How Blockchain Can Help You Fund Your Startup

We are streaming live today for our blockchain webinar. We are super excited to be here with all of you. Do jump in the chat and let us know where you're watching from. We've got hundreds of people from all over the world joining us today, which is super exciting. David, Brent, Katiana, hi, good morning everybody. This is great, so glad to have you all here. I just wanted to let you know that we are going to do a couple of quick housekeeping announcements and then we'll jump right in. So The first thing I wanted to let you know, my name is Catherine. I work for Founder Institute HQ, and I'm here to support Michael through this webinar. So I will be in the chat as Founder Institute. That's me when you see that pop up, and please do ask us questions. So Michael's gonna give us an awesome presentation for about 45 minutes, 30, 45 minutes, and then we'll use the remaining time to go through your questions. Wow, you guys, the chat is flying by. This is amazing. Welcome everyone. This is fantastic. So please do pop your questions into that chat. One note about questions. When you do, in that little text box at the bottom where you type in, in the upper right corner of that box is a little three dots called chat. And when you click them, you have the option to say, mark as a question. Please do mark your questions as questions or else I'm gonna have a hard time keeping up. So help me out and get those in there. That would be great. Max, chemo, Marcus, awesome. Brazil, you guys, this is awesome. Everybody's coming in, great. Love it. All right, so the last thing is if anybody has any audio or video problems, there is a reconnect button. For most people, it'll be across the top of their screen. Give that a try. It fixes 99% of your connection problems. So if you have any other problems with that, just go ahead and message me privately in the chat and I'll help you out. Without further ado, I am super pleased to introduce the founder and CEO of 10XTS. He is the leading industry expert for regulation-compliant initial coin offerings, and he's helping startups from all over utilizing blockchain technology to help fund their startups. Mr. Michael Hiles, welcome, Michael. So great to have you here today.

Thank you, Katherine. Let me get set up here and we'll get started.

Fantastic. And I'm going to sign off and I will see all of you in chat, and Michael will get the slides going. Thanks so much, guys.

Super. Thanks everybody for attending today. It's awesome to see literally hundreds of people on here. This is great. So So we'll get started. I'm gonna turn my camera off because we've got some slides that I want to make sure we have a little content on. So we'll get started here. So hi everyone, welcome to Hacking Startup Funding with Blockchain. My name is Michael Hiles and I am the CEO of 10XTS. It is truly my honor and privilege to share with you today. My passion in life is really helping startup founders realize their goals as innovators and creators of value. So who is this for? Let's talk really quickly about who this session is targeted towards. It's in short, this is for startup founders and teams who are trying to raise capital investment to fund their company. So if you're a founder, an advisor, or even an investor in a new startup, this session is for you. Now, I want to be clear, this is primarily for US-based startups today because of the specific legal and regulatory concepts that we're going to discuss around some of the securities laws. But without question, the things I will discuss also applies to startups around the world. Just depends on the securities laws and your legality. So in the next hour, I'm gonna show you how to leverage the changes in the blockchain world, raise capital for your company in a legal compliant way. One of the big topics that we're going to cover today is the underlying problems in early-stage capital and why early startups are having a hard time raising money from investors. The second thing we're gonna discuss is some of the newer alternatives to venture funding. In particular, we're going to cover some of the crowdfunding legislation in the United States and how even it is still an emerging space. Of course, we're here to discuss how blockchain is starting to disrupt the early-stage capital markets, especially the evolution of initial coin offerings and the move away from what everybody kind of refers to as the Wild West of ICOs or initial coin offerings. The fourth thing that I'm going to discuss today is that move from the Wild West is in part due to the scrutiny and the focus of the regulators and what kinds of risks this really presents to startups who want to sell security tokens. The fifth thing is I'm just basically gonna spell out the step-by-step roadmap for success. You guys kind of follow our game plan. We're out blazing the trail as a company on multiple fronts. So we're looking to help you guys leverage these things to raise money for your startup, even if you're not a blockchain company. I want to make that clear. This certainly has applied to blockchain software companies, but we're literally talking about the evolution of venture capital into the tokenized space and how literally any startup can leverage blockchain frameworks to raise funding in a legal and a compliant way. Real quick though, I want to make sure that we're clear on what this session is not about. So this is not a technical primer in cryptocurrencies or blockchain technology. Blockchain literally covers a lot of ground from data to math to programming. And the technology has been around now for 10 years, literally a decade. And there are a lot of great resources online to learn about the ins and outs of various aspects of the blockchain technology stack. So we're really not gonna take a deep dive into the tech today. This session is also not to be considered legal or accounting advice by any stretch of the imagination. We're only gonna cover these topics from a strategic level. Any specific questions relating to your specific personal situation should be covered with your counsel and advisors. So do these things sound like you? Before we dive into these things, I want us both to be clear on where your business is at right now. Be honest with yourself and really think about the answers to these questions because it's really all— it's ultra important. So bootstrapping is great, but it's not always feasible for a lot of startups. So are you worried that you won't be able to fund the development of your vision if you aren't able to raise capital? Do you feel like there's an invisible ceiling on your success because you aren't sure if you can raise money to fund your company? Most venture capital is invested in a few big regions like Silicon Valley and New York. Are you concerned because you live in an area where venture capital and investor access is very limited? And here's a big honesty moment. This is one that, you know, certainly has affected me, a personal moment here, but do you secretly get annoyed deep down inside when yet another news flash announces some other startup raising a huge amount of money, right? So it's startup founder envy here a little bit. And if you do get the chance to talk to investors, do you come away like kind of upset because they floated a terrible term sheet and they want you to give them too much equity, right? So, you know, this is really what I want to key in on today. Now, real quick, uh, Catherine did a great job of introducing me. But who am I, right? So, or