 From Palo Alto, California, it's Cube Conversations with John Furrier. Hello everyone, welcome to a special Cube Conversation here in Palo Alto, California. I'm John Furrier, the co-founder of SiliconANGLE Media and also co-host of theCUBE. Our special guest here is Grant Fondo, who's with Goodwin. He's a legal expert in blockchain, initial coin offerings, also known as ICOs, experienced federal prosecutor and former assistant U.S. attorney in Northern District, California, head of the blockchain group at Goodwin. A lot of legal action going on. Welcome to this Cube Conversation. Thank you, John, nice to be here. Thanks for coming in. Goodwin, you guys are a great firm, well-known in the Valley, helping entrepreneurs meet the track record of Goodwin. It's pretty significant. Been familiar with Anthony McCusker and the team over there. You guys are doing a lot of work. I've been asking around all Silicon Valley because we're hot on the ICO trail ourselves, blockchain we've been following, covering extensively, Bitcoin going back to 2010. It's a hot market, it's very frothy. But in asking around, I'm like who was doing the legal work? So a lot of people are kicking the tires now or now getting their toe in the water, want to explore blockchain, want to explore the notion of cryptocurrencies. Take a minute to talk about Goodwin, what you guys are doing because you guys have a lot going on. We do. And there's a lot of issues to talk about. We're going to get to that. What are you guys doing? Take a minute to talk about Goodwin. Sure, so we've been involved in this space for three and a half years now probably. I got involved, I was a former federal prosecutor, as you mentioned. So I got involved in the regulatory side, represented a company in a DOJ and FinCEN settlement and prior to that, kind of that took off my interest in it. I thought this area was fascinating and the amount of talent and energy in this area is tremendous. So that's what launched my initial interest. And then from there, we've represented a couple of other companies in significant regulatory matters, but we're also very actively involved in the startup. I mean, that's kind of Goodwin's bread and butter. And so particularly in the FinTech and blockchain space, we've been doing it for a while and so now what we've really seen probably over the last eight months is just a tremendous growth and interest in the token sales. You referred to him as the ICOs. And so we're probably doing representing 20 to 30 companies at various stages from just initial concept to launches. Yeah, one of this personal observation and we were talking before when you went on camera here is that I've seen a lot of waves in my time and the cloud computing, I thought that cloud intersecting with data and mobile was going to be on run. But I see blockchain is really one of those disruptive. Reminds me of the early days of the web where it truly was the Wild West and it is kind of happening. So, you know, you have involvement in the white collar litigation and area in the past. This is essentially a rush onto the marketplace because with cryptocurrencies, with decentralization and people experiencing distributed computing, it's changing business models. So people are making a lot of cash, if you will, on the raising money side. So people are going there. So there's a lot of people migrating into the space not without some uncertainties. What are the issues? I mean, cause on one hand it's a scam, people say and some people say it's legit. Where is it? Where's the difference between the two? So I think in many industries, especially new industry, there's uncertainty. And I know the attention goes to the scams, but I think that's really the minor, very minor component of it. What you're seeing is a lot of good companies with great ideas who have developed a new model to develop their platforms. And part of what you saw in digital currency that people loved early on and that you're seeing in blockchain and now you're seeing in the token sales is the democratization of their industries and their platforms. And so they're allowing, you see all these marketplaces being created and tokens is a way to facilitate that. Not only in the context of obviously raising money but also providing a platform for people to participate on that platform. And so it's been fascinating. And so... And a lot of smart people are getting involved too. You're seeing a lot of big brains getting in and also entrepreneurs that know how to hustle. That's why I kind of call it the early days of the wild west of the blockchain. Is there any pattern that you're seeing? What is the catalyst in your opinion? What's driving all this? Besides the new way to finance or a new way to provide value? I think there's a couple things. One is the interest in the blockchain and the greater understanding. Even now more mainstream. You know, eight months ago, it was really more crypto people doing the token sales now. We were getting calls from all aspects of industry. And so, and some very conservative, historically conservative ones. And so what I think what people are seeing is this blockchain technology is really here to stay. It's really transformative technology. And it's technology that applies to so many different industries. It's not just a crypto technology. It's a technology for everybody. And it also allows so many different participants and transparency. And so people are really fascinated by it. And they're using the token sales in part to help build that industry. Grant, I got to ask you the number one question that I get in the one thing that I think about a lot in our businesses. What's the playbook? Take us through a day in the life of what's going on a good win. As you guys are dealing with people knocking on the doors saying, hey, help us. Now you've been kind of pivoted to blockchain from natural extension where you've come from, great, great position to be