KoreConX launches $15M Digital Securities Offering using its own Fully-Compliant KoreProtocol

KoreConX is excited to announce its Digital Securities Offering that will utilize its own KoreProtocol. The KoreProtocol is the world’s first complete end-to-end protocol that has built-in AI to manage the entire lifecycle for tokenized securities, from issuance, trading, and all types of corporate actions.

The global securities marketplace is changing, and the future is tokenization. Combining corporate and securities law with tokenization facilitates efficient liquidity and fully-compliant transactions in multiple jurisdictions.

“We are thrilled about developing and launching our Digital Securities Offering on our KoreChain. KoreConX’s AI-enabled blockchain, based on Hyperledger Fabric and hosted at IBM, provides the highest level of security. The KoreProtocol handles the complete lifecycle of the security token, from issuance, secondary trading, and all types of corporate actions,” said Dr. Kiran Garimella, KoreConX’s Chief Scientist and CTO.

KoreConX will be working with established broker-dealers worldwide to make this initial offering of $15 million USD available to accredited investors in multiple jurisdictions (countries).

KoreConX believes in complying with securities regulation and corporate law to protect investors, issuers, and other participants in the global capital markets.

“KoreConX has been a fully operational all-in-one platform for several years helping many clients worldwide with compliance activities. The opportunities are tremendous for using tokenized securities to create efficiencies, reduce costs, and provide stronger governance for private companies. Our unrelenting focus is on ensuring the safety, security, and investor protection in global private capital markets,” said Oscar Jofre, co-founder, CEO of KoreConX.

For more information visit www.koreconx.io

Webinar sheds light on Digital Securities Terrain

The regulator’s message is clear: there’s no room for tampering with the regulation when it comes to capital raising, and many companies that invested time and energy on ICOs (Initial Coin Offering) are now facing the consequences.

But that doesn’t mean that the private capital markets are dead when it comes to digital assets, on the contrary. Companies have been tirelessly researching to find an alternative to ICOs that is compliant with regulations.

The private market industry is now being inundated by terms such as Digital Securities, Tokenization, STOs, ICOs. To decide the fate of their business in the digital arena, entrepreneurs need to be on top of the game and know the concepts, the differences, and who are the stakeholders behind every new term.

Having all this in mind we, at KoreConX, put together a Webinar “An Industry Evolving: Digital Securities, Tokenization, STOs, ICOs… What are they? How do they differ? Who’s regulating them?“.

To provide the public with the most up-to-date information about the topic, we invited two experts in the field. Oscar Jofre, CEO and Co-Founder of KoreConX, and Darren Marble, CEO and Founder of Issuance, will discuss the landscape for traded securities utilizing different forms of distributed ledger technology.

The webinar will happen this Wednesday, April 17th, at 11 am EDT.

Click here to register for free.

Click on the link below to watch our previous webinars:
Marketing Your Raise From Traditional Capital to Digital Securities

The Right Technology – The Case of Mercury Cash

Nothing proves the wisdom of choosing the right technology for the right job than the case of Mercury Cash, a hosted-wallet solution for real-time liquidation and transfer of cryptocurrency and fiat assets. Recognizing the importance of being prepared for a new cryptoworld, Mercury Cash set out to explore various blockchain protocols to find the one that can stand the test of the real world.

The real world is full of messy complexities. We may think the mess is unnecessary and we should sweep it all away and usher in a new world order, but we do have to recognize that regulation and corporate law make it possible to protect investors and shareholders.

As someone pointed out regarding the tragic debacle of QuadrigaCX, Canada’s own Mt. Gox, “When was the last time your banker died and you lost access to your money?”

I’d add, “When was the last time you forgot your bank account password and your money became irretrievable?”

Can regulation and corporate legal processes be more efficient? Yes.

Are some of the regulatory requirements onerous or unnecessary? Yes.

But pretending that all regulation is unnecessary is like pretending that protections are unnecessary. Disruption with technology is good, as long as it doesn’t lead to destruction!

Click here to download Mercury Cash Case Study.

Many issuers are finding out the hard way two fundamental truths about how the real world works:

One, transactions don’t exist in atomic silos, least of all in securities; every transaction is connected with others and impacts multiple entities at various points in time in an ever-expanding ripple effect. One buy/sell securities trade requires validation of participants, ensuring protection for all parties, recording changes to captables, distribution of dividends, exercise of rights, filing reports, getting notifications of corporate events, voting, etc., all of it over a long time cycle.

Two, choosing a technology based on hype, popularity, and promise is not the way to go; instead, understand the characteristics of the problem and then identify the technology to solve it effectively.

In the case study, Mercury Cash describes the capabilities that will keep their business processes humming in a fully compliant manner. Most importantly, they found that ERC20-based protocols are inadequate for full lifecycle management of securities. This is not a knock against Ethereum, which is a fine platform for many types of DApps; much of the technology work is praiseworthy. But a Ferrari, no matter how shiny or powerful, cannot sail the high seas.

Many of our clients are coming to the same realization. Interestingly enough, a company could conduct its main business using public blockchain, while managing its security tokens on KoreChain. There is nothing wrong with that – it’s just like transporting a car on a ship. In many conversations with some of these technologists, I point out that the issue is not that ERC is inadequate for securities, just that it’s not the right tool. The same can be said if someone tries to use KoreChain for building cryptokitties.

