 From Palo Alto, California, it's Cube Conversations with John Furrier. Okay, welcome back to our special Cube Conversation here in Palo Alto. I'm John Furrier, co-founder of SiliconANGLE Media and the co-host of theCUBE. You're at Grand Fonda, who's an attorney with Goodwin, specializes in blockchain, initial coin offerings, also known as ICOs. Part two segment, we just went over a high level kind of landscape. But I really want to walk through the playbook of ICO process, call this the initial coin offering or ICO 101. Take me through the process, okay? Hypothetically, let's just say that we want to do something, we don't have an ICO called CrowdCoins, something we're looking at doing, but let's just walk through that. What's the advice? What's the playbook? Take me through the process. Sure, so the first question is, where are you located and who are you targeting? So what I mean by that is, where is the founding team? Are they in the US, the threshold issues, whether in the US or abroad? They're in the US and they want to stay in the US and most don't want to move, so they want to stay in the US. That's, then we talk about, okay, you're going to be subject to US, potentially to subject to US regulation. And so the next step on that is, who is your target audience for the token sales? Are you looking to do accredited investors? Are you looking for US people? Are you looking for foreign? And who are those target people? So the threshold issue is, as I mentioned before, are you looking for accredited or unaccredited? Most people would rather, they believe in the democratization. And accredited is over a million dollars of net worth, it's essentially a sophisticated, yes, it's essentially a sophisticated investor. And what's the trade up between the two of those? So the trade off is, if you really want to get a large market, you do the unaccredited route. And that means anybody can participate. Accredited, if it's accredited, it's a much more limited, typically 50 to 100 people, high net worth individuals, there's a paperwork process, it's an exemption under the securities rules. Most of the token sales we're seeing are unaccredited, although we're seeing a trend now too that people are doing a hybrid of accredited US investors and unaccredited foreign investors. And so that's an interesting hybrid that we're seeing. But so that's an initial threshold. We have many companies that say, well listen, what if we move our operations offshore? What if we open up a foreign company in Switzerland or something like that? And I think what they don't realize is that if they're trying to seek US money where they are located in the US or the money that they raise comes back to the US in some way, that they're going to be subject to US regulations. So simply sticking something offshore doesn't cut it from a regulatory perspective. So that's the first question we ask, is trying to figure out, okay, where are we setting up this entity? And typically you set up different entities to raise the token sale. So what if a company, say, as an example, already exists, we're a Delaware corporation, do I have to set a new company up or subsidiary, what's the playbook? So there's a clean sheet of paper, which is a new company. That's where you start, I get that. But what about pre-existing companies? So if you're a Delaware corporate pre-existing company, sometimes we'll set up a new, like a subsidiary. Sometimes just for typical corporate reasons, it's good to set up separate entities. The other issue that you're doing, threshold issues, the tax issues. So we typically advise people to get sophisticated tax advice from CPAs, things like that, like Deloitte's one of the players in the space, for example. And that decision then becomes, do you set that entity up in a tax, more tax friendly venue than the United States? British Virgin Island and the Cayman Islands are two of the examples of where people set those entities up for tax purposes. The tax thing seems like it would take time. I mean, does that slow things down or is it kind of super important, obviously? So it does. It has a couple of components. It slows it down because you have another player involved. You also have the potential transfer of assets and you have to figure out, what are the assets that you're going to train, move from the Delaware Corporation, for example, to the Cayman Island Corporation. You also have obligations of, you have to go live in the Cayman Islands for a while, which is not a bad thing. My wife wants me out of the house. I had a client who said, all right, let's set up in the hotel right next to the airport. And I'm like, if you're in the Cayman Islands, go to the beach. Don't stay at the airport. Stop scuba diving and a lot of people can do that. Okay, so great. Jurisdiction and corporate structure is the first kind of consideration. Yes. What's next? Then the next sec is related to that is what type of sale are you doing? Are you doing a token sale or a security sale? And that's a big threshold issue. What we mean by that is, and most of the sales are token