ICOs Complaint or Legal | What to do?

Jaron Lukasiewicz is a co-founder of WRKFLOW, an advisor to several blockchain companies and the founder of Coinsetter, a cryptocurrency exchange sold to Kraken FX.

In this opinion piece, Lukasiewicz proposes a way for initial coin offerings to avoid running afoul of securities laws while retaining the practical commercial advantages of tokenization.


A few blockchain companies have recently been touting a "legal" or "compliant" ICO.

After digging into the details, however, I am realizing that these ICO teams have very little understanding of SEC requirements, and that their token sales are not compliant.

 

This isn't surprising. Most entrepreneurs are (rightly) more focused on building a business than understanding regulation, and this is not limited to blockchain entrepreneurs. That said, companies that are raising funds through an ICO are navigating treacherous waters, and it's important for entrepreneurs to have a game plan that keeps their regulatory risk low.

I have spent the last six months devising a strategy for launching a compliant ICO, which would 1) comply with SEC rules, 2) maintain the usability of the underlying token and 3) enhance the terms currently being offered to investors. After countless hours spent getting here, I would like to propose a strategy for how an SEC-compliant ICO could be accomplished.

I am calling this ICO model FACTS, for Fair and Compliant Token Sale.

Stepping back

Before I lay out the strategy, I would like to explain why creating a compliant ICO has been a challenge in the first place.

Most ICOs to date have operated under the presumption that the instrument being offered is a "utility token," not a security, to which SEC rules would not be applicable.

There is a strong point to be made here. However, there are certain assumptions that come alongside the utility token argument that most companies are not following.

These assumptions include:

  1. The product is launched and currently usable. Most companies do not have a usable version of their product available for tokenholders at the time of their ICO. It's difficult to claim that a token currently has utility when it cannot be used for several months or more.
  2. Tokens are purchased by the platform's users. Most ICO tokens are being purchased by investors seeking profit, not users of the underlying platform. ICOs also seem to fundamentally be a capital-raising activity, which would likely be under the SEC’s jurisdiction.

Many will agree that the pure utility token argument has holes in it, and when one looks at the regulatory risks assumed upon taking this approach, some crypto entrepreneurs begin looking for another option that is more compliant. Unfortunately, things don't get clearer or easier when one looks to the SEC's rules for workable solutions.

To that end, let's look at the idea of offering a "security token" that will remain compliant with U.S. securities laws.

Taking it straight from the dragon's mouth, "Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the securities with the SEC."

Unusable tokens

Let's start by tossing out the option of registering tokens with the SEC, as that would imply that a token is listed on a stock exchange, held in cold storage and no longer transferrable in the peer-to-peer realm.

This option also assumes that a company can even get its token listed on a public stock exchange in the first place. In short, registration with the SEC is not a viable route.

If a security token will not be registered, then it must qualify for an exemption. Most private token sales would fall under Rule 506(c) of Regulation D, which would restrict token sales to verified accredited investors and add transfer restrictions. Most ICOs today are already self-restricted to accredited investors, and when they are done alongside a Reg D filing, many people would suggest they have executed a "compliant" ICO.

Unfortunately, Reg D offerings come with additional baggage.

After the offering, a Reg D security token would have to comply with ongoing restrictions, including a 12-month lockup and a limitation on token transfers solely to other verified accredited investors, which would need to be monitored.

One may ask: How exactly is a token to be used in commerce when it can only be accessed by accredited investors? Should the use of decentralized software be limited to the wealthy? Reg D restrictions cause a token to become totally inaccessible by most people, and frankly, unusable in general.

We now find ourselves in a situation where we must choose between either creating a non-compliant utility token that is likely subject to securities laws, or a useless security token that doesn’t work in commerce.

The FACTS ICO model is a solution to this conundrum.

The FACTS approach

FACTS is a two-token ICO model that supports both crypto entrepreneurs and SEC regulators with a model that fits into current laws every step of the process.

The model utilizes two tokens: a security token and a utility token, each created within a two-part token sale, outlined below.