When many companies are coming to us abandoning ERC20 protocols for various reasons, it validates our own approach to technology: first understand the problem you are trying to solve, then carefully pick the technology stack to solve it. In doing so, some of us have to leave our technology egos behind to move forward.

Click here to download Mercury Cash Case Study.

Meet the KorePartners: Luka Gubo, Blocktrade


This post is part of a series of short interviews about the companies and faces that are part of the KorePartners Ecosystem*.

We believe that behind every great company there are people, and behind every person, there is a story to tell.

KorePartner: Luka Gubo, CEO at Blocktrade

Born in: Celje, Slovenia
Based in: Ljubljana, Slovenia and Schaan, Liechtenstein

What was your first job?
 High Frequency Trader at a proprietary trading firm.

How and when did you get involved in the Blockchain industry?
I started reading about Bitcoin in 2015 and mostly dismissed it as an alternative for fiat currencies. In 2016 I read about other Blockchain protocols and immediately saw the potential for disrupting the capital markets – both on the primary market (issuance of securities) and also the secondary market (for post-trade processes).

How do you see the Blockchain scene today?
There was a lot of regulatory uncertainty in past years and I think this will change in 2019. Crypto assets have their place in broader financial markets as a unique asset class where more and more institutional investors will seek uncorrelated returns. On the technology side, I think we will see a lot more use cases where several counterparties are involved – we are focused only on the capital markets, while we see a lot of disruption in banking, payments, transportation and other industries.

What does your company bring to the KorePartners Ecosystem?
Blocktrade is a secondary market for crypto assets with a focus to bring institutional clients to this new market. With the MTF license (pending regulatory approval) we will be able to list security tokens issued on KoreConX and bring necessary liquidity.

What is it about the partnership with KoreConX that most aligns with your company strategy?
KoreConX provides a full suite of services that companies that are issuing (or just tokenizing) their shares on blockchain must have in place when admitting securities to trading on a regulated trading venue. Covering the full lifecycle of these securities (from issuance, reporting, trading, etc.) we can together create a seamless experience for companies and investors. I believe that Blocktrade and KoreConX can together disrupt how the capital markets operate.

*The KorePartners Ecosystem is a group of organizations that follows our governance standards and share with us the same goal: to provide entrepreneurs with the tools they need to grow their business.

Lessons To Be Learned From The SEC’s Recent Penalties for ICO Companies

The Securities and Exchange Commission recently brought their regulatory hammer down on several ICO-related companies. After months of public statements from officials and rumors of numerous subpoenas and investigations, the SEC sent a strong and undeniable message to companies that have held unregulated initial coin offerings, and to those who are considering it.

Don’t do it.

There are lessons to be learned from these recent regulatory actions. These lessons confirm what I have been preaching in my securities law practice to all of the coin/token/crypto companies I have been talking to or representing: Follow the existing securities laws to raise capital selling tokens or be prepared to suffer some extreme consequences. In this article, I will dig into the story of Carrier EQ, also known as AirFox, whose story is a perfect illustration of the dangers a company faces when they hold an ICO without following securities laws.

I am going to get into a lot of specific facts because what AirFox did is so common in the ICO world, so we can all learn from their mistakes. I will also explain in layman’s’ terms what happened to AirFox as the SEC reviewed their offering, in an effort to provide a “heads-up” to companies that still believe they can get away with holding an ICO in the United States without going through the SEC. It appears that AirFox did not receive very good advice in their ICO, and despite all the recent warnings and negative publicity, I still have ICO companies contacting me wanting to use these same methods (“But I’m selling a utility token!”) that got AirFox in trouble.

Two things are obvious after this SEC enforcement action:

  1. You cannot call what you are selling a “utility token” and have securities laws magically not apply to your offering (see Lesson 7 below), and
  2. Unless you can definitively prove what you are selling is not a security, you need to follow securities laws in your offering.

The AirFox ICO

AirFox is a U.S. company that sells mobile technology that allows prepaid mobile phone customers to earn free or discounted airtime or data by interacting with ads on their smartphones. From August to October 2017,[1]AirFox offered and sold blockchain-issued digital tokens called AirTokens in an ICO where the company raised about $15 million to create a new international business and ecosystem. AirFox told potential ICO investors that the new ecosystem would include the same functionality of AirFox’s existing U.S. business (allowing prepaid mobile users to earn airtime or data by interacting with ads) and would also add new features such as the ability to transfer AirTokens between users, peer-to-peer lending, credit scoring, and eventually using AirTokens to buy and sell goods and services other than mobile data. In the ICO, AirFox stated that AirTokens would potentially increase in value as a result of AirFox’s efforts, and that AirFox would provide investors with liquidity by making AirTokens tradeable in secondary markets.

Any advisor who even has a basic understanding of securities law would look at this and say “Hey, AirFox, you are selling securities. You are selling tokens to the general public, that you are alluding to an increase in value, to finance a new business.” Apparently, AirFox’s “crypto advisors”[2] and lawyers (if they had any) did not bother to Google “what is a security?”[3]

The SEC Penalties

On November 16, 2018, the SEC instituted “cease and-desist proceedings” against AirFox. This means, in laymen’s terms, that the SEC told AirFox to “Stop Breaking The Law!” because the SEC is about to come in, and effectively shut their company down with penalties. As a result, AirFox reached a settlement with the SEC so they could have some hope of continuing in business. The settlement requires AirFox to:

· Pay a $250,000 fine,

· Inform each person that purchased AirTokens of their right to get their money back if they still own the tokens or if they can show they sold them for a loss,

· Issue and post a press release on the company’s website notifying the public of the SEC’s order, containing a link to the order, and containing a link to a “Claim Form” for investors to get their money back,

· File the appropriate paperwork with the SEC to register the AirTokens as a class of securities — this means the AirFox now must follow all securities regulations and ongoing reporting requirements as to these tokens — an extremely expensive requirement, and

· Deal with a lot of other ongoing reporting requirements related to these penalties to keep the SEC informed.

