What I learned at Blockchain@Berkeley’s ICO Financing Conference

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Adam Sterling of Berkeley Law kicking off the conference

Blockchain@Berkeley hosted a really cool conference focusing on ICO Financing. The organization itself is super impressive. In just a year they’ve become a preeminent organization focused on education, consulting, and research and development in the blockchain space. And it’s all student-run. Here’s what happened and some thoughts.

The first panel was titled: SAFT, Coinbase Framework, ICO Modeling, Utility Tokens.

Moderator: Jeremy Gardner — EIR at Blockchain Capital
Patrick Baron — CEO at Ambisafe Financials
Matthew Liston — Crypto Native and CSO at Gnosis
Ameen Soleimani — Cofounder and CEO at Spankchain
Jason Teustch — Founder of TrueBit
Vinny Lingham — CEO and Cofounder at Civic

This session first looked at the entrepreneur’s perspective and considerations before conducting an ICO or token sale. It seems to me like the considerations are very similar to raising a seed round. Patrick Baron said the farther along you can get before raising capital, the better. As an entrepreneur you want to have a minimum viable product, maybe some sort of traction, and things like vesting in place.

The group talked about token pre-sales, and Matt Liston made it clear he was not a fan. He said good projects don’t need pre-sales because there’s enough demand for the tokens. He, along with Vinny Lingham, were opposed to discounts for pre-sales because it advantages larger crypto holders. If tokens are sold through pre-sales at a discount, those token holders are not aligned with the rest of token holders and may want to sell their tokens for quick profit. In addition, pre-sales result in a few large holders of the tokens when it’s much healthier for the network to have the tokens distributed across more holders. Vinny discussed how Civic had a limit on the number of tokens each purchase could buy in their token sale.

The conversation shifted a bit toward the SAFT Project and how venture capitalists are investing in token sales. A few panelists were strongly opposed to the way some VC’s “pump and dump” tokens. VC’s can leverage their brands to create a lot of hype around a project. They can purchase tokens through a SAFT or something like it and get a discount on the token price at the ICO. Because they invested before the ICO, individuals are more interested in purchasing tokens for that project, therefore inflating the price. Because there are rarely any transfer restrictions or requirements to hold onto tokens, the VC’s can sell their tokens soon after the ICO for a quick profit without contributing value to the project aside from the initial capital they contributed.

The panel concluded that if you give discounts on pre-sales, they should come with lock-ups to avoid the pump and dump schemes.

Lastly, Matt Liston made the point that earning tokens align incentives much more than purchasing them, so if you can build a project that doesn’t need an ICO, even better.

Panel two was titled: ICO Structuring

Moderator: Laura Shin — Senior Editor at Forbes and host of Unchained
Reuben Bramanathan — Product Counsel at Coinbase
Matt Corva — Legal Counsel Lead at ConsenSys
Lee Schneider — Partner and Head of Fintech at McDermott Will & Emery
Karen Ubell — Associate, Cooley LLP
Joshua Ashley Klayman — Of Counsel and Head of Blockchain + Smart Contracts at Morrison Foerster

Lee Schneider kicked this session off saying blockchain is not an industry, it’s a technology. The regulatory framework depends on what type of blockchain project you’re building. If you’re building a healthcare network, you need to worry about all of those regulations. Same if it’s energy, food, etc.

There isn’t a “best model” for structuring an organization for a blockchain project. A lot of projects have used the foundation model, but there are negatives. Most countries have laws against using non-profit foundations to enrich other people, so issuing tokens that appreciate in value might be in violation. Foundations also face a lot of governance problems. For example, once a Swiss foundation is formed, it is very difficult to change the purpose. So if the project changes there are problems. It’s also hard to get money out of a foundation once the capital is contributed. And if you do manage to get the capital out of the Swiss entity, U.S. tax law still applies.

Many token sales are done through a regular Delaware C-Corporation, but there are still issues like conflicts of interest that for-profit entities deal with. For example, a C-Corp could have an opportunity to work on something that will bring profit into the C-Corp, but will at the same time take resources away from developing the protocol. Dealing with that conflict might fall under the business judgement rule, but there’s some legal risk.