Part 1: A company creates a security token, which is offered to the public through an ICO. The ICO is filed with the SEC under Reg D and is restricted to verified accredited investors, who will all have a 12-month lockup period on their security tokens, which can only be transferred to other accredited investors afterwards.

This security token would give investors equity in the company (a cumulative 10% of the company in the form of non-voting stock might be a good industry standard), and it fundamentally gives investors a better deal in the ICO.

You may be asking how a security token solves any of the problems I mentioned before. Now for Part 2…

Part 2: Once the ICO is finished, the company then makes a distribution of utility tokens to its ICO investors in the form of a dividend, more specifically, a property dividend. The total value of utility tokens distributed to investors will match their investment amounts in the ICO (i.e. investors should receive the same number of utility tokens that they would receive in a typical ICO).

These utility tokens are not a security, and can be transferred or used by token holders at their discretion. While only accredited investors can participate in the ICO itself (which is arguably an investment subject to securities laws anyway), Part 2 of the FACTS method democratizes the use of utility tokens permanently thereafter.

Through the FACTS model, ICO investors receive two tokens for the price of one.

Furthermore, because utility tokens are distributed to investors in the form of a dividend, the FACTS model offers a clean series of transactions that fits within the existing legal framework.

Some final notes

After exploring many other structures and strategies for ICOs, I believe that FACTS is the only model today that can logically allow ICOs to become a more mainstream financing method.

Going forward, this model would benefit from affirmative guidance from the SEC, as well as further research on how it would apply in other countries with their respective securities laws. It would also be worth exploring whether Regulation Crowdfunding can be applied to the model to democratize investment into the ICO itself.

A final disclaimer: I am not a lawyer, this is not legal advice and you should consult an attorney before proceeding on any ICO methodology

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Analysis: New ESMA Regulations Likely to Reshape the Industry as We Know It

The new regulatory environment which European watchdogs have unfolded will change this business for the better

Unfortunately, as it many times happens, the mistakes of the few have impacted the many (or perhaps the other way around in this case, not so sure on this one). Unregulated brokers that have plagued the Forex and CFD trading industry, along with binary options brokers have prompted a drastic response on behalf of the supranational EU-wide industry watchdog.

The changes in short

Again… I am assuming you are not from Mars, but just in case Elon did manage to insert you inside the spaceman suit on that roadster, here are the changes to regulations in brief. Maximum leverage for trading FX has been cut to 1:30, indices and gold are at 1:20, other commodities are at 1:10 and shares are at 1:5.

Brokers are required to provide a negative balance protection and display clearly on their marketing message what is the percentage of their clients that lose money. Yes, exactly, that must read like something similar to: “come along and deposit some money with our brokerage, we hope you are not one of the 90 percent of poor folks that lose money.” (You might as well add a smiley face at the end, just for color.)

Impact for market makers

We are going to have a look at the impact on the industry from two different perspectives. The first one is that of brokers that are acting as principals and are internalizing their flow. The so-called ‘market makers’ are likely to get more materially affected by the changes mandated by the ESMA.

The reason for that is that such brokers are typically more reliant on direct marketing, trading incentives, and most crucially, their clients losing money. Higher leverage always means a shorter life-span for a retail trader’s account. Low levels of leverage are the preferred way to trade for institutional investors, where big drawdowns in the account balance are quite unwelcome.

Brokers have been offering high leverage to clients in order to lure them into the narrative that it is easy to make a lot of money with a relatively small deposit. The reality in the financial markets however, is that, as described by the ESMA, between 80 and 95 percent of retail clients are losing their deposits.

So when a market-making broker attracts a client with say 1:400 leverage, the likelihood that the holder of this account will be bust within three months is very high. A switch between fear and greed emotions in the brain chemistry is one of the most perilous enemies of a trader.

Trading the market is catering to these emotions and short bursts of dopamine when a trader is winning are driving their desire to trade more. Curiously, some social media users are experiencing precisely the same pattern that lures them into continuing to stick to that phone screen on the train.

