution in how businesses get done and there are going to be some very interesting businesses that emerge from the primordial ooze.

George Weiksner:

Cryptocurrency investing is more like I feel later, and ICOs in the beginning. What we do on our ICO is we're making it. So you're investing in something that's already been partly built. Ours is kind of in-between, which is nice.

Amy Wan:

So, now the basics. Let's start with an area that's very confusing to many people. How does Bitcoin or cryptocurrency investing compared to ICO investing, Paul?

Paul Menchov:

You're looking at two fundamentally different kind of evaluations of what you're investing in. In the case of Bitcoin, you have something that's more analogous to call it stock market investing or any other kind of public market investing. There's a market out there. There's a number of exchanges you can trade on. The market's going to move in various ways and any one person has a limited ability to move that market and you're basically trading on the more traditional fundamentals.

Whereas in ICO investing, it's much more akin to something like startup investing where you care about who the team is. You care about the founder. You care about how far along they are. You have to evaluate the nature of their white paper. Is it well-written? Are the concepts that they're demonstrating in there, legitimate? Do they actually solve for the problem that they're claiming to solve for? So, much more kind of hands on evaluation of that investment compared to a much more market-based evaluation in the case of something like a Bitcoin.

Amy Wan:

Very interesting. Now, some people who invest in cryptocurrency are often day traders looking to see if Bitcoin will go up or down. Paul, how's this different from ICOs?

Paul Menchov:

In terms of looking at things go up and down, well in the case of Bitcoin, again you have that market. So, you're able to do some trading. There is a price that can go up and down. In the case of ICOs, it's just that first offering of a new token to the public. So, you don't have this ability to sell, or buy, or trade on price. You can either get into the deal or decide not to get into the deal, and for varying amounts and potentially on varying terms, but that's kind of all you have to do.

Adam Chapnick:

So Paul, do you think people that like cryptocurrency investing, they're also liking investing in ICOs, or people sort of bifurcating away and sort of stay in their lane?

Paul Menchov:

I would say that in general. People who invest in tokens don't necessarily invest in ICOs but it definitely increases the chance of it. So, if you're already investing in Bitcoin, you're investing in Eth, it often makes it a lot easier to then go and look at an ICO, evaluate it, and be somewhat familiar with the mechanisms in play and the modes of evaluation, as well as you actually make the investment because you're able to do it in form of cryptocurrency rather than fiat, which not all ICOs accept.

Amy Wan:

So Paul, CoinList has been really active in ICOs. How would you differentiate investing in ICOs from investing cryptocurrency?

Paul Menchov:

Again, going back to those previous points, you have to evaluate much more in-depth about the nature of the project, how far along you might be, who the team is, are they a credible team that can do this. You have to get much more in the weeds in terms of your evaluation whereas again, in general in cryptocurrencies like Bitcoin or an Eth, you're mostly looking at market movements. You're looking at news revolving around the world and how it might implicate the changes in prices. For example, regulations coming out in China might affect the price of Bitcoin and that kind of effect. It doesn't really carry through the ICOs in the same way.

Amy Wan:

Let's proceed to the next background area. The difference between investing in traditional public or private offerings and how that differs from investing in ICOs. Ed, you have a solid Wall Street background, let's hear your thoughts on this.

Ed Maguire:

So, investing in traditional equities is really a very established practice. That's where investors have access to information, public recording, established financials. By the time a company actually becomes a publicly traded company, in most cases they have already several years of operating experience. You can scope out the competitive landscape. With ICOs, you're really looking at projects that in many cases haven't even been built yet. So, you really have to apply a very different filter in looking at the potential for a project from the lens of a venture investor.

So, you have to think more like a venture investor, although venture investors tend to look at their investments with a seven to 10-year time horizon when there will be a liquidity event. With ICOs, the liquidity can be pretty much immediately or there might be a year lockup. Again, you're going back to trying to assess the ideas, the economics in the design of the token, and also of course the team is paramount and perhaps the most important criteria of all.

Adam Chapnick:

Ed, how easy or difficult is it for people who have that traditional investment knowledge to even understand ICOs, and what are the things that you think are the stumbling blocks or the differences that are there between the two?

Ed Maguire:

It's a great question. I think that investors in early stage investing, angel investing actually have a much better skillset to draw upon. You really have to apply a completely new set of criteria and filters. It's tough. Listen, crypto has a very steep learning curve. It takes a long time. Nobody knows everything and it's still evolving right now. All of the issues around the legal status or the legal definition of what is a token are evolving. Nobody knows yet how to evaluate companies or value tokens that don't have any track record of customers, or trading, or financials where you can apply traditional metrics.

So, this in some ways is it's terra incognita. So, for investors to want to apply traditional methodologies, the disciplines of due diligence on the stories and essentially the viability of an idea as it fits into an existing ecosystem, or a competitive environment if for instance somebody's proposing a business or an idea that's designed to disrupt traditional incumbents, but everything else is new and it really requires a beginner's mind to approach it.

Adam Chapnick:

I love that, the beginner's mind and for this terra incognito. What about the guys here in LA? What do you think about that in terms of the difficulty for an investor to just grasp what the heck these things are, these ICOs? Even a seasoned investor who has got some experience getting in early stage, an ICO isn't equity maybe or is it? Is it a token? What do you find is the stumbling block for some of the investors to keep them from getting in, and what are the things that make investors who do get in, willing to do that? Any ideas, any thoughts on that?

