How ICGo Saved Grandma From Getting Fleeced and Ushered in the Era of Secure Venture Investing for All

Another Report from the near future, by ConsenSys Web3Studio

John Wolpert
Dec 4, 2018 · 7 min read
Photo by Jeremy Wong on Unsplash

This story is fiction…for now.

Emma Whitnel was furious and ashamed. Her grandmother lost everything to a shady blockchain investment scheme (an ICO that had a fancy whitepaper with plenty of vague, inspiring language but a team with zero intention of doing anything but taking peoples’ money). And it happened while Emma was working for a major crypto investment fund.

Crowdfunding’s Promise and Problems

Emma remembered that in May of 2016, the SEC had finally provided the rules for the 2012 JOBS Act and Title III Crowdfunding. On the surface, Title III seemed to do exactly what Emma was thinking. It let startups sell shares to non-accredited investors, any US citizen worth less than one million dollars or making less than two-or-three hundred thousand a year.

  1. There were strict rules about how much someone could invest in crowdfunding opportunities in a given year, and there was no easy way to know whether someone had already exceeded their limit when they invested in something new;
  2. Crowdfunding could only be managed through broker-dealers or accredited funding portals, a new type of SEC-regulated financial intermediary. And these took on the risk of non-compliance if Grandma went over her annual limit or something went wrong…so they took hefty fees of 3–6%, further increasing the cost and friction of raising funds this way;
  3. While it was possible to have more than 500 investors in a crowdfunding sale, it was tricky and costly to do so, which meant that to raise a million dollars, each investor had to be in for an average of $2,000. That was pretty close to the maximum amount a person with a net worth of $107,000 could invest in an entire year. And yet, a couple-thousand wasn’t exactly penny cash for Grandma to invest in a single risky startup.

Wouldn’t it be awesome, Emma thought, if equity crowdfunding were so friction-less and safe that Grandma could invest in startups as easily and often as buying a lottery ticket?

So Emma created ICGo

Using her experience and connections in blockchain finance and her background in securities law — with a little help from her friends at OpenLaw — Emma created a special kind of funding portal. ICGo now offers Title III crowdfunding and brings startups and investors together, like any other accredited funding portal. But it uses Web3 technology and practices to vastly reduce the frictions and costs.

Here’s how it works

Startups use the ICGo site to list their offering, but included in the portal is an automated system that takes the effort of financial and legal compliance off the back of the resource-strapped startup. At first, ICGo just ate the cost of engaging accounting and legal services, but now it has turned that into a low-friction marketplace where firms and qualified individuals bid to review deals and earn tokens for validating each others’ work. ICGo also uses AI technology to further ensure that irregularities are spotted quickly. Signals from the AI are sent to the ICGo validation marketplace for verification, and that is fed back into the AI as training data. ICGo gets smarter every day, and the SEC has begun to notice. Recently they issued a positive statement about easing Title III restrictions based on ICGo’s data, which shows that investor risk is much reduced from initial estimates.

ICGo is like having TSA pre-check for venture investing.

ICGo doesn’t just rely on this, though. “Bad Grandma” could be sneaky and find ways of overstating her income, over-buying by using separate funding portals, or she could just make mistakes in her taxes. Those mistakes could cost ICGo dearly if an audit found they were selling Grandma more securities than Title III allowed.

ICGo Leads Standards

Emma realized as early as 2019 that to make ICGo work financially and safely, she needed to work with the SEC. Together with a team of industry and regulatory experts, she helped establish two key standards in 2021:

  1. ERC 2021 is now the official crypto-token standard on Ethereum for Title III securities. The magic of 2021 is that a token complying with this ERC is incapable of completing a sale unless all of the digitally-enforceable SEC rules for Title III are met. For example, an ERC 2021 transaction will fail automatically unless the Title III registry returns “True,” indicating that Grandma has not exceeded her maximum investment limit — no matter how many portals she may have used. (If she uses a portal that isn’t integrated with the registry, she — and that portal — are breaking the law.)

Turning Standards Leadership into Great Tools

Ensuring that a Title III sale is legal is just the tip of the iceberg. Ongoing reporting and monitoring requirements for both the ventures, the investors and the portals mean that ICGo’s primary business is providing better and better tools to ensure that everyone is in compliance while exerting the lowest possible effort.

But Wait — There’s a Twist

What I didn’t tell you about Grandma at the beginning of this story is that she was, in fact, an accredited investor when she got fleeced by the unscrupulous token-scheme. She had a net-worth over one million dollars. So it isn’t surprising that once ICGo got traction, everyone started using it, especially angels trying to keep track of their investments. Even ventures that don’t opt for Title III funding use the platform to manage compliance and cap tables.

Background Resources

ConsenSys Web3Studio

The stories and releases from ConsenSys Web3Studio

John Wolpert

Written by

Seeker of Awesomeness: The postings on this site are my own and don’t necessarily represent the positions, strategies or opinions of my employer, ConsenSys.

ConsenSys Web3Studio

The stories and releases from ConsenSys Web3Studio

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