The growth of cryptocurrencies has really shown the people’s hunger to invest in things and opportunities for their money to become passive income. With the ICO (Initial Coin Offering) craze, we can see how a lot of people want that. However, not everybody is qualified to be handling that money. Tracy and Monika discuss funding blockchain ventures with ICO, sharing insights whether ICOs make sense in certain stages of businesses while laying down the JOBS Act due diligence process as well as going global.
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Funding Blockchain Ventures With ICO Or Capital Raise
We are excited because we’re celebrating. Monika got an investor. She got her first money in.
I know it’s been such a long road. It’s not my only focus, but investing and fundraising, talking to investors are its own full-time job. How can you build a business and be building your investor relationships? Sometimes you can’t clone yourself. I get to a point where things are good, and I’ve got good stuff to show people and then I go back to find the people to show it to. Then go back and build some more. It finally came around. I finally got an investor in. A lead investor is so important. That first person to say, “Here’s the social proof.” They threw $50,000 in and they are for real. They’re not me. They’re not my friends and family. They came out of the world.
This is what we wanted to talk about because that’s a real distinction. Just because you’re taking investment and you happen to be working in the blockchain and crypto space doesn’t mean that you’re doing an ICO. That’s something totally different. Let me clarify that for people because you’re taking in a capital investment like any business.
We’re doing a traditional raise, a seed raise. It’s not an ICO. We’re talking to qualified accredited investors, people that have money to really risk in something that’s new like a startup. It’s not like something where they get a token about it. They have equity in the company. It’s been a lot. With the ICO craze, it was maybe an easy way for people to run out and talk to anyone in the world. You could see there was so much investment that came in, retail investors across the globe. There’s clearly a hunger for people to invest in things and want more opportunities to see their money become passive income. I get that. Everybody wants that. A lot of people want that. The hunger is there. As we all saw with the crypto winter that came after the crypto insanity, not everybody was qualified to be handling that money. Without more due diligence, it was hard to know who was scamming and what was what anymore. The traditional raise became the vehicle that people went back to. That never went away. It got shaken up a bit by all these retail people saying, “I want to throw in some money.”
I’d love to hear your view on this because I have my own and I can talk about that. Your view on whether ICOs make sense in certain stages of businesses.
ICOs can make sense in stages of business depending on your geographic region. It doesn’t make sense to try to do an ICO in the US ever because retail investors can’t participate. Why would you bother? At that point, you’re still talking to the same investors that are accredited. They’re going to do their due diligence and they’re not going to be as easily swayed by the hype.
Let’s explain that to the audience because we do have audiences around the world who may not understand that here in the US things are very different. We are encumbered by the JOBS Act. The JOBS Act requires that all investors into anything have to go through this due diligence process. You know them so you have to have documentation of having known them. They have to go through documentation that they can and are qualified to invest. Otherwise, you can go through a crowdfunding model. You still have a lot of documentation and things that have to happen but their thresholds for what they can invest is capped, so they don’t have to do as much proof on there to end up being qualified.
You’ve pretty much explained it. In the US it’s very different. A lot of people that have totally legitimate companies in the blockchain space are familiar with crypto. They saw the use through iToken to help them raise money and also to help them gain community and access the user base that they ultimately want. Those things all aligned really well. In terms of the global markets, the place where that’s more popular and where it’s legal is mostly Asia. If people want to do an ICO, they’re going to Asia. If they want to do crowdfunding, they go to Asia. They’re not staying in the US for that. Can you be a US-based company, go to Asia, raise and come back? You still can’t. That would be an investment in US-based companies. You have to be a non-US based company raising in non-US based places with non-US based investors. Even if someone’s traveling overseas in Singapore, but they’re an unaccredited American investor, they still can’t invest. It’s locked down in the States.
There is still a play for an ICO at a various stage. A public offering is not a great exit strategy because you have to be coming up to the billion-dollar size. It’s getting too large to head into IPOs nowadays. There may be a stage. It’s a strategy and you’d have to have a whole entire team around you shifting your base of operations offshore and doing all of that. It allows you to exit and plan this ICO-style exit at a lower stage than $1 billion. That could be very valuable for certain companies that it was going to make a lot of sense for them to move into that, but it’s interim between that and IPO.
I can understand IPO being an exit for someone who says, “I have built a company for five or ten years. Me and this team, we’ve grown so big. We’re totally giant enough that we’re going to go public and then I’m going to step back because this whole machine is an operation and it’s well-established.” That makes sense. That’s why the SCC is fine with an IPO. There are certain regulations around that as well and you meet those thresholds and you can go forward, but you used the term ICO exit strategy.