more importantly, why should you listen to anything I have to say about all this? So my specialty is innovation and helping new ideas get launched into the market. I'm a lifelong serial tech entrepreneur. I launched my first web development company in 1994, and now I'm the CEO of Tenextia, a blockchain development software company that I started putting together a couple years ago, actually. So because of all of my work with startups and early-stage VCs, I actually became the director of Founder Institute Cincinnati. So I'm a director of a regional chapter, and I actively mentor startups not only in my regional ecosystem, but now all over the world. I'm also the general partner in a venture fund dedicated to investing in blockchain and crypto. So enough about me, let's kind of get to it. That first thing we were gonna talk about today, first big area I want to discuss is why is it so hard for founders to raise early-stage capital for their startup? So I like to also call this section how venture capital is broken. So let's take a look at a few numbers. First of all, let's talk about who can and cannot invest in startups. The United States and other nations around the world, they've established guidelines for who may invest in higher-risk securities like startup equity or debt. The term for this person is an accredited investor, which is someone who has a net worth of $1 million or more over and above the equity value of their primary residence, or that person has earned $200,000 per year for the previous 2 years, or $300,000 as a household. This means the average working-class person has traditionally not been able to put money into startups. So in the United States today, there's approximately 2.1 million people who are legally allowed to invest in unregistered Regulation D securities, which are the most common forms of funding vehicle for startups, like equity or convertible notes. But according to the National Venture Capital Association, the NVCA, uh, only around an estimated 370,000 accredited investors actually did put money into startups, uh, uh, in 2016. This means we're starting with an incredibly small pool of individuals who are actively investing in early stage. The troubling part of all this is nearly all innovation and new companies are in the hands of a very tiny percent of the population who actually can help make it happen. But, you know, there's at the same time a backlash on this. According to the Kauffman Foundation, one of the biggest industry groups that tracks entrepreneurship, they identified in 2016 almost 6.5 million new startups were launched in just in the United States. But the Angel Capital Association, another big early-stage funding group, reported that only around an estimated 71,000 of those new startups actually received funding, which is around 1%. Now certainly most of those businesses either didn't qualify for funding or they didn't need it. So maybe a lifestyle or a services business. But, you know, I wonder, one has to wonder if like the next Google or Tesla died because of lack of access to capital somewhere in that mix. So according to CB Insights, at the end of 2017, seed stage investing, you know, very earliest of stage investing, declined to a 5-year low of around 27% of all venture funding deals. And that was a significant drop from 2016 at 32%. What used to be seed-stage capital in the angel space, they're now waiting for more mature companies. And investors are moving their money downstream into later stage. So why has there been such a decline in that earliest stage of angel and venture capital? And it's already a small pool of individuals, right? So there's two primary reasons. First, we can't get around the failure rate of startups. Startups fail. That's one of the great things about Founder Institute. Adeo and Founder Institute's mission is to try to improve the lasting companies and improve on those actual metrics. Now, the second big issue is the illiquid nature of startup investment. It's not easy to get your money back out of these things. So now let's talk about failure rates. In general, venture capital returns are not necessarily all that great. When investors are putting their money into startups, they already consider that most of their portfolio is either not gonna return anything at all or at best return the initial principal. So almost 65% of investments from VCs either lose or just simply return the initial money. I joke around with like my VC friends that the only venture cap— only in the venture capital industry is a 100 batting average considered a successful success rate, meaning that only 1 in 10 investments actually do extremely well. The rest are either flat or they're ultimately losers. But in all seriousness, this means that an average investor must make the same number of investments in startups to see the same kinds of success rates of 1 in 10. Now, we're talking about having to not just put a casual $25,000 or $50,000 into a random startup, but literally treating our startup investing like a VC portfolio where you need 10 investments to see a significant return. So, this puts it at like $250,000 to $500,000 an individual must put into alternative asset classes. So from an investor perspective, if they allocate alternative investments as a percentage of a balanced portfolio in the safe range of like, say, 5% asset allocation, a person's really got to have $10, $20 million or more to play the game very well. Now you're really narrowing the pool of people who can put money into startups and, you know, make a decent regular return. So big issues right now. The second big thing is startups are illiquid. Aside from the failure rates and the flat returns, the other big factor is the illiquid nature of startup investments. Liquidity is the degree to which an asset or security can be quickly bought or sold in a market without affecting the asset's price. Higher liquidity alleviates the trade-off between the price an asset can be bought and sold for and the speed of its sale. So this is the degree to which an investor must wait to get access to the cash that they put into a deal. And in the case of startups, it can really be a very long time. Because it's such a long time, if an investor wants to get out of an investment early, assuming they can even find a buyer for that security, the discount they must be willing to accept can also be very high, as much as like nearly a third of the actual value of the overall investment. So it's like a huge discount. So where public shares in a company can be bought and sold within a few seconds, it may take years for a startup investment to show any return or even find a buyer at a reasonable price before the investment's freed up in what's called a liquidity event, right? So you can see on this chart the length of time between transactions for different types of assets. Startups typically are in the range of 5 to 8 years. So when you look at like the median time to exit in years, you know, look at the hard number, it's literally like for a strategic acquisition, 5.1 years to nearly like 7 years for a public offering. It's even higher for a private equity type of a buyout. Now, this is a really long time to wait for an investor, and the prospects of taking such a heavy discount to sell out sooner really isn't all that attractive to most investors. Investors. Now, with the amount of venture capital available that's looking for the lower risk of later startup deals, later stage deals, companies are able to stay private much longer. So for example, in 