sales, but is the token that you're using going to give someone equity in the company? Are they going to get a percentage of the profits from the company? Are they going to be able to control some of the decisions of the company? If so, that looks more like a stock. And so therefore it's deemed a security token. That is subject to SEC regulation and there's a different route. Many people don't go that route, but some do. So for example, people in real estate transactions where they want to give these tokens, but they want to get investors who get a percentage of the real estate profits. They'll go kind of the accredited US investor route. For the other pivot is towards the utility token, which is the utility token, like an arcade token is basically a token that works in the platform. And people use it so that they can transact on your platform. They can play games. They can get content. They can encourage people to find bugs in your software. So transactional type value. Transactional, exactly. So smart network, smart contracts assume some sort of marketplace with the coins and the currency, right? Exactly. Okay, so the next step, the tokens and security and utility, I get that. Okay, make that decision, now what? Okay, so the next step is you need to do a white paper and you need to hire a law firm to help you with the white paper and all the legal, all these different steps. But so then we'll take a look at the white paper and we'll advise them on what their token looks like. If they're trying to do the utility route, we'll kind of walk through the different language and things of that nature. We also try and clear it up, make it just a little bit more readable. And then once they do the white paper, we then also help them with the pre-sale documents. Oftentimes they'll do two sales. So what's it called a pre-sale, which is where you give an opportunity for significant purchase, people you believe will be significant purchases of tokens and they'll come in and they'll buy a large amount of tokens, let's say $100,000 of tokens, but it is significant discount from the price that will be for the regular token sale. So maybe a 20% discount. So once I have my token, security or utility, it's okay, now I got to go figure out how I'm going to sell this. Yes. And that's what we're getting at here. Yes, and so typically you make the decision to do a pre-sale and you raise a certain amount of money and then you do the token sale about a month later, typically. What about allocation of tokens? That comes up a lot. So I'm also thinking, okay, is there a structure for X percentage for the development, X percentage to sell, to offer to the community or network? How many say in the company, we see companies keep an allocation for the company or between 15 and maybe some higher? So how do you put the pie chart together, a distribution of token? Sure, so one of the things is you have to figure out, is this a token that you're going to sell all your tokens right off the gate, except for some of the ones you keep? Or do you envision later releasing tokens over time? So some of our token sales, every year, excuse me, token companies will release tokens over time to continue to provide tokens to users. So you have to make that threshold decision. What you typically see is you see a percentage kept by the company. You see, and it's usually, usually you see like 15 to 20%, although you've seen, I've seen companies up to 90%. And then you'll see a bunch of the tokens issued to the market and they will tell people through their white paper what they intend to use that money for. Most of the times it's for kind of R&D and development of the platform and continued maintenance of the platform, but also legal and administrative expenses for that company. One of the big issues that companies face is where are they in the development of that platform? Ideally, by the time they do the token sale, the platform exists and the tokens can be used immediately. That helps, we talked earlier about being a security versus a token. That helps in that analysis. If you're building a platform and you've already got it up and running, that looks more like a utility token. If it's going to be a year or two before that platform is available for use, the SEC may say that looks more like a security. And a lot of people get flagged and I've seen ICOs where it's like, oh, we're going to have something in late 2018. And so they hope to raise the money through the tokens to do development. And it can be like a Kickstarter kind of model there, but it's not legit. I mean, from a product standpoint. Or I shouldn't say not legit. It can be scrutinized. I think now the guy, SEC gave some guidance a couple of weeks ago. And I think that in CoinCenter, which is a great think tank in this area, they issued a spreadsheet essentially that talks about what are, how do you know, when are you more like a token versus security? And I think that's an issue. I think especially going forward companies, if they can, are better off having a platform up and running by the time they issue