 Live from San Juan, Puerto Rico, it's theCUBE. Covering Blockchain Unbound. Brought to you by Blockchain Industries. Okay, welcome back everyone. We're here for exclusive CUBE coverage in Puerto Rico for Blockchain Unbound, Great Conference where entrepreneurs and leaders are all here. Coming together at a global level, you got investors, you got entrepreneurs, you got the ecosystem developing, we've got a covering for you. I'm John Furrier, your host of theCUBE. Next guest, Joe Mullen, CEO of Chimes, industry executive, a lot of experience, doing an ICO, doing some great work. Joe, welcome to theCUBE. Well thank you, it's a pleasure to be here. So, tell us first what Chimes is doing, you got an interesting approach with music. Okay. What are you guys doing? Is there an ICO in the future? Have you done an ICO? Give us a quick update. Okay, sure. Well, Chimes is a digital media company and we are consolidating music related search results on Google in a similar way to what Amazon did with IMDB consolidating film intelligent results many years ago. Amazon built an audience of about a quarter of a billion to half a billion monthly users and we expect we can create an audience on that order of magnitude over time. So, just like IMDB is the third largest entertainment website in the world, it is our objective to create the fourth largest one. What's the value proposition there? You acquire audience, use that audience to tokenize. How does the token economics fit into all this? Well, first, like any media company, the first thing you have to do is an audience, right? I mean, I remember I interviewed for a job of CBS when I was at a college in the interview, they said, do you know what we make here? And I said, you make TV shows? They go, no, we make audiences, right? So we have to make an audience with a good product. The audience will be driven primarily by search, okay? But we also do have a really a double ICO in our future. First, we monetize a big audience. You can monetize with advertising but that's not enough to make big money anymore, right? We all know that. So we have a layer of crypto products over and above that that we're going to be launching, including, for example, inter-country commerce, hiring producers in another country, hiring songwriters, et cetera, but automating that so we can do it on scale with smart contracts. So we are creating a micro currency that we can use on the website, but we're doing an ICO for that but that's not for the purpose of raising capital. As an entrepreneur- That's more part of the business model. That's part of the business model. That's not the financial aspect of it. Correct, and that's done so we can scale international commerce with automation. We're doing an actual ICO for the equity, for securities tokens as well. Now I've done a full IPO myself, okay? My first company on Microsoft and novellas my shareholders, there was a full S1, full registration. You went through the whole process. Yeah, but I'm also doing, I also did a Form 10 once, 10 years ago for another reason. So what we're doing is we're doing the first, possibly the first, certainly one of the first, but I think the first, registration with the SEC of a company actually doing an ICO. And we're doing that using, I don't want to call it a loophole in securities laws, but there is a provision in the 1934 Securities Act called Section 12G. And what this does is it allows us basically to go public by telling the SEC we're doing it without having to delay it to wait for their permission. Okay, a Form 10 looks just like an S1, but when you file it, it's automatically effective 60 days after you file it. Period. And so what we're doing is- Period, full stop, no issues, no questions. No issues, right. So what we're doing- So you have to fill all the same paper, S1, the normal format, do the business plan, the normal paperwork. Now, right, now in 1930- But there's no comments come back? They just, you just ship it through? Comments come back and you have to clear them just like with a prospectus, just like with an S1. However, that doesn't delay it becoming effective. It's effective 60 days later. So they're going to be commenting during the 60 day time clock going on, but after 60 days, you're in. It's effective. And we'll continue to clear comments, but the thing is with tokens, who knows how long that'll take? I mean, is the SEC going to shepherd something through with crypto? I wonder, are they going to make it take five years? I don't know. Who knows? So the thing is, we are complying with all of the laws for registration, but 60 days after we file it, it's effective. Now what we're doing is, in the presale, the presale for the tokens, we're not issuing the tokens themselves to the buyers in the presale for six months. Okay, and the reason for that is, they will have met the statutory holding period. So once the Form 10 is effective, those buyers can sell freely on token exchanges. And what's the statutory holding period, six months? Generally six months. There's a few exceptions for affiliate, like an insider. So I'm confused. The holding period kicks in before or after six months? After six months, the statutory holding period is satisfied. So you're going to wait to delay them anyway, six months. Yes. So that covers the holding period. Correct. And then we file a Form 10 six days later, they can trade and anybody can buy it. Should you file a Form 10 before the six month holding period? About the same time. Okay, the reason being is because we have to get all the ducks in a row to be a public company, right? I mean, to be public. Cutting edge advice here, this is fantastic. So you're basically going to be the first ICO that actually files with the SEC. Correct. I mean, who does that? Nobody, you. Well, yeah, watch us. You know, the... That's awesome. Basically, we're using it, it's like we went back in time to 1934, got them to put something in the 1934 Securities Act for the purposes of ICOs. And then in 2018, we came back to 2018 with the time machine. Are you from the future? Back to the future. You went back and jury rigged the... Hey, we should put this Form 10 in there. There you go. It could come in handy someday during the crypto bubble. That's right. Okay, so let's get back to the cryptography thing because I think the cryptocurrency thing. So I think you're onto something