The levels of leverage which the ESMA is mandating are automatically slamming the breaks on excitement levels. Suddenly a trader has to deposit $5000 to open a position sizeable enough to change one’s life. When previously $500 were enough, this makes a huge difference. Brokers will need to change their acquisition and retention strategy altogether to stay on top of their game when attracting clients.

 

Impact for STP brokers

After we established some of the potential risks for market makers, let’s focus on STP brokers. Straight-Through Processing (STP) is a different mode of operation for the retail brokerage industry. Such firms are not relying in any way on the losses of their clients, as the money in those accounts is flowing into the market.

The revenue of the brokerage is relying on commissions. The more trades a trader makes within their lifespan, the more commissions the brokerage is getting. As a result, we can deduce that such brokerages are keen on their clients not losing money, because they will stop generating commissions to the brokerage the moment they lose their balance.

Such brokers are typically more inclined to provide their clients with added value tools that can drive a mediocre trader closer to success. The ESMA’s new regulations are going to have an impact on such companies in two major ways.

The first one is trading volumes. Granted, broker trading volumes will register a decline, and probably, at least initially it will be big. Leverage restrictions, however, have had a mixed impact on other markets. In Japan, for example, the official maximum leverage of 1:25 has not impacted the industry in the long run as local brokers are posting the highest trading volumes in the world.

Capital requirements is another issue. All brokers are now mandated to provide negative balance protection and the FCA was one of the first regulators that suddenly realized that having firms with a capital requirement of a couple of hundred grand was no longer adequate. All STP firms are very likely to need to apply for a 730.000 euro ($900.000) license and prepare to meet the capital requirements that come with that.

Loss percentage disclosure (Ouch!)

Last but not least, I want to pay some explicit attention to a subject that has not been discussed enough. That is the disclaimer that every broker has to accompany their advertisement messages with a  line reading ’90 percent of our clients lose money!,’ or something of the likes.

The ESMA’s announcement has just created a great new incentive for brokerages and that is to attract the best possible traders. This will inevitably result in a paradigm shift for good practice in the industry. Suddenly attracting traders is not enough, brokers that want to remain in this industry for the long haul will have to attract the right kind of clients and strive to make their clients better traders all the time.

Not many brokers have been working in this direction, and even fewer have been successful in doing so. Education will no longer be an extension of retention. I am referring to a number of products that are branded as education but the only thing they do is confuse a trader even more and completely disconnect them from the reality of the market: it is very hard to make money trading.

I hope that many brokers manage to succeed in the quest to teach traders how to trade. It has been a long and hard way for the few that remain in this business. In the meantime, those phony educators that are acting akin to affiliates are now becoming something closer to a bad practice for every broker who is committed to having a good ratio of profitable traders.

As the final rules are published by the ESMA and as local regulators start chipping in with circulars, we will know more details. But for now, it is well worth thinking about how you are going to approach this brand new market starting from a couple of months from now.

Coinbase Acquires Earn.com In $100 Million Deal

Perhaps the best-known company in all of cryptocurrency has announced their first major acquisition. Coinbase has bought Earn.com, a startup that allows users to be compensated in digital currency for completing small tasks and responding to emails.

Coinbase Deal as Much About New Staff as it is the Acquisition of Earn.com

Recode reports that Coinbase has bought Earn.com for just over $100 million. Along with the acquisition, there are some additional perks for digital currency exchange too. The buyout will enable Coinbase to bring Balaji Srinivasan on board as their first Chief Technology Officer.

According to a blog post by Coinbase CEO Brian Armstrong, Srinivasan is “one of the most respected technologists in the crypto field”.

A brief look at his resume gives clear indication as to why Coinbase would want him to fill the role of CTO. Srinivasan holds qualifications up to PhD level in Electrical Engineering, as well as an MS in Chemical Engineering. These were awarded by Stanford University where he also teaches a variety of subjects. These include data mining, statistics, genomics, and blockchain courses.

Armstrong outlined the purpose of Srinivasan’s appointment in the post:

“Balaji will serve an important role as the technological evangelist for the company. Balaji will evangelise for both crypto and for Coinbase, educating the world and recruiting crypto-first talent to the company.”