In essence, the SEC made AirFox pay a large fine, forced them to return up to $15 million back to investors, publicly admit on online and in the press that they broke the law, and be subject to a ton of time-consuming and expensive paperwork (disclosing information like audited financial records that investors typically need to decide if a stock is a good investment ).

How many companies that held an unregistered ICO could financially stay viable with the imposition of such penalties? My suspicion is that there are very few.

What do we learn from the AirFox settlement?

1. The SEC is going to follow the Howey test[4] at least as a baseline to determine if a token sold in an ICO is a security. AirTokens were “securities” under the Howey test because people buying the tokens would have had a reasonable expectation of obtaining a future profit based upon AirFox’s efforts, including AirFox revising its app, creating an ecosystem, and adding new functionality using the proceeds from the sale of AirTokens.

Lesson: If your token offering cannot pass muster with a well-known 76-year old Supreme Court ruling, you are selling securities.

2. If you sell tokens that are securities, you have to either (a) register the securities with the SEC or (b) qualify for one of the well-known exemptions from registration such as Regulation D or Regulation A when you sell the tokens. In other words, follow existing securities laws. AirFox, like many ICO companies, did neither of these things, which is illegal.

Lesson: This isn’t rocket science. Either file an S-1 and register your token offering or be sure you qualify under one of the exemptions from registration (like Regulation A) before you sell any tokens to anyone.

3. The SEC is going to read your “white paper”[5] and review everything[6]related to your token offering. With AirFox, the SEC specifically noted that “in September 2017, AirFox explained to prospective investors in a blog post that the ‘AirFox browser is still considered ‘beta’ quality and will continue to be improved over the coming months as we execute on the AirToken plan.’” This blog post helped the SEC satisfy one of the Howey prongs of what constitutes a security: Money from the token sale was being used in a common enterprise for the company raising capital to build their business.

Lesson: Follow securities laws in all offering documents, marketing materials, media interviews, and everything whatsoever associated with the token offering.

4. AirFox’s white paper informed investors that 50% of the proceeds of the offering would be used for engineering and research and development expenses. In AirFox’s whitepaper, the company proposed a potential timeline of development milestones which covered from August 2017 through the second quarter of 2018.[7] Again, the company’s own documentation showed they were selling securities under Howey, by explaining that the company was going to use the funds from the token sale to fulfill their business plan.

Lesson: If you are using the funds from the token offering to build your business, follow your business plan, or build your ecosystem the tokens will be uses in, you are probably selling securities.

5. In its ICO, AirFox raised approximately $15 million by selling 1.06 billion AirTokens to more than 2,500 investors. The number of investors is important: A company selling securities is required to register their equity securities under “Rule 12(g)”[8] if the class of securities was held of record by more than 2,000 persons and more than 500 of those persons were not accredited investors. In other words, if you sell securities to 2,001 total investors, or 501 non-accredited investors, you have to be registered with the SEC.[9] With more than 2,500 investors, AirFox would be subject to these expensive registration requirements, if their tokens were considered to be securities.

Lesson: Watch the number of investors in your offering. Even when you are selling tokens that are clearly securities, you must pay attention to the rules surrounding how many investors you are allowed based on the laws applicable to your offering.

6. AirTokens were available for purchase by individuals in the United States and worldwide through websites controlled by AirFox. The company is based in the United States. The websites selling the tokens in the U.S. were controlled by the company. This all subjected AirFox to the jurisdiction of the SEC.

Lesson: If your company does business in the U.S., or wants to touch the U.S. investor market, you need to follow U.S. securities laws. If you are not a U.S. company[10], and do not sell or market at all to U.S. investors, most of this article may not apply to you at all.

7. The terms of AirFox’s the ICO required purchasers to agree that they were “buying AirTokens for their utility as a medium of exchange for mobile airtime, and not as an investment or a security.” In other words, AirFox assumed they could agree with their token purchasers that they were selling a “utility token” and not a security. It doesn’t work that way. Calling something a “utility token” and saying it “is not a security” is meaningless to the SEC. As the SEC notes “at the time of the ICO, this functionality was not available. Rather, the AirFox App was a prototype that only enabled users to earn and redeem loyalty points, which could be exchanged for mobile airtime. According to the company, the prototype was “really just for the ICO and just for investment purposes so people know . . . how it’s going to work” and “[did not] have any real users” at the time of the ICO. Despite the reference to AirTokens as a medium of exchange, at the time of the ICO, investors purchased AirTokens based upon anticipation that the value of the tokens would rise through AirFox’s future managerial and entrepreneurial efforts.”

This quotation from the SEC is important for two reasons:

· It makes it clear that the AirTokens violate the Howey test. Investors purchased AirTokens anticipating that the value of the tokens would rise through AirFox’s future managerial and entrepreneurial efforts. That is, almost literally, the definition of a security contract from Howey — someone investing in a company where the company’s efforts will increase the value of the investment.

