A Practical Guide to Forming a Blockchain Business

Garnering enthusiasm for an idea is the easy part. It’s another matter altogether to have the discipline and patience to implement a sound business and legal strategy around an idea.

Feb 2, 2019 · 6 min read

By Joseph “Jay” Arcata III, BX3 Capital

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Image by The Next Scoop

arly-stage blockchain startups often fall prey to the same mistakes as new businesses of all stripes: they fail to devote attention and resources to basic legal and business issues upfront. Yet blockchain and cryptocurrency companies have an issue that tends not to befall businesses breaking into sectors that are not quite as nascent: they don’t have an established playbook.

Cryptocurrency and blockchain firms often find themselves feeling in the dark, looking for guidance on how to navigate often spotty, if not non-existent, securities law governing virtual currencies, lest they run afoul of regulatory authorities. With scrutiny of initial coin offerings (ICOs) by the SEC having intensified in recent months, it is even more critical for these companies to ensure that their regulatory house is in order from the outset.

Garnering enthusiasm for an idea is the easy part. It’s another matter altogether to have the discipline and patience to implement a sound business and legal strategy around an idea. I have been party to countless pitches by early-stage crypto companies attempting to raise money for a project but when pressed for details regarding their formation, banking relationships, due diligence, etc. all I receive are blank stares. It’s a bit like trying to pour the foundation of a house before the floor has been constructed.

Blockchain and crypto projects are raising money these days via a number of ways. While the ICO boom has (at least in the United States) quieted, security token offerings (STOs) through traditional financing methods have taken off. While the means of raising money may differ from project to project, the steps that emerging blockchain companies should follow before raising capital are largely the same.

Here is a business-formation checklist that early-stage blockchain companies can use as a guide:

1. Blockchain use case

Before forming any business built on blockchain technology, the blockchain use case should be front and center. Questions to consider first and foremost are:

  • Is blockchain necessary for the successful launch/implementation of the platform?
  • If so, why?

Many projects that I have come across have very attenuated blockchain use cases and seem to be shoehorning blockchain into what would ordinarily be a garden-variety tech project.

  • Does blockchain technology offer the best solution to the problem?

If the answer to that question is in the affirmative, will it be built using an existing blockchain platform or will a new one be built?

2. Corporate structuring

  • What legal form will your entity take?
  • Where will its legal home be?

Once these two questions are answered, the necessary steps must be taken to ensure that entity formation is completed and the appropriate forms are filed in the jurisdiction where the entity will be formed.

3. Assemble a team of experts in the following areas:

Mark Zuckerberg on techniques for hiring the right people / Stanford ecorner/ YouTube

· Tax structuring and compliance: choosing the optimal tax structure and ensuring compliance with relevant laws)

· Accounting and bookkeeping: generating financial statements, coordinating filings)

· Banking: establishing banking relationships and accounts in desired jurisdictions

· Human resources: selecting and setting up payroll, benefits

· Legal services coordination: You will need a qualified, experienced legal team to guide you through the regulatory environments in different jurisdictions and perform necessary due diligence. Is there intellectual property to protect? What other legal issues are at play? Also, you will need assistance with everyday legal matters, such as the drafting of a privacy policy, terms of use, and advisor agreements.

· Graphic design: logos, website, infographics, advertisements, promotional materials

· Broker-dealer coordination: assisting in establishing relationships with broker-dealers, as appropriate

· Marketing: generating awareness, attention and excitement about a project’s story and mission
Public relations/earned media: placements in top-tier publications; e.g. The New York Times, Fortune, TechCrunch)
Content management: coordinating the production and delivery of bespoke articles, posts and other content relating to a project and its team)
Paid advertising: targeted campaigns on major advertising platforms
Community building and management through general social media channels such as LinkedIn, Reddit, and Twitter; as well as industry-specific channels such as Discord, Steemit, and Telegram

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Image by Waves Lab

4. White paper and revenue model:

In the span of one or two pages, your white paper should describe your product, articulate the problem it seeks to solve within a particular industry, describe how you are going to solve the problem, detail other products in the marketplace and how yours is different, and provide a high level overview of your business model, tokenomics and token usage specifics and outline your team members and advisors. A white paper should not be overly technical and should not focus on blockchain, per se. Blockchain is merely a component of the project and should not be the focal point of your white paper.

5. Fundraising timeline and roadmap:

  • How are you going to deploy the capital you raise?
  • When will you be seeking additional capital?

Every business should have a detailed roadmap in order to win investors’ confidence. It should contain realistic and achievable milestones and goals.

6. Prototype/MVP:

Another area that early-stage blockchain companies often fall short is the lack of a minimum viable product (MVP). Many are armed simply with an idea. In today’s fundraising environment, an idea, without any proof of concept or validation, is not enough. According to a recent report by research and consulting firm GreySpark Partners, nearly half of all ICOs in 2017 and 2018 failed to raise any funds. While there are multiple reasons for this, including fraud and regulatory/legal troubles, one of the most common maladies suffered by failed ICOs is not enough focus on developing the product itself. Even a proof of concept, which validates the technical side of the project but is largely silent regarding the business case or user base, falls short in the eyes of many investors. An MVP provides validation in that:

  • It has enough value that people are willing to use it or buy it from the outset;
  • It demonstrates enough future benefit to retain early adopters; an
  • It provides a feedback loop to guide future development.

Given the lack of a roadmap, blockchain and cryptocurrency companies are often left to forge their own paths, while still needing to heed regulatory guidelines, as murky as they may be. As the industry continues to mature, the wheat will be separated from the chaff. The firms that establish themselves as legitimate players in blockchain and cryptocurrency will be the ones that prevail — and will draft the definitive industry playbook.

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John “Jay” Arcata III is BX3 Capital’svice president of client operations, where he guides businesses through complex and evolving regulatory hurdles and provided key insights into emerging technologies, including blockchain and smart contracts.

Jay joined BX3 after having spent the past several years as a partner at Halloran Sage, one of the largest and most respected law firms in Connecticut. While at Halloran, Jay was a business litigator and general counsel to a broad spectrum of businesses. In addition, Jay founded and served as chair of the firm’s Cybersecurity, Data Privacy and Technology practice group. Jay has spoken and been published extensively in the areas of cybersecurity, data privacy and emerging technologies and has been called upon by numerous television and media outlets to share his insights and knowledge in this area.


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