 Hello everyone, welcome to this CUBE Conversations. I'm John Furrier here in our Palo Alto studios. This is the CUBE signal program here at Gran Fondo. Partner at Goodwin, CUBE alumni I've been on before. Thanks for coming back in. Good to be back. Partner at Goodwin, one of the best law firms around ICOs and just corporate governments. He's a security guru, regulatory guru. We've talked in the past as a YouTube video up there. Check it out, search for Gran Fondo. You'll find our previous interview with laying out the ICO playbook update. Let's get the update to the playbook. So ICOs kind of in a winter state now, but still ICOs going on. Signal announced massive attraction with their ICO. They're going to do an insider kind of private sale looks like and then open it up. They got millions of people. So that's interesting. But then ICOs stabilized. You got to see them in the 20 million range. What's the current update from the ICO front? So I think in the US, the current update is sort of post-munchy. So there was a SEC enforcement action and then Commissioner Clayton made certain statements about ICOs. And then the net net on that is, I think it has provided greater clarity about issuing utility tokens in the US. Clayton's statement essentially was that the SEC really hasn't seen any utility tokens that are really utility tokens. The munchy decision emphasized that in some regard. So with the munchy decision, some of the things that they focused on was that the marketing of the token, even though essentially the SEC assumed that the token was a utility, had a tremendous utility essentially on the platform. But what the SEC did was looked past that and said, okay, what's the practical reality of that? And so what they focused on, they focused on was the marketing. So how is that company marketing the token? Are they selling it to people just to use it on the platform? Or are they selling it much more broadly to investor, kind of crypto investors, VCs, that type of thing? Also there was some certain marketing statements where the company was actually trying to strive up their, emphasize that the price of the token would go up in value. They also focused on the fact that it was going to be on an exchange. And so what they said was, listen, this token is not a pure utility token. What it is is a token for people to buy with the idea and hope and expectation that it will go up in profit. So they basically, the munchy decision was targeting guys who were throwing everything at the wall. They seemed to be. Yeah, so it's funny. I think that's a little bit of a misinterpretation. So there's clearly there were statements in there that you sort of shake your head a little bit. But I think that misses the picture of the munchy decision if you focus on, oh well we won't make those sort of statements. You need to look at and focus on also what were the other underpinnings of that enforcement action? What was the message, combined message with that with the July 25th guidance that they issued and then Clayton's statements. And I think the message is that utility tokens are going to be a tough road in the U.S. going forward. They certainly have not identified what a valid utility token would look like. So I think it's a little bit of, they've created greater clarity, but it's also a lot of uncertainty as well. I was having a conversation with some friends and we were talking about ICOs. As you know, we're bullish on ICOs. But the conversation turned towards two bipolar positions. Man, this is a crypto, so awesome, blockchain, innovation, take down the incumbent, decentralized apps, this is the future. And then the other side, from very smart people is, man, that's fraud, don't associate yourself with ICOs. So there's a little bit of a wolf of Wall Street, wolf of ICO kind of mentality going on when they see the pink sheets, the old over-the-counter market that they made the movie Wolf of Wall Street around. People are nervous about that. And that's saying that's happening, but there's a vibe there. What's your reaction to that? I'm sure you might have conversations about the same kind of reaction. Yeah, my reaction is this is a sea change and it's going to happen and it's happening and I equate it to the internet in many ways. And so I think you have to go in eyes wide open. I think you have to understand the regulatory risk if you're a company doing it. You know, there's not a certain path to do it in the US and you have to evaluate that. There's, you can go offshore and there's certain paths that way, but as someone who's potentially going to purchase tokens or digital currency, and I sort of separate them between like the Bitcoin and Ethereum, which is more digital currency and then tokens, which are some of the ones we've been talking about. Close to 1400 now out there. I would assume there's even more at this point. So they're already popping up every day. And I think you have to, like the internet, I think there'll be winners and losers. They'll probably end up being more losers than winners. I think the regulatory environment will get more certain. And then there's going to be, and that's fine. You know, I mean, you have to go eyes wide open and you may lose your money in it. And then there's the category of pure fraud. And so that there's always, whenever there's an opportunity, the criminals come jumping in and or people take an advantage of a situation where maybe they would not have otherwise. And that's going to be a portion of it too. But I think you can get a pretty good read on some of these, whether this