2017, the coworking space real estate company WeWork, they raised a G round of $760 million. Now, with that kind of capital available to later stage companies, there's no reason for a founder team or a company to take on the overhead of all the regulation of going public. And this kind of situation further extends the time that early investors have to wait to get their money back out of a deal. One of the primary ways early investors and employees are able to get liquidity in startup companies is through initial public offerings. But due to regulatory compliance, IPOs have become so expensive. It's like an estimated $3 to $4 million to actually go public, and then at least $1 million a year in legal and auditing overhead to maintain the compliance in the reporting required by the Securities Exchange Commission and FINRA. As a result, most emerging companies are choosing to stay private longer and longer and longer and longer. So of course, now there are other factors, but when you look at the market from the average investor's vantage point, you can really easily see why it's harder for startups to raise early-stage capital. So no matter how awesome your deal might be, you are fighting against big market forces that put you at a huge disadvantage when trying to raise money for your company. All right, so what are some of the newer alternatives to venture funding? So let's discuss some of these newer forms of funding that have recently emerged. For startups and investors. So traditional forms of startup funding are usually in what's called a Regulation D security. Regulation D is the exemption from registration with the SEC under the law, but these are instruments that can only be bought by what we talked about earlier, accredited investors, right? These instruments are things like shares of equity in the company, a simple agreement for future equity, also known as a SAFE doc, or convertible notes. Aside from only being available to accredited investors, the other important thing that I really want you to understand about these securities going forward is that investors are restricted from selling their position for 12 months after their initial investment. So that lockup really slows down the trading, and it's very limited. Uh, it's back to the liquidity issue. So in an effort to alleviate some of the difficulties in startup investing, Back in 2012, President Barack Obama signed into law the American Jobs Act, which stands for Jumpstart Our Business Startups. Now, the new law did several things, but most importantly, it created a way for startups to run what's called crowdfunding campaigns that permit average, non-accredited, just working-class individuals to invest a limited amount of money into early-stage companies without requiring the founders to actually register as a public company. Now, the first part of the JOBS Act is the creation of Regulation Crowdfunding, or what's called Reg CF campaigns. This permits a startup to raise up to $1 million through crowdfunding efforts, a lot like a Kickstarter, right? This part of the law went into effect in 2016, and it has grown in popularity, but the United States has been far behind the rest of the world when it comes to early-stage equity funding and crowdfunding platforms. Now, Reg CF campaigns, they are open to non-accredited investors who can put in a small amount of money to help fund a startup, right? There's also a minimal registration requirement, and it does carry a minor amount of reporting to the SEC. So Reg CF campaigns are executed through authorized crowdfunding portal companies, like for example our friends in our region. Marvin Abrinica is the CEO of a Reg CF portal called Wonderfund. These portals are registered with the SEC and FINRA, the Financial Regulatory Authority, and manage the individual crowdfunding projects, the investor registrations and the distribution of the funds. Now the portals typically take a fee based on the amount of money raised, similar to a broker-dealer who underwrites the traditional securities, right? So there's a drawback to Reg CF though. The law did not adequately take into consideration the same liquidity issues and secondary market trading of shares by investors. So in essence, when an investor puts money into a Reg CF campaign, they are literally locked up for the entire life of of the investment until the company has another liquidity event. So there's no secondary market trading later on down the road, very minimal. So while this may be okay for the founder, it's not necessarily a great deal for the investors. So it's back to that investor liquidity conversation, right? Investors may want access to that cash before that same 5 to 8-year window that we talked about earlier. Now there is some good news, right? The JOBS Act also expanded a class of filing called Regulation A or A+. With a Reg A filing, a company may raise up to $50 million in a single calendar year through the registration and sale of their securities. However, this requires a more detailed registration process and a lot more upfront auditing, which adds to the cost of the campaign. In fact, it is considered a mini IPO, and companies can even opt to complete once they're done with it, like the additional requirements necessary to list on the over-the-counter markets or even public exchanges like NASDAQ, if they would want to go through a full-blown audit back to the $4 million level, right? Now, the great part about a Reg A issue is that the general public is allowed to participate and buy the securities and immediately trade them in secondary markets after the fact without any kind of restriction. So while it's still relatively new and unproven in the United States per se, on a global scale crowdfunding is actually expected by itself to just pass up venture capital in terms of amounts of money raised and popularity. As a general concept, it represents the democratization of capital is what I kinda look at in the opportunity for the average person to share in wealth creation that's ultimately on par with the big financial institutions. So let's talk about how blockchain has disrupted the early capital, early-stage capital markets. Now we've laid some groundwork, you know, let's dive into the disruption that's taking place. First of all, we need to discuss a concept that everyone's probably seen or heard about in the media by now, an initial coin offering or ICO. It has also been referred to as an initial token offering or a token generation event. And this is a special kind of crowdfunding method that has been used by startup blockchain software companies mostly to fund their efforts, right? So there's 3 main types of blockchain tokens. Before we go into how a token sale works, let's discuss the 3 primary types of tokens or coins. The first, you have currency tokens. Now these are like Bitcoin, Bitcoin Cash, Litecoin, Monero. These are the tokens that represent the basic stores of value that can be transmitted, the cryptocurrencies, right? They're also in like a proof-of-work type of consensus environment. They're the primary reward for the miners who are maintaining the ledger and all the transactions on the blockchain. So now it's important to note that these coins have repeatedly been considered commodities by the CFTC and other regulators like the IRS for tax purposes in the United States, which is why there's less overall concern about cryptocurrencies in the general blockchain space. Now next we have probably one of the more controversial token types, utility or an application