really, I think is a tell sign that I haven't seen yet. I've been seeing some formation of it. You are using two types of tokens. Correct. So your business model is do security token for funding. Right. You're going to trade that puppy through the Form 10. Correct. Utility token, another separate ICO for the product. Right. And that's going to have one token, two tokens. There's one utility token, so to speak, one currency token. And that has its own regulations you have to manage to also. But that's designed to appreciate but not like to go up. Okay, so I want to dig into that for a sec because you mentioned scale. Right. You're going to scale your business model with utility token. That's the purpose of the utility token. Correct. So let's go into how you're going to do these smart contracts. So let's just say that a producer in Europe somewhere in Italy says, hey, I'm going to do something with Joe in the UK. Yes. And they form a collaboration. Yes, well, that's right. And do they use that utility token or a new token gets created? No, no, that utility token. It's called a CHIME, the CHIME token. And what happens with that token is you can build in the contract administration to the token. Right now, you can do international deals. I mean, people do them every day. The difficulty is if you've got an audience of a half a billion people a month, for example, to do that on scale and automate it. Right now, if you do a deal with somebody in Japan, you've got to view the American Hasteven, American lawyer and a Japanese lawyer. That's a nightmare. So to see. And if there's a dispute, good luck suing it. I, one time at a customer in Hong Kong, owed me a million and a half bucks. And he's like, sue me. And I'm in New York. He's in Hong Kong. And good luck. With smart contracts. So what did you do? Did you do the New York thing? I'm flying over. I'm going to break your legs. We bitched and complained, threatened him. And ultimately we settled on 30 cents and a dollar. So we did. That's exactly what happened. So with a situation like this, with smart contracts, you need the side has to hire two sets of lawyers in the other countries. So Chime takes care of that. You want Chime to take care of that. Administrative inefficiency. Correct. And now the company might still get involved in administering exceptions, but not every single one. What the smart contract does is allows you to scale international business. The key is international business. And that's a new efficiency into the market. That's a great problem. In the business model, what does that scale mean to you for operationalizing it? More people, you have to hire them. More cash. No, less people and more cash. Because there's more automation, right? I mean, it's more software development. Where's the cash coming from? So we have a lot of revenue products. I mean, like the obvious, like every other website, we have subscription revenue and advertising revenue. Subscription revenue comes from like, you know, IMDB is the link end of the music and TV and film business, right? So we'll have that too. But in addition to- It's not really large, though. It can be. It's okay. Amazon could make it larger if they wanted to. They have the reasons for doing it the way they do it. But in our case, I'll give you an example of some revenue products, okay? Let's say you want to crowdfund a project. So let's say you want a bunch of Taylor Swift fans to crowdfund a project for her to do a duet with Kanye West, right? Sounds preposterous. But it's goofy enough. I mean, you'd be amazed at what Stormy Daniels is crowdfunding a project for her legal bills with Donald Trump. And I bet you it's going to get funded, right? I would agree. So there's a lot of nutty stuff that gets crowdfunded, right? The wisdom of the crowd is actually efficient. Yes, that's right. And the whims of the crowd. But also, I'll give you another example. Let's say you want to, people want to, if they go to a webpage about an artist, the band All American Rejects, for example, and Will are one of the band members, it's 10 years ago if you could have given your niece a gift of a CD of All American Rejects. Well, good luck now. They wouldn't even know what the CD is in many cases, right? But what you could do is say, hey, you know what? I'll give you a gift of a Google Hangouts chat with him. And I'll pay $200 for that, or $500 for it. I mean, and you know, it's not, you wouldn't think about it. It's probably a bot, but anyway. So, no, but how do you make that this happen? So this is really important. You're creating value by allowing people to collaborate in a way that's different, so that scales. Right. Is that going to be done on the Chime contract? Yes. Or it's all going to be part of one currency. One currency, that's right. And we're very careful. We bought it as an advisor, Rod Garrett, who gave one of the keynotes here yesterday. Rod Garrett is the money supply economist from UCSB. But he was also a former VP at the New York Fed. He was the leader at the New York Fed for cryptocurrency. Rod is one of the smartest. Really? First people I've ever met. You know him? Very well now. Rod can explain the most complex things in simple words, which means he actually understands them. So we've actually used Fisher's Equation to help model the utility token value over time. And again, it's designed to appreciate, but we don't want like nutty appreciation because then it'll be used as a currency, right? We have fixed supply, the Bitcoin principle, a fixed supply, and stable market-making so we can keep it reasonably stable. You're using the utility token to create value on your network. You have to create value. The creators can capture that value. Correct. That's what you're doing on the utility. Yes. Security is the money making side. How are you backing the security token with? Equity or cash flow? Equity, and very important, okay, really important. If you did a percentage of revenue royalties, it wouldn't work. And I'll tell you why. Wouldn't scale. Because we're looking five years out, 10 years out for this to be a good investment. We want investors to buy it, right? And if you, let's say you need to do a secondary because an acquisition becomes available because you're low on money or whatever, right? Then how do you do a secondary? You know, if you've already given away 20% of your revenue