Token Sales for Entrepreneurs featuring Debevoise & Plimpton and Smith + Crown
Written by Hunter Gebron
Token Sales for Entrepreneurs was an event hosted at MetaX HQ in Santa Monica, CA on July 20, 2017. Led by Lee Schneider of Debevoise & Plimpton and Andreas Weiler from Smith + Crown, topics ranged from regulatory implications of token sales, taxes, and what entrepreneurs who are looking to raise money through a token sale need to know.
Established in 1931, Debevoise & Plimpton is one of the most elite and successful law firms in the world with over 650 litigators spread across the globe. They were instrumental in adChain’s Token Launch and provided our team with legal counsel throughout the entire process.
Smith + Crown is a research group focused on the revolutionary technologies in the emerging field of cryptofinance.
With his opening comments to the 60+ attendees at last night’s event at MetaX Headquarters, Lee Schneider of Debevoise & Plimpton stated the obvious,
“we’ve reached a point in time when every man, woman, cat, and dog wants to raise money with a token sale.”
Pouring over charts and graphs Lee Schneider and Andreas Weiler of Smith+Crown demonstrated how in Q2 of 2017 a total of $850 million was raised across 55 token sales and in Q3 (now less than 20 days old) an eyebrow raising $400 million has already been raised. Token sales have overtaken traditional Venture Capital backed projects by a margin of 4–1 in 2017, with an average of $7.3 million raised per token sale.
The room was filled with people loaded to the hilt with creative ideas for new blockchain business models and clever token use cases. If one thing stood out from all of the enthusiasm, it’s that token launches may have just entered the mainstream. Things have changed pretty drastically since 2016, and soon we may find ourselves in a whole new token world (if we haven’t already.) But amidst all of the excitement, there is still the looming cloud of uncertainty regulators, and government bodies home and abroad are casting over the space. What do entrepreneurs looking to launch a token on the Ethereum blockchain need to know?
Fortunately for us, Lee and Andreas broke it down into three easy-to-follow categories:
2) Don’t Commit Fraud
In the first category ‘Global,’ Schneider and Weiler emphasized one critical point about token sales. While you may think it’s only the U.S. government you need to worry about in regards to whether or not your token is a security, in fact, token sales are Global events. Figuring out if your token is a security on a world market e.g. South Korea, Japan, Taiwan, etc. is something token entrepreneurs need to be thinking about. Each country has its own interpretation of what constitutes a security. And so just because your token may NOT be classified as a security in one jurisdiction, it may be in another. Debevoise & Plimpton has a worldwide legal presence and each token sale they counsel involves cross-checking securities law internationally.
The Second Category, ‘Don’t Commit Fraud’ is a self-explanatory one. Fraud, according to Schneider just means, “lying to people, taking their money, and absconding.” This topic is particularly relevant at present. Two high-profile hacks took place in Ethereum Land this week. One on Parity’s Multisig Wallet, where a hacker managed to steal $32 million from projects such as Edgeless, Swarm City and aeternity due to an exploit in Parity’s code. The other was a hack perpetrated against CoinDash. The CoinDash hacker was able to change the contract address on their official website during their token sale to fool would-be investors into sending Ether to the wrong address, in this case, the hacker was able to steal roughly $7 million.
Hackers aside, the core message around fraud came down to one of transparency. Schneider and Weiler emphasized the importance of outlining a clearly defined token mechanism in your projects white paper. Making it easy for people to understand the use case of your token is a primary factor in determining a project’s viability and credibility. Another key component of teams looking to do a token sale is to allocate and define the use of proceeds. Or in Schneider’s own words, “you need to tell the people you raise from where the money is going.” He also went on to say, “Many projects weren’t expecting to raise as much as they did — and if that happens and you’ve laid out a use of proceeds that doesn’t account for all those extra proceeds, you will be in an interesting situation.”
The Third and Final Category, ‘Taxes’ was branded as, “hugely important” for token entrepreneurs. Schneider said, “If your token is not a security then most likely the money you raised is revenue, so without offsetting expenses, you are going to be stuck with a huge revenue tab you need to pay taxes on. If you are in U.S or Global this has implications, so talk to your accountant(s), or you will be in big trouble.” When asked about whether there are any national jurisdictions either better or worse for token entrepreneurs to launch their token from, both Schneider and Weiler deferred that it depends on a variety of factors. One thing to consider is where the team is located and the nature of their project. For example, prediction markets like Augur and Gnosis could fall under the umbrella of ‘gambling’ in some jurisdictions, and that could mean lots of regulations and tax implications depending on where you are.
That concludes the main portion of the presentation and the bulk of the items discussed at the event. Schneider and Weiler then opened the floor for a Q & A session.
There were many great questions throughout but one audience member, in particular, asked the very pointed question, “We’ve been watching these ICO’s go crazy, some of it feels good and some if it feels like 1999. In your heart of hearts will the SEC wake up soon and declare this (token sales) a security and make ICO projects return all of their money?”
Weiler responded, “until someone gets hurt I think it will be about self-regulation and setting standards. Initiatives like, “A Securities Law Framework for Token Sales” put forth by Coinbase (and which Lee Schneider was a leading contributor to) is really about setting standards, so we don’t get a lens placed on us. Bancor spent 117k ETH to keep their liquidity reserves — they still have half of their ETH left, and so they may be OK but if they spend it all or something to the equivalent happens, and millions vanish, that’s bad.”
Schneider also jumped in to answer the question saying, “we try to talk to the SEC on a regular basis. They are very much alive to what’s happening, and in their words, they are in “information gathering mode.” It’s also important to note that even if the SEC says something is a security that may not be the last word. The SEC does not have jurisdiction if it’s not a security. They can try to reach out and grab everything, but there are examples when it’s not — one area is event tickets — we all know there is a huge secondary market for event tickets but that is not a security until Congress changes the law.”
In closing, one final word of advice was passed down to the audience from Lee Schneider who said, “This is a new world, and this is a new area. When we reach out to our global network of counsel to make sure a token project doesn’t have issues in China, the EU, or wherever, what we are finding is things are changing very fast. Maybe not so much in the U.S. but the point is that what you hear right now as far as what the law is may change by the time you do your launch, so it’s important to stay on top of what is going on.”
Written by Hunter Gebron