Today marks a huge milestone for our space.
In my opinion, this news is one of the most important cracks in the dam we’ve been waiting quite some time for.
So what happened?
The US Securities and Exchange Commission on Wednesday cleared blockchain startup Blockstack to sell digital tokens. At RSC we’ve been referring to these as Security Tokens and the process of offering them as Security Token Offerings (STOs).
There is no difference between the security token and digital security nomenclature, but regardless blockstack refers to their offering as DSO (Digital Security Offering) so we’ll do the same for this newsletter.
So, what’s the big deal?
Well, this is huge because it’s a first-of-its-kind offering and could give young cryptocurrency businesses a new fundraising template.
Let’s make it crystal clear so the value of that is realized: there is now a mass market option to offer security tokens / digital securities to unaccredited US investors.
That option is Reg A+.
From the WSJ article: “Reg A+ is part of the Jumpstart Our Business Startups Act, a 2012 law meant to spur job creation. Under Reg A+, companies can raise up to $50 million in a 12-month period with fewer disclosure obligations than in a traditional IPO.
When the JOBS Act became law, Reg A+ offerings were marketed as a way for startups to tap the capital markets without the expense of an IPO. Yet these mini-IPOs, as they are known, have been dogged by lackluster performance and fraud concerns. Nasdaq Inc. and the New York Stock Exchange recently raised listing requirements for Reg A+ companies due to their poor track record.
Some blockchain-based startups have sold tokens under a different SEC provision, Reg D. Those offerings don’t require SEC approval and are limited to accredited investors—companies with assets of at least $5 million and individuals with a net worth of at least $1 million. Anyone can buy shares or tokens offered in a Reg A+ sale.”
Today’s approval was what we hoped for, as it signals the SEC is serious about DSOs becoming integrated with traditional capital formation models.
Up until now, the only DSOs to be conducted have been through rule 506(c) of Regulation D (Reg D) and Regulation S (Reg S). Reg D only allows US accredited investors (i.e., millionaires) to participate, and Reg S only allows non-US accredited or non-accredited.
Essentially, 92% of the US population had no viable way to participate in equity tokenization, which severely limits the appeal and reach.
That’s why we got Reg A+ and Reg CF offerings introduced with the JOBS act. Unfortunately, the red tape involved has meant that many A+ offerings fail or are rejected, and CF offerings are limited to only a 1M raise and is very restrictive.
So, needless to say, we we excited to learn that Blockstack filled for their A+ on April 11th, because we needed that breakthrough. The SEC could have taken up to 120 days to consider it (brings back Bitcoin ETF memories), but it seems they found the filling credible enough to set a new precedent.
Again, A+ is a step forward for us.
Reg A+ aligns much more closely with blockchain community values.
This gives the everyday investor access to early-stage investment opportunities typically reserved for high net-worth individuals. It’s also worth noting that securities sold in a Reg A+ offering are not restricted so investors don’t have to deal with a lock-up period like they do for Reg D.
What’s somewhat a seemingly fateful twist is that DSOs are a step forward for the A+ as well.
Due to a combination of factors ranging from low-quality deals, unrealistic valuations, and little after-market support, the Reg A+ industry has stagnated.
Frankly, it hasn’t lived up to the vision the JOBS Act put forth. Companies simply prefer less red tape and the lack of fundraising limits you get with the Reg D.
So, it’s a total win-win for us and the A+ because the crypto industry has badly needed a realistic alternative fundraising model to replace the broken and abused ICO.
The IEO is simply an ICO in makeup, so I don’t consider it to be that realistic an alternative.
Digital Securities are what we need, simply for the reason that they are a better model in every way over the ICO.
Reg A+ DSOs will give us an influx of quality offerings backed by credible companies with tangible visions and fair valuations.
It will not be a moon lambo carnival of 1000% returns, but it also won’t be the lawless Wild West that burned so many small investors.
It will be an equitable land of opportunity, both in monetary terms and in perception.
The blockchain industry is still plagued by the aftermath of ICOs.
According to an Ernst & Young analysis of top ICOs responsible for gathering 87% of all proceeds from January 2018 to September 2018, 86% of ICOs are below listing price and 30% lost all their value to date.
Importantly, Digital Securities do NOT protect you from bad investments, of which there will still be plenty.
BUT, it will afford you the legal protections and investor rights that we need as retail investors.
If we could combine the attention and deal flow that ICOs generated, high-quality deals, and necessary regulation and investor protection, both the blockchain industry and Reg A+ industry would benefit significantly.
We’ll keep mulling this over.
One thing that is unfortunate is the terms of Blockstack’s A+:
“While the offering resembles an IPO in some ways, there are big differences. For one, token buyers won’t get ownership stakes in the company. Rather, they will get “utility tokens” that they can use as currency on Blockstack’s network, a blockchain-based software platform on which developers can build applications.”
An A+ for utility tokens with no equity, voting rights or revenue share is a solid “meh” from me, but at the same time, we have to recognize this as a HUGE win for us. Non-accredited investors getting skin in the game is going to drive growth, capital formation, and a market that makes the ICO one look tiny.