Howard Marks:

Well, the biggest difficulty I think is first of all, be able to own some cryptocurrency to start with such as Bitcoin or Ether. In order to do that, you have to create a wallet. You have to buy it may be on the exchange. Then, once you have the wallet, you have to put it into your computer because a lot of the ICOs will not take the cryptocurrency directly from one of the exchanges because they can't ... They don't know who sent the money. So, it's really complicated in that time.

Now, once you mastered that ability to take that crypto, put it away, know how to send it, know how to receive it, at that point you look at all of the different offerings that are out there. There are hundreds. I mean, you type the word ICO on Google, you'll see hundreds, and hundreds of offerings, and so which one do you pick? There's no clear sense of how people know. There's a lot of talking done on chat rooms like Telegram, which will tell you what's going on but you don't know who is actually telling you, giving you that advice.

Adam Chapnick:

Right. So, it's a combination of sort of the technological complexity to even play and then trying to filter through the noise to find out what's worth playing in, is that?

Howard Marks:

Yeah, and I think if you look at if for an analogy for your listeners, is before when internet came out, there was no browser. There was no browser because everything was done on command line and that was really reserved for those technology-oriented people. Then, the browser came out and the consumer was able to command and re-participate. I think we're kind of at that level right now where it's neither they're perfectly ready for the general mass consumer to come in. I think this year is going to get there.

Adam Chapnick:

Yeah. A lot of people are talking about when will the Netscape moment come? That's exactly what you're talking about.

Howard Marks:

Yes.

Adam Chapnick:

We're looking forward to it too and you'll definitely find out about it here first. So, let's turn to Ed. In traditional investing, people usually invest in a for profit company, but in ICOs, there's all of these different structures. There can be incorporating companies. There's foundations. There's virtual companies. Can you explain how these different organizational structures are used in ICOs sometimes?

Ed Maguire:

Well, a lot of this is evolving. I think the first thing that you have to look at is the functionality of a token, and I know that's a topic that we'll be getting into a little bit later on. Yeah, these are not necessarily traditional companies or for profit organizations, a foundation may be set up to be essentially the curator of a project. This is open-source economics and really an open-source ethos where essentially the software code that's being written for many of these projects is open and free to the public and this concept of forking a project means that you can copy it and it's completely legitimate to do that.

So, these are structures that don't rely on traditional patent laws and protections. What they rely on is engaging users to build up the networks and use the functionality of the tokens, and the services that they're building. So right now, I would say it's hard to put this into buckets because all the governance is slightly different and there's a lot of nuance, but I think if you're seriously looking at investing in any project, you do need to spend quite a bit of time grokking through the governance and making sure that this is a structure that will stand the test of time.

Adam Chapnick:

Yeah. It's a lot to wrap one's head around. Well, thank you so much Ed. It's always great to hear from you get your perspective.

Amy Wan:

Now, we're going to transition to the basics of ICOs.

Adam Chapnick:

The first to mention people want to know about is what solution or innovation are they actually funding? When it comes to investing in ICOs, you should know that there are different categories people are investing in. Some are technical infrastructure companies built off blockchain technology in the distributed ledger.

Amy Wan:

Then, there are applications that service different areas of consumer applications such as supporting wallets, entertainment, as well as business and industry applications. For example, there are those that support the financial services industry.

Adam Chapnick:

Yeah, I think it's interesting to see if in a pie chart how much of sort of a traditionally slow part of the economy, which is a bunch of the different slow categories are coming in and participating in blockchain in a way that I find unexpected. You got utilities and they're doing that. I think that's interesting.

Amy Wan:

Yeah. I think every industry really is going to be affected by blockchain technology. If we're not there today, I think it's going to take a couple more years, but I think it will happen. Do you guys have thoughts?

Jor Law:

Yeah, in general I do think that if you think of ICOs being an extension of how people raise money, then certainly every industry eventually may do an ICO even if it's as simple as just having their securities documented on the blockchain. That by itself without having any other blockchain function could still give them legitimate purpose in this new economy.

Adam Chapnick:

So, let's now take a look at a few examples of ICOs. Let's go back to New York where I believe we're now going to be joined by Ken Nguyen. Ken is the CEO of Republic, an investment platform connecting tech startups and blockchain project with global investors. Prior to Republic, he served as general council of AngelList and fellow of Stanford University's Center for Corporate Governance. He's the founding advisor to NOW Ventures and CoinList, an ICO platform. It's good to see you both.

Ken Nguyen:

Thank you for having us.

Paul Menchov:

Yeah, great to see you.

Adam Chapnick:

So, Paul. Help us understand using a few examples from 2017 maybe how some ICOs successfully stood out.

Paul Menchov:

The ICOs that stood out in 2017 are ones that were kind of demanded by the space effectively. Those are ones that focused on core infrastructure around decentralized applications. Some examples of that could be Blockstack who is building basically a decentralized app source. They're providing you all sorts of different APIs that you can plug into to build your decentralized application like a faster [inaudible 00:19:46], or an identity-oriented API, or an authentication API that make it easier to actually build out those kinds of applications on top of ... or Filecoin for example, which is one of the larger ICOs in 2017, and basically serves as a decentralized marketplace for file storage.