· More importantly, the SEC seems to have cracked the door open a little. The SEC specifically set out several reasons why the AirTokens are securities and not “utility tokens” …but what if those reasons did not exist? What if this ICO had taken place later, and the following facts had been in existence:

(a) At the time of the ICO, the tokens’ functionality was available,

(b) The app was a not a prototype but was fully functional,

(c) The app had real users at the time of the ICO,

(d) The tokens were being used onlyas a medium of exchange at the time of the ICO, and

(e) Purchasers of the tokens had no anticipation that the value of the tokens would rise through the company’s future managerial and entrepreneurial efforts, because the tokens were not allowed to be traded on an exchange or otherwise.

While the marketplace for such tokens would not likely yield nearly $15 million in purchasers like in AirFox’s ICO, it seems that the SEC mightentertain characterizing tokens in the scenario[11] above as not being subject to securities laws.

Lesson: You can’t call what you are selling a “utility token” and have securities laws magically not apply to you. What you call your tokens is irrelevant to the SEC’s legal analysis.

8. AirFox’s whitepaper described an ecosystem to be created by the company where AirTokens would serve as a medium of exchange and that the company would maintain the value of AirTokens by purchasing mobile data and other goods and services with fiat currency that could be then purchased by holders of AirTokens and that the company would buy and sell AirTokens as needed to facilitate the purchase and sale of goods and services with AirTokens. In other words, the investors in the tokens would, again, be relying on the future efforts of AirFox, clearly one of the Howey prongs that make the AirTokens clearly securities under the law.

Lesson: If you are relying on the future efforts of the company selling the tokens to give the tokens value, the tokens have failed one portion of the Howey test.

9. Prior to the ICO, AirFox communicated to prospective investors that it planned to list the tokens on token exchanges to ensure secondary market trading. Obviously, liquidity in any investment is a huge part of the investment decision by a purchaser, and AirFox made it clear (a very common trait in unregulated ICOs) that their tokens would be traded on crypto exchanges, so buyers could sell them and potentially make a profit. This satisfies the “investment” arm of the Howey test. If investors have a reasonable expectation of profit from being the tokens, the tokens are very likely securities.

In fact, in the middle of the ICO, AirFox announced that it was reducing the token supply from 150 billion to 1.5 billion without changing the anticipated market cap “to alleviate concerns raised by many current and potential token holders and token exchanges who prefer each individual token to be worth more.”

Imagine a tradition initial public offering of stock, where the IPO company suddenly changed the number of shares of stock available but kept the valuation of the company the same. “Hey, those shares you first-in buyers got for $20 are now worth $2000 each because we decided to sell 1/100thof the number of shares.” This kind of market manipulation would likely end of with a few people in federal prison.

Lesson 1: If you tell purchasers of your token that the tokens are going to be traded and that you are going to do things to make the tokens more valuable for these investors, you are selling securities, without any question.

Lesson 2: Changing the material terms of a securities offering in the middle of it = bad idea.

10. The SEC noted the following interesting bit of information. Following the ICO, AirFox attempted to list AirTokens on a major digital token trading platform, and answered an application question that asked, “Why would the value increase over time?” AirFox’s response was “As time lapses the features and utility of AirToken will go up as we continue to build the platform. As of today, the people are able to download our browser to earn and purchase AirTokens to redeem mobile data and airtime across 500 wireless carriers. Over the next two years, the utility of the token will expand and therefore, more people across the world will need to have AirTokens in their possession to participate on our platform and ecosystem.”

Lesson: The SEC reads and reviews everything, including interactions a company has with third-party companies.

11. AirFox offered and sold AirTokens in a general solicitation to potential investors. This means AirFox advertised the ICO to the general public and solicited investments from anyone willing to send them money. In the securities world, general solicitation is limited to certain types of securities under certain exemptions, and allowing any investor to purchase securities, regardless of their accredited status, is not allowed in most cases.

Lesson: If you are going to advertise your token offering (and how else would you get the word out and find investors?) you need to follow securities laws and regulations related to general solicitation.

12. Through a “bounty” campaign, AirFox provided “free” AirTokens to people (crypto advisors) who helped the company’s marketing efforts. AirFox entered into an agreement with a crypto advisor who had previously led similar ICO promotions by other companies. This crypto advisor received a percentage of the AirTokens issued in the ICO in exchange for his services, recruited other people to translate AirFox’s whitepaper into multiple languages and to tout AirTokens in their own internet message board posts, articles, YouTube videos, and social media posts. More than 400 individuals promoted the AirToken initial coin offering as part of the bounty campaign. These individuals also received AirTokens in exchange for their services.

While the SEC did not specifically address this point in their ruling, I would not be surprised to see some regulatory or legal investigation undertaken against these crypto advisors. Depending on several factors that there is not enough publicly available information to know for certain, it is possible these crypto advisors may have conducted illegal broker-dealer activities subject to various regulations. The advertising and marketing of securities is highly regulated and based upon the representations made by those who were paid “bounties” by AirFox, it is also possible that some of these individuals did not follow existing laws and regulations as to how such advertising should be conducted.

Lesson: Follow all securities laws and regulations related to marketing, and only deal with advisors who understand and follow securities laws. When interviewing advisors, ask them about their experience in token offerings that were done in compliance with SEC regulations, not their experience with unregulated ICOs.

13. AirFox aimed its marketing efforts for the ICO at digital token investors rather than the anticipated users of AirTokens.