in because it's a natural place. But this is a first time market. There's new things that are emerging, new use cases. What is the playbook? What are people knocking on the door saying, help me with how do I get this implemented blockchain or an ICO? Is there a playbook that you've seen that's working? And what's, well, the pitfalls should be avoided. Sure. So, I mean, there's a couple initial decisions that you have to make. And one is, the question we often get is that people are trying to stay within the boundaries. The problem is the boundaries are still very uncertain. And so you try and work with a brand new technology and a brand new concept with regulatory regimes that are a little bit older and not quite built for it. And so part of that, part of what the initial questions are when people call us is how do we fit what you want to do within the frameworks and try and minimize any risk? Because in any business there's risk, but the smart thing to do is try to minimize it. And nobody who calls us is trying to scam anyone. They're trying to do this launch a fantastic business, one that will be truly disruptive in their industry. And so one of the things we first deal with is jurisdictional issues. Where do we set up companies? And so do we set up, people have this common perception, if I just set up a corporation abroad, will I be fine? And that's not the answer. And so you set up corporations and entities that make sense for that business, where the people are located. The executive team is based here in the US. That changes the dynamic. We also get a lot of foreign companies to call. So there's a lot of decisions about where does this company get set up? So this is almost like going back to business school one-on-one, where you domicile or where you start the corporation, what entity it is, and then a lot of paper that goes on. But I want to step back and talk about some of the distinctions that are nuanced or actually specific, if you will. The notion of utility versus securities, concept that's well known in business, but as it applies to blockchain, those are specific nuances, aren't they, in how the regulatory market looks at blockchain? Can you explain? What that means and how people should think about utility versus security? So I break it down in two kind of examples. A typical utility token would be, remember when there were arcades, and you would go in an arcade, and you'd stick the token into space invaders or whatever the game may be, and there's still arcades out there. So that's a utility token. Does that token have some utility on the platform? Is it doing something on the platform? That's what the model is, so that it's essentially people avoid some of the regulatory hurdles with a security. Conversely, a security is as you think about it. Typically Silicon Valley was built on companies selling parts of themselves for equity and people buying into the company and getting stock. And so you're trying, most token sales are trying to avoid being turned to security where someone is getting an interest in the company, an interest in the profits, control over the company, and instead what the model's based is on this utility token. The test is called a Howie test, and it's basically, if you hit certain criteria, you end up being a security. If you don't, hopefully you stay in the token regime. And so it's really, and the way to best do that is you build a token that truly makes sense on your platform, that people can use it to build, to transact, to exchange goods, to build ideas. And they're not running the company, they're just using that token in a sense, much like an arcade token. So it's not like a secure, like a stock, there's no stock option plan, there's no token plan. If you can't think about it that way, is that what you're saying? Yeah, well, so you raise a very interesting issue because there have been some companies that have set up tokens, like vesting over time, that tend to, or tokens for employees, or tokens for advisors, and I think there's a risk that the SEC says, wait a minute, that looks a little bit like an option, or a security. So one of the things we advise is do not set up token plans, or vesting token plans, because that may be an indicia for the SEC to say, hey listen, that's a security. Well, again, I want to get this to drill down on the whole government, because it's still going to be some things are coming down the pike, and is it also a global phenomenon? So it's interesting jurisdictional questions, I want to get to that in a second, but just to stay on the security piece, one you mentioned earlier that most of the blockchain activity around ICOs are around disruptive, or democratization, I think you used the word, but really it's disruption of markets. So one of the areas we're seeing is the brave browser with the bat token that's disrupting kind of the web browser kind of thing, or the user experience. Steam does like kind of a Reddit kind of clone. And there's a variety of other ones. We've seen some all over the place in different verticals. And then there's one with democratizing venture capital. Yes. So we've seen some activity around folks who are using cryptocurrency to invest in companies. Talk about the dynamics between those two approaches, and mainly the funding one, is it still kind of Wild West undefined, or how does that work? So I think initially it was Wild West. You had basically crypto people investing in companies and buying these tokens. Now what you're seeing is the VCs are smart people. We represent a bunch of them. They're successful for a reason. And they're aggressive in the sense of they're not afraid to take risk. And they're constantly on the move for new ideas. So VCs are investing in crypto. So now you're seeing, I think there's a lot of interest. I'm getting a lot of calls about can we present, VC fund will ask and will I come in and present and kind of walk through the token