So, you pay Filecoin to store a file. You receive Filecoin before storing files. Then in that way, they're hoping to create marketplaces out of this particular kind of utility. I think that's something, a trend that we're going to continue seeing in terms of the largest size and most successful ICOs.

Amy Wan:

So Ken, Republic has also been involved in an entertainment-oriented ICO called PROPS by YouNow. Can you tell us a little bit about this?

Ken Nguyen:

Of course. In addition to this intermediating, the middlemen as Paul has mentioned, another very good use case for blockchain or tokenization is just the enhancement of user engagement because you give more people more skin in the game, an incentive to either keep on engaging sending people to the platform, and PROPS or YouNow is just a good example of that. I mean, this is a digital video platform that people can comments, and reward, and show tokens of gratitude for contents they like. With tokenization, instead of using USD to purchase these gifts, these virtual gifts, now through tokenization and the use of the PROPS coin, there's an added value to that and I think that will drive users to the network exponentially more in the long run.

Amy Wan:

So Howard, can you actually tell us a little bit about some of the StartEngine ICOs?

Howard Marks:

Well, here's a situation. As you know, this is a highly regulated industry and in order to be able to talk about them if they are on our platform, I'm not able personally to promote them. So, I can't mention who they are but your listeners can go to startengine.com and take a look at those offerings.

Amy Wan:

Okay, great.

Adam Chapnick:

Got it. So next, we go to one of the really difficult topics of ICOs, which is what exactly does an investor get for their money? Traditionally, investors in private or public companies invest in equity or sometimes debt, but ICO investors do not always get equity or debt. So let's hear what Gil Penchina had to say about this.

Gil Pechina:

What I would say is the tokens in many cases are the only economics in the business. Now, there is no revenue. So, if you take Pryze for example, which is what I'm involved with recently, the company will earn zero dollars of revenue forever. So, you can own all the equity you want, but it isn't worth anything. What you want to own is the tokens because they are the things that appreciate.

Amy Wan:

Now, let's talk for a second about tokens. They might be equity tokens, or they might be utility tokens. They could even be both. It's not mutually exclusive. It's really a new field that's being called token economics, and we had a chance to talk to the co-founder of CryptoOracle, Lou Kerner. Let's hear his thoughts.

Lou Kerner:

I talk about it and other people do, but it's still very, very early. It's token economics. When you set up these economies and what's interesting is I've got down that rabbit hole because it's so important to the success of these companies and it's so early. I really believe in 10 years, we're going to have kids graduating, the smartest kids from UCLA are going to be graduating with degrees in token economics.

Amy Wan:

Okay, great. So Howard and Jor, can you give me a little bit of your thoughts on what investors get in terms of utility, or equity, or even both. How does it work?

Howard Marks:

Well, this is I think we all agree it's new territory. Right now, most of the tokens are issued under an ICO. What they're getting is they're getting a service. They have the right to use a service, that's what they get. Now, it turns out because the number of coins are limited, it becomes an inflationary economy and the price can go up because there's not enough people who ... If more people want to buy those tokens, the price has to go up because those who want to sell it will only sell it for more money than what they paid for, but ultimately the use of the token is to use the service of that application, this distributed application promised by their person issuing them under their ICO.

Amy Wan:

Interesting. Jor?

Jor Law:

Yeah. There's been this big debate about, it's something an equity token or security token versus the utility token. I think really that's beside the point. Really, you just look at the token and you look at what rights and obligations are attached to that token, and in some cases the token has a specific use case. It could be utilized for a service, or a product, or something, and it may have inflationary economics behind it such that the value of the token rises, but you're starting to see more and more tokens come out, where they really function almost like stocks of companies and that's okay. So, some tokens are going to just have dividends or appreciation rights and have no utility, and I think you'll start seeing variations of tokens come out more and more.

Adam Chapnick:

Yeah. I think this is a really central part of the understanding that a lot of investors were totally baffled by at the beginning. I don't know what the numbers are from, but just from talking to people over the last year, a huge number of investors thought they were just buying a piece of the company when they bought tokens, and it was very surprising to them that they had no such thing. I don't know if you get any of that feedback, but that was something that we definitely heard over the last year. Did you find that?

Howard Marks:

Well, I haven't done surveys of investors who come up to StartEngine to invest, but I have to say most people are familiar with the concept of equity. The idea that the token they purchase is not equity, is not debt, and it's something different, I think would surprise people especially if they find out that the application that the token is going to use is owned by a foundation.

Adam Chapnick:

So okay, Paul and Ken. There's also something a little complex that investors have to grapple with that are now called SAFT, another one of our acronyms that investors tend to have to get involved with. Can you talk about the SAFT? What is it? What does that mean to an investor?

Paul Menchov:

Yeah. So, a SAFT is a Simple Agreement for Future Tokens. So effectively you pay now, and if you're lucky, you get tokens later. That's the general premise of the contract. It's a prepaid futures contract, and it's just a mechanism by which token networks that haven't yet launched or companies who are not yet ready to distribute tokens are able to enter an agreement with investors possibly giving them those tokens at a discount because they're paying the money now and then ultimately deliver the tokens at a later date.