token. Now, this is a hybrid type of a coin. So they do have a store of value function in that they're traded on a market basis, meaning they do carry a value based on market economics of supply and demand and general market forces. But they also have an intrinsic function within a blockchain software application. So these are typically used to unlock features in an app. Or pay for fees that are associated with the use of a platform that only accepts that particular type of token as payment, for example. So examples of these are like, of course, Ethereum, right? The big one. Storj, Gollum, Basic Attention Token. You know, these are other coins that are only useful when using that particular software platform. Now these are the most controversial of all because of the questionable legal status of whether or not the regulators are viewing these tokens as securities based on a lot of different factors. This brings us to the, the third primary token. The third classification is a security token, which is a blockchain token or a coin that simply represents some other underlying real-world security or asset. Now these are really emerging as a means of, say, efficiently fractionalizing and tracking ownership of that real-world asset. So examples are like the Science Token, right? The Science Accelerator in Los Angeles. Blockchain Capital Fund, they were one of the first to do it, to actually raise an LP or a fund using crowdfunding and a blockchain token sale. And even like the recent 500 Startups project, the 22X Fund, right? Jonathan Leal, he's got the 22X Fund launch that represents ownership in the funds or the portfolio companies that they hold. Now, it's really important to understand that these are indeed tokens which represent actual securities, and these tokens must be treated in the same way that the security itself from an ownership and trading standpoint is treated. So these tokens are really what we're gonna focus in on here in just a little bit. So now let's talk about how a token sale works. Now that we've discussed the 3 primary types of blockchain coins or tokens, let's run through the process of an ICO or token sale. So first, a project or company creates a specialty token. In the past, these have been mostly blockchain software startups. These have principally been the utility type token sales. They're generally developing a token that's used as a utility or application. Then this token is specific to the platform that they're developing, and they launch a crowdfunding campaign to contributors or to investors. Then the investors in a campaign will send an amount of value in the form of an actual currency token, most often Bitcoin or Ethereum, to the company. And this is either sent directly to the company or sent through a special blockchain-based application program that runs on the blockchain called a smart contract. Now in return, the investor receives a corresponding amount of the specialty utility token that gets converted at like market spot prices. So the value of Bitcoin is say $8,000 when they send it to the company, and the specialty token is being sold at $1 each, the investor is going to get 8,000 of the project utility token for a whole Bitcoin, right? So then the company funds the development of their project and, you know, pays for salaries and, you know, all of the fixed overhead things by selling the currency tokens off on the open market in exchange for actual fiat dollars and currency to pay for pretty expensive, right? All right, so that should explain, and I know that's a lot, right? It's a bunch of stuff, but if you guys have any questions, feel free to fire them off into the chat, because I know talking to me is like drinking from a fire hose sometimes. So let's talk about how popular just token offerings happened. I mean, it was all over the media last year. But if you look at funds raised in ICO projects in 2017, they literally raised $6 billion globally in 2017, right? 2016 was $100 million, $94 million, and it went to $6 billion in a single year. So huge, massive growth in the entire space, around last year's activity. Now, most of these have been like the Wild West style ICOs, right? So now the regulators are leaning in and we're gonna talk about those guys here in a second. So already in 2018, by like mid-March, we'd raised like $3.1 billion, even with the regulators leaning in, right? It's still going on. And now I'm seeing numbers that it, After closing out first quarter, it's more on the par of like last year's numbers already this year. So for every 6 Series A deals back in October, for every 6 Series A deals, there was an ICO. So not only had ICO projects passed up seed funding numbers, right? They're moving literally in on not only actual seed formal rounds from VC funds, But we're moving in on Series A type rounds. Massive amounts of money went into it and continue to go into it. So when you look at the venture capital side, for example, there's funds that are being raised just on the VC side, and the funds are putting a phenomenal amount of money into the actual crypto space, the startups, every VC I talk to is now thinking about how do we tokenize? How do we actually launch a new fund by selling a security token as an LP? So why are these things so popular, right? I know it's obvious that, you know, these things have taken hold, right? The structure, you know, especially given the nascent aspect of the emerging technology, It's really interesting. So fast capital raises for startups, that's like the duh moment, right? That's right. From a startup perspective, token sales are awesome because they represent very quick direct access to the market for raises, for capital formation. And there's no broker or intermediary to deal with. And in the case of blockchain software startups, selling a utility token represents non-dilutive capital. That means that you're not giving up equity in your company as a utility token. That's part of the controversy that's going on right now with the regulators. And so for investors, they're actually putting money into startup blockchain projects. Tokens represent a solution to one of the big problems that we discussed earlier— liquidity, right? So tokens are easily tradable either directly or via cryptocurrency exchanges immediately when they're listed. So an investor looking at the landscape can still get the opportunity for returns through the growth of the value of the tokens without necessarily locking up their capital for that terrible 5-year wait, right? So the other thing is that it demonstrated the demand for early-stage investment on a global basis. It's become easy for people all over the world to move their money around into projects that they like or they believe in. It's pretty easy for somebody in Japan to buy into a startup in South Africa with tokenized blockchain investing. The other big thing that it represents is global capital mobility. The technology has enabled the movement of money around in ways that we've never imagined before. In fact, these are the things that are making the regulators and the central banks and the governments nervous because they see that global mobility and they're going to have to figure out how to manage it and deal with it. So the other big thing is I want to discuss is that security token. Now most of the ICO projects to date have been utility token sales by blockchain software startups. However, one of the next big waves of token sales are actually coins that represent those underlying securities in non-blockchain companies. Now this is