The Yes and No of ICO with Avichal Garg (Electric Capital), Arianna Simpson (Autonomous Partners) and Valerie Szczepanik (SEC) | Disrupt SF (Day 1)
3:01AM Sep 6, 2018
One of the biggest stories last year was of course the so called initial coin offering, which took the world by storm. And but one of the things about it is that it seemed like a little bit of a dark art to many people who were only observers. But to unpack that issue and talk about the finer points of Icos, what it means for the future of investment startups and an all of the stuff that we love. Please welcome avichal Garg from electric capital. Arianna Simpson, from autonomous partners and the Valerie ship panic from the SEC. No, no less. And to moderate this panel. We have our very own
john Biggs from TechCrunch, come on up everybody. They can
Welcome guys. There's gonna be good stuff. Okay. So what we've discovered is this is basically just we're just going to gang up on you, Valerie be apologizing. Secondly,
this is an odd panel, because we have to investors and we have someone from the SEC and everybody should be getting along. But it's technical like putting cats and dogs into a sack right? Are you guys friends? We hope
so. You hope so? All right.
Good. All right. We'll see how this works. Is all crypto going to zero? Which is my investment done?
Not my to Bitcoin? I hope not. So it's not going to zero?
Well, it can't
actually give any kind of investment advice here. But
again, nobody's here. Those people are people are just cleaning crew.
Well, I would say crypto in general, probably is not going to zero. And I think even if you set aside like use cases or evaluations or anything, I think the really interesting signal I look at is how many entrepreneurs are going into it. And there's been this really dramatic shift in the last six to 12 months where a lot of the early stage a lot of the best entrepreneurs at the early stage are looking around and thinking about where they want to start companies. And there's this challenge where you say, Well, if I do something in social, is Facebook just going to crush me if I do something in e commerce? Does Amazon just crushed me if I do something and AI does Google just crushed me. And so you start looking around as an entrepreneur and you like, actually, crypto is pretty compelling because you don't have these massive incumbents yet. And so actually, the the talent flow that I think has come in when you look at professors leaving universities to start companies are entrepreneurs starting new things are serial entrepreneurs coming into the space as an early leading indicator that crypto is real. That's kind of what I look out even more than prices, like these early signals of developers and entrepreneurs entering the space. Yeah, I
agree. I think there's been a really dramatic shift from a couple years ago, I think oftentimes, if I think back to 2014, or 2015, it was really teams that had blockchains in search of problems. And now it's actually domain experts from various fields, who want to use the technology in some way to actually solve real problems in their industries, whether that's supply chain, or, you know, any other kind of financial services business.
Yeah, and it's a really exciting time to be a regulator in the space and to be working in an agency that's very receptive to innovation and wants to invite entrepreneurs and developers and practitioners can come in and talk to the SEC, have a conversation with us, and let us know how we can help you understand our rules and regulations that said, if I'm going to keep my job, I have to, I have to say that the views I express today are my own, and not necessarily those of my colleagues or any Commissioner.
But what we've done over the past year at the SEC is set up a FinTech kind of hub where folks can come in and request meetings with us and talk about their ideas, particularly in the DLP space, the distributed ledger technology space, and we've had literally dozens of meetings with folks like you guys. And, and if you bring your advisors into, and we have pretty open conversations, to try to understand the technology and be better regulators through understanding technology and the back and forth that we conduct through these meetings. Okay,
I don't want to go down too much of a regulatory rabbit hole. But so you're part of your you're in charge of digital assets and innovation, right? So the so the,
at what point is your work? What, at what point does your work move into, I guess, the the Canon or the the regulatory system in place of sec right now, but presumably, we can do all sorts of exciting stuff of FinTech. But at some point, you basically draw a line not in the sand, but in concrete that says, Don't do this. At what point is all this stuff going to be solidified? Is it solidified yet? What should some of these startups worrying about?
That's a great question. The SEC doesn't regulate technology regulates conduct, and they uses of implementations and certain technologies. And so our rules and regulations for the most part, are pretty flexible and principle based. And they're meant to cover kind of broad concepts like investor protection, facilitating capital formation, protecting the investor integrity of the markets. And we do that through kind of broad based rules that talk about what disclosures have to be out there, if you're raising money from the public, what trading rules should be in place if you're engaging in secondary trading on in the marketplace. And these rules are flexible, and we don't like to, to build in too many details because by doing so, you could stifle innovation, or you could guide things a certain way that maybe not leaving any room for development to occur. And so part of what we're trying to do is have people come in and understand where those guideposts are so that we can help folks implement their technology in a way that addresses our concerns about investor protection, market integrity and capital formation.
So this is a question for all three of us. We're gonna figure this out how to answer this, given everything we know today, is it a good idea to run an Ico initial coin offering in the US as a US company
is it with me,
I don't want to do all the talking. But, you know, there are there are compliant ways to raise money. We're certainly seeing folks coming in who are trying to either conduct an Ico by doing a registration statement or conduct an Ico pursuant to some valid exemption from registration, or conducting an Ico in such a way that what they're issuing is not a security but it something else. And that the framework that we have in place has a lot of nuances and a lot and every Ico is really a facts and circumstances based kind of analysis under the securities laws. So
I would encourage those people who were who are considering using an Ico to raise money to see competent securities counsel, or at least come and talk to the SEC, and we can help guide guide you through the rules and regulations.