sounds like pretty sketchy or not. And you just have to be realistic about it. And you guys are doing a good job in the practitioner community is really working hard. I mean, I always say, my feeling on this, we've talked about this before, is that the internet bubble was a bubble, but everything played out. You had buy pet food online. You get stuff delivered to your home. So I think the same things happen with ICU. I think the things that are coming out that's innovative will end up happening. The question is the compressed nature of how fast forward this bubble is. I mean, you look at the NASDAQ growth during the dot com bubble stage and look at the crypto market total market cap. It's so fast forward. It's happening faster than even the dot com bubble. How do you keep up? I mean, what's your day like? I mean, you go through research notes. I mean, you're talking to clients. I mean, it's a fire hose. Yeah, it is, but it's a great time to be a lawyer in this space too. So a lot of it's dealing with clients and trying to figure out how do we deal with the regulatory situation, advising them, connecting with foreign counsel as well. Dealing, there's been some enforcement activity both on the state and federal level. So I'm dealing with that as well advising them through that process. So I mean, it's a fun time to be a crypto lawyer and an ICO lawyer. And I think too that you are, what is also part of that you're seeing here that's fun and interesting is that regardless of how you feel about ICOs, one of the great benefits of it is you have all these different companies that otherwise would have never thought about using the blockchain or hadn't focused on it. And they're suddenly using the blockchain in this technology. So you mentioned about how fast forward it's going to have quickly things. I think these have accelerated this change and this disruption by five to 10 years. And I think that's an enormous impact that is a positive impact. And so no matter what happens with the coins that you buy or may not buy, that's going to be a change that's going to be with us going forward. So how about the regulatory update? There's obviously concerns and whether you're investing in crypto or investing as an individual or fund or as an entrepreneur trying to build a business. What are the regulatory things that people should be aware of now that's different than before or that's more maybe more prominent? How would you talk about the regulatory? So I think there's a couple of buckets. So one is if you're the company doing the ICO, you've got to address whether that token is a security. I think the SEC has said most of them all of them are securities. You have to deal with that reality. If you're trying to create a cryptocurrency you have to look at are we going to be registered by FinCEN? And so I think you need to assess those. I think if you are part of the ecosystem helping any of these sales, so let's say that you're doing the marketing for one of these token sales or you're an advisor who's trying to bring in other investors or things of that nature. You have to look at what's called participant liability under the SEC rules. And so you have to be aware of what you're doing or does that create exposure to you or your company if that token ends up being unlicensed security. Likewise, if you're an exchange moving these tokens or facilitating the sale of these transactions you now have to think about am I should I be registered with FinCEN? Should I be registered with the SEC? So those are really kind of core issues that you have to deal with. And then as an investor, I think generally investors would be viewed as the victim by these regulatory agencies. So I don't know that there's real exposure from a liability or litigation perspective but I do think it's more again like doing the due diligence and eyes wide open and understanding that if it fails you may not have any recourse. So everyone wants their tokens to go up that seems to be the trend. Let's parse through the concept of utility and security we did. But now I have a token out there ICO and I plan to take it ICO or I'm ICO. What's the role of exchanges and all this because good tokens should have liquidity. People should be exchanging tokens. Some people hold the tokens or hoard them but the role of an exchange do I plug with an exchange? Do I do my own exchange? What's some of the law around that? Because if I'm a ICO candidate I'm like, hey I'm going to launch my token it's going to be a secondary token but I'm going to run my own exchange and of course list my token on the big exchange so people can trade it and the price will go up. So that's a natural reaction. That to the SEC is going to sound like a security. So one of the things you have to address is if you're going to do this in the U.S. or bring in U.S. money is I think it's a real risk to put the tokens up on it. Is there hybrid models? Because I can see a utility vehicle saying hey what a utility like the arcade example we used before but what good is a token if the price doesn't go up? So say that utility doesn't go fast enough in all this arbitrage. Can I do a hybrid utility and security? I think it's hard. I mean it depends on how it's structured. One way to do, potentially to do a hybrid this has not been tested as far as with the utility token but the SEC has, sanctions is not the right word but it's said what's called passive bulletin boards are not securities exchanges. So that's in the context I imagine you essentially say here's a platform for people buyers and sellers of our token to