Ken Nguyen:

The SAFT in recent months, it became quite popular. I would say that the name SAFT alone is just well known for token projects as well as for investors, but the document itself, which is a legal agreement and you can customize and built into it any new features, and recent impact in or recent changes in tax law certainly affect the desirability or the broad application of the SAFT. So I think earlier, Ed had mentioned that the industry is still very new. I think that any new instrument right now, this is just still the early days and most things that we accept as standard nowaday probably would change very quickly probably in a matter of months not years.

Amy Wan:

Interesting, wow. Speaking of change, earlier we talked about different types of organizations offering ICOs. There are foundations, and corporations, and decentralized networks that might not even have formal organizations. So Paul, can you explain to us what organizations people might be investing in?

Paul Menchov:

Yeah. I think one of the things to look at mostly are jurisdictions more even than organizational types. So typically, companies will be looking to optimize for a number of factors. One are the laws of the jurisdiction that they offer out of, and two are the tax advantages or the structure that they end up ultimately taking for their offering. So for a while now, people have been doing things like Swiss Foundations mostly for the tax benefits of doing a nonprofit foundation at Switzerland, a fact that's actually changing sometime in 2018 if it hasn't already with regards to Switzerland's ability and willingness to tax high-profit nonprofit foundations within its jurisdiction.

Amy Wan:

So Jor, do you have anything to add about organizations or jurisdictions? I mean I feel like we're seeing things everywhere, it's Gibraltar, and Estonia, and all these crazy places, Cayman Islands, Panama?

Jor Law:

Yeah. I think it is a new world where everyone's trying to learn about these and you find that even the regulators and even the top experts are still struggling to figure out what this is, because honestly as global as the world is, cross-border investing from crowdfunding hasn't been that active. So as investors are looking through these, I think fundamentally they should still value the company and the private company for, or the tokens for what they understand traditional business diligence to be, and then try to add on the geographic layers to the extent that they can.

Adam Chapnick:

So, there are a number of different ICO investment processes that are important to know, okay? The first is the ICO life cycle itself and presales process. Having a presales process is common in traditional investing in private and early-stage companies. Ken, can you help us understand the presale process for tradition companies, and what an ICO presale is all about? Why is it different and why should people understand that difference?

Ken Nguyen:

Sure. If I may, just step back-

Adam Chapnick:

Sure.

Ken Nguyen:

A step further-

Adam Chapnick:

Please.

Ken Nguyen:

... and say a brand new company looking to fundraise because after all token sale or token presale, it's just another mean of fundraising. You can raise an equity, a tradition of friends and family, or that an equity round, or you plan to build a network, distribute tokens, but now you're going to be selling the tokens that don't exist. So, a presale is basically a promise to deliver something that you have yet to build, and then you will one day deliver. Nowaday, I think that most lawyers would probably agree that token presales by at large are all offerings of securities.

Now, once you have the token available for distribution, how to get them out into the hands of both unaccredited investors and accredited and where in the world at that point. Then, you deal with the term coin offering or public distribution. I know that people used these terms interchangeably, but they have massive impact as to determining and the resulting tax and securities law implications.

Adam Chapnick:

That's a fantastic distinction. So, thank you for backing up on that. Yeah, that's great.

Amy Wan:

So Jor, not all companies have presales like Blockstack, and yet other companies intend to host ICOs but end up canceling them. Can you explain these different situations?

Jor Law:

Yeah. In a perfect world of course, companies would love to have everyone in their deals but practically speaking, there comes a cost and expense to having many investors and sometimes, and also there's regulatory authority concerns, so it's not uncommon. I think sometimes when you see a company and they need to raise X dollars of money, if they've already done that through the presale and they find that they don't need to raise any more money, then more increase and then you're finding that some of these companies are just saying, "We'll just cancel the public sale." In some cases people say that, that's bad, but in other cases that's good. It shows the company is being responsible.

Amy Wan:

Very good. Howard, question for you. So as part of the ICO process, sometimes there are lockups for investors, I think they're becoming increasingly popular now in 2018. What are lockups, how do they work?

Howard Marks:

So, this lockup comes from the traditional IPO situation where the early investors cannot sell ahead of the new investors. So if you invest in tokens very early, the deal is you'll get a lower price, a discount but against that discount, you're going to have to wait let's say one year or more, or you'll have investing period of one year over four years to have the ability to sell those tokens.

Adam Chapnick:

Got it, okay. So on that note, Ken sometimes there are also lockups for management employees. How does that fit in to investor protections?

Ken Nguyen:

It also relates back to apparently where they are in the public market, the IPO market, the notion that management and senior employees of a company and in this case the people, the principal people working on a project. We have information that's not known to the public, and whether it's really good or really bad, upcoming news that would otherwise drive up the price once publicly disclosed if ... It's just fundamentally unfair to allow people to act on that information and trade on it to the judgment of the public.

So, I think there are concepts obviously from the public securities that are being borrowed, if not imposed by law, by the industry, by players that have a role in setting the standard for this niche in industry that they are starting to apply this concept into what is known as governance of the token distribution as well as long-term maintenance.

Adam Chapnick:

Yeah, and things like that will help maybe put the mind at ease of investor who's on the fence. They feel a little more reassured that nothing nefarious might happen. So, I think-

Ken Nguyen:

Absolutely.