where a company can issue tokens that represent equity or debt in their project, but instead of everything being on paper contracts, the raise itself is conducted through the same kind of process as an ICO. The investment is sold to investors in the form of the tokens that get held in their actual wallets on a blockchain. So now let's talk real fast, 'cause this all sounds great, right? You know, hey, let's go smash and grab and raise a lot of money. Let's talk about some of the risks that are being discussed right now. So all sounds great. There's a lot of uncertainty facing the industry, which brings us to this fourth major topic that we need to discuss. So first of all, blockchain itself, has a very notorious reputation of having slow network latency. So there's a problem with a lot of that, the public frameworks that are out there. You may have seen or heard about the network latency and slow confirmation times for transactions with Bitcoin and Ethereum, especially like when there's peak periods of volume. There's a lot of discussion and controversy about how to speed up these networks. And these are really legit issues, right, for blockchain platforms if they're ever going to move into enterprise-grade types of implementations that are as truly secure and hardened as, you know, financial system requires. So the other big problem, if you're a crypto trader like myself and other people, you know, getting fiat currency in and out of a blockchain are, yeah, that is a nightmare, right? Many banks have rejected cryptocurrency trading and closed accounts that are just simply attached to the crypto exchanges account. So, you know, I'm fortunate that I bank with a bank that doesn't mind that I buy things on Coinbase, right? But the banking and the licensing laws have been very difficult for companies trying to get into that space and figure that part of it out. So the other big problem, third, you know, I'm sure you've seen in the news media if you follow the space, there's been a lot of high-profile hacks of centralized trading exchanges in particular, which has resulted in the losses of millions of dollars in stolen currency and utility tokens. And it's because these centralized exchanges are big targets for hackers who can get away with a huge haul. All they have to do is hack a single stack and they can get away with $400 million worth of tokens. The other is just simply outright scams. This is where I'm not necessarily a popular guy in the crypto space that's anarcho-capitalist and likes the Wild West approach of it. But I've also seen victims of people who have actually been fooled into investing in garbage projects. Due to the global nature of the public crypto space, There's been a bunch of these things that just ended up being nothing but exit scams, and they never had any intention to launch anything at all. And this is where I am a proponent of saying, if this technology is going to be useful and persist, then, you know, where regulation is light, bad actors have moved in, and it's never going to gain the legitimacy that it deserves until we figure this out. So, you know, of course, the, the big question on everybody's mind and mine, it keeps me up at night, is the regulatory uncertainty, right? Because the scams have attracted the attention of regulators around the world and just overall government concerns, you know, some nations like China have completely banned ICOs. You know, different governments have approached the topic from positions of outright rejection to that of saying, hey, yeah, we're permissive, we want you to do your project in our country to attract business development and growth. But in the United States, there's still a lot of regulatory uncertainty, particularly around different aspects of the blockchain, like the status of utility tokens, secondary market trading. Is every ICO that Jay Clayton has seen a security? Is it an unregistered security offering? So I kind of tend— you know, so it goes— the debate is really interesting right now between the regulatory agencies, the themselves over the status and the nature of utility tokens. Now the CFTC has declared them all to be commodities, right? The Treasury Department jumped in last month and said, hey, these are all currencies such that we now regulate them. And then the Securities Exchange Commission saying, hey, we've got, you know, kind of an unofficial view that all tokens issued through an ICO are securities, even, you know, going after projects that have promoted and sold tokens because they didn't register them under securities laws. But these issues really only affect utility or the application tokens. So unless you're a blockchain software company looking to make a raise, that's primarily where the big concern is. When considering securities tokens as a category, the rules are actually very well established and clear. Back in 1946, there was a landmark Supreme Court case case that defined what a security is under federal law. The court ruled that any transaction is an investment contract if the following 4 things are met. First, there's an investment of money. Bitcoin counts as money under this attribute. It's a tangible commodity of value. So second, there's an expectation of profits from the investment. Now, with the explosion of all of the media around the huge growth of Bitcoin and other tokens, it's gonna be pretty hard to convince anybody that you're not putting money into an ICO for anything other than making a profit. So third, the investment of money is in a common enterprise. So token projects are usually a handful of lead developers or people or a company that's working on the project. And then finally, any profit that comes from the efforts or a promoter, of a promoter or a third party As in it's truly a passive investment, you're not actively working on the development of the company. Well, as unpopular as it might be based on these attributes, I am inclined to agree with the SEC that most, if not all, ICOs have been unregistered securities. So I like to use this as an example. This is another part of the security aspect of these tokens, and it's my jelly donut. So to further demonstrate how the precarious nature of securities really is, you can turn anything into an unregistered security simply by how you talk about it. So for example, my donut here, right? Would you, anybody on this call, be interested in buying this jelly donut from me today for $1,000? And out of the hundreds of people that are still with me here, I You know, doubt anybody would say yes. However, what if I told you that you could resell that jelly donut next week for $10,000, making $9,000 profit in a week? By simply talking about the jelly donut in the way that I just did, it technically turns into an unregistered security because I promised a return. Words actually do matter when it comes to these things. So with all these issues, how does a startup deal with all of it when contemplating a raise using blockchain tokens? And that's pretty easy. Treat it like the security that it really is. If your deal works on paper, you know, develop a structure for your raise that works on paper to pass regulatory scrutiny. Register your security with the SEC or figure out some exemption under the existing law, right? The blockchain token simply represents the offline real-world existing security. So here's a quick recap. Let's run through a couple of things here. First, we talked about why it is so hard to raise early-stage capital. Then we reviewed crowdfunding as a newer alternative to venture