process. What are the risks? I get a lot of calls from investors, more sophisticated traditional investors, hedge funds about what is, what are the risks here? How do we invest? How do we minimize our risk? And it's a new paradigm, but it's a paradigm that I think the traditional financing vehicles are paying a lot of attention to now. So it's still an open book at this point, not truly defined, but there is activity. What is the entrepreneur's perspective? But what's that side of the table look like? Because they are looking at this and certainly they're all in there jumping in with the ICOs. How are the entrepreneurs looking at it? And how should they deal with these new progressive investors? So the entrepreneurs are looking at it, quite frankly, as an alternative to VC and loans. And I think that they view it in part as it's a quicker and easier way to raise money, in a sense, but also that there are potentially less strings attached. And I think there's some truth to that, but I think one of the key components is when you raise that money and you apply it, you have to do it in a truthful honest manner and you can't mislead people. You need to be pretty, pretty forecoming about your disclaimers and things like that. So it's not an unattached raise, in a sense. You just have to be careful about that. But I think they're viewing it as, as any entrepreneur you're always probing for what's new. How do I get best get to what I need to do to achieve and have a chance with my business? And they're saying this is a great alternative. All right, so I got to ask the tough question and that is some entrepreneur perspective. This sounds like it's going to cost me a lot of dough to get this done. What are the fees like? I mean, you don't have to give specific numbers, but I mean, are we talking series A? Is it the financing kind of model? I mean, we're talking about hundreds of thousands of dollars. It sounds like there's a lot of work. It's getting first-time work going on. The leverage and the economies of scale aren't there yet. You guys are doing a lot of work. So you're getting there, but I would imagine that the fees would be enormous. So I think it depends on what type of token sale you do. If you do an unaccredited token sale, which is the majority of them, fees are a lot less. If you do accredited, it's a little bit more. But I think there's a couple different components. There's not only legal. And the legal can be, there's, I mean, you can get sort of the Mercedes version of, we'll write you 10 memos about the following, but I don't think that's, most entrepreneurs don't take that approach, with some reason, because the memos are never gonna say, whatever you do is perfect. So I don't typically recommend that. But so the fees are probably not as much as you would think. I think where the fees start to escalate is, there's a lot of different components to this. One of the fascinating things about digital currency blockchain and now token sales is there's so many components to it. And so for the entrepreneur, it's not only the legal, which I think they'll find is actually one of the least expensive parts of that process. But getting tax advice. So it's, you're bringing in all these token sales. You really need good tax advice to make sure that you're maximizing your tax benefits when you do it. That can get expensive. And the tax issue as could be significant because I'm sure even the government doesn't figure it out. Is it revenue or is it investment? So is it revenue or is it, I mean, how does the tax treatment? I think the IRS would look at it as revenue. Okay, so this frame, I kind of had a loaded question. I was kind of smiling there, but I want to go into the next question on that point because I think this brings up the next one is, how do I organize my company? Because, you know, I'm scared to get sued. I don't want to get put out a bizzare scene. Robert Scoble say on Facebook, I'm doing an ICL all of a sudden, like almost like a legal term. I'm not advising that company anymore. So someone must have coached him like, hey, if you get involved, you're promoting it. So people don't know where the lines are anymore on what was old kind of test standards. You can't promote it, an offering. Is it revenue, gray area? So people are organizing outside the US. Yes. What's the best practice of a company that says, hey, I want to do an ICO, what do I do? So I don't think there's a best practice. I think you have, because every company is different. I think there are, but there are road, there are guideposts. And so I think if the biggest guidepost is, where are you located? If your team is in the US and you want to get you, and or you want to get US dollars, you have to assume you're going to be regulated by the US regulatory regime. So you have to deal with that reality. And then so you structure things differently. So then the next question is, are you going after accredited or unaccredited token purchasers? And so then, most people want to do unaccredited. So then the measure of protection is okay, is our token truly utility? You and I talked about that a few minutes before. And so that's sort of the threshold issues. If you're going abroad, you really have to be completely abroad, meaning no US money, no US executive team, the companies abroad, the businesses abroad, et cetera. Because the US takes very, US regulators, not as a former prosecutor, they take a very broad view. So they'll see right through that, that, that mirage. They'll see right through it. If there's any impact in the US, they have jurisdiction over and they'll, and if some, if US people have been harmed, they will take notice. So there's no real kind of way you can get around that. How about the Cayman Islands? Certainly that's a contrast in Panama. Been a lot of issues there. I mean, what is Cayman Islands an option or? So the Cayman Islands, it's a great question. The Cayman Islands is a great option