US SEC approves regulated token offering for the first time
On Wednesday, July 10 the SEC approved New York-based blockchain startup Blockstack to launch a $28 million token public offering. Blockstack announced it would commence the sale of its Stacks tokens on Thursday July 11. As the first offering of digital tokens to be approved by the SEC under Regulation A+, Blockstack’s offering is a potentially groundbreaking moment for the cryptocurrency markets.
Blockstack sponsors an open-source peer-to-peer network for decentralized applications. According to Blockstack, a total of up to 295 million “Stacks” tokens will be offered under the approved Regulation A+ offering.
First, up to 215 million Stacks will be offered at a discounted purchase price of US $0.12 to current holders of non-binding Blockstack vouchers.
Second, at least 40 million Stacks will be sold for $0.30 to the general public. Furthermore, Blockstack has stated that it will allocate up to 40 million Stacks to developers that created the top-ranked applications within the Blockstack ecosystem. Per Regulation A+, the aggregate amount of capital raised in the offering will not exceed $50 million.
Blockstack will be offering Stacks through its website, where potential investors can review an electronic version of the offering circular and execute a subscription agreement. Once an investor buys Stacks, they will be able to use them on Blockstack’s network.
What is notable about this offering is that Blockstack chose to offer its tokens in a different way than its previous token sale. In 2017, Blockstack raised approximately $47 million through a token offering which relied on Regulation D. Like Regulation A+, Regulation D is an alternative to a traditional public offering, where a company can offer and sell securities without having to register with the SEC.
Although raising capital through an offering in reliance on Regulation D has fewer requirements than a public offering, Regulation D has certain limiting conditions such as dollar limits, issuer and investor suitability requirements, restrictions on resales and more.
In contrast, Blockstack is now relying on Regulation A+, which was adopted in 2012 as part of the “Jumpstart Our Business Startups” Act (the JOBS Act). Regulation A+ allows an offering to be open to the general public and the securities being sold are not deemed to be restricted securities. However, Regulation A+ imposes its own limits – notably that the offering is limited to US $50 million being raised in a 12-month period.
Practical Considerations for Other Token Offerings
While this offering being approved by the SEC is a significant, there remain practical considerations for others wishing to follow the same path. The biggest of which is that the approval process is lengthy and costly. In fact, according to WSJ, Blockstack spent about ten months and $2 million on the approval process. This means that newly formed startup businesses are unlikely to be able to raise capital under Regulation A+ without first obtaining funding through more traditional routes such as friends and family and venture capital. In this case, Blockstack had already raised $5 million from venture capital before it launched its first token offering in 2017.
Regulation A+ offerings have also been less popular due to disappointing performance and fraud concerns. The WSJ recently reported that both Nasdaq Inc. and the New York Stock Exchange are moving to raise listing requirements for Regulation A+ companies. Consequently, the cost of a Reg A+ offering may continue to rise.
What’s happening next?
Overall, it is too early to tell how the Blockstack offering will impact the market. On the one hand, initial coin offerings (ICOs) have been on the decline and blockchain companies may be encouraged to use Regulation A+ as a means of raising capital because the enhanced disclosure and regulatory scrutiny requirements provide comfort to potential investors.
On the other hand, conducting a Regulation A+ offering is both time-consuming and expensive – which could offset the desirability of Regulation A+ to a startup without deep pockets and time to spend. Therefore, it remains to be seen whether the Blockstack offering is the first of many Regulation A+ offerings conducted by blockchain companies, or simply an interesting footnote in the cryptocurrency markets.