Adam Tracy Contemplates the Initial Coin Offering vs. Regulation A+ Offering Decision
Blockchain capital markets expert Adam S. Tracy evaluates the decision between an Initial Coin Offering and Regulation A+ offering, the advantages and disadvantages of each fundraising method.
Transcribed from: http://adamtracy.io/video/reguation-a-offering-tokens/
Adam Tracy:
So the the IPO versus ICO decision, coming up more and more now that you get more traditional finance industry types looking at cryptocurrency. I’ve done a number of them. I’ve done a number of ICOs now. And so the question is, which one do I do? And I think there’s three things to sort of evaluate. One is the cost. And timing. For a traditional a IPO in the United States requires one, a audit of your financial statements for the prior two years, which due to the nature of the audit, PCAOB audit, could be expensive even for startup companies because of the liabilities involved, and auditors tend to pass that cost of their insurance and whatnot, rightfully so, to the clients. That’s number one.
Adam Tracy:
Number two, it is the timing, the process. In order to qualify, an IPO typically involves filing either an S-1, which is the traditional form, or even a Reg A filing Form 1-A with the Securities and Exchange Commission, and what happens is they will evaluate that and review that filing, and you’ll typically get three to four comment rounds where you’ll have to respond in writing to comments made by the SEC attorney examiner, and then amend and resubmit that prospectus. So that process, depending on how long or how complicated you have, it can take four to six months. And in the crypto space, as you saw with the Winklevoss twins’ sort of attempt at it, they’re looking very, very hard at cryptocurrency-related ventures. So you could expect some greater scrutiny. You can expect that it would take a long time.
Adam Tracy:
And finally, three, it’s liquidity. A “small IPO” is really 250 million and below. Small IPOs, let’s say 25 million, can be very difficult to place. It can be very difficult to find the requisite shareholders and the investors. There is no guarantee that since you’d go through the process with the SEC that you’ll ever sell any of the shares that you intend to sell and raise the money that you intend to raise.
Adam Tracy:
And another thing that’s sort of the other half of this point three is that going through the SEC and getting your registration qualified so you can legally sell the shares, it’s not the last point. In order to mechanically list on a securities exchange, you have to go through FINRA, which has oversight on securities markets. And so you have to go through the 15c2–11 process, which is how you mechanically go from having an effective registration statement to listing with a ticker symbol and all that stuff. But the reality is that’s not going to happen until you close your offering.
Adam Tracy:
So in the absence of an underwritten offering, what will happen is you may qualify the securities registration, but not immediately start trading. So you even have that period where you’re still left telling investors that we’re going to do this. We haven’t done it yet, you can’t see our symbol, but we’re going to do it. So it’s sort of the show me scenario. Is it really going to happen? And obviously it’ll happen if the people follow through on it, but you have to round out some type of offering. You have to have enough shareholders. You have to have enough shares sold, else you won’t even get the 15c2–11 through, but you still have that other process, and people don’t really realize that. So cost, timing, and then just the overall liquidity aspects of it make it tough.
Adam Tracy:
Now on the reverse of that, you have ICOs. And so let’s talk about what’s problematic about it. Number one, it’s an unclear regulatory environment no matter how you shake it. Utility tokens, sure, there’s a clear use case. There’s clear exceptions to the how we test. But it’s unclear. Things could change and things will undoubtedly change.
Adam Tracy:
Two, when you have a token that is a security, you really have no liquidity. Because as it stands right now, none of the cryptocurrency exchanges, like the main ones in the US, Kraken, Bittrex, et cetera, they’re not going to trade that token. The reason being that they’re not a licensed national securities exchange, so if they are going to make a market, then they’re acting in violation of the law. So you really don’t have a market to trade on it. And if you think about it, like OTC markets, NASDAQ, New York Stock Exchange, they don’t list any cryptocurrencies. Individual cryptocurrencies. The [Board Of Trade 00:05:14] and the [Board Options Exchange 00:05:15] make futures contracts on Bitcoin and options contracts in Bitcoin, but there’s no place to trade spot Bitcoin that is in a regulated environment right now. And I know there’s some institutional efforts to create electronic markets, but those just simply, simply don’t exist.
Adam Tracy:
And then finally, you’ve got just the general risk tolerance of your investors. In an IPO, you’ll tend to have… There’s decidedly some framework for what you have going on. Whether I have an agreement or not, you sell me a share of stock, I’ve got 400-plus years that I can rely on, and I know what my rights are. I know what my rights and privileges are. I know if this company goes bankrupt, what I get. I know what I can vote on. I know that I’m entitled to dividends and certain sorts of [inaudible 00:06:11], irrespective of whether you write that out.