for tax purposes. So a lot of token sales are being run out of the Cayman Islands because of the tax benefits. It's not a regulatory protection in my view, unless you happen to be all abroad and you're not seeking US money. But usually it's primarily set there for the tax purposes. All right, let's talk about the regulatory issues. Because this is still, we've heard, it's pretty much, again, the Wild West we said, there's been a rush and there's been rumors that the SEC and the federal government's going to be putting things in place at the end of this year, maybe early next year, the timetable seems to be shifting. It's a moving train. What is the concern on regulatory and how is that impacting people in the blockchain ICO market? Because it seems to be like a rush. Get out before you can be grandfathers. Has there been any statements of grandfathers? That's a big area. What's going on there? So I think what you see is about two weeks, two, three weeks ago, the SEC came down and issued some guidance. And I say that with a little bit of a grain of salt because I don't think it was a tremendous amount of guidance, but there's a couple of takeaways. One is if you act like a security, they're going to view you as a security. That's not news, but that's fine. The second component, which I thought was in many ways was very interesting was they said, they implied that some token sales are not securities, which we always believed, but it was a nice tacit concession. A utility, yes. So not all token sales are securities and therefore they are utility. And that's where the battleground is. What was frustrating about, or let me one other aspect too, was they mentioned the term participants. So if they believe that a token sale is a security, not only will they necessarily go after the company, but they will go after participants of that token sale. Like potentially VCs or investors? Well, I think it's an open question what participants mean. Historically, if you look at securities, and I used to do securities litigation and I do insider trading and things like that, participants would be like investment banks, for example. So if there's a pseudo investment bank involved, and I think they would view that term broadly, because it's typically not investment banks and token sales. But the SEC might say, listen, you are a participant. You benefited, you helped launch the sale, et cetera. So I think for participants, there's potential risk as well. But they really did leave the, they left the door open for the token. They're not hardcore, they're not, so it sounds like they're giving some guidance like, hey, we're watching you, but we're going to let this thing play out a little bit more and let the professionals kind of deal with it. I think it's two things. One is, I think they said historically, those that launched earlier, we're probably going to let that pass as long as you didn't commit fraud. That's sort of my read on it. And then the second component is that we are watching you and you're unnoticed now. So don't cross that line. So you brought up the investment bankers. I mean, I salivate when I see this whole opportunities out there because you think about the traditional IPO process, not to compare ICOs to IPOs, but there is a serious bunch of cash coming in. I mean, a couple of these ICOs pulled in over $200 million. That's some serious cabbage as we would say back east. So this is significant. Is there like rules on market making, what you can say, how you promote it? I know there's a Reg D and there's like this A plus stuff going on out there. I'm not an expert in that area. I'd love to get your thoughts on how should people watch the lines on how this gets done? Are there market makers? There are certainly sites that promote ICOs. How is all that playing out? Is there, can you share some insight on that? Sure, so for, if you're doing a utility sale and your position is that you're not a security, general advice is you should not be marketing your token as an investment opportunity that our token's going to go up in value. You don't want to be publicizing like here's a great way to make money by our token. That's not, that looks like a security. You mentioned Reg D. So Reg D relates to accredited investors in the US. And generally the rules are you can't publicize your token sale if you're targeting accredited investors. So likewise, you shouldn't be putting things on your website targeting all types of people. So that's where people will get in trouble. I think the area that for entrepreneurs like Silicon Valley is so social media focused, right? Between Reddit, Twitter, et cetera. There's a lot of promotion going on. And the nice things about a lot of these token sales is they're building these communities. It's a fascinating area, but the downside of these communities and these constant communications is you have to be very careful with your language. So when you have these Reddit community hosts that are helping you with your launch, for example. To be very careful what you say, you can't in any way imply that you're trying to raise, the tokens will go up in value or trying to protect the value of the tokens. So you have to be very careful. That's a tough thing. I'd better delete my Facebook post. I just posted two days ago. Well, let's get started. So the utility is the key. I think I would see and envision more utility deals going down because this is where the infrastructure changes happening. I think that's phenomenal. I think there'll be arbitrage on the security side, just my personal experience and opinion. However, that is the key. If I'm a utility token, what is the language I should use? So avoid selling it as a security, so we're using language. What's safe? What would be safe? If we're doing a utility token sale, what's safe language? Can I say, hey, get your coins, join our platform? Do I market it like software? Do I market it like a technology? I