After discussing the entity structure, the panel spent a lot of time on securities regulation. Karen Ubell of Cooley actually worked on the SAFT Project, and there was a lot of discomfort amongst the other panelist with using this model. The moderator polled the room to see who was a fan of the SAFT from a securities regulation perspective, and very few people raised their hands.

The panel also discussed the idea of “utility” tokens, emphasizing that there is no bright-line rule about what makes a token a “utility.”

The third panel was titled: Hedge funds and VCs: Trends, due diligence, and advice for teams

Moderator: Ronen Kirsh — Blockchain at Berkeley
Jonathan Allen — Managing Partner at Dekrypt Capital
Spencer Bogart — Managing Director and Head of Research at Blockchain Capital
Joey Krug — Co-Chief Investment Officer at Pantera Capital and Co-Founder @ Augur
Dovey Wan — Managing Director at DVHC

This panel kicked off with an interesting comment from Spencer Bogart of Blockchain Capital.

I was surprised to hear this because obviously the point of a something like Blockchain Capital is to invest in new blockchain projects. But the comment itself makes a lot of sense. Like the previous panel that mentioned the difficulty in changing the mission of a foundation, it’s difficult to change the mission of a network. The investment strategy is pretty much the same as a seed stage VC, where you’re investing primarily in the team. By investing with equity you’re better able to invest in the team rather than in a protocol or decentralized app that may not work and may have little flexibility to pivot like a team working on a Delaware C-Corp could.

The panel spent a lot of time talking about what they look for in investments. One major red flag is “rent seeking.” The whole point of the decentralized applications is to be able to remove the middle man from transactions. If a project is trying to pay themselves a cut of transactions on the network, it defeats the purpose of doing it on the blockchain and might as well be a traditional centralized entity.

The panel predicted that in 2018 launching an ICO will get a lot harder because of all the noise in the space. It used to be possible to sort through every project that came in the door. Now there are 50 ICO’s a day and it’s impossible to track all of them.

The fourth and final session was the keynote from the Securities and Exchange Commission

Kristin Snyder — Associate Regional Director (Examinations) at SEC
Zach Fallon — Special Counsel in Office of Small Business Policy at SEC
Victor Hong — Senior Counsel in the Division of Enforcement at SEC
Scott Walker — Attorney Advisor in the Office of Compliance Inspections and Examinations and Member of Distributed Ledger Technology Working Group at SEC

This was the most anticipated panel of the day but unfortunately the SEC didn’t share anything that wasn’t already on their website or in The DAO Report. They kicked it off with a disclaimer that everything they said was their own opinions and not necessarily the opinion of the SEC, so that was cool. Zach Fallon joined remotely from D.C. and it wasn’t his fault, but the screen was so gigantic that it made for a sort of awkward dynamic when he was speaking. This made it a little funnier:

Fallon went through existing securities regulation, but I think people were more interested in hearing about the unique challenges of regulating token sales. I think the SEC is going to focus on the edge cases first. There is a lot of grey area in the space, and the surefire way to get SEC attention is to blatantly violate the rules. But aside from that, if you’re following SEC guidance as best as you can, there is probably low risk.

This was highlighted in a question from the audience about baseball cards. Baseball trading cards have never been subject to SEC regulation or determined to be a security despite the fact that they have no utility, are traded on exchanges, and have monetary value. The SEC didn’t have an answer to this because based on the Howey test, baseball cards might be considered a security. To me, this is an example of a security that the SEC never went after. The SEC spent a lot of time talking about the existing rules, but for obvious reasons they don’t discuss the probability of enforcement.

The SEC also talked about resale restrictions. Someone asked how the SEC will deal with the fact that it’s basically impossible to prevent resales on a blockchain network. The SEC did not have an answer, but pragmatically pointed out that the rules are what they are, but they might need to be changed. Of course, that’s not the job of the enforcers.

I didn’t learn as much as I’d hoped from the SEC panel, but it was super interesting to see how they are thinking dealing with questions that haven’t ever come up before due to this new technology.

Overall, it was a great conference. I learned a ton. Can’t wait for the next one! Thanks to the Blockchain@Berkeley team and co-sponsor Berkeley Law for putting on such an amazing conference.

Written by

legal counsel to startups and VCs, jd-mba, former investor at Dorm Room Fund

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