funding. And now we've talked about how blockchain is disrupting early-stage capital markets. And then we just finished up discussing some of the risks of using blockchain to raise funding for your startup. So the fifth thing, this is the last topic today, a step-by-step roadmap for success that I promised you guys earlier. So technical difficulties, there we go. First, I want to tell you real quick about my company 10XTS and specifically what we're doing to help startups use blockchain to raise capital. Now we're a blockchain development lab We've got a world-class team of financial people, legal experts, software developers, literally bankers, economists, AI experts, mathematicians, and, you know, seasoned business leaders, right? Remember back at the beginning when I said my passion in life is helping startup founders realize their goals as innovators and creators of value? Well, that's what we're working on with 10XTX. We've been developing our flagship product called XDEX, which is a blockchain-based fintech ecosystem that makes it easy to launch, trade, and report on regulatory-compliant asset-backed security tokens. Pretty simple. Now we've kind of blazed the trail, so I'm a big believer in eating my own dog food, so to speak, and practice what I preach, right? So before I go into any detail about XDEX, I want to show you what we're doing with our own company. With 10XTS. We're going to expose our roadmap that really does seem to be meeting with legal approval right now. And I've probably got one of the most conservative Midwest securities attorneys you'll ever find on this thing trying to poke holes. So first, we tokenize the equity shares in 10XTS. We created a Delaware C-Corp with both non-certificable common and preferred shares. Non-certificable is the key word there. Delaware like passed legislation last year that made it legal to issue shares and store corporate information on a blockchain. Those 10XTS shares are represented by tokens on our xDEX blockchain, and we really quickly sold out of preferred in our own seed raise. So it seems like people are interested in what we're building. So now we're in the process of launching our next round, which is a Regulation D offering to accredited investors only. We're launching this round using probably either simple agreement for future tokens or convertible notes, also represented by a separate class of tokens, right? So we're hitting the road this summer to secure partnerships with angel groups and VC funds who would ultimately also be users of this platform on the investment side. So now then, finally, our goal is to launch a Regulation A Tier 2 offering towards the end of 2018, first of 2019. So we still got a lot of work to do, but we've been moving and grooving pretty fast. So when we launch in 2018, the end of 2018, first 2019 for the Reg A offering, that creates a token that's tradable by anybody regardless of their accredited status. So the Regulation D token is representing some way that it'll convert into the Reg A Tier 2 offering, and then it's gonna be convertible to— ultimately will become our own internal currency token within the platform. So we're blazing the trail of how to get money through the securities hurdles into an internal tradable currency. So while we're a blockchain software company, we actually separated our utility token away from the security token, which means really the same process can be used by any other startup that wants to launch a security token on the platform. So now we've also built this on top of a decentralized peer-to-peer framework that allows over time the further decentralization on a global basis of the actual trading platform itself. So we're just getting the system going, but the great thing is, is this— the way that we've approached this is that we can launch the network and go global with it, but still enforce regulatory compliance in the localized level. So like after a year of R&D, unlike any other of the security token exchange platforms that are under development, we chose to avoid Ethereum as well. So we built an entirely new blockchain with its own infrastructure that is not reliant upon any existing chain, any inherited legacy liability, uh, associated with regulators. There's contingency of the SEC that still thinks Ethereum is an unregistered security and it's a bad thing. They're eyeballing it closely, right? So there's no centralized vector of attack because it's a decentralized platform as well. And our platform has all of those regulatory controls built into the business rule engine that ensures the proper registration of people through a process that meets the legal banking standard of know your customer, anti-money laundering, and it maintains the compliance and reporting for literally all issuers, investors, all of the security tokens and the trades down to that localized level. So our secret sauce is our business rule engine and our API microservices layer. That literally only permits transactions and trades based on the answer to a single question. Can these two entities engage in this specific transaction? Now, while the parties remain anonymous to each other, the platform knows whether or not individuals may buy or sell a specific security token based on the status of the people involved and the security itself. So we've got like this built-in white label system that also will attach to an entire— call it Edgar is baked into the blockchain itself. We're developing the system to permanently maintain information continuity about an asset on the blockchain forever into the future, which is important for future investors doing their research into whether or not they want to buy a particular security token sometime in the future. The other thing that we've worked on is, and this is important for regulatory compliance, is to design the platform so that we can electronically file transactions and trades with any auditing system or any regulatory authority using our XML-based reporting layer. So we could file everything directly to EDGAR. In the— our target market, we've looked at launching in obviously the early-stage funding space. So our secondary focus is traditional capital institutions, anybody that's got alternative asset classes. We want to make them more tradable and liquid. And our third focus is obviously institutional and banking to enable them with crypto asset custody and management services through the platform itself. So now you have the roadmap, right? And you got insights into what we're doing to advance capital funding for startups with blockchain. Now since I'm a Founder Institute director in Cincinnati and my hypothesis really started as a result of working with early-stage companies through the program, uh, we've been working to establish a global partnership with Founder Institute to help graduate companies follow a similar path. So that's one of the main points of why I wanted to do this webinar today, is to really help educate the Founder Institute ecosystem about what we're doing and give everyone an opportunity to engage with us directly to help. So I've explained to you what you need to do to position your business to take advantage of the changes in the early-stage capital and, you know, access investment with blockchain. I've shown you a way out of all the funding challenges you're struggling with. By positioning yourself for the future of funding. This stuff is not going away, whether it's me, whether it's ultimately going to be absorbed into the traditional Main Street financial ecosystem. This stuff