Adam Chapnick:

... it's definitely seems healthy in general that this is a trend. So yet another complicated area for people to understand, investing in ICOs often involves investing in risky early-stage companies obviously. As such, the US Federal Government in the past has often limited investments in early-stage companies to wealthy investors that they call accredited investors. Now Jor, your firm I understand specializes in verifying accredited investors. Who are these people and how many are there?

Jor Law:

Yeah. So there's roughly ... The statistics vary, but roughly it's around 8% in 10 million households. It fluctuates year to year, and as for individuals, they're typically people that are making 200,000 individually or 300,000 with a spouse, or they have a net worth either individually or jointly of a million dollars, and of course, there's many categories for entities as well. Essentially, these are the people that they ... People, government has I guess deemed to be either rich enough or sophisticated enough that they can take a hit on their investment or understand the risk of the investment that they're making.

Adam Chapnick:

Right. So they use money as a proxy for sophistication. Is that always true?

Jor Law:

Well, I mean there are some other categories that have a little bit of sophistication tied to them but definitely one of the big criticisms is that certainly, you could just be rich and entirely not sophisticated and still invest, or you could be extremely sophisticated and be advising other people on their investments, yet you yourself may not be able to be investing.

Adam Chapnick:

Got it, good.

Amy Wan:

Very interesting.

Adam Chapnick:

Yeah, thanks for clearing that up.

Amy Wan:

So, let's turn to Paul for a second. We talked about the ICO presale stage. This stage in the US at least is currently limited mostly to accredited investors. How does this work and why is that?

Paul Menchov:

Yes. In mentioning the word presale, you actually end up talking about two different things. One is what Ken had been mentioning earlier, which is a sale taken prior to the launch of the network. Another one, is just the more private version of the sale that's going to happen publicly regardless of what's actually being sold. So, a lot of terms in the space actually get kind of reused in that way but assuming in either case really, the notion is that the accredited investors are able to buy these unregistered securities under exemptions that are less burdensome onto a company than some others.

So, either you're going to be registering these tokens or whatever instrument that you're selling them as with the SEC, or you're operating on as an unregistered security under some sort of exemption. The exemptions for interacting with accredited investors tend to be a lot easier on the company in terms of the burden in running that deal than the ones that allow for offerings to unaccredited investors, and that's typically why they'll do those sales over to the accredited investors.

Amy Wan:

Very interesting. Okay so Howard, when an ICO finishes the presale stage and then essentially turns to a public ICO, often that public stage might also be limited to accredited investors but companies like StartEngine and others are now allowing non-accredited investors to participate in ICOs. How does that work and how much or little can an investor invest?

Howard Marks:

Absolutely. This is I think part of revolution that happened in 2012 when the JOBS Act was voted in and signed by our President Obama. It was a revolution for investors because the accredited investor was always privileged and was able to invest because of the capital they own, but now you have the ordinary investor. They can participate in an ICO, and this is fundamentally different. We at StartEngine, we've decided that this is an area we particularly would be interested. So, we did these new regulations. One of them is called Regulation A plus. We call it a large online public offering, and so a company can raise up to $50 million a year from any kind of investor out there, and then you have the smaller ones called Regulation Crowdfunding, which is for up to a million and $70,000 per year. That is a lot easier to get in place and faster for a company to raise a capital for, but the concept here is that ordinary investor has the ability to participate under some limitations.

Adam Chapnick:

Got it. Okay. So Ken, let's shift over to a specific thing you guys worked on. It was PROPS by YouNow. We actually had on the show and that was last fall. They raised about, if I'm correct, about $6 million through strategic investors, and then they got 16 million via accredited investors on CoinList. Then also, somewhere around a million bucks through Republic. Can you talk more about that, it's a multi-headed dragon of fundraising?

Ken Nguyen:

Indeed. To add on to what Howard was commenting earlier of using a different provision on the US securities law to legally provide unaccredited investors with access to securities, in this case token presales or token sales. So, Republic offers a comfortable product, and so PROPS was ... As far as I know, the very first lay stage credible block chain project that had received interests from noted VC's and institutional investors that conduct a pretty significant talk in presales in the US in a legal way that is only to accredited investor on CoinList, and at the same time meet the demand of their community to offer them access into the presale.

One may ask, why does it matter that that unaccredited investors should have access to token presale? Well, presale means early access. Early access almost always means discounted pricing. So when you have mostly non-accredited people supporting the platform, building the community, and now they get shut out of a wealth generation opportunity, so there's a level of unfairness with that. Last but not least I mean, blockchain is about decentralizations which means open participation. So, through these angles within US Securities Law, that we provide hopefully, bring open access back to blockchain in a way that fits within the legal framework and that's going to be a continuing process, and we expect to have additional products in the near terms to take that a step further.

Amy Wan:

All right. Howard, I want to go back to something you just mentioned a couple of minutes ago, which is that there may be some situations where ICOs might raise up to $50 million from the general public by getting the public involved via raising money is actually only one motivation. Like Ken just said, some ICOs they want a network effect or a viral effect by having a lot of people participate in an ICO. Can you explain more about why this might be?