think you market like a token at arcade in a sense. And it's a simplification, but I think the concept's the same. You're marketing that this token sale, this token has this great use on your platform. And people should be really excited about joining your platform. And they should be excited about buying those tokens so they can use them on the platform, whether it's to make money, whether it's to access games, whether it's to, you know, we're seeing in areas of artificial intelligence, life sciences, really the game. So show the utility use case more than money making. That's all you should be talking about is the utility. Because you're selling your platform and you're selling just a mechanism to get onto your platform. Okay, so what's the conversation like at the law firm these days? I'm sure that the firm's buzzing with the growth of the inbound you have. I don't know if you can say the number of ICOs you've gotten, a pipeline, if you can be great, if you can share it. Greater than 10, less than 100. Yeah, right now I'm actively advising probably 20 to 30 companies that are in the process or at some stage in the process. Where's the scar tissue? What have you learned? What's the big aha takeaway for you that you can share anecdotally from these ICO processes? That's a good question really. So I think it's tempering people's expectations. I think, I mean, the reason I left the government and I got in with good win and stayed in Silicon Valley was because I love the entrepreneurial aspect here. And so you get excited for your clients and you have these clients that approach you with these great ideas. And some of them are like mind-buying. I should have thought that never did. And so you have to temper that a little bit and temper their natural enthusiasm to say, okay, listen, there's a right way to do this and there's a right, a wrong way. Or it's not necessarily a wrong way, but a more gray area. And if you want to really be more in the right area, here's how we have to do it. It may not be quite as lucrative. It may not be as easy, but it's the right way to do it. And let us help you get there. Where's the operational bumps that you guys have hit and where has it been similar to existing legal practices within the firm? I think the operational bumps is there's just not a lot of people that really know the space. I get calls a lot and people will say like, my God, you're a lawyer who actually understands what we're talking about. And so even in a firm like Goodwin, there's a segment of us that, when we have a team and so we understand the language, but not everybody does, right? And so I get calls even internally from the firm, can you help us out on this? I have a client who's talking a slightly different language. And so that's, but that's fun. I mean, that's the exciting part of the process. And you got a natural background in digital rights and securities and white collar crime. You mentioned some of the things you were involved in. Seems natural. That seems to be the profile, doesn't it, for the legal kind of pedigree? I think it is because it's another interesting aspect about this is it covers a lot of regulatory regimes. So obviously it's fraud, it's DOJ, where I used to work yesterday in his office, but also FinCEN and other- What's FinCEN? So FinCEN is basically the regulatory regimes that deals federal level deals with money transfers. FinTech or? Yeah. And it's so like Western Union moving money back and forth. But there's a lot of issues with moving tokens as well. Wire fraud, right? Sounds like token frauds. Whole nother practice. You're going to be in business for a while. Final question, your vision on how this plays out, just so you can shoot it forward five years, look at the trajectory. I mean, you must be sitting there pinching yourself like, man, this is pretty wild. I mean, is that where you're at? What's your vision of how this plays out? I think we're in the beginning stages. I think, you know, when I got involved with digital currency three and a half, four years ago, I didn't know where it was going, but I knew it was going somewhere. And I knew that no matter what we projected, it would go in a different direction. And it has. It's such a great technology. So I think the token sales will continue. I think as the regulatory regime becomes more certain, we'll continue to figure out how things go. But I think it's here to stay. The amount of interest outside the Valley now and other tech hotbeds is extraordinary. And so I think it's transformative. And I just think we're at the beginning of that wave. Great stuff, Gran Fondo. One final question, because it just popped in my head, I get a lot of questions from some of my smart legal friends who are kind of in litigation. Some are GCs and companies. Some are at firms, CXOs at large enterprises. The number one question I get is, man, I got to pay attention to blockchain. What do I do? Where do I find information? How should I attack learning and immersing myself into it? What's your advice would you give there? So a couple of things. One is YouTube's got some great videos on just what is blockchain? What is digital currency? And I sometimes check in on them just to refresh my memory on them. So they're great. So we have a blog. So it's digital perspective. So check out blogs that interest you. And those are great ways to do it. There's also meetups. Like in Silicon Valley, there's a theory of meetup. So there's a lot of opportunity to really get to know. And those are the ways I recommend. You go to a couple of those ethereum meetups. They're really interesting. Well, we'll certainly have you back for checking in with us. It's great to have you right down the street here for our Palo Alto office. Great firm, Goodwin. Do some great work. They have a whole department dedicated to blockchain and ICOs. This is theCUBE's conversation here in Palo Alto. I'm John Furrier. Thanks for watching.