is— this is where it's going, guys. This is not going away. So now you got some choices to make, right? You can keep plodding along and, you know, fielding your, uh, you know, traditional equity raises And good luck to you. You know, we're here to help on that as well. But my team and I have set aside some time to speak with you guys. Anybody that's interested in this topic, we want to talk to you personally because we're in a position where we're now fielding it out with a lot of startups. We've got some regional ones we've been working with, starting to, you know, even talk to some other cities for Founder Institute companies already. But, you know, we want to talk to you about how you can apply these ideas. If something I've said today is interesting to you, But since every business is different, we can't really sort of can it yet. So you guys are helping us out by talking to us about what I've talked to you about. So what we wanna do is we wanna get on a call with you and walk you through some more of these processes. But you basically tell us where you're at with your business, where you wanna go, and we'll tell you exactly how to get there in terms of what we're doing. So the cost, you know, is everyone's like, oh my God, he's gonna sell me something. Okay, so the time for the call is absolutely free. So we're gonna set aside time and we're really super busy, but we're not gonna charge anybody anything right now because we just, we're moving into that market validation expansion. We already validated it. We just wanna hear from more. Here's the catch though. This is not really for everybody. So here's our requirements. You must have a company that's been formed and really preferably be a graduate from Founder Institute from a chapter. So, like, with what we do, we're inundated with people all over the world every day. It's like, hey, I've got an idea for a token, I want to launch an ICO, but they've not taken the necessary steps to even establish their company, their team, or their product. So we want to prioritize companies that are already out there hustling, already out there working to make it real. The second thing— there's two things that we're looking for. You do have to have access to at least a minimal amount of capital resource. Now, for example, we raised a traditional small seed round, right, before we ever went down this path. These things cost money, and marketing is still marketing, promotion is still promotion. So we know that if you're smart, you want the best help you can get in this area. So on the call, like, we can talk, and if we both feel like it's a fit, then we might invite you to become one of the new clients that we take on this summer for actually launching. A security token raise. So we set up a little application form to kind of, you know, get you guys into the program. So 10xts.com/apply. We can get you scheduled on the call, right? So coolio. With that, I'm gonna open it up for some questions here. I know that some have been posted. Now what I will tell you guys is we will take all questions even if I'm not able to answer them. I wanna be able to push out to all the attendees answers to the questions. So even if I can't get something live, I promise you that we will figure out a way to answer them and Cat and the FI headquarters marketing team can ensure that it's been distributed to everybody so that everybody gets an opportunity. So, are companies evaluated the same way as regular VC funding? Method, for example. Now, of course, valuation's always like a big topic issue. What I can tell you is if you're moving into securities tokens versus traditional ICO token sales, the valuation is going to be different because you're talking about still a traditional equity or a traditional security, and the company still has, you know, financial model and a balance sheet. So I would say that In the instance of a security token, yes, they would still be evaluated very similarly. So next question: Does the platform launching the ICO have any obligation to retain the chosen currency it receives, like Ethereum, through the ICO, or can it convert to any currency, crypto or fiat, at will? Well, converting things between crypto and fiat in general don't lend themselves well right now to at will, but I presume that once the platform launches the ICO, can I liquidate my Ethereum? Well, that's how you pay for things, basically, so yes. So next question: Do you assist in the seed capital requirements to bring the platform to MVP ready for ICO and lodging ICO costs on a skin-in-the-game basis without a return coming immediately successful on token launch? Well, we have friends in the ecosystem that we're connected to that would probably be in a position to help sort of prime the pump for you if you're looking to try to generate a seed commitment, you know, get some seed capital to help fund some of these things. We would not as a platform per se, but the token would be managed and launched. Now, that being said, you know, we're still very in early stages of the platform itself. So, you know, we're in sort of deal-making mode. You know, we can probably figure out how to help you guys out with some things, but it really has to do a lot with your legal and your accounting. You know, your team has to be comfortable with this thing if you want to go down this path. So, all right, a couple more questions here. Let's see, and you know what, I'm gonna turn the camera back on real quick. So Costadin, Costadin, I'm butchering the pronunciation, asked, is it a must to use blockchain to develop the project in order to be funded with blockchain? No, obviously I kind of went through that. So, you know, securities tokens allow non-blockchain companies to to form capital. Ernest says, are you saying that Delaware is better to incorporate than Wyoming? I read a news article that Wyoming is accepting ICO and crypto companies and not taxing them. They just passed this legislation, didn't they? Yes, they did just pass legislation that was principally focused on figuring out a state-level path for utility tokens. In the instance of a security token, I know that Wyoming is a pretty good state for LLCs, for example. You know, we chose to pursue Delaware just because they have the most developed body of corporate embodiment of law. That's why everybody incorporates in Delaware. So Mike asks, why would an investor want to buy a very recently made-up token? Well, if that very recently made-up token has equity securities attached to it, or maybe convertible debt. Maybe it's just a debenture with an interest payout, right? There's something actually backing that token other than the promise of a market to develop in the future. So John says, who are the coin-friendly banks? Well, in my experience, the two most coin-friendly banks in the United States right now, they're Sunrise Bank based out in San Diego, and And they've been pretty friendly, in particular on the institutional side with some funds. And then there's Manhattan, M-something, blah, blah, blah, blah. It's the guys that use, that Coinbase is used, but their minimum bar is, I think, $5 million reserve. So there's a couple of them. It's based in Manhattan. I can't remember right offhand and I'm not gonna look it up while I'm still cruising here, so. Snahal, not all tokens are getting listed, which brings a risk of liquidating tokens. What are the ways to liquidate them? Have you funded a startup with an ICO? Yes, we're working right now to fund our own startup with an ICO, and I'm working with groups that