Howard Marks:

Well, it's all about liquidity. Here's how it works. The more investors you have in an ICO that hold tokens, the more likely that they're going to be selling them and trading them to other investors. If you only have let's say 300 people in a presale, and then you cannot go to the main sale and you don't have a lot of investors, those 300 people will hold the tokens, there won't be a lot of liquidity. So therefore, the exchanges that are selling those tokens are not going to want to list that company on their exchange to provide the ability to trade those tokens. The incentive for those exchanges is when you have thousands of people who hold the token, they're going to be very excited about the idea to put this token on their exchange and allow the trading to happen because you have thousands of people who have the ability to do that.

Amy Wan:

Very interesting, and there's also a whole community aspect too as well. A lot of these are for example, open source decentralized projects that really want to get the community involved. Jor, do you have anything to comment about that?

Jor Law:

Yeah. Anytime you can involve more of the people and give them an ownership interest in the project or the community, you always have a happier community and better effect. It's not always necessary. Recently, there was a company that did an ICO that was may be 90% held by insiders, but when they came out, they were the top volume on some of the exchanges. It's not necessary for the liquidity but certainly it helps, and certainly it gives everyone a feel good attitude.

Amy Wan:

All right. Yesterday, let's turn to a bit of recent news for a second. Yesterday, there was news that broke that Telegram who had previously launched an $850 million presale is actually or maybe now is supposedly holding this second private presale, and if successful, this could bring Telegram's total raise to $1.6 billion. Now, Telegram is also under a lot of scrutiny for their Telegram Open Network, which sources say is underdeveloped, that investors are buying into the hype as opposed to an actual valuable technology. Jor, can you offer us some thoughts or insights on Telegram's ICOs?

Jor Law:

Yeah. I haven't studied it myself in detail but Telegram has at least a working product. Many ICOs don't have anything like that. Is it overhyped? Yes, probably. Are many other projects overhyped? I think so. So, I think it's not so much. I don't mind if something is overhyped. The real question I think is whether there's been fraud in any sort of the offering and there's no reason to think that that has happened.

Speaker 4:

That is a very good lawyerly answer. I appreciate that. ICO regulations have become increasingly important since the summer of 2017. To help us explore this area, we are now joined by Jack Hayes of the Steptoe & Johnson Law Firm. Jack is a security specialist and joins us from Washington, DC. Jack, it's a pleasure to have you here today.

Jack Hayes:

Thanks so much for having me this evening. I appreciate it.

Speaker 4:

It's good to have you. Jack, ICOs are obviously a worldwide phenomenon and every country has different types of regulators to regulate securities, commodities, currencies, etc. In the US, could you explain the role of the SEC, just the SEC in this?

Jack Hayes:

Sure, and this may have been covered already but the Securities Exchange Commission takes the view that many of these tokens or coins, however they are phrased are securities and that there is a test for that, which we could go into but the bottom line is, is if you have an investment contract that is tradable and is based on economic performance of management. There's a strong argument that that is a security, and unless someone is registered or exempt, then you could have an offering of securities, which will be a violation. I heard earlier discussion about accredited investors and without getting into the details, if qualified under the accredited exemption rules, then it may not be viewed as a security.

Speaker 4:

Got it. Armed with that information, Ken, why or how important is it that investors understand something about the regulations on ICOs?

Ken Nguyen:

As you mentioned earlier, or one of the panelists, or the experts mentioned earlier that whether it's an early stage startup or an early stage blockchain project is that risk of total loss of capital, but when you deal with ICO investing, there's an added risk which is regulatory risk and legal risk that you don't see inventory investing, so two-fold. Securities offering very complex topic and added on the uncertainties to how the SEC in the US, and as well as regulators in other jurisdiction treat various forms of ICOs, or token sales, and presales. So, if you violate inadvertently or advertently a certain set of laws, then you're a subject to regulatory sanctions, but on top of that, you're also subject to investor lawsuit.

So, if you're an investor and you invest in a project that looks robust but conducts the ICO in a manner that's not fully compliant, shares the legal risk and the regulatory risk should they materialized, can bring down the entire project added on the total risk of total loss of invested capital in a way that investor got to think through, got to examine how and if a project is doing the token sale in a thoughtful way and a compliant manner.

Amy Wan:

All right. So Jor, I have a question for you since we are both securities attorneys and this question strikes particularly close to our hearts. There's a lot of law firms out there today representing ICOs in the US that are trying to determine how to advise their clients on whether or not their tokens are securities. Have you noticed any interesting trends in this area and how are law firms approaching this topic?

Jor Law:

Yeah, definitely. I think early on you had a number of law firms that were trying to ... were little bit aggressive in their application of their legal advice and they would argue frequently that something, which is utility even though it was pretty clearly not a utility. I think the pendulum have shifted the other way almost to an extreme where law firms have now gone on to a trend where they think everything is a security and that's probably a good thing for now, but hopefully in the future, you'll find that law firms will balance out a little bit and be able to craft something that truly is a utility token again.

Amy Wan:

Great. Jack, this question is for you. So, one of the deeper issues of ICOs involve something that investors don't need to think about which is know your customer or KYC, and anti-money laundering, AML. Can you explain how these global ICOs create new opportunities for terrorists and drug organizations, as well as how KYC and AML are becoming very, very important in ICOs?

