 Hello everyone, welcome to the Cube Conversations here in Palo Alto Studios for theCUBE. I'm John Furrier, the co-host of theCUBE, co-founder of SiliconANGLE Media. We are here for Thought Leader Thursday with Mitzi Chang. She's a securities attorney and partner at Goodwin, formerly Goodwin Proctor. Goodwin Proctor is the name. Again, great to have you on. Thanks for coming in, talking about some of the securities around blockchain ICOs. You guys are doing a lot of work. Thanks for coming in. Thanks for having me. So obviously, blockchain is the hottest thing we've seen, AI obviously is hot as well, IOT. All this is about a new decentralized internet. And it's the Wild West. And we know because we're looking at doing our blockchain and tokens for theCUBE and all that good stuff. So we're totally loved the new environment. Everyone, although like tier one entrepreneurs are licking their chops and go, wow man, good action. And a lot of the Thought Leaders are saying this is a fundamental shift. So it's cool we get that. But now, okay, is the technology ahead of the law? And just today, the news is breaking. The SEC is now putting a clamp down on a new thing. Celebrity endorsements into ICOs initial coin offering. So you're a securities attorney. You have to sit back there and like, why are these deals together? Right. What's going on? I mean, so is the law behind the tech? How are you guys managing it? What's the flow look like for you? Yeah, I mean, I think that the law is almost always behind the technology, right? That's just how it works. I mean, from our perspective, we represent tons of companies on normal securities law or securities issuances. And this can be similar depending on how the token is structured. So the SEC said in its July guidance that tokens can be securities depending on the facts. So part of what we do as lawyers is review the facts of the token, right? What does the token do? How do you treat the token? How are you issuing the token? How are you marketing the token? Are there securities like features of the token? So for example, does it have profit sharing features? Does it have voting features? Those are pretty obviously more security like features. But also, in the token ecosystem, are you treating it like you would equity? So for example, are you putting investing conditions on there? Are you marketing it to VCs who may never use your network? Those are some factors that make it look like more security versus a utility. You guys also, I mean, I've been in Silicon Valley now 18 years and been an entrepreneur for longer. And the entrepreneur is always three feet in a cloud of dust, breaking things and bulling the China shop as they say. And they have to give the lawyers to kind of clean things up or set things straight. Securities is a known practice, but now there's some kind of bumps on the road, but still people are moving forward. So I got to ask you, what's the test? I mean, we hear things like the Howie test. What are some of the things that entrepreneurs should know around where to pay attention, kind of where to put their head down and drive? Because there are known practices on the security side, you mentioned a few of them, but where's the test? What's the one thing? Is it the Howie test? What is this Howie test concept? And what are the things that entrepreneurs didn't know about? Right, so I think the Howie test is a test that was in case law that basically explains what is an investment contract. And an investment contract is what is considered a security. So basically the payment of money based on the efforts of others where you kind of have the reasonable expectation of obtaining profits from those efforts of others versus yourself. So that's the general gist of it. So I think from a securities law perspective, that's really important because there has been so much focus from the SEC. But there's also other regulatory agencies who are focused on this. Some of those are money transmitter laws. There's potential commodities law issues. So there's definitely other regulatory regimes that could implicate the token or the token could be implicated in that regime. But I think the securities law one is one that I focus on and it's important to look at. All right, so the first test is, okay, obviously new internet infrastructure, different conversation, but the real law test is, is this token going to be an investment, making money or is it going to be a utility, one that provides values to the participants? Did I get that right? Yes, I would say generally speaking, right? Is the token, you know, is it a use case or is it an investment, right? Am I expecting profits from that token or am I using it like an access fee or a membership or, you know, to obtain services? Exactly. And Arcade Game is probably your best example. Yeah, okay, so then the next test is, I've heard some things that I'd like to get you to explain what anti-money laundering or AML is and KYC know your customer. And obviously Bitcoin has been kind of, you know, we've heard silk road stores under belly, a lot of things are happening, but anonymous is good. But here, financially know your customer is a specific thing that means something and then AML anti-money laundering. How does that factor into this whole thing? Yeah, so I think for, you know, when you open a bank account, for example, right, your bank wants to know who you are. They'll obtain certain information from you, you know, whether it's your driver's license or passport, where you obtained your funds. I mean, that's part of the know your customer anti-money laundering activity. And identity behind the face of something. So part of it is because cryptocurrency can be very anonymous, right? There are anonymous wallets that you're sending cryptocurrency to and from. You don't know who these people are. So part of it is making sure that you understand who your purchasers are. You don't want to run afoul of, you know, anti-terrorist type, you know, regulations. The