Adam Tracy:
Well, in cryptocurrency you don’t have that, right? There’s no statute or law that I can look up and say, “Oh, hey, listen, well, I bought this token. This is what I get.” So the risk profile is very, very high. That’s why you don’t get a lot of traditional finance people investing in it right now because no one really knows what they’re getting. You can define that by contract, but my experience is most ICOs don’t go that far to kind of explain what do I get if this goes into bankruptcy, what do I get if the company sells. None of that’s there. So the risk profile is really, really high and mostly focused on early cryptocurrency adopters and people who are later cryptocurrency adopters. So the risk profile is very different than traditional financing.
Adam Tracy:
So you compare the two and the question becomes which one should I do? And my easy answer is well, follow the money. If you can obtain financing through an ICO, and it’s non-dilutive, and you have a clear utility case, absolutely go with it. That’s a no-brainer. There’s no dilution.
Adam Tracy:
And the duality of an ICO, which a lot of people don’t realize, is really the best part about it. Whereas in a IPO, I don’t want 10 million investors. That’s a administrative nightmare. But if I’ve got a true utility ICO token, I want 10 million investors because each of those investors also represents a user. So from a valuation standpoint, for my platform, all of the ICO investors are also now users. So I can say, listen, for no dilution, because again, it’s not an equity deal. No dilution. I still own 100% of the company, and I just gained 10 million users, and I gained $10 million because I sold 10 million tokens at dollar piece. You can’t beat that. You can’t beat that. So in the utility token context, when you can make the case for it clearly and without risk, absolutely. I think right now, just, and I qualify by saying now, in the short term, the ICO is the way to go.
Adam Tracy:
Now on the flip side, when you have a token that is a security, I still don’t see any value over doing that versus doing a traditional IPO. Your investors can’t sell. There’s no liquidity for it. There’s no exits. And there’s very few rights and privileges that are inherently ascribed to it or made appurtenant to law. So I think in that case, you’re better off selling somebody a share of stock or a note or whatever the case may be, because at least they know what they get. And you’re going to be able attract the more traditional finance people with a lower risk profile because they understand what they’re buying, whereas with the digital asset, with the cryptocurrency, they just don’t.
Adam Tracy:
So right now it’s a duality, but I think when that window’s open where you can do a utility token ICO without the burden of securities regulation, it’s the way to go. The flip side of that, I think you have to stick with the traditional Reg D offering of stock or note.
Adam Tracy:
So check me out. Happy to answer any questions that you all have. Tracyfirm.com is my serious website, and then bitcoin-lawyer.org is my less serious one that you guys all probably care about. So I’ll talk to you.
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A former professional rugby player, Adam S. Tracy brings over twenty years’ experience as an attorney, consultant and dealmaker with a particular focus on cryptocurrency, digital products, payments and immersive corporate structures. As an accomplished executive and advisor to high risk merchants and stakeholders, Adam has proven himself as a results oriented, decisive leader with proven success advising early market entrants, technology adapters, as well as established participants across a wide range of verticals. Adam Tracy’s attack-first personality allows him to excel in dynamic, demanding environments including complex corporate negotiations, distressed environments and regulatory investigations.
In addition, Adam S. Tracy also has a successful track record co-founding high risk industry ventures, building & leading cross-functional teams, and spearheading diverse corporate transactions. A serial entrepreneur, Adam has successfully started and created exits across a wide swath of markets, including various mobile SaaS ventures, nutraceuticals, peer-to-peer payment systems, and several telemarketing-based ventures. Moreover, as a recognized expert in the payments field, Adam Tracy has been a blockchain and digital currency evangelist and influencer since the early days of Bitcoin.
Utilizing his proprietary “Pre-Event Driven™” strategy for decision making, Adam S. Tracy further leverages his over twenty years’ experience to create cost-effective, value-add solutions for each client. A data-driven acolyte, Adam continually refines his strategies based on field studies and data collection. Moreover, Adam Tracy further augments his range of solutions by actively networking with regulators, liquidity providers, legal and compliance experts, deal-flow brokers, investors and management of leading high risk industry ventures.
Adam S. Tracy earned his Bachelor of Science in Computer Applications and Bachelor of Science in Finance from the University of Notre Dame. He subsequently earned his Masters in Business Administration from the DePaul Kellstadt Graduate School of Business, while concurrently earning his Juris Doctorate from the DePaul College of Law. Adam lives outside Chicago with his with his wife, four dogs, and two cats.
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