When it comes to initial coin offerings, or ICOs, there’s plainly a lot that investors still don’t understand. Though start-ups and founders have raised more than $1 billion so far 2017 by selling customized virtual currencies to anyone willing to buy them, it’s been unclear whether and which tokens might eventually be categorized as securities; how ICOs impact startups’ valuations; and who, if anyone, might regulate such offerings.
Yesterday, the SEC finally spoke up, saying it has concluded that at least some virtual currencies should be considered securities and made subject to federal securities laws. It suggested that not every token should or will be defined as a security but rather that determinations will be made on a case-by-case basis, depending on “facts and circumstances . . .”
Still, the world of ICOs could use a bit more structure, according to Juan Benet, the founder of Protocol Labs, a venture-backed company that’s building a decentralized storage marketplace called Filecoin and that also worked with AngelList this year to create CoinList, a platform that’s promising a more structured way for founders to raise money for their token-based networks. The (sizable) catch: the investors buying into the projects on CoinList must be accredited.
Benet has reason to think that bar won’t slow down ICO sales too drastically. To wit, Filecoin will become the first project launched on CoinList, and demand is such that Benet has already pushed the date of the ICO back twice to ensure that all goes smoothly. (Unlike with many ICOs, Filecoin, whose offering goes live on August 7, is also capping the sale, though it isn’t letting investors know where that cap is until after the sale is completed.)
We talked with Benet earlier today to better understand what he’s up to, and why he thinks Filecoin’s ICO could serve as a model for future founders. Our chat has been edited for length.
TC: The SEC basically put everyone on watch this week. Do you see that as good or bad news?
JB: I think more clarity is great, and we did expect it. I think a lot of people misunderstood what [the agency] said to mean that all tokens will be regulated, when what it said is that some tokens could be securities. Every token has different properties, and whether they’re securities depend on those properties. If a token acts like equity, for example, it’s probably something like a security. Other tokens, like Ethereum and Bitcoin, are more like commodities, so the SEC hasn’t gone after those.
TC: You’ve taken a page from Y Combinator, which last year came up with new kind of framework for founders and investors called SAFE agreements. Can you elaborate on what you’ve created and why?
JB: So what happened with a lot of these token sales is, because it’s not clear what’s going to happen with [these ICOs] or whether they’re legal in the U.S., many founders have just excluded U.S. investors as a whole. We knew that as a U.S.-based company, [our own tokens are] potentially a security. So we’re trying to create a SAFE-like agreement for future tokens. We do it via 506c [a nearly four-year-old rule that enables organizers of “private placements” to advertise them widely as long as they’re made available only accredited investors].
One of the constraints is that we’ve had to [verify that the investors using CoinList] are accredited, but now, other projects will be able to use CoinList as well.