exchange it between each other. We're not in the middle. We're not taking any transaction fees and so there's a path to that. Now that may not be attractive to certain ICO companies but that is a potential path where you can provide liquidity. Craig's list or like a bulletin board, the old school bulletin board days. Yes, people still use them. They used to use the bulletin board. Back to news, okay. Exactly. And so that's a path to do it. You can also, if you do create a system where the token does not leave your platform so it's a closed loop token. That's a potential path that you can do. Again, it may inhibit. So there's solutions for people who need to have some sort of interaction between token holders. Yes. Without going pure exchange in the sense of trading and having a market cap and all that stuff. Yes, I think it's many clients would say that it's less attractive from a marketing perspective but there are potential paths. There's also the path that we're seeing more and more which is securities tokens. I think when you and I met last time we had just started touching on that but I think that is... Explain, what's the big change? So the concept is the securities token is you're basically going to treat it like you are going to treat it as security. You're going to own it and you're going to go to the SEC and get it registered through like a reg A plus which is essentially as a 50 million or less raise. That's sort of a common one we're seeing. And so in that context you are saying it's a token but it's a security. You don't have to give up equity. There's other ways to do it. So you can give up a percentage of the revenue sort of treat it like a dividend. And that way it's a regulated entity and you're not taking that risk about are we utility token or not? That's a good path and that makes sense depending on the ICO. Okay, let's talk about bounties. As you know, we love bounties. Love the concept of bounties. You know, media business would call promotion, SPIF channel partner, whatever. People use promotional incentives. Bounties are popular. You're seeing bug bounties in open source being used. Try to get Kelsey to kind of address it a little bit but it's more of a legal thing now. What's the status of bounties you mentioned before we came on that gets the SEC's attention? So the bounty is designed to sell the token. So you're in your fundraise round for example and you put out a bounty so that people will go sell the tokens. I think it creates issues with the SEC. Part of it is it's very hard to control that bounty. So you're going to have people who are trying to make money selling your token and they are potentially going to make statements that are going to indicate that or make statements the SEC is not going to like. So you know, it's something we just- More promises to basically sell the deal. Broker dealer almost, right? Correct. So there's a couple of issues. Not only from the company perspective that you've got somebody out there who's probably marketing your token in a way that the SEC is not going to like. And so that creates potential exposure. But also from the bounty person, the person doing the bounty, there's potential exposure. But are they essentially doing a broker or are they acting as a broker dealer or other type of seller of unregistered securities as a participant, for example. And so it's not something we generally recommend to our clients. That said, if you are going like more of a true utility tout, there's nothing wrong with like a reseller agreement. So you could structure something. And most of these bounty sends to be like, hey, if you bring us X amount of token sales, we'll just give you something. There's no real strong contractual arrangement. But if you are a company that has traditional resellers and the purpose of the sale of these tokens is for that customer to use it on your platform, I think you can structure things so you have reseller agreement. So it's really case dependent. If you're using the bounties of arbitrage to settle the deal versus actually part of your business model, that's kind of where you look at. Yeah, I mean, yes. I think that's a distinction and I think that's a distinction, no guarantees, but I think the SEC would understand. I mean, it's all part of it. They're looking at the picture. Are you trying to just make this token go up in value or is this token really supposed to be used on your platform? All right, so question for you. Since we last talked, I think it might have been two months ago, maybe it's been 60 days or so I can't remember when we came in last, it seemed like yesterday. What's changed? What have you learned? What's new? What surprised you? What's interesting that's happened over the past few months? So I don't think any of the regulatory action has surprised me. I think we sort of knew that was probably coming. I think what surprised me though is that every time there's been guidance issued by the board enforcement action issued by the SEC, we now also have state actors. Massachusetts has become pretty active. Texas has also been active. You would think that it would dampen or slow down the market and it really hasn't. So I've been surprised that it almost has led to more phone calls, not just about, oh, are we in trouble, but more in the context of, okay, we really recognize we need lawyers, we need to try and do this right. But the enthusiasm is still really there. I mean it's really- So it's validation in the fact that they're issuing guidance in my opinion, but I think it brings the question of, man, I need help on