the tokens. Okay, so next question is, okay, great. I'm rocking and rolling. Now I got to do some blocking and tackling. I need a white paper. I got to have a website. What are the minimum viable elements that need to be in market for an ICO? I'll say website to do stuff. What are the elements there? So what is the white paper which we talked about? You also, as part of that white paper, you want to make sure you are conscious of this is a paper that has to live and breathe for potentially years. And so you want to be honest and forthcoming, but also give yourself some flexibility. But the other thing is not every company is a super sophisticated smart contract company. And so they'll often hire vendors to do that. Do the white paper. No, not to do the white paper, sorry, to do the actual smart contracts to set up the token sales. Those companies will also assist with the white paper, just like we do, but their primary platform is to, or purpose is to help launch the smart contracts. You'll also have kind of marketing companies that will assist with marketing the token sales so that more of the community knows about your business and that there's a platform out there and that hopefully that's a platform that you want to use tokens on. And so that's another component. And then also the tax advice that I mentioned before. All right, so in that white paper, is also the consideration for who the service providers will be in the process? Sometimes, not always though. Sometimes they will identify who's going to get, if the service provider, for example, will get tokens. But oftentimes you don't see that in there. All right, so white paper, probably an FAQ of some sort. But again, thinking about this being an evergreen living document that'll be on the web, it could bite you in the butt or help you. So be careful, right? That's what you're saying. Yes, good advice. Okay, tax considerations. Okay, now I got my tax hat on. Okay, bring in Deloitte, bring in the tax guys. What are they talking about? How does that impact the process? So you mentioned the delay before. So I think anytime you bring more players in, it obviously delays things. But they're important players. All these are important players. And part of what you want to do is you want to bring them in early versus kind of waiting, because the tax implications are significant. Takes time to set up foreign entities. It takes time to go live in the Cayman Islands. Not the worst time, but it takes time. And so- With duration in the Cayman Islands, would someone have to live? So I'm not an expert on that, but you're going to spend a couple of weeks there for sure, if not longer. And you're going to have to stay there through the token sale. So- Does the boat get paid as part of the token sale? I'm only- I'll leave it up to you, how you decide to spread the money. Okay, so back on the jurisdictional thing about the Cayman, this is important. So people, can they do it in the U.S.? Yes. They can, okay. But how does that impact the process? Is it a tax issue? Or is it just comfort? I mean, what's the consideration between a Cayman Islands, I mean, the foreign makes sense if you have people there. But Caymans would be the alternative for the U.S. companies, right? So they're Cayman, so if you do it in the U.S., you can still have your operations here, in a sense you can have some people here, but you could, but the primary wallet essentially entity that's receiving the money will be in the Cayman Islands. If you decide, and that's really mostly tax issues, if you decide to forego that, so some companies decide the tax issues are not significant enough that I want to deal with it. Setting up a Cayman operation, there's delay, there's expense, and we'll deal with the U.S. tax issues. And so that's just a business decision. And because the tokens are viewed as income? Revenue. Revenue. Revenue is a revenue from a company. Okay, does that mean if a corporation wants to buy tokens, that's an expense? So it's funny, we haven't had that question asked, and I'm not a tax expert, but yes, I think it would be an expense. We'll have to get a referral, we'll get a tax guy in here to answer these questions. The post-ICO issues, okay. Do we get to the ICO? Okay, no, okay. So the next step is okay, got my tax considerations, it's time for the ICO. What happens next? Do I ring a bell? Is it a digital bell? What happens? So it's kind of fun. Most companies, what they do is they put a time, a countdown to when the ICO is about to start, and then how, they usually give a window. And it's typically a two-component thing. One is, if we raise, let's just pick a number, $30 million. If we raise 30, it's a $30 million X amount of tokens we sold, the token sale will stop at that point. Or they also put, and or a time limit. So two weeks, we'll have a two-week token sale. And so you'll have the timeline, and they'll actually register for you on their website how much they've raised, how many tokens have been sold, as well as where they are in that timeline. And then the timeline ends either through one of