Interim to an exit strategy is what I really meant. You can’t get that kind of level of IPO funding that you need to move and grow into that size of business. There isn’t much venture capital at that stage anymore. You run out of Angel to invest in low small venture capital. The next set of venture capital is looking for companies that are “IPO-ing.”
It is true because after you have a seed round, you usually go back to a Series A, Series B, B plus. People do multiple rounds and that’s where they’re getting tens of millions of dollars at a time. For example, I know a technology company. They are in the blockchain space. They’ve got a great product. Their protocol level, they have an awesome user base. They’ve got a lot of developers, but they need a lot of money to scale faster. They’ve gone straight from their seed round and they opened their Series A, they opened their Series B. Now it’s a Series B plus, which is Series C. Those are Series rounds that people do when they’re building a legitimate company. That money is there. When you’re talking about ICOs, a lot of times, the only time that that’s relevant in a company’s life cycle is when it’s first starting out.
That’s why ICOs are going to be really going to go through a new re-skinning or rethinking of what they even are, where they operate in the global ecosystem of funding because ICOs are for retail investors most of the time. ICOs are for retail investors overseas. Cutting out the US completely, let’s say we have all of these people in Korea and Singapore and wherever else that want to invest and they legally can, that’s in a company. Typically, people are going to go and deal with all of that retail investor noise and all of the hype and marketing outlay and all of that when that’s their only way to get going. Once you have traditional investors in, you can’t just go back to ICO. If you had a venture capital firm or high net worth individuals invest in your company traditionally and then you’re going to go ICO, it wouldn’t go over well.
I’m looking at it may be a little bit different because some of the companies that I’ve been talking to and looking at are looking at the difference between a startup and then moving globally. When you start to move global, normally, in a traditional model of it, you would go Series C and IPO. The problem with that is that a lot of Series C that’s why you’re getting B pluses and stuff like that and they have dried up. There’s not as much money flowing there. There is a gap in those stages right now. It’s preventing companies that might be going more global. They either have to be forced into getting themselves ready for IPO or they have no way to move in that and they get stuck without being able to bring the necessary capital, the scope of capital. That’s where I’ve seen some of those. That’s why my perspectives are a little bit different, but it’s those looking at going global.
We can look at going global as a stage. Even now I’m talking to accredited investors and they’re saying, “Do you have anyone unaccredited in your cap stack?” Meaning has anybody gotten equity in your company that’s not accredited? If they have through any means whatsoever, a lot of accredited investors don’t want to touch that. Similarly, once you’ve taken in accredited money, traditional money, the opportunity to go to the crowd can sometimes be limited. Overseas is a whole different animal, but it’s a funny thing. I found that I’ve had to pick which track I would go down completely and not to ICO. It’s not going to happen or do ICO and that’s all we’re going to do. One of the two because accredited investors don’t really want to mix that way, at least in the States. They’re worried about what SEC is going to say, what’s that going to mean for them. Also, maybe it’s all also specific to my vertical, but people are very touchy about China or foreigners or whatever that is, buying up all the real estate, buying up America. For us to say we’re going to take this vehicle where we exclusively go and get Asian money to invest in US real estate, can be a hard sell to domestic co-investors, I suppose.
It was occurring to me that maybe it isn’t mutually exclusive, that you don’t have to choose one or the other should you decide to allow and go Series CF at the same time. In other words, if you went crowdfunding model and ICO, could you do both at the same time? If you are on the SEC, you could.
You are getting confused Series CF. Series C is a late stage funding round. It goes after Series A, B and C. When you’ve already got $20 million to $50 million, you’re raising another $20 million to $50 million or more. You’re talking about Reg CF. That’s the regulation that’s made up by the SEC. It has nothing to do with Series C funding raise. That would be a very large raise that’s from accredited investors. It’s totally separate. A Reg CF is a small raise capped at $1 million that can be a specific way to go to and do crowdfunding. CF stands for Crowdfunding. It is a legal way to sell a security to the crowd or to be able to get a retail investor in. It requires greater disclosures and you have to treat your retail investors with more kid gloves. To digitize that would be to ICO. It’s a way to do an ICO, but it’s not an ICO in the sense that, “We have a white paper. Who knows who made it? We have a cool video. Click here, buy.” It’s like, “No.” The SCC says, “If you do this the right way, you’ve got a lot of disclosures. There’s a lot of due diligence because we are not going to let you screw over a mom and pop.”