U.S. government has several lists that, you know, they have online that you can search for names of folks that, you know, you don't need to be doing business with. So there's a lot of, you know, there's a lot of structures already in place and part of that is just understanding who your purchasers are. And these are requirements on certain things. And the anti-money laundering, I suppose, is just audit trailing and certain things that you got to have as compliance thing. Correct, correct. And so I think in America, you know, we don't normally, I would say, you know, if you were kind of outside of the U.S., this is probably a little bit more normal, right? People are used to doing it. I think in America, you know, maybe we're not as used to it, but these are not, you know, kind of new guidelines. This is always existed. All right, so sometimes entrepreneurs are fast and loose with their clients. Ah, screw the anti-money laundering thing. Well, they get, I don't understand, that's too much work. I don't understand. So they blow it off. When do they have to not blow it off? When do you have to worry about like all these anti-money laundering things? Cause you have to obviously do more work. Right. Gotta make sure you're checking the boxes, complying. That probably is overhead, cost money, or maybe buy some new software. So we've been recommending that all of our clients who are in the token space and kind of obtaining, you know, digital currency, go through KYC and AML. Some of the digital currency can, you know, exchanges, right? So in order, when you're receiving your digital currency and you need an account, in order to exchange the digital currency into US dollars, for example, it's essentially like opening a bank account. So they're going to ask for all of, you know, the information with respect to how did you, you know, receive your digital currency? So part of that is you need to have that in place prior to actually launching your token sale so that you can kind of follow the flow of funds. So I was trying to find this image I would put up, but I can't find it because that's not on this computer. But I saw our thing on a conference. It might have been BlockCon that you guys were at. I think you guys sponsored that event, or might have won it in Europe, where the cost of doing an ICO can range from, they said on the cheap, and they use the word cheap, not an expensive cheap, probably implying, not getting a good lawyer, 100K up to $750,000. So range of cost between $100,000 and $750,000, from cheap to done right, or expensive. Is that right, or is that, what's the cost range? Yeah, I mean, I think there's a lot of players in the ecosystem, right? So there's the lawyers, and typically lawyers bill by the hour, so it's kind of how much time, we're looking at documents and things and helping you structure. There's the tax accountants, so part of that is also how much time they're spending, but some of it can be very complicated from a tax structuring perspective. Then there's the technical people, right? Unless you have that in-house, to actually build your blockchain network, kind of help you with all of that, the technical aspects of that. So software engineers, for example. Then there's the ICO consultants, someone to kind of help you manage, quarterback the process, maybe help you with marketing, the tokens to certain different websites, or help you with that. So all of those together, I mean, yes, it can be very expensive, it kind of depends on how much of that you want to outsource, and how much of that you can do yourself. Obviously, you can't really do what you want yourself. So it's in the ranges, it could be in the ranges. I mean, tax alone could kill you if you're looking at all kinds of complicated schemes or licensing agreements. Right. All of that you want to make sure you're structuring the entity appropriately before you start it. Okay, so where do you get involved? So let's just say, let's just walk through the day-in-day operations of, say, Goodwin. Okay, we've got a client, and okay, you come in for the securities component. What does that mean? You just make sure they're incorporated properly, all the laws on the stock, and then the tokens, treatment. What specific things do you do? Sure, so once we kind of have brought the client in after our conflicts procedures, and we've agreed to the engagement, part of it depends on where they are. If they don't have a company, we'll help you form the company, right? And make sure that all of those startup documents have been appropriately done. Sometimes people are an actual company, right? We don't need to form them, they're already in existence. So then we look at, pass the formation items and we look at the token issuance. So we'll look at your white paper. The white paper typically describes how the token works in the ecosystem, and you get involved in that, just to kind of check if it sounds... From a high level, from a structuring perspective, do we think this is a security, or do we think it is leaning towards utility? And the SEC obviously has not said, what is a utility and what is a security. So that's the gray area. So the gray area is watch the language, don't be careful what you say. But also what you do, right? It's not just what you say, it's also what you do. So part of it is talking to the clients about, what are you thinking? How are you envisioning this? Where can we help you kind of restructure or decrease your risk? And you guys become a safety net, help defend that too, obviously, as attorneys, but the clients still own... Correct, I mean, part of it is we give you advice, right? And the clients can take, or not take our advice, but that's what we're here for. Do you guys offer legal opinions behind these? I'm sure you don't. We don't offer legal opinions. We do do research memos on kind of where we think your token lies, but we don't do legal opinions. So have you guys talked to the SEC at Goodwin and you guys have conversations? I don't know what goes