those two mechanisms, and then the token sale is closed. And then I'm sure there's a protection issue around protecting the tokens. Can you add some color there? Because there's been rumors that, you know, someone's been raised $34 million and lost it all. I mean, basically been robbed digitally by hackers. So it's, it's... Who do you call that? Better Coin Bureau? I mean, there's no, there's no, I mean... So we've dealt with that issue, and we can give advice when that happens, but it's a tough issue. I mean, tracking the FBI, I mean, obviously you know by the FBI, but it's a fatal flaw. It's a real problem. Typically they're people abroad, so you have to assume it's gone. So one of the immediate things we talk about is security. And some of it's very basic security. And that is, if you are receiving all these, all the Ethereum or Bitcoin or however you're raising it, set up a bunch of different wallets. I mean, just if you're going to lose money, it's better to lose one out of 10 wallets or one out of 20 wallets versus one wallet with all your money there. So some of it's just prudent, but in that sense. But I also think you really need to make sure, and that's part of why you bring some experts, and if you don't have that inside expertise, is to make it extraordinarily secure. How do you vet the service providers? I'm going to work with the company if I'm an entrepreneur or an entity to deal with the front end of the first collection and the wallets make sense. You sprinkle it around, it's like digging a hole, putting mattresses all over your house. So I get that. Who do I deal with on the inbound? Is there like a central authority that takes the cash in before it goes to walls or does it go right into different wallets? So that's where we talked about like a smart contract vendor will assist you in setting things up so that it goes directly into a wallet. Part of it is just word of mouth. People get referrals, they look through who's done other ICOs. Part of it's reputational. Some of it too is when you talk to people you can figure out, do they really know what they're talking about? I mean, hopefully you have some IT security people in your team or that at least you can rely on who can really vet these providers and to say, okay, this is a really strong product. We feel comfortable with that. And you're betting a lot on it. So it's a really important. So you invest in a security resource. I think you have to. Okay, now ICO is completed. Everyone's high five and the clock's ticking and there's a post, maybe a trickle or one shot opportunity assuming that trickles as part of the process. What's the post ICO consideration? So one of the issues is the money, right? And so what do you do with it? And so this is a pre and post token sale issue. And that is do you provide employees or founders with tokens? And I think the consensus now is that the more you provide tokens for employees and founders it more looks like securities. So there's a tendency to want to get like people advisors who come onto the company to provide them tokens. I think there's a risk that if you do that it looks more like securities. So you have to treat that money and that, especially the tokens, because the company keeps some tokens too, right? You have to continue to remember that that's a utility token, not a security token. As far as the money goes and what you're going to use it for you have to keep consistent with your mission. And so it's just like crowdfunding when we saw, you know, if you ask people to donate money to an idea you can't change that idea. And if you do change that idea you need to let them know about it. So you have to be pretty transparent. So there's no such thing as free money. And I believe that one of the risks with the post-token sales is, listen, some of these companies are not going to make it. And so you want to be very cognizant of that you're doing the right thing, you're making the right decisions, pretend that in a sense it's truly your money and it's every dollar that you spend is your own dollar. And so you want to use it wisely and you never want to be embarrassed or ashamed or concerned about how you spent that money. As long as it's not buying a boat or having a Silicon Valley, Treasure Island and having a big party, use it wisely into the mission of the firm. Okay, so the question I have for you this comes up a lot is, okay, I get the utility token that creates value for the currency, you're not selling the appreciation as an investment, it's a transactional component of a smart network, smart with smart contracts and value creation and distribution of that value. I get that. If a company wants to do that they can still have an equity plan I assume because you have to assume that that utility is contributing to the value of the overall enterprise itself, the company. So that's where the employees would get the stock options and a normal stock option plan. Yeah, it's just like any other company, when you raise money you still have equity. And so I think that they're generally Delaware corporations as typically