The blog post seemed much more focused on the appointment of the new CTO than it did about the acquisition itself. That said, Armstrong did state that Coinbase would be expanding the Earn.com model within the crypto exchange. He went on to acknowledge the platform as a prime example of an early use of blockchain technology that had been able to “achieve meaningful traction.”

Conversely, a post on Earn.com’s news section expressed excitement for what the acquisition would mean for the platform itself. Under Coinbase, the company expects to be able to get “bigger and better”. This will better position them to complete their lofty end goal:

“If we’re successful in our long-term goals, we will be able to turn the billions of smartphones worldwide into a new source of work.”

Earn.com, formerly 21.co,  started out in 2013 as a Bitcoin mining hardware manufacturer. They’ve since rebranded in late 2017. The company now offers a service in which users are paid for responding to emails and completing small tasks such as surveys.

By using cryptocurrency to compensate their users, Earn.com can appeal to a truly global user base. They can pay people a small sum of money for their time, even if the user doesn’t have access to traditional banking infrastructure.

Week of 3/25/2018 Market Moving News

FOMC speeches will set the tone for the week. We are expecting USD to crash 1% or more tomorrow (Monday) 

 

This could be the breaking point for the S&P and even possibly the Dow

 

 

 

with FOMC speeches all week & GDP being published we may see some moment in the dollar 

 

 

As for Forex we see some great opportunities

EURJPY long (intraday type setup)
https://www.tradingview.com/chart/EURJPY/MUscO5YT-EURJPY-Long/

USDCAD short (intraweek setup)
https://www.tradingview.com/chart/USDCAD/SKv8FzvB-USDCAD-SHORT-overall/

USDJPY potential long (intraday setup)
https://www.tradingview.com/chart/USDJPY/gdO6NJC0-USDJPY-highly-active-potential-long/

AUDUSD double play. Shorting then longing (look at chart)
https://www.tradingview.com/chart/AUDUSD/T5AKBlCQ-AUDUSD-Major-Trend-Long-W-chart-Shorting-D-chart/

EURUSD keeping an eye out but not trading
https://www.tradingview.com/chart/EURUSD/9W0l7yu2-Not-trading-EURUSD-for-now/

 

Dollar Remains Slightly Lower after U.S. Jobs Report



Investing.com - The dollar remained slightly lower against the other major currencies on Monday after Friday’s U.S. jobs report tempered expectations for a faster rate of rate hikes by the Federal Reserve this year.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was at 89.94 by 10:13 AM ET (14:13 GMT), down 0.13% for the day.

The U.S. economy added 313,000 jobs in February, the Labor Department reported Friday, but average hourly earnings rose by just 0.1%.

The strong jobs growth boosted risk appetite, while the slowdown in wage growth dampened expectations for four rate hikes by the Fed this year, a negative for the dollar, which tends to become more attractive to yield-seeking investors when borrowing costs rise.

The euro was little changed, with EUR/USD last at 1.2310 after rising as high as 1.2341 earlier.

Sterling pushed higher against the softer greenback, with USD/GBP climbing 0.27% to 1.3889.

The pound’s gains were held in check amid fears that an upcoming Brexit summit meeting later this month would fail to secure a transition arrangement.

Sterling was higher against the euro, with EUR/GBP down 0.2% to 0.8863.

Against the yen, the dollar was lower, with USD/JPY down 0.24% to 106.54.

Demand for the Japanese currency was boosted amid concerns over a cronyism scandal linked to the country’s prime minister and his wife involving the sale of public land. The safe haven yen tends to rise in times of market uncertainty.

Market Snapshot – Dollar Weakening Continues

The euro rose higher during the course of trading today as the dollar weakness assumed larger proportions during this period and we saw the dollar weaken all across the board. We are likely to see this weakening continue for the rest of the trading session as worries about the tariffs imposed by the US continued to dominate the headlines and weaken the dollar. Not only would these tariffs increase the domestic costs of cars and other items that use these metals, it would also lead to a large possibility of a trade war breaking out between the global economic powers and this is not good for any country for that matter. This has led the stock markets lower and this is likely to keep the dollar weak as well. Just when it looked as though the dollar would be able to make a major bullish run, we are seeing the euro about to close the week above the 1.2240 support region and this should help the bulls regain control.