· AirFox promoted the offering in forums aimed at people investing in Bitcoin and other digital assets, that attract viewers in the United States even though the AirFox App was not intended to be used by individuals in the United States.

· AirFox’s principals were interviewed by individuals focused on digital token investing.

· In a blog post, AirFox wrote that an AirToken presale was directed at “sophisticated crypto investors, angel investors and early backers” of the AirToken project and in a pre-sale, prior to the public offering, AirFox made AirTokens available to early investors at a discount.

AirFox made no effort to market the ICO to the anticipated users of AirFox tokens — individuals with prepaid phones in developing countries. Instead, AirFox marketed the ICO to investors who “viewed AirTokens as a speculative, tradeable investment vehicle that might appreciate based on AirFox’s managerial and entrepreneurial efforts.”

Lesson: If you are going to claim you are selling “utility tokens” in an offering, you should sell those tokens to the ultimate users of the tokens. If you do not, you are likely selling securities to speculating investors, and your argument of selling “utility tokens” falls apart very quickly.

Conclusion (The Final Lesson)

I’ve been talking to (and in some cases, actually representing) token and crypto companies ever since the DAO decision when the floodgates opened to companies realizing that the only safe way in the U.S. to issue a digital asset, token or coin is to follow securities laws. It’s not that hard. Every mistake AirFox made was avoidable, and everything they did to violate well-established securities laws could have been avoided if they had received good advice. Selling investments to U.S. citizens is one of the most highly regulated industries in the world. To think a company can avoid following these well-established laws and regulations just because of a new technology, and because “everyone else is doing it,” is ridiculous.

Can I start openly selling cocaine online to anyone who wants to buy it because I keep the records of the sales on a distributed ledger and track each kilo on a blockchain? No, and nobody would be so stupid to try.[12]

This is not that difficult. The final lesson is: If you want to sell tokens without following securities laws to the U.S. market, you need to be 100% certain they are not securities, and that is going to be very difficult to do in most cases. If you and your advisors are not 100% certain that what you plan to sell is not a securitiy, get advice from reputable securities counsel before you do anything.

Once more thing: if you find yourself creating arguments to get around parts of the Howey Test rather than being able to definitively prove your tokens do not fit the Howey definition of a security, then the SEC is most likely going to disagree with you, and deem your tokens to be securities.

[1]It is important to note these dates. One month before the AirFox ICO, in July 2017, the SEC announced that it viewed the tokens offered by The DAO, an ICO that raised more than $150 million in 2016, as securities. This ruling was widely reported and sent shockwaves through the “unregulated” ICO industry. It would be hard to imagine that those advising AirFox were not aware of the DAO ruling when they started their ICO one month later.

[2]Some “crypto advisors” are persons (nearly always without a law degree) who advertise that they have “helped companies raise millions” in other ICOs (none of which followed U.S. securities laws). They often have influence in the ICO community and on ICO review websites where, in many cases, the review of an unregistered ICO is based on how much money you pay the website.

[3]Or, their advisors Googled it, read the Howey test, and decided “Let’s make like an ostrich and ignore the obvious.” Advisors to ICO companies should not take the attitude of “but everyone else is doing it and raising millions of dollars so it must be okay” or, my favorite, “there are no rules for ICOs, these are unregulated!”

[4]SEC v. W. J. Howey Co., 328 U.S. 293 (1946). The “Howey Test” is the U.S. Supreme Court’s definition of what a security is and has been the law for 76 years. In a nutshell, the four-part Howey Test determines that a transaction represents an investment contract if a person (a) invests his money (b) in a common enterprise and is (c) led to expect profits (d) solely from the efforts of the promoter or a third party.

[5]A “white paper” in the ICO world is a document that explains the business and the offering. In most cases, these documents are heavy on technical language regarding the tokens and blockchain but offer little to no guidance on the financial health of the business and rarely disclose all the risks of investing in the offering. In many cases, these “white papers” are not even close to what a securities lawyer would draft for any securities offering. But, many ICO companies apparently are advised to believe their white paper, with its page of legal disclaimers copied from other white papers found online, will magically protect them from any securities laws repercussions.

[6]The SEC will look at a company’s white paper, any other offering documents, websites, social media, media interviews, and any other online or offline matter related to the offering. If it is publicly available, the SEC is going to review it. Even if it is not publicly available, the SEC may subpoena it. In the AirFox case, the SEC noted that AirFox talked about prospects for development of the AirToken ecosystem on blogs, social media, online videos, and online forums and even gave a specific example of quotes from AirFox’s principals making claims in a YouTube video.

[7]These are typical White Paper 101 inclusions in an ICO. A breakdown of what the funds will be used for (which is actually a normal part of a securities law compliant offering document) and a timeline. While there is nothing wrong with these disclosures, the problem is that these white papers rarely discuss the risks involved with the offering, and almost never disclose anything about the financial condition of the company — staples of a compliant securities offering.

[8]17 CFR 240.12g-1

[9]There are notable exceptions to this rule under certain exemptions from registration, including under Regulation A, as amended in the JOBS Act.

[10]Without getting too technical, if you are a New York City based company, with offices and employees in Manhattan, who sets up a shell company in the Virgin Islands that has no office or employees and you run that company out of New York, you are not being clever and avoiding the fact that the SEC is probably still going to consider you a U.S. company. All you have done is sent up a red flag.