this thing. People that have got a call on the pros. All right, the other thing that's interesting about these guidance I'm gonna get your reaction to is, has it really set the rules of the road yet? I mean, what I'm trying to look for is what are the rules of the road? I mean, I drive on the right side of the road here in the U.S., I stop at the stop sign, I can get through things with the rules. What's changing? What's stable? Obviously security's tokens is solid, right? That's a good rule. Yeah. What rules of the road are developing? So I think using your analogy, I would say that what the SEC has said, if you go over 20 miles an hour, probably more like 10 miles an hour, you're speeding and that's the securities. But we're not gonna tell you if the floor is 10 miles an hour. So it may be that if you go two, three, five miles an hour, we're also gonna give you a ticket. And that's sort of the environment we're in. So there's, we know where there's the danger zone, where you've crossed that line. What we don't know is where is the safety zone? And so that I think in some ways is where that guidance has come. I think where that is pushing people though is more offshore. And I think that's always a risk. When I was involved in digital currency several years ago with certain regulators and that's when I think the government was more interested in stamping it out. And there was a huge offshore movement. You're seeing that with token sales now too, that companies that want to be in the U.S. are moving offshore. So hopefully my goal and hope is that the regulators avoid that problem. I do think that it's, the regulators still are not looking to crush this industry. They're trying to regulate it. And I do think that's a big change. I'm not saying that there aren't going to be people hurt. It's better. It's better. Not great. Not great. Not really fast enough basically is the issue, right? Or? Yeah, I also think that companies, even for companies going through that process, it's sort of still extraordinarily painful. So I'm not saying that in any way that the regulators are having a light touch, but I do think there is also a recognition here that we don't want to destroy this industry. And I think Congress, the same way. And you're doing a great job. You guys are pioneering a whole new class of law, documents, agreements are all being kind of recasted and re-imagined with crypto. Daily. It's daily, well. Well, I got to ask you the final question. You know, as things progress, things are happening. You got a lot of more deals under your belt now. You guys are doing great over there. Good one. You're in the top set of law firms doing crypto deals. So I got to ask you, what are you advising clients now? I mean, obviously you're trying to, you know, zig and zag at the right time based on guidance, make sure everyone's covered and the risk reduction. At the same time, you guys have also been, I won't say super aggressive, but you've balanced aggressiveness of opportunity recognition and capture with risk management. What's your current advice now? I think if generally it is really take a hard look at the securities token. I think that that, I mean, it's not the perfect path for everybody. There's cost, expense, et cetera. But I think if you really want to do a token in the U.S., you want to be safe. I think you've really got to look hard at the going down the securities token route. The other one is to go purely offshore and do pick a venue that is relatively crypto friendly and do everything offshore, which means no U.S. money, not even at the SAF stage early on and also have the token go on an exchange. If you're going to put it on an exchange, don't put it on an exchange that has U.S. people buying and selling tokens. That is sort of the two paradigms that we're seeing. I think anything in the middle, then we're advising, all right, let's talk about pure utility token here, where I mentioned it before, where the token stays, doesn't go outside the platform, or where you've put a set of fixed price on the token. Or you worry if you do create some type of token, you do a passive bulletin board. Those are models to still to be explored. I don't think many companies are doing them, but those are sort of the paths. I think that the utility token that we've been seeing over the last six months is now is a pretty difficult path to go. And the offshore thing, Kelsey Lemister, who is on a tech partner at your firm, was just talking with me about, might not be the best thing, you put the tax reform in the U.S. Yeah. So what's your state now on that? You still advising offshore kind of depends now on based upon decision making, whether you're security or not. Yeah, so with Kelsey, he's talking about tax issues. And historically with these tokens, the tax issues were very significant and there was a push to go offshore for those reasons. And then there was also always a push about whether you go offshore for the regulatory reasons, we're not going to touch the U.S. I think those are both things that companies have to figure out and intersect. So we had companies that ultimately decided not to go offshore because the tax advantages were not that significant. Maybe they'd lost a lot of money during the course of their three or four years. And so they decided we can offset those gains. Also there's aggravation with going offshore. And so you have to build that in, getting money back from the Cayman Islands or elsewhere, there's a process versus just going to B of A down the street. So I think it's all these things that you have to