Jack Hayes:

That's a great question and I think one that the whole industry needs to wrestle with. We're already talking about the SEC issues but based on certain different types of operations in releasing coins, they could also be treated as commodities. So, the CFTC could have jurisdiction if there are derivative or swap-related transactions going on. The Department of Treasury Financial Crimes Enforcement Network could also have jurisdiction if someone is issuing, or administrating, or exchanging a virtual currency and what this means under the SEC rules, and potentially the CFTC rules, and FinCEN rules is that these companies could be essentially considered a financial institution.

As you probably all know, these financial institutions have very rigorous requirements to know your customer and that's done for anti-money laundering reasons, terrorist finance reasons, economic sanctions reasons, anti-corruption reasons. One big reason to do that is to protect not only the investor, but the company itself to make sure that the person releasing the coin is not dealing with the proceeds of crime, or helping to finance terrorists, or terrorist organizations, narcotrafficking organizations. So, it is an important component that investors and the companies themselves need to be attuned to.

Adam Chapnick:

So when companies want to create ICOs, they have to go through a lot of manual work to support KYC and AML, but there are some new approaches involving security tokens that may provide some level of KYC and AML efficiency. I don't know. Jor, are you familiar with this? Can you elaborate on some of this?

Jor Law:

Yeah. Anytime you get into capital raising especially in a new area like in ICOs, it's always going to be a little bit more expensive and a little bit more laborious in the beginning, but certainly there are movements underway by many, many players in the space to try to automate and lower the cost, and bring up the efficiency of repeatable processes, and AML, KYC is definitely one of those problems that a lot of people are looking at. How do you determine that that person that's interacting with this ICO is a legitimate person? That's definitely something along with identity accreditation, verification, etc., that many companies are looking at. It will definitely get better.

Adam Chapnick:

That's encouraging. So Howard, investors should know that when they're investing in US companies or ICOs, the key executives in those companies have to go through something that's called a bad actor check, and that's not ... making sure that Ben Affleck does not work at the company. That's a different kind of bad actor check. This is ... Thank you. Thank you, everyone. What types of checks are involved in this process?

Howard Marks:

Well, good news. I did a bad actor check and I passed.

Adam Chapnick:

Wow.

Howard Marks:

Is that amazing?

Adam Chapnick:

That is exciting.

Howard Marks:

It's very important. Now, that we get into an ICO that is I would say regulated under the rules of the SEC. There's a rule called the bad actor check and if anyone who is an officer of the company, or who owns 20% or more of the company, or who has some form of control of the company and the company itself goes through a review and that review will check all sorts of things to see if they've had any, I would say serious criminal issues, fraud that are related to securities. Unfortunately for some people, that will exclude them from the opportunity to conduct their own ICO because of that past, but it reassures their investors that potentially, people who have committed fraud in the past are not coming back to do the same thing.

Adam Chapnick:

Now, also there's a flip side of that whereas for the issuer for the company sometimes that could be a little bit of a dicey scenario when there might be someone who owns a little bit of your company that have been subject to bad actor check. Yes, they gave you money but sometime in their past, maybe there are some sort of conflict arises. Is that something that has happened in the past, or is that a concern of issuing companies?

Howard Marks:

Yes, absolutely. We've seen that. We've unboarded last year over a hundred companies. So you can imagine-

Adam Chapnick:

I can imagine.

Howard Marks:

... a lot of companies, a lot of people involved, and several people per company. We've had one situation where a company, there was an investor that didn't go through the bad actor check the way we so intended, and then they had to withdraw their application and that was it. So it shows that in many ways, regulation has a benefit and the benefit worked in this case. So, there's a lot of criticism from the market place including companies who don't like the idea of regulation, and they would rather have a free marketplace where only the bad guys are taken, but no one knows who they are until the bad things happen.

That's why in a way, regulation is coming in the right place at the right time in the ICO market, in early phase of the marketplace saying, "Look, we will continue growing this marketplace but we'll do it with the right kinds of checks," and one of them is the bad actor check.

Amy Wan:

So now as we noted, ICOs are being offered on a worldwide basis and so regulators around the world are trying to determine what this means. You can learn more about this regulatory journey at ICOInvestor.tv via our global regulatory review.

Adam Chapnick:

All right. We'd like to thank all of our guests for participating today. From New York, Paul Menchov and Ken Nguyen. From Washington-

Ken Nguyen:

Thank you so much.

Paul Menchov:

Thanks so much.

Adam Chapnick:

Thank you guys. Thank you guys. From Washington, Jack Hayes.

Jack Hayes:

Thank you.

Adam Chapnick:

From our LA studio, Howard Marks and Jor Law.

Jor Law:

Thank you.

Amy Wan:

Thanks guys. So, I had a chance to discuss the state of ICOs in Southeast Asian market with Nix Nolledo from the Philippines.

Adam Chapnick:

Nix is the chairman and CEO of Xurpas Inc. Xurpas, is the largest mobile consumer technology company in Southeast Asia. He's the 2015 Ernst & Young Philippine Entrepreneur of the Year, as well as an active angel investor in early stage tech startups and blockchain company token sales. Let's have a listen on what he had to say.