[11]There are other factors to consider, as Howey is just part of the analysis as to whether something is, or is not, a security. But, for illustrative purposes, this section of the SEC’s analysis is very helpful for companies considering a token sale, because it illustrates a potential path to a token not being subject to securities laws, and the possible ability in very narrow circumstances to sell a token outside of securities laws.

[12]Okay, someone might be dumb enough to try. Never underestimate the stupidity of some people. The TV show America’s Dumbest Criminals filled three years of episodes with people who might have tried this. For the record, if a stupid criminal tries this, and says it was my idea, please remember that they are, as noted, a stupid criminal and do not believe them.

Disclaimer (because I am wearing my lawyer hat): Kendall Almerico is a securities lawyer who represents companies raising capital in JOBS Act offerings (Regulation A in particular) and companies that want to sell tokenized securities in a compliant manner through a security token offering. This article does not contain legal advice and should not be relied upon bu anyone for legal advice. It is simply the opinions of Kendall Almerico interpreting certain matters that were recently in the news. Do not rely on this article for legal advice as every situation is different. In all cases, consult your own attorney or advisors.

There, I said it.

Difference between Crypto and Security Token

Is there a difference between cryptocurrency and a security token?

The answer is yes, there is a big difference. And it is time we get these right so the thick fog around this topic can begin to clear up. It is very important to understand how each of them is very different from each other.

You probably read or hear these two words every day and in most cases in the wrong context. Before we get into the difference lets make one thing clear.

Crypto or Cryptocurrency is an alternate (i.e., non-fiat) CURRENCY

All over the web, there are many discussions, blogs, articles, and tweets on using blockchain. Of course, many of them follow to the extraordinary words “Crypto”, or “Cryptocurrency” and “Security Token”.

I am amazed by the number of people who use these two words interchangeably, yet they are so different as stated above. Let’s have a look at each one in more detail.

What is Crytpo or Cryptocurrency?
Wikipedia has a clear definition: “A cryptocurrency (or crypto currency) is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.”

Crypto or Cryptocurrency is just a currency. Other examples of currency are Dollars, Euros, Pesos, etc. These currencies are traded worldwide by currency traders. Nowadays we have the introduction of digital currencies such as Bitcoin, Ethereum, Litecoin, etc. Wikipedia has put together a list of these digital currencies.

Currencies are regulated by a securities commission or foreign exchange agencies. The rules around who can purchase currency and trade them are very simple. In most cases, it is required to be 18 years or older. ID Verification, AML (Anti Money Laundering), and some basic KYC (Know Your Customer) will be done. Not more than this is required to purchase a currency.

For trading, the platforms will need to be registered with commissions and/or regulators in their country to legally operate the exchange. This financial regulator is regulating the currency, transfer, and trading business.

What is Security Token?
In 2017 we saw the emergence of companies issuing tokens to raise capital. In countries such as USA and Canada, regulators have been very clear on this form of capital raising.

When a company offers a token from their company for an investor to invest in, the goal is for the token to trade and gain in value. Security agencies, including the SEC in the USA and the CSA in Canada, have made it clear that when companies are conducting a token offering in which the token has the ability to trade and gain in value, it must be issued as a security token.

Security Token is a tokenized security that is issued by a company. The security represents an equity position in the company. In order to issue the security, the company must comply with regulations as to how it can market the offering, who it can attract to invest in their company, reporting requirements, trading restrictions, and custodianship (Transfer Agent) requirements.

For a company to issue a security token it must:

  • Determine what jurisdiction (countries) it wants to attract investors from
  • Determine what exemption to use to offer their security token to investors (accredited or non-accredited investors)
  • Determine trading restrictions per jurisdiction and exemption
  • Determine reporting requirements per jurisdiction and exemption
  • Determine Transfer Agent requirements per jurisdiction and exemption
  • Determine if Broker Dealer is required per jurisdiction
  • Determine what regulated ATS Secondary Market is available for trading

As you can see it’s clear how different these two are from each other and there should be no confusion going forward.

Here is how the two can come together and be used in the proper context. You can use cryptocurrency to invest in a security token offering by a company. But that can only happen as long as the company has agreed to accept this form of digital currency, the investor meets regulatory requirements, the company can offer their securities in the country (Jurisdiction) of residence of the investor, and if the company is using a broker-dealer, the dealer is also prepared to accept that form of payment.

KoreSummit – an opportunity to learn about what is a fully compliant Security Token

Security Token – and all the technology and buzzwords that go with it – is not an easy topic. Search these terms online, and you can get lost in a labyrinth of links, manuals and definitive guides. Above all, you will find many experts that will guarantee this is the next big thing and they know all about it.

The complexity surrounding the security tokens is second only to the importance it carries in the financial world. It can indeed be the next big thing. If companies get the foundation and development of security tokens right, this has the potential to bring down the market as we know today.

Which only adds more pressure to get to the right information. Take, for instance, the thousands of ICO that emerged with the blockchain phenomena. Thousand of investors thought they were well informed and ended up victims of scams.

If you want to invest in the blockchain, by buying security tokens or offering it through your own company, you better listen to experts. That is why events such as the KoreSummit, in which renowned professionals share their insights with the public, are so important.

No wonder this is an invite-only event. This is exclusive information that you may not get elsewhere. All aspects around the new KoreToken protocol, including the KoreChain, Hyperledger Fabric, and Security Tokens will be discussed with the public.