counterbalance. And like we mentioned, it's just everything's changing very rapidly. And so it literally is like a day-by-day assessment of what's the next path. It's like the big set of waves coming in. It's really awesome. Final comment I'd like to get, I'm looking at a hedge fund, fund of funds deck from a cryptocurrency fund of funds. So now you're seeing funds of funds and funds and hedge funds. So a couple of bullet points I want to get your reaction to. New investable asset class uncorrelated with others, value creation at massive scale, nascent markets with liquidity, unlike VC, inefficiency provides opportunity. Those are the kind of the main bullets on the first page. I think so, my reaction is there's- No regulation, regulatory concerns, we got tax. Boy, it sounds great. I should jump right in and just, yeah. So, I mean, obviously the cryptocurrency is skyrocketing. I mean, we've had a kind of a pull back a little bit the last week or so, but some of them are back up today. So I think there is a lot of opportunity and I think some of the opportunity they were talking about, so we represent a number of hedge funds and others who create kind of financial products with this. Some of the opportunities, you look at the stock market. The stock market now is really hard to basically game the market in the sense of not cheating, but like doing arbitrage where if you go to one exchange and buy the stock from there and sell it and now they're that type of thing. Really hard to make money. There's a lot of sophisticated players, a lot of technology. You're talking at literally, I mean, what was that movie about where they were able to do a trade like a millisecond faster and it gave them an advantage? That's what you're talking about. Here in the crypto space, you don't have that sophistication yet. So there are companies who are figuring out ways to buy and sell currency in the same currency and make money in that transaction. Maybe they buy from one exchange at a dollar and it's selling at a dollar 20 at the other exchange. So they sell it. So I think there is a lot of opportunity. Ultimately these are being regulated. Even the crypto currencies are regulated. Some are regulated by FinCEN. The exchanges are regulated by FinCEN. So there's regulation, but there's a lot of opportunity. A lot of arbitrage, certainly. Yep. Big time. So it's a really fascinating market, very sophisticated market. Again, eyes wide open if you go in and invest in it. And this really talks about the makeup of the personality of the people involved. If you can handle the wave, she could out there, hence the reaction to some people who look at it a little bit nervous. They're the risk averse to folks. You got to be, you have to have a stomach for this. You know. You also have to be smart. Like you shouldn't put all your money in it. You shouldn't pull out your 401K money to start investing in any asset class. You have to invest enough that you can, if you lose it, it's not going to be life changing. Well, a lot of smart people that I know and I know a lot of people who are really into this and see great opportunities. Certainly there's the bad actors in there, but I love this opportunity. I think it's a once in a generation movement. I think it's the biggest wave that's hit since many generations. So really awesome. Congratulations on the work. You're doing any new update on good win, good win front? Yeah, no, it's just been a fascinating time for us. And it has, we've got a ton of people doing a lot of interesting stuff. And literally every day we hear a new project where you're like, well, that's a really interesting application of this technology or a different use case. And our clients are coming to us. I mean, that's the beauty of Silicon Valley and that model is we learn things from our clients when we meet with them. So we love having those meetings. And I think you're just going to see tremendous change really literally week to week. How's your VC client based? They're probably engaged heavily at this point. I'm hearing a lot of folks on the VC side, not like feeling like they're being left out, but they're seeing this as a new way. I would certainly have been called out here in the hedge fund, unlike VC. I mean, classic venture capital's been around for a while. It's a new paradigm for them. I think they're grasping with it. I think that in some ways it's attractive to them because it does provide for their LPs, it provides much greater liquidity than a typical VC investment, which is a five to 10 year wait. But they're also people are saying that they're being replaced and they're having issues where companies no longer want to go to VC. They say, why should I give them equity and control when I can get the money through different means? So I think it is disrupting their world. I think they're slowly, not slowly. They move pretty quickly. They're adapting to it. I think that there's tremendous value to having VC's involved in the ecosystem. I mean, they should do it. I mean, they should take a little bit of their fun because just the opportunity to get appreciation and again, liquidity in an unregulated market is an opportunity. It is an opportunity. And they're exploring this stuff. Grand Fondo, partner at Goodwin. Check out Goodwin, a great firm on the ICO front there in the top in Silicon Valley and around the world. They get great tax law. Grand, good friend to theCUBE. Thanks for coming on. I appreciate your commentary and update on the ICO playbook. I'm John Furrier. This is theCUBE Conversation. Thanks for watching.