For ICOs StartEngine Introduces RATE: Real Agreement for Tokens and Equity
Last year we saw a major shift in the fast-moving ICO industry. Companies began to transition away from offering utility tokens and toward offering security tokens. Part of the evolution is due to the SEC’s strict criticism of noncompliant offerings. In December 2017, SEC Chairman Jay Clayton issued a public statement describing most tokens are securities. He warned that companies issuing coins must comply with Federal and state securities laws.
What the SEC did not provide was a recipe for how exactly companies should go about legally raising capital with ICOs. Rather, the memo hints that the securities industry already offers necessary tools for raising capital. The majority of these tools are made available through the JOBS Act, which was voted into law in 2012 — well before any ICOs existed.
Today, many companies are using SAFT (Simple Agreement for Future Tokens) to raise capital for their ICOs. There is no more dispute that SAFT are securities. However, if a company raises capital with a SAFT and is later acquired, the investors would not participate in the future value creation of the company. This is OK for many cases, but investors are also interested in owning equity, which is traditionally what companies offer.
Investors have been bullish on utility tokens. This is primarily because they provide instant liquidity. Companies offer utility tokens on a basis of profit — and in many instances, they deliver. Last year, some tokens grew hundreds of percentile points, producing eye-popping multiples for investors. The flexibility provided by these tokens was unfathomable and irresistable. Who would want to buy IPO stocks on the NYSE when ICOs seem to outperform them every time?
The ICO industry needs methods for raising capital that benefit entrepreneurs as well as investors. Introducing RATE (Real Agreement for Tokens and Equity), a new way for ICOs to raise capital. The RATE structure offers both equity in the company and tokens. This double whammy could be very attractive to investors who want to maximize their investment two ways.
The best way to explain this new agreement structure is through an example:
Matt’s French Bakery wants to raise $30M with an ICO. The company decides to create an early sale period during which it offers 10 tokens for every share purchased. In addition, early sale investors receive a 15% discount on the sale of common shares that will be offered in the regular crowdsale. The early sale incentivizes early purchasers to invests larger sums of money.
The company uses Regulation Crowdfunding (Title III of the JOBS Act) to raise up to $1.07M directly from everyday investors with a minimum of $100 or the equivalent in BTC or ETH. Simultaneously, Matt’s French Bakery uses Rule 506(c) of Regulation D to raise millions from accredited investors. In both offerings, the company uses a RATE to offer investors both equity and future tokens as a bonus to the offering.
The idea of a bonus is simple: give a large incentive to investors to make the offering more marketable. Also, the bonuses are securities on their own. It all depends on how the token is designed. The RATE is actually selling equity in the company. A company can offer non-voting Common B shares, voting Common shares, Preferred shares — whatever it wants.
The shares offered in the RATE are speculative in their nature and are inherently securities.
After the pre-sale, the company decides to raise the remainder of the $30M they are seeking and use Regulation A+ (Title IV of the JOBS Act) to raise up to as much as $50M from everyday investors. This offering requires the SEC to review and qualify the offering. Once qualified, the offering goes live, the investors sign a RATE, they and receive equity without a discount (full retail) and 5 free tokens as a perk (half what the early sale offered).
You may ask, how will investors get liquidity with a RATE? Two ventures, tZERO and StartEngine Secondary, have announced their intentions to launch regulated marketplaces in 2018. Both will have SEC registered Alternative Trading Systems (ATS). More are likely going to be announced shortly. The shares sold under RATE will be transferable and once the tokens are issued they will also find themselves on registered ATS platforms.
The main benefit of using a RATE and the JOBs ACT exemptions are simple: companies are following the law. This will protect the officers and professionals involved in the offerings and, more importantly, will allow investors to make an informed investment without the risk of the company being sued by the SEC because it illegally sold securities to investors.
Those interested in learning more about RATE can download this agreement. Note: This first version is intended for raising capital under Regulation Crowdfunding. Additional versions for rule 506(c) Regulation D and Regulation A+ will be added soon.
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