Usually, you would pay a significant fee to access this type of information. But the KoreSummit is for free, in the same spirit of the KoreConX platform.

You can apply for the event here, and our team will review your application.

Hope we can meet there.

Top Questions a Securities Lawyer will Ask an STO Issuer (in USA or Canada)

Security Token Offering is a serious business. The days of the ICO are over. These are clear messages not only from the SEC and other regulatory bodies but also from thoughtful and experienced professionals. The SEC, in particular, is delivering this message mainly through regulatory actions and the position of SEC Chairman Jay Clayton. Most recently, a federal judge ruled that the U.S. securities laws may cover ICOs, giving the Feds a much-needed victory in their battle against fraud and money laundering.

Regardless of the nuances and the debate, what should be clear to issuers who have legitimate businesses or startup plans is that investors, as well as issuers, require protection. If anything, legitimate issuers should welcome such scrutiny and regulation which ensures the market is kept free of bad actors and questionable affiliations.

However, companies considering a security token offering need to be prepared to respond to questions that their securities lawyers will ask. To this end, we reached out to top lawyers to learn which information is crucial to them when a client reaches out for advice on their Security Token.

The professionals that contributed to this list are Sara Hanks (CrowdCheck Law, LLP – USA); Ross McKee (Blake, Cassels & Graydon, LLP – Canada), Lewis Cohen (DLX Law, LLP – USA); Rajeev Dewan and Kosta Kostic (McMillan, LLP – Canada); Alessandro Lerra (Lerro & Partners – Italy), and Alan Goodman (Goodmans, LLP – Canada).

Below is the list of items on which lawyers and other advisors will be focusing. There is no particular order, but you should be ready when contacting your securities lawyer or advisors to make sure you are prepared. This list is subject to change as the market develops.

  1. What jurisdiction is your company incorporated in and in what jurisdictions is your company doing or will do business?
  2. In which countries are you planning to offer your security token?
  3. Is the company already a public reporting issuer anywhere or are any of its other classes of securities already listed on an exchange?
  4. Will you be conducting a Direct Offering or a Broker-Dealer Offering?
    1. If a Direct Offering, how will you manage all of the regulatory requirements (including “Know Your Client” requirements)
    2. If you aren’t using a Broker-Dealer and you are selling to retail investors, how will you comply with the requirements of states that require you to register yourself as an issuer-dealer?
  5. Will this be for accredited investors only or will it also be made available to non-accredited investors?
  6. How do you plan to confirm or verify accredited investor status?
  7. How do you plan to confirm or verify investors are not on prescribed lists?
  8. Do you have a method to establish the suitability of the investment for an investor?
  9. What securities law exemptions do you intend to rely on for each jurisdiction you want to sell your security token?
  10. What documentation or certification will investors be required to sign?
  11. What is your investor record-keeping system and how do you plan to handle regulatory reporting of the distribution of securities tokens?
  12. What are the tax implications of the sale of the token for both the issuer and the investor?
  13. If ongoing tax reporting (e.g., FATCA) is required, how will that be handled?
  14. Which blockchain is the token going to be created on?
  15. Does the client understand the differences between public blockchains and closed or permission blockchains?
  16. Does the platform already exist?
  17. Do you know which Security Token Protocol you would like to use?
  18. Does the Security Token Protocol manage the lifecycle, custodianship requirements, and corporate actions of the security token?
  19. Does the Security Token Protocol have the capabilities to be managed by a regulated Transfer Agent?
  20. Has the smart contract code for the token been audited by a code audit firm?
  21. What level of assurance does the code audit firm give in terms of their work?
  22. Is the Security Token Protocol implemented on robust, highly-secure, and enterprise-class technology platform?
  23. Does the blockchain for the STO prevent cryptocurrency fraud, unauthorized mining, and forking?
  24. Does the blockchain for the STO provide guaranteed legal finality for securities transactions?
  25. Does the blockchain for the STO provide for recourse with forking or technical intervention in case of errors, losses, or fraud?
  26. Is there a utility element in the token?
  27. Is the security token coupled with a cryptocurrency?
  28. Does the blockchain have a well-defined and published governance model, and are you confident that the governance processes and governing entities are credible?
  29. Does the blockchain have adoption and recognition from financial institutions?
  30. Will the tokens be immediately delivered to the purchasers?
  31. What is the stated purpose of the offering and what is the business of the issuer?
  32. Is the number of tokens fixed or unlimited? Is there a release schedule for future tokens?
  33. How many tokens, if any, are being retained by management?
  34. Will the tokens have a fixed value?
  35. How many security token holders do you expect?
  36. Are you aware of the requirements for a Transfer Agent?
  37. What are the rights of security token holders?
    1.  Voting?
    2. Dividends?
    3. Share of revenue/profits?
    4. Wind up the business?Will the purchasers be seeking a return on their investment or are they buying the token for other purposes?
  38. Will the purchasers be seeking a return on their investment or are they buying the token for other purposes?
  39. What is the exit strategy for the company?
  40. Does your company currently have a Shareholders Agreement?
  41. Does the company have a board of directors?
  42. Do you have financial auditors?
  43. Do you intend to list the tokens on any secondary markets and are those markets in compliance with regulatory requirements that apply to securities exchanges?
  44. Following issuance of the tokens, are any lock-up periods required or advisable with respect to the token?
  45. Are there any requirements that the tokens may only be traded with persons in (or outside) certain jurisdictions?
  46. Once any lock-up period has concluded, where will the tokens be able to trade?
  47. How will any applicable resale restrictions be implemented and complied with? How will subsequent sellers and purchasers of tokens be made aware of these resale restrictions?
  48. How are any requirements for the tokens to trade on a given market or alternative trading system being handled?
  49. Does the company intend to provide ongoing reporting to investors and if so, how will that be handled?
  50. Will the blockchain be used to facilitate any additional levels of transparency?
  51. What social media platforms are you using?
    1. Telegram
    2. Twitter
    3. Facebook
    4. Medium
    5. LinkedIn
  52. Do you know what limitations on communication or other requirements (such as legending or delivery of an offering document) apply to social media communications?
  53. Are you planning set up a “bounty” or similar program that offers free tokens?
  54. Will you be using airdrops?
    1. How are recipients selected and what do recipients need to do in order to receive airdrops?
    2. Have you made sure the airdrops comply with applicable securities law?
  55. Do you have a white paper?
    1. Has the whitepaper been released?
    2. Does the whitepaper include a clear business plan?
    3. What statements, representations, or comments have been made by management in the whitepaper, any other publication, or orally, about the future value or investment merits of tokens?
    4. Should the whitepaper be characterized as an offering memorandum and if so, does it have the prescribed disclosures and notices?