I'm colleagues with that are doing extremely well shifting gears now into the security token space. Yes, not all tokens are getting listed. In this instance, I think it's pretty clear that we're listing tokens on our own platform, which has its own decentralization model. So we're bringing a completely different game here. Deymar, do you have some resources we can read about ICOs? It's pretty broad. There's tech aspects, legal, financial, you know, economics, software, ecosystem modeling. A lot of different ground to cover. Daymar, if you jump out to the TEDxTS site and fill out just a contact form and let me know specifically what you're looking about, maybe we can find something very targeted to your question. So Thomas says, how much does it cost upfront to fundraise through blockchain? Well, a lot of that comes down to the legal structure and the cost of what legal you're using. We're hoping in the future to force law firms into templating this a little heavier because it really is kind of going to take on a very similar format. I talk to attorneys all the time about how their world is changing as well in light of things like smart contracts. To go through a complete Reg A offering is probably $100,000 to get it all put together and then however much you want to spend on marketing. So if you want to go completely public with your security token, that's what you're looking at. Now, it's back to how much does it cost for a Reg D structure? What are you doing? How much does it cost to put a fund together, for example? That's legal, accounting, and then we're working to figure out on our side of the fence from a technology standpoint, what does it cost in terms of the the tech listing and all the transaction fees, the things that we're launching on our platform. So Luigi asks a couple things here. Would like to know the following: what's the difference of a token sale versus ICO? Same thing. There's no difference between the two of them. Which is better to go with in order to raise funds? They're both the same thing. Token and coin are interchangeable. A lot of people would argue with me on that, but they're all blockchain-based hash key pair of some sort. So which is better to go with to raise funds? Coin ICOs kind of have a bad rap right now because of the gamification, and I think, you know, just as a phrase in the media, it's jumped the shark a little bit. So staying away from coin might be better, particularly if you're contemplating a security token issue. How much money will it take to do an ICO or token sale? So I just discussed that. Like, I'd say the least amount you could do it for, depending on the form, would probably be $25,000 to $50,000. All right, I'll do a couple more questions here. Can I still use a security token as a utility token? Well, the SEC hasn't ruled on that yet. So Jay Clayton has sort of telegraphed that a token could start as a security and end up as not. But to date, there has been no court case and ruling from a bench, from a judge that provides the case law that all of our legal counsel needs to tell us there's no risk in doing it this way. So that's why we kind of divided the waters and said securities tokens are security tokens. And then we've got an internal commodity currency token that's actually not being sold in an ICO. And so we have a completely different decentralization model around that. We're raising, you know, once again, we're eating our own dog food. We're raising through a security offering. So Theo, did Bitcoin.org really speed up the process of transaction reducing latency? Ah, tech question. Through their cryptocurrency, is it still Bitcoin's and other cryptos' latency? I've not done any like comparative latency tests. But right now, even if a particular blockchain protocol could transact at, let's say, 1,000 transactions a second, which would be awesome, blazing fast, there are already other consensus frameworks out there that'll do 100,000 transactions a second, and even more that would be more applicable in the IoT space that would do depending on your node structure, 40 million transactions a second. So the technology's already moved on, the consensus models. So Thomas asked, regarding the liquidity of investment, is there no secondary market in the US? Secondary markets for alternative assets are a royal pain in the behind in the United States. We're hoping that this shift and evolution in structured capital brought about by the technology, uh, pushes the window on changes here. Um, okay, so will the recent banning of cryptocurrency ads impact crypto funding? Well, I still see crowdfunding ads all over the place. So if you're crowdfunding through a regulation crowdfunding mechanism, um, because you're using a token to do it, it's still, you know, a crowdfunding project. So I would say that we're still pushing the window on a little of that, but as long as it's not, you know, scam central, uh, ICO 2017 circa marketing language attached to it, um, you know, it's just a crowdfunding deal, right? Um, so my thoughts on other specialized crowd investing platforms like SeedInvest, which covers more vetting of the companies put up for funding. We're taking a completely regulatory compliant approach with everything, which means that broker-dealer level of due diligence is more extensive. Until someone produces for me, you know, I don't care if your broker-dealer does it, if your law firm does it, but I've got to have the minimal amount of broker-dealer level due diligence for somebody to say, yep, we're good, we're clean, here's our bill of health. Put our token on the exchange. So that's how I'm looking at it. How does European regulation compare? Elio, it's a patchwork quilt, man. It's like all over the place where you have, you know, for example, I guess, you know, Belarus is not EU, but in Europe, Lukashenko wants to make Belarus a blockchain capital. Now, there's certainly nations that have taken more of a relaxed approach— Malta, Gibraltar. So, but it really is a patchwork quilt, and that's why we, when we started looking at this, do we want to play the game of flags and try to find a favorable jurisdiction to launch in? I said nope, we're going to confront this regulatory issue head-on here in the United States because even international companies still look to the United States is kind of a lead model here. And if we solve this problem for the US framework, then now that becomes, you know, sort of the defined standard for what other people are looking for around the world. So I'll take one or two more here. Let's see. When is that 10XTS feature coming out? So it's coming out this summer. We're launching MVP. So right now that's why we're teeing things up. So Louise asked for about our time for us. Mauricio, I'm sorry. Well, Louise asked for it as well. So, all right, cool. Well, there's still a few more questions here on the list, but I'm already 7 minutes over and I want to let you guys get back to your awesome Thursday. So, uh, uh, appreciate it. Thank you, Katherine.

Can you hear me now?

Can you hear me now? I can.

All right, well, thank you so much, everyone. This has been great. We've really enjoyed having everyone participate, and look for Founder Institute in your email box. We will be sending a recording of this webinar. And it will include the full webinar that you just viewed and hopefully also slides, right, Michael?

Yes, we're gonna package up slides and shoot them out.

Awesome. Okay, well, that does it for us. Thank you so much, everybody. Have a great day.

Cool, guys. Thanks.