Amy Wan:

Great. So Nix, many people know about the cryptocurrency incident of last September when China went and shutdown a lot of cryptocurrency exchanges, but today we want to actually focus on ICO actually. So, to what degree do people in Southeast Asia focus on the day trading of Bitcoins and a few other coins versus how much do they actually focus on ICOs that are often being used by startups to raise money?

Nix Nolledo:

It depends really on which side of the table you're on. The common day every man, the common person here trades quite a bit on exchanges like Binance over here in Southeast Asia. This activity on doing cryptocurrency trading really hit the crescendo around December when the prices of cryptocurrencies peak and everybody felt like an expert. I could personally hardly get away from having any kind of cryptocurrency-trading type of conversation to the most casual interactions with different people in the region, whether I go out and have dinner, or lunch, or coffee with someone. Everyone was talking about what's the hot new token.

At that point in time, in the fourth quarter of last year, transaction velocity on the on-ramp platforms for Bitcoin, which tends to be the point of entry really, the main currency, trading currency to buy other out tokens or buy out tokens increased sharply in the fourth quarter of last year versus the third quarter.

Amy Wan:

So, what types of ICOs are becoming important or popular for funding in Southeast Asia? Are people focusing more on infrastructure protocol project or are people more into the ups and things of that sort?

Nix Nolledo:

You're seeing a lot of what I call infrastructural solving this part of the world's type of problems, type of projects that are being funded and are being released. The kind of opportunities in an emerging market tend to be very different from let's say the kind of opportunities that we might see in the United States. So, those are the ones that are getting some capital.

Amy Wan:

Very interesting. Let's turn to the regulatory ecosystem for just a second. Many countries around the world are having evolving regulations running ICOs, can you comment on any regulatory directions that are happening in countries in Southeast Asia?

Nix Nolledo:

For me, regulation is really inevitable anywhere in the world. My belief is the countries that properly regulate, meaning strike a fine balance between controls and innovation, they really attract a ton of investment capital and potentially accelerate the economy that they are headquartered in because of the influx of cryptoactivity. I've spoken to a couple of regulators in my part of the world and their perspective is that they know that overregulation will simply drive people to the black market. However, too little regulation and you have these uninformed investors that will not be protected. So, it's really a fine balancing act.

Singapore has really been leading the charge in this region. They're very open. The monetary authority of Singapore has been one of the most progressive sort of government bodies when it comes to cryptocurrency regulation, and if I'm not mistaken even released an official set of guidelines around ICOs and cryptocurrencies in the fourth quarter of last year. Countries like Malaysia, Indonesia, Philippines, Vietnam, none of the governments in those markets have banned ICOs, but all have released their customary warning about engaging with cryptocurrencies. When you look at the attitude really of this cryptocurrency investors, you would be able to tell that government regulation is somewhat necessary.

Amy Wan:

How about this? Can you leave us with any predictions on ICO activity in Southeast Asia for 2018?

Nix Nolledo:

You're going to see an absolute deluge of ICOs in this region in 2018. The mean driver really is the capital available in this market to fund startups, to fund blockchain projects is very, very scarce. So ICOs, these challenges, absence of capital become the driver of innovation. Innovation not just in the kind of projects we implement, but innovation also in how you fundraise. I mentioned it earlier, the kind of activities, the kind of projects that you're going to see funded in this region are the ones that solve the issues, problems, and challenges that tend to be more unique to an emerging market versus other markets.

Amy Wan:

Absolutely.

Nix Nolledo:

So, I believe there are tons of opportunities for entrepreneurs to leverage off this source of capital raising and the technology that underpins it to potentially bridge, a few digital to bridge the digital side.

Amy Wan:

Great. Thank you so much. That was Nix, CEO of Xurpas live from Manila. Thank you so much.

Nix Nolledo:

Thanks so much Amy.

Adam Chapnick:

We periodically get questions from all of our fantastic viewers like you, and before we go I just want to give an opportunity to [Ernie R. 01:01:54] who asks us a question today, and I'm going to toss over to my colleague here. So Ernie asks, for companies that raise funds via ICO, can part of those funds be used to buy existing companies in order to get a hold of technology that will be used for blockchain?

Amy Wan:

Oh, absolutely. The answer is absolutely yes, and I hear that there are some companies that are actually doing it. Now, the SEC is a very disclosure-based regime. You can almost do whatever you want so long as you disclose. So, when you're raising those funds, if you disclose that, "Hey, part of these proceeds are going to be used to go buy this other company or go buy this technology," then absolutely.

Adam Chapnick:

There's your answer Ernie R. and keep the questions coming, and on our future shows we'll make sure that we answer more of them.

Amy Wan:

All right. So that's all the time we have for today. Don't forget to visit us at ICOInvestor.tv for more information on all things ICO and to view ICO spotlight interviews, learn more from our ICO Learning Center, see all the latest regulatory announcements on our global regulatory review and hear more thoughts from the community on our crypto meetup channel.

Adam Chapnick:

Check us out on social media too where you can see exclusive interview clips from industry leaders and get all the latest crypto and ICO news. You can also find us on Twitter, Instagram, and Facebook. I'd like to again, thank our guests today for being part of our conversation, and of course thanks to all of you at home for watching. I'm Adam Chapnick. For everyone here at ICOInvestor.tv, thank you so much and we will see you next time.