on behind the curtain of the big law firms, but I'm assuming that you guys are up to speed on all the file and all the notes and everything, but do you guys actually talk to people at the SEC, or do you guys, is that how it works? Because this is a cutting edge here. I'm sure you guys have to be on the cutting edge. Yeah, I mean, we haven't had any clients knock on wood that have had to go through any of the SEC investigations on this, so we have not had, on behalf of our clients, had to talk to them about it. So that's good news. So you guys doing good. And I know you guys doing like over a more close to 30 plus ICOs, so congratulations. Is there a pattern that you've seen from a legal standpoint that you've seen emerging? Obviously it's pretty clear out in the marketplace, certainly the celebrity endorsement, Paris Hilton to the boxer dude, and all kinds of stuff was going on where people were endorsing a thing. So kind of, I don't want to say pump and dump, it's a worry that's been used in the dot com bubble, but people are saying a lot of these things are scams and the majority of them aren't going to work out. So we've said editorially here on theCUBE and Silicon Angle that failure doesn't mean scams, we have some failures, but certainly there are some scams. So has that caused people to pull back a little bit and say, whoa, we're not going to go forward fast enough or is nothing stopping this? What's the pattern? I mean, I would say from compared to a year ago where there was no SEC guidance, right? And there was no guidance from kind of other regulatory agencies. People were definitely going very quickly. I think now what we're seeing are more sophisticated clients. Clients who really want to make sure that they're following all of the legal requirements to the best that they can, right? Given the greatness in the securities laws and other regimes. And a lot more of a thoughtfulness about, well, let's make sure that this works, right? We're not going to get into trouble. Have you seen any co-mingling between some of the traditional VC venture capital investors or hedge funds that are emerging who want to come in and participate on the pure equity side of the preferred stock or common, mostly prefer we see them. But also play in the tokens. Is there coexistence between participation or is it mostly they line up on the preferred and then let the tokens go here? Is there a pattern there that you see around how those securities are playing out? Yeah, I mean, I think a lot of people see value, right? In the token ecosystem and they want to participate in that and a lot of our venture capital clients or our token clients who have VC investors, they want to participate. So we are definitely seeing people are very excited about it and want to kind of be a part of it. What about the pre-sale concept? We're seeing a lot of people jump on the pre-sale bandwagon because it allows them to, you know, it's not an inexpensive process. You guys obviously don't work for free. You guys have deals where obviously startups can come in and you guys have a good, great startup program and can testify that you guys do have a good, you know, good community participation there. But at the end of the day, this is a legitimate process now. It costs money and you guys have to get paid and service providers like the tax attorneys got to get paid. So there's a lot, we see a lot of entrepreneurs doing this pre-sale where they try to offer this kind of discount. How is that working out and has that been going well? Yeah, I mean, I think, you know, while the SEC has not commented on this, the practitioners and kind of the ecosystem, most people I think are considering that pre-sale agreement prior to a network actually being live as a security. And so people are going out to accredited investors. You know, sometimes that's VC, sometimes that's, you know, high net worth individuals that's usually done through a SAFT, which stands for Simple Agreement for Future Tokens or a pre-sale or contribution agreement. So part of that is it's like a, you can liken it to a preferred stock financing, but it's not preferred stock. But it's a known vehicle for financing. It's not like it's tied to the ICO in a new vehicle. It's just like, okay, we're going to do something down the road, there's risk associated, all that stuff is closed. Right, it's an investment contract. I'm giving you a million dollars to invest, to build out the platform at the end of, you know, when the platform launches and hopefully when the network has utility and your token has utility, then you'll receive tokens. And this is good for innovation because it gets everyone rolling a little bit. Is that, it's kind of, seems to be the pattern that I'm seeing, it's like, you know, let's get the- It's basically like a seed round, right? That's probably a really good example. It's a seed round to get something started. That thing is not your company, it is, you know, your network. And it also sets the community. I mean, I've noticed on the blockchain, these ICO communities are a very big part of it. Goodwin's got a great reputation, certainly here in Silicon Valley and, you know, around the world as a law firm. This is a big part of it. So the pre-sale is also kind of a gesture of credibility for the opportunity. And I think, I mean, you know, people I talked to, like, hey, I look at what's going on in the pre-sale, kind of as an indicator of who's involved, judged by the company that you're keep kind of thing. So that's interesting. Have you seen that pre-sale not dominating more than just going right to the ICO, given the market conditions of the ICOs? Yeah, I mean, I think it depends, right? Some of our clients have existing businesses, right? Where the, this is very complimentary. The blockchain network is complimentary to their existing business. And so they may not need to have this big pre-sale, right? Part of the pre-sale could be, you know, two weeks before your general crowd-sale, you have folks