My point is that if we did a Reg CF or somebody did, then you would have higher disclosures. That may be a more legitimate way to go into doing an ICO because you’re having at least that level of proof and that level of information and disclosure that might be a more viable way to go into an ICO without as much scam potential.
We’re only getting caught up on semantics because people jump at ICO. Ultimately, a digitized crowdfund is an ICO with more disclosures. A Reg CF is something that we’ve been looking at doing here with my company as well because it’s a legitimate way of getting in some retail investors. We have such a product that’s targeting the retail market. That to do a small $1 million raise of equity in the company, taking it to the crowd and doing the due diligence to use SeedInvest or other crowdfunding platform that sells. That helps people to do crowdfunding Reg CF in their companies, they could help us. We’ve been exploring if that works. The ICO thing is its own mark. Unfortunately, it’s its own entity that’s really specific mostly to the Asian markets at this point.
I’m familiar with a couple of platforms. Sprout is another one that I know who started. There are some really scary things that go on some of the platforms. I want to mention that out to people. Do due diligence on the platform because if it’s not doing its job for you capturing the documentation, doing it properly, some of those platforms reveal your IP to the public. That’s what I found when I was doing my research and wrote a couple of articles about this. Because of the way that they make the offering, some of them make it behind closed doors after someone’s already somewhat qualified themselves into at least and put a certain amount of information into the platform and then they’re allowed to see what’s going on. Others, they put it right on the outside of the platform and then expect someone to buy in and then we come in. You’re exposing yourself that way.
Others found that their competitors were posing as investors coming in and checking out. Just be careful. There are some that have limits on that and have specific qualifications. You can block anyone who’s brand new to the platform without going through and getting it approved by you. There’s a bunch of different levels of things. Check it out especially if you have something that’s very high IP value, you definitely want to make sure that you are protecting yourself and your IP and not putting it out there and exposing yourself. The other type of crowdfunding, which is like Kickstarter and all of those kinds of things. That’s the biggest problem I have to pick up for all the time is that many of the people who have come through that get knocked off immediately by putting themselves on Indiegogo and Kickstarter. They enter the market with competitors already. It took longer for them to get their money and then get their product completed. This could happen as well through these platforms. Be really careful.
That is a good cautionary tale. You never know who’s looking. The more that you go to the crowd, you’re going to the crowd of people. I found that being a speaker in the blockchain space, I’ll be at a conference and talking about tokenizing real estate and I have people come up who want to shake my hand after. Four months later I see him at the next place, at the next conference and they’ve tried to rip off my company. Suddenly, they’re doing exactly what I was doing. I can’t tell you how many phone calls I get of people trying to get more information about my company. What’s the value you’re bringing? I know what you want. Why don’t you try to get me? Why don’t you start with that?
Isn’t that interesting how that happens? We hear that all the time. There’s a lot of this subterfuge in the investment community, wherein they’re investigating on behalf of other companies.
You have to also look at what are accredited investors, people that are savvy, they know what they’re doing, what do they invest in? They invest in the founder and they invest in the team. The ideas are agnostic. Lots of people have had ideas. It’s like when you go to an art gallery and you’re saying, “My kid could have made that.” It’s true.
Your kid didn’t make it, that person made it. That’s why it’s there. That’s why they’re not going to make it.
The person with the most passion and that truly wants to do what they’re doing. You do what you love and no one can really competes with that.
That’s why I’m not a big fan of doing the ICO or even the Reg CF model because I’m not a fan of not knowing enough, not meeting the person, not getting enough details. I don’t care how little or how much I want to invest. That’s what I care about at the end of the day. That should be the case all the way through. If you’re passionate about moving an industry forward too, that’s also where I see a lot of the blockchain investors right now. They’re looking for investments that are going to move the whole blockchain industry forward. They know that some are not going to succeed. They get the risk. If the whole industry is growing because they’re investing in it, it’s really going to move forward and keep that going. Yay to you for getting this done and getting this moving. We’re here to celebrate and share with everyone. I’m glad we got to talk a little bit about what’s going on out there though so that people can have a good scope of maybe, “How am I going to fund my venture?”
That’s something you and I should probably circle back to. I know you’ve talked a little bit about maybe monetizing using a coin or an internal token or how you might do that for your business. It would be interesting to see how you’ve made some progress on that. Let’s circle back to this, especially as I may get more investors in and we talk about Reg CF. I’m going to do my research on Sprout as well. Thank you so much, Tracy. I really appreciate you telling me about more places that I can learn about. Hopefully, I’ve given you some value too. Let’s talk about your company next time.
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