the standard structure and you can give options in the company, there's no concerns with that. So you're going to have a coin vehicle going on and an equity standard equity program. Yes, absolutely. Okay, so post I see, what else? So I think- Crush your fingers and hope you can use the development cash. I think too that, and this goes throughout the process from the beginning through the post, which is be careful how you talk about the token sales. So don't talk about we're going to try to increase the value of the tokens. Remember the token is a utility token. It's an arcade token. It's not a security. It's like playing a video game or pinball wizard, pumping into the thing, play your game, people get value out of that. So that's fine, but what you don't want to say is you don't want to encourage people to continue to trade and buy the token for the purpose of they hope it's going to go up in value and not use the platform. Even though everyone's doing that. There's some truth to that. There's a little bit of that sale in the room a little bit, but there's different ways to do that. So as you build your community, as you talk about it and you're excited about your company, and people are. It's a great, it's a fantastic tool. And what's really been fun about it is you're seeing these companies that hadn't thought about the blockchain and utility tokens and saying, wow, this is such a great mechanism to build this huge community and have all these people participate through these tokens. Setting aside the fundraising aspect of it, but just this, it's just great mechanism to do this. The democratization of my platform and I can reach internationally. So focus on that. Don't focus on the value of the token. There's another issue which is putting them up on exchanges. So particularly pre-i-s token sale. You want to, I think you need to think twice about trying to connect with an exchange and sticking your tokens up on an exchange. Why? Because it sounds like a security again. If it sounds like you're trying to develop this market for more people to buy this, the token to go up in value. Now it's okay to provide a platform just like the arcade owner for other. It's okay if that arcade owner thinks that other people can sell his token for him or her token for him. That's fine, but you got to be really careful about how you do it. So Brave browser, which is obviously utility, has bat tokens. They're listed, I believe. So you can, yeah, and I think, you can list, I think it's just a risk. And I think what you don't want to do is you don't want to say we're listing our tokens and trying to encourage people to buy the tokens. So it's optics. It's how you position it. It's important. The optics are important. All right, talk about expectations. Can we talk about this in our first segment? But I want to just, in this block, ICO 101 went through the process. Overall expectations, any thoughts on that? What people should expect? Duration, fees, costs, order, is it order or manual? What solar system are they in? Million dollars is going to cost? Is it going to be 20K? I mean, how do you engage on fees and then process timeframe? Sure, so the process depends on part of the company. How far along are they on the white paper? How long, far along are they on the platform? But setting aside that issue and more from the legal technical advisor, generally takes two to three months. We're seeing some that are longer. You know, it takes time to put the white paper together and we proof it and give advice. And then I'll also have some of these other advisers give advice on it. It does take time to set up the tax structure. So if you're doing the Cayman Islands, that's probably a two to three month process for sure. Depends on how much IP you transfer as well. So that can slow things down. License and agreement's all going to be, it's like standard legal stuff. That's track, there's no shortcuts. There's no shortcuts. You're bringing additional consultants, those takes time to negotiate. So I think safe, you're going to assume at least three months, if not, definitely more. Got it. Well, the number one question I think here today for you is, who's going to pay for this hour? Who going to bill for this? You'll get my bill. I appreciate the candid conversation. Thanks for sharing your knowledge. Again, this is an expensive hour here in theCUBE. The community is a freebie. Grant, thanks for sharing. You did some great work. Congratulations. I think we're going to look back in this time in history and say, man, glory days or hell of a time, it's going to crash and burn or go big in my opinion. So, great stuff. Grand Fondo. Thank you. Upturnia, Goodwin, great firm. Check them out. I'm doing great work. 25 plus ICOs in the pipeline. I've done a bunch of work. New area, exploring the future of blockchain, a lot of disruption. Anything has to do with supply chain, anything to do with technology. Decentralized concepts in a distributed manner is really the rage. You see this as a game changer at SiliconANGLE. I'm John Furrier and thanks for watching.