Blockstack's A+ offering
our first look at a regulated token sale
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Earlier today news broke that Blockstack had received the green light from the SEC to conduct a a $28 million token offering under Reg A+, a “mini IPO” that allows issuers to sell up to $50 million in securities to both accredited and non-accredited investors in the U.S.
While traditionally reserved for equity issuances Blockstack is pioneering the use of Reg A+ to distribute tokens while complying with existing regulations. With the inclusion of non-accredited investors Blockstack has reversed the trend of only accredited (i.e. wealthy) investors getting access to early deals and puts tokens in the hands of what will ideally be the platforms end users.
For those that aren’t familiar, Blockstack is building a privacy focused network and application ecosystem that allows users to control their data instead of storing it with app providers. The project started in 2014 as Onename, a decentralized user ID system, and has since expanded into a full network of over 120 apps. (for a deeper look at Blockstack you can check out our profile)
Powering the network are Stacks, tokens that provide a similar functionality to ether on the Ethereum blockchain. While representatives at the SEC have stated that ether is not currently a security, it likely was at the time of issuance. Blockstack seems to be approaching things the same way by using the Howey Test and SEC framework to decide that Stacks are securities now…
but have the potential to lose that designation if the network becomes sufficiently decentralized.
How sufficient decentralization is measured remains unclear, even from the SEC, and raising funds to pay in-house developers makes it hard to imagine when this would be achieved.
The total offering size of the Reg A+ will be up to $40 million. In addition, Blockstack is running a Reg S for non-U.S. investors that could bring in another $10 million. Tokens will be priced at $0.12 for early supports who hold vouchers and $0.30 for the general public. Reg S participants are being offered tokens at a discounted price of $0.25 to compensate them for a regulatory-related one-year lockup that will be coded into the blockchain. Reg A+ investors will receive tokens over a 24 month period, again based on blockchain logic.
Despite the $40 million value of the Reg A+ offering Blockstack will likely see closer to $25.2 million hit their account. Issuance fees are expected to be $2.8 million, $1.5 million of which are legal costs. Accounting standards require Blockstack to value “app mining” tokens at the offering price, even though they are not being sold but will instead be given to top app developers over time knocking another $12 million off the total. Any new issuance, including mining on the eventual Blockstack blockchain, could fall under this rule requiring Blockstack to value and account for these new tokens.
This is a bit of a catch-22. If the token appreciates to the point that new mining rewards trigger the annual $50 million fundraise threshold the team will need to restrict mining (impossible idea), fork the protocol to stop inflation (bad idea), or file an S-1 with the SEC (expensive idea). We have yet to see any platforms run into a similar conundrum, so it will be something worth focusing on.
Investors can expect some early issues as well due to Stacks status as securities. Liquidity will likely be low to start as U.S. crypto exchanges are unlikely to list Stacks due to regulations.
Globally this is less of a concern and on a positive note a hot issuance could accelerate the growth of SEC approved alternative trading systems like OpenFinance, Templum, and tZero.
While a $28 million offering is far from what some projects raised in ICOs, and even less than the ~$47 million Blockstack has already raised through private placements, the results will have an outsized impact on the crypto ecosystem. After what was likely a year long and expensive process we will get to see how a compliant token sale is conducted and how the SEC deals with the nuances of tokens and blockchain networks under its purview.
The sale starts tomorrow and whatever happens Blockstack deserves props for trying to democratize its token issuance and pushing things forward for U.S. based crypto users.
-Eric
Interested in learning more about Blockstack? We will be hosting a live AMA with the team on Friday July 12th at 10:00 AM ET. Join our Telegram group to get you questions in and join the conversation.
P.S. Have questions? Want to troll us? Let us know on Twitter.
Messari Compression Algorithm
Content and thoughts from around the web as summarized by the Messari team.
🤔 [Analysis] FOIA documents reveal cryptocurrency guidance has not been a priority for the IRS - James Foust (July 2019)
A Freedom of Information Act (FOIA) request by Coin Center revealed the IRS had significant unanswered questions with its own 2014 crypto tax codes. Questions like how to calculate the fair market value or triggering external agency reporting have yet to be addressed. IRS Commissioner Charles P. Rettig told Congress that updated guidelines would be released in June, guidelines that have yet to be released. As Coin Center notes, the ambiguous rules have crypto investors becoming unintentional tax cheats. The FOIA only adds to frustration with the IRS. (share or read more)
✋ [Analysis] SEC, FINRA issue explanation of crypto custodian approval delay (July 2019)
The Securities and Exchange Commission and the Financial Industry Regulation Authority (FINRA) jointly released an explanation on crypto broker-dealer approval delays, citing the novelty of digital asset trading. Under the Securities Investor Protection Act (SIPA) of 1970, broker-dealers must have methods of recourse for troubled trades that cannot exist within the realm of digital assets. Until recourse issues are resolved, delays should be expected. As the explanation states, “whether a security is paper or digital, the same fundamental elements of the broker-dealer financial responsibility rules apply.” (share or read more)
Quick Bits (Don't read that, I read it for you)
Choke Points (Exchange News)
😬 Stolen Binance funds are on the move again with 707.1 Bitcoin ($BTC) worth $8 million split over two transactions today. Binance's May 2019 hack cost the exchange $40 million at the time now valued at $83.5 million. The spider web of hacked fund transfers points toward the hacker seeking a cash out method. (share or read more)
👩💼 Coinbase is in talks to set up its own regulated insurance company with the help of Aon, industry sources told CoinDesk. Coinbase and Aon see this structure as potentially part of the answer to the shortage of insurance available to crypto exchanges. (share or read more)
Startup Signals (ICOs, Cryptos, and Startups)
💰 MakerDAOs ($MKR) first $1 million Dai ($DAI) loan was conducted in late June with MakerDAO expecting more to be on the way. “I would not be surprised to see a $3 million mint by end of the year,” MakerDAO's Joe Quintilian, “Minting high dollar amounts has been steadily increasing over the past year.” Ethereum's ($ETH) steady price rise is speculated to be behind the action. (share or read more)
🕹 Overstock.com's tZERO is set to tokenize its first project, a biopic of Atari founder Nolan Bushnell: 'Atari: Fistfull of Quarters.' Overstock's CEO Patrick M. Byrne commented on the project, arguing the project will "bring much-needed transparency and accountability” to Hollywood. tZERO's subsidiary Vision Tree will distribute the tokens, dubbed 'Bushnells.' (share or read more)
The Powers That Be (Legal/Reg/Policy)
🏛 A 2018 crypto 'safe harbor' bill that stalled in the U.S. House of Representatives Ways and Means Committee has been reintroduced by Rep. Tom Emmer (MN-R). The bill would issue tax clarity on forked digital assets and protect investors who incorrectly filed or failed to file on forked assets. (share or read more)
📱 The IRS may use Grand Jury subpoenas to access crypto information stored by tech giants such as Apple, Google, and Microsoft, according to Twitter user Crypto Tax Girl. The information was presented to IRS personal in the Criminal Investigation unit, although the documents could not be confirmed by CoinTelegraph. (share or read more)
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