We hope this can assist you in preparing for your security token offering (STO). Obviously, for those who have already raised their money, tokenizing their securities will require some of the same questions.

A Big Lesson from the Delaware Blockchain Amendments

Andrea Tinianow, the founding director of the Delaware Blockchain Initiative (and ‘Blockchain Czarina’), recently published a very insightful article on the significant gap in the mainstream protocols for security tokens. The gap is in the way the Delaware Blockchain Amendments are interpreted by the mainstream security token platforms.

The Delaware Blockchain Amendments were an outcome of the Delaware Blockchain Initiative. The Amendments were introduced in the Delaware Senate Bill 69 and signed by the Governor on July 21, 2017. This landmark legislation allows Delaware corporations to maintain their stock ledgers on a blockchain. In making this provision, what the Delaware Bill meant was that all of the stock ledger data should be maintained on the chain, rather than only a portion of the data.

The more accurate interpretation of the provision bumps up against one limitation that public blockchains face. As the number of nodes in the chain grows dramatically—as it should in a truly decentralized system—the performance of the chain suffers. Validation, consensus, and finality take longer and longer. The problem becomes significant when security tokens are involved, since the data payload of securities transactions is much larger than the normal token payment data within Bitcoin and other payment-oriented cryptocurrencies and tokens. More importantly, contract execution is much more complicated than technical (or cryptographic) validation of transactions. Even simple contracts can generate a multitude of mini-transactions that need to follow a labyrinth of complex processes in the securities world. All this activity generates more data, exacerbating a problem that currently has no clean solution in fully decentralized public blockchains.

One way around this problem is to put securities data off-chain and store the keys on-chain. This can provide some relief on storage but probably not as much impact on performance. Even with the limited payload, the Bitcoin blockchain has grown from around 1 MB in 2010 to more than 170 GB eight years later! Transactions speeds are even less impressive. Hardcore fans of Bitcoin deem it unfair to compare its 7 transactions per second with that of Visa (which conducts around 20,000-30,000 or even more transactions per second), since Visa had over 60 years to improve its technology. Presumably, Bitcoin fans predict that Bitcoin’s transaction speed would match that of Visa if the Bitcoin network too had a couple of decades of improvements. But these arguments miss the point: by the time Bitcoin achieves Visa’s throughput, Visa itself could double or treble its own performance. Ethereum too is facing similar issues and currently experimenting with various approaches, including sharding and proof-of-stake.

In any case, putting securities data off-chain violates the provisions of the Amendments. “Thus, although the ERC-884 is designed to transfer shares of stock, the share ownership information is captured in an off-chain database,” says Andrea Tinianow, alluding to a derivative of the ERC-20 protocol. “This arrangement is in stark contrast to what was contemplated by the Delaware Blockchain Amendments….”

In contrast, the KoreChain maintains all information on the chain. Scalability and performance are not issues precisely because this is a permissioned chain with functional sharding (a topic for another blog) but no mining, proof-of-work, or proof-of-stake. The KoreToken protocol also addresses the full ecosystem of participants in securities transactions. The implementation of services is too important to leave it to interpretations and all the subsequent hassle of reconciling varied interpretations. For example, even the most basic partial sale of security tokens on a secondary market exchange requires a minimum of twenty-five separate sub-transactions involving upto five participants. In order to be robust, real-life implementations have many more steps. Currently, all these steps do take place, but the majority of them happen after the primary sale transaction occurs. These tasks fall into various groups of activities such as clearance, settlement, reporting, disclosure, and corporate record-keeping.

There is no debate that the whole process is inefficient, costly, and error-prone. This makes the process an excellent candidate for true smart contracts on the blockchain. But this does not imply that the blockchain makes these tasks unnecessary. From the context of a naive security token protocol, Andrea Tinianow points out in her article, “Tokenized shares do not eliminate many of the types of errors that are symptomatic of a system that relies on third-party intermediaries to manage and control shareholder databases.” KoreChain, engineered carefully to be fully compliant with all the complexities of securities regulation and corporate law, mitigates errors and creates efficient end-to-end securities transactions without ignoring the risks. The KoreChain implements all tasks that are mandated by securities regulation and corporate law.