In the crypto markets, the BTC prices have once again lost touch with the $11000 region and with the weekend closeby we can see the action begin to wind down in a slow and steady manner. The market is open during the weekends but we doubt whether the bulls would have the power to push the prices higher by too much over the weekend and this is likely to lead to consolidation and ranging for much of the weekend. The traders were hopeful that the bulls would be able to establish control atleast over the next few days but that has not happened so far and we believe that the price action is likely to be even more choppy in the coming days as the prices swing on either side of the larger range between the $10000 and the $12000 regions so far.

Market Snapshot – Traders Tread Cautiously on Hawkish Fed

Stocks Move Lower

The stock markets have been trading in a cautious manner over the last few days as the Fed has been more hawkish than what many would have expected it to be. The focus over the last 24 hours has been on the FOMC meeting minutes that were released yesterday. After some initial confusion over how it needed to be interpreted, the traders realised that the Fed meant business and that it could be possibly even 4 rate hikes during the course of the year depending on how the incoming data from the US pans out. This kind of hawkish language was not something that was expected at this stage from the Fed and this has led the dollar higher and put the pressure on the stock markets. The increase in interest rates could make taking loans a costly affair in the US and hence this is likely to affect the stock markets in the medium term. This is one of the reasons why the stocks are under pressure and the traders are trading carefully with the next bearish leg just around the corner.

Cryptos Hit by Losses

In the crypto world, we are seeing some all round losses with the BTC moving below the $10,000 region after scything through the strong support at the $10,400 region which had been holding up the prices till yesterday. The ETH prices have also dropped below the $800 region as of this writing and it can be said that these losses can be seen all around the markets. There have been no specific reasons that can be attributed to the drop but as the markets begin to mature, we have to try and see how the different markets and instruments operate in co-relation with each other in the short and medium term. The last couple of days has seen some solid strength in the dollar and the prospect of quick rate hikes in the US and this could be affecting the demand of the cryptocurrencies. The traders need to wait and see if there is a pattern emerging out of this.

 

Global Equities Struggle after Fed Report, Wall Street Reverses Lower

Global equities have sold off this morning. The Nikkei Index declined by more than a percent, and the Hang Seng fell nearly 1 and a half percent. European equities have also produced selling. French Consumer Price Index statistics were lackluster with a result of minus 0.1%. And a German Business Climate reading missed its estimate. Wall Street was positive most of Wednesday, but upon investors digesting the Federal Reserve’s Meeting Minutes the three major indexes experienced strong momentum downwards. Wall Street is expected to open with further headwinds per indicators coming from the Futures Markets.

U.S Dollar Reacts in Strong Fashion, Disappointing U.K Business Sentiment

Forex has provided pure fireworks the past day. The U.S Dollar became stronger late last night as investors began to react to the renewed prospects of a few interest rate hikes in the States. The Pound and Euro have been trading relatively calmly the past couple of hours, but remain below yesterday’s higher values. Second Estimate GDP results came from the U.K this morning and were slightly below expectations. And a Business Investment survey, also from Britain proved disappointing. The Yen has been slightly stronger as risk adverse trading dominated Asian equity markets today.

Near-Term Appears Vulnerable to Gold, Steady Decline and Headwinds

A strong reversal took place for Gold late on Wednesday. After initially gaining upon the Federal Reserve’s report, the precious metal began a steady decline and headwinds have continued. Gold is near 1321.00 U.S Dollars an ounce and looks vulnerable for the near term.

Canadian Retail Sales Statistics, Weekly Unemployment Numbers from the U.S

Crude Oil Inventories data will come from the U.S at 16:00 GMT and could provide insights for commodity traders.

  • 13:30 PM GMT Canada, Core Retail Sales
  • 13:30 PM GMT U.S, Unemployment Claims
  • 16:00 PM GMT U.S, Crude Oil Inventories