to token holders, what do you have to do a secondary tertiary capital round? Now, how many rounds were necessary for Spotify, or I happen to know Spotify was six, right? Facebook, Google, how many rounds of findings did they do? A lot, and by the way, they still might do more. So basically the revenue shares a hair on the deal. Really puts a lot of hair on the deal. Destroyes it, in my opinion, destroys it. I mean, it's a dressing thing, but look, if you're really going to grow to a major company and have it be a five, 10 year success, it kills it. Look, this is my opinion. Other people would be just- What percentage of equity do you say they're going to do a $50 million raise? Hard cap, soft cap, say 25. That's what seems to be the norm right now. What would be a percentage of equity converting to tokens? Well, okay, in Chime's case, right? So we have a common A, okay, class of stock. We're creating a preferred class of stock called the Series T, which represents about 40, which, if fully sold, will be about 43% of the equity in the company, okay? And we had to do a preferred stock because there's too many in Delaware Corporate Law, which, you know, all the tech companies were all Delaware, right? In Delaware Corporate Law, common stock would be very difficult to make a token. With you have more, you have to do whatever you want with preferred. So the preferred is more flexible, so it's actual equity, actual shares. It's not a derivative, it's not a rev share, it's not a royalty, it's actual equity. It's paper that converts nicely and it scales on the business side. And the benefit of that, so you say, what's the valuation? So we're selling $100 million worth of the equity or we're offering $100 million of the equity. In that, the pre-sale valuation is a little over $200 million. In Chime's case, that's because though we're not a startup, we're a startup, early stage company, but we went out. How long's the company? Pardon me? How long's the company? Three and a half years. I see you around. You were born yesterday. We acquired music databases that were built at a cost of tens of millions of dollars in Europe, okay? Funded by the richest guy in Europe, okay, who built it out and then got tired of it, tired of funding it, and then we were able to pick it up on attractive, basically for equity deals, paper deals. We picked it up and we're buying a second music database also, it's a very big one. So it's not like we're a startup with an idea of business. No, you got assets. Yeah, real assets. You got momentum, good management team. You obviously know what you're doing, it's awesome. Got a great scalability mindset. Yes, that's right. Nicely packaged, clear target. That's right. So I mean, we're probably a little bit different than a lot of crypto startups in that. I mean, a lot of brilliant entrepreneurs to see here, but we've been around the block with having to do IPOs, having to do exits, having to do, and you know, look, I'm a contrarian, right? You know, I was getting a lot of advice yesterday from a lot of really smart people saying, hey, raise the money overseas to a foundation and then do this and then it'll like. Everyone's doing it. It's like, look, I'm going to take a contrarian approach. I'm just going to comply with the law by doing the registration. And they say, well, what if your utility token has to comply with money transfer and the laws? Look, then we'll comply with them, okay? It's like, look, the contrarian approach is just whatever the law is, follow it. And it gives us the. Well, the thing is, you're actually doing what they want you to do. Notifying what you're doing. Yeah. And you have a utility. Yeah, that's right. It's actually a utility. So by separating out the token into two, one that has the attributes of a currency, one that has the attributes of an equity. We, neither one is screwing up the other. I agree. That's really smart and very novel. Lot of smart people are going down that road because it's actually known things people can understand. Yes. Security token is paperwork that you can do. Yes, but I'll tell you, the other thing I feel is very important, a pretty important point I make. By doing registration, the resale can go to anybody. My personal opinion is, you know, these second market type approaches that you can only resell them to accredited investors or to foreign investors or whatever. I think that's a mistake. And I'll tell you, I think what happens is people take that approach, you're going to find that the resale value of the token or the token of securities is going to be about 10% of what it would have been otherwise. If they only do accredited? Well, yeah, because here's the thing, okay? First, it's not only they got to be accredited. I can get around the security token. I thought it's a security. Because it's registered. You can, the waitress working the bar here can buy a publicly traded equity if it's registered, right? Okay, so she can buy a publicly traded token. That's a form 10 you were talking about. Right, form 10 registered to the company. Now the initial batch of trading will be done under 144 because the token holders will hold them six months so they can sell them at their leisure, right? Now, there are exceptions, by the way, like an affiliate might have to do some form filing. I would have to file a form three. You know, the usual stuff, right? Yeah. But a regular token investor, you can do whatever he wants. And I can call them investors. I can do business in the United States. I don't have to pretend them domiciled in a country you never heard of, right? So it's like, look, I'm an American. My staff is mostly American. Do we do business in America? Let's follow American laws, instead of... Joe, this is a great conversation. We're getting down and dirty under the hood. Capital structure, business models, chimes, really interesting approach. Joe, thanks for sharing that great data here on theCUBE. Section 12G of the 1935 Securities Act. 34. 34 Act, form 10 is the secret weapon that was built by aliens before us to allow us to get this special clause in there for crypto. I'd love to continue this conversation another time. I think there's four or five things we just identified with great, great topics. Thanks for sharing. It's theCUBE's coverage here in Puerto Rico. I'm John Furrier. We'll be back with more after this short break.