who kind of get in early. To me, that is not necessarily, I mean, it really depends on obviously fact specific, but that's a little bit different than doing a, quote, pre-sale agreement, like a year before, six months before your token launch. That's a little bit different. Yeah, so also you brought up a good point. Existing businesses versus kind of like people who just need the cash to get going. We're seeing a lot of companies that either have a successful business like Kik and then to KinToken was one example we talk about all the time. The other one is Pivots. We're seeing a lot of entrepreneurs take companies that were Pivots, AKA going out of business, where the token timing of a token and decentralized blockchain actually is great for their business model. And they have to essentially go recap or do some securities resetting. That's your world, right? You've got to get involved in those areas. Yeah, I mean, I think anything that has to do with kind of changing your capital structure, right? You should have your securities lawyer, your corporate lawyer involved, because that'll obviously impact your securities laws. Exemptions that you're taking, typically from a private placement exemption for most of our private company clients. Is there any new trends that are popping out of that kind of pivot? Or wow, this is really, I was out there, I got some funding from Y Combinator or some sort of venture and we're kind of just barely staying alive. But oh my, this blockchain can really accelerate. There's no momentum. Is there any trends that you see from your work, standpoint, work products that are happening that are obvious new things that are coming out of this? It's just always a standard recap the cap table, normal corporate work. Well, I mean, I think there is a tension, right? Between doing a normal, you know, stock finance, preferred stock or common stock financing, you know, whatever you would typically do, whether that's a convertible security or convertible note. And then, you know, raising funds through a token sale, right? And so from my perspective, it's obviously cleaner to do it the traditional way, right? Because you're not dealing with unclear SEC rules, right? You know, it's very clear how you do a preferred stock financing. We do that every day. So to the extent that, you know, companies are in that position where they can choose, it's certainly cleaner to do it the traditional way. If you pull off an ICO, God bless you, it's a new, I mean, certainly equity-free tokens. Right. There's no equity to token, right? Okay, so I was reading about the Delaware, corporate Delaware was allowing companies to use blockchain. This is right up your alley. So they're not doing ICOs. So can you clarify the Delaware situation with the blockchain? Because they're using a blockchain from a ledger standpoint, but there's no ICO, it's not an ICO haven yet. So talk about the Delaware situation. Correct, so the Delaware amendments, which I believe are now approved as of a couple of months ago over the summer, essentially allow the cap table ledger to be on the blockchain. So it's, you know, they're kind of ahead of everything, right? Because, you know, so for like, for example, a few years ago, no one had, you know, uncertificated stock certificates. Everybody wanted the physical stock certificates. And now most companies that we represent, you know, have exactly digital uncertificated stock certificates, but there is a ledger and there is a, there's a record of it. You just don't have the fancy paper with the pretty legend on it. So I think, you know, technology is moving and the law needs to as well. So part of that is, you know, Delaware kind of getting, getting on board. Yeah, Delaware's got a great opportunity to nail the ICOs. Well, Missy, thanks for coming and really appreciate any other observations that you'd like, that you see in the market that you'd like to share. Take a minute to talk about what you're doing, a good one as well. What's going on? What's happening? Yeah, I mean, I think, you know, it's a really exciting time. We're really excited to be a part of it. It's cutting edge work. I think that, you know, there's, there's a lot of, I guess, what I would call kind of your more traditional clients that we have, that we take calls from every day, whether that's investment banks, or, you know, VC funds, private equity funds, or just, you know, our venture-backed companies that, you know, are curious as to what, what is this all about? So I think it's really exciting and I'm glad to be a part of it. I don't think that it is going to stop. I think that certainly there's likely to be more regulation about how you do one of these ICOs, one of these token generation events, you know, within the confines of the law, but I don't see it stopping. You don't see it stopping at all. No. I mean, I think, you know, once there's more regulation, there'll be more clarity about how to do it and how to do it within the confines of the law, which we try to do, obviously, you know, given that there's not a ton of clear guidance, but I think that, I think the ship has sailed. Yeah. Well, this is a great conversation here with Goodwin, formerly Goodwin Productive, Mitzi Chang, partner. She's a securities attorney. We should call this show Billable Hours because we're getting some free legal opinions and conversations. Thanks for coming on. Appreciate it. Thanks for having me. A lot of entrepreneurs are using it. All the top tier one entrepreneurs are looking at this as a great opportunity, similar to the Web 1.0, the TCPIP era, the internet, blockchain as fundamental infrastructure for the future decentralized agent. So, great opportunities, causing lots of innovation. Check with your attorneys, obviously Goodwin and a few others all doing great ICOs, great potential fundraising, but also great business opportunity. Thanks again. Appreciate it. Thank you. It's theCUBE Conversations here in Palo Alto. I'm John Furrier. Thanks for watching.