Well, you know, not to give advice one way or the other. But what I've seen in general, in my portfolio, and other companies that are looking to do an Ico is that a, it seems like a lot of companies are postponing, doing one just given kind of general market sentiment and the fact that things have obviously cooled down a little bit after 2017, but also in many cases, they're choosing to, you know, run one out of Malta, or some of the other jurisdictions that seem to be a little bit more friendly in that category. So, you know, I think there's definitely been a pullback from raising money in that way in the United States, because even in cases in which there is a way to do it, you know, in a manner that's compliant, I think it does impose a pretty significant legal and cost barrier for many early stage companies. And, you know, I think that's a little bit of a shame just because, you know, it does risk having many of these companies choose to move offshore. Instead,
the way I think about it is what what, what is the goal and what is your strategy. And I think
what a lot of people are realizing what a lot of entrepreneurs are realizing is there's a lot of money available in the world, but who you raise money from, should come with other value. And so actually, most people who could go do an Ico and would potentially do it in a compliant way and structure properly, I think, are actually starting to think about, well, who do we actually want involved and why. And a lot of the times that actually takes you down a different path than the nice yo it actually takes you to people who have started companies and sold companies and scaled companies and people can actually add value to the, the thing you're trying to build in the world, which probably looks a lot less like an Ico and then there are the potential advantages of something that is like an Ico which is in a distributed network, you might want distributed ownership, and you might want the users of the network to have some stake in it, or to have, you know, access to the utility of it. And there are lots of ways to have that distribution happen that that I think, are much safer than trying to like skirt, you know, the edges of securities law. So in general, what we're seeing is the really good teams are kind of backing off from that and are moving towards more tried and true ways to raise money. And then being really thoughtful about how to do token distributions on the other side of it to their users in a way that sort of avoids all these gray area issues entirely, might
be interesting to go back. So one of the one of my
theories is that what TechCrunch and specific did is it basically it basically solidified that idea of angel seed a BC up until being sold and vanilla equity event. And it basically said to small companies that didn't have a chance. And very many cases, here are the things that are that are compliant you can do to raise money, and you can have this money, you can put in your bank account, you can build a business, the VC, VC world kind of went along with that, then we also socialized entrepreneurs with incubators and accelerators and everything to make everybody figure out how to make a PowerPoint correctly, what's it going to take to move to the next level is the Ico the next level, is there still room for a VC in that world, I guess we can start from the beginning again,
you know, I think at the SEC, we're not going to tell people what's best for them from a business sense. But we're willing to talk to people about what ways to do things that are compliant,
and whether or not people consider still using Ico, you raise some good points, you have to decide what your ultimate business looks like, and who you who you want your investor base to be, and who you want your advisors to be, and how you want to go about doing that. And I think there are some definite advantages to distributed ledger technology, what we're seeing now is the application of that technology into more traditional systems. And, and that's exciting to see how that's gonna play out. But in terms of fundraising, I think it's really going to be up to, to the folks involved in what they want to achieve.
So I think if you look back every, every 10 years or so, kind of from putting on like, the investor hat for a second, every 10 years, we kind of have this, this change in the market where what it means to do a company kind of evolves. And so 10 years ago, that was like, Y Combinator and first round, and kind of the era that you were talking about. And before, that was kind of when a lot of the, like, big internet VCs kind of came into their own. And there's an era before that with, like, hedge funds and public market stuff. And before that was like ETFs, and index funds. And so I think what we're actually seeing now is a lot of mega trends that are kind of coming together, which is there a lot of really smart people all over the world, there's a lot of money all over the world, there's a lot of desire, because of macro conditions for people to want to seek risk. And when exposure to this stuff, the access to technology, and the ability to like write code is a thing that has now spread all over the world. And so you're having all these new companies that could potentially emerge, and people are experimenting to try to figure out what the right structure is. And, and kind of every decade when that happens, you get new native funding firms that come in, and they look different than the previous generation, right. So Y Combinator just did a different thing than what the VCs were doing. And they targeted, you know, initially younger people. And they gave him very little money, or what looked like very little money at the time, and had amazing outcomes. And so I think kind of what's happening here is, we have a lot of things that have changed in the world in the last 10 years, and lot of experimentation that's now possible from the from the investor side. And so what you're going to see is a bunch of new native firms that kind of emerged that take the best properties of what's possible now, and take the best practices from what was possible, and then do a bunch of stuff really, really differently. So for example, if you're a VC, your usual model is to invest in a company and then hold it and and hopefully there's an IPO or some sort of liquidity event in token land, a lot of the times the the listing can happen on exchange in two years. But that effectively looks like a series a company. And so how do you think about managing that liquidity for what's effectively a series A or Series B company over the next seven years of the life of that company? And to manage that question, I think you have to have a different way to think about the business and, and the liquidity and the operations of that company. And so you're going to get firms that do that natively, which is why I think like, where we see opportunities, actually, a lot of what you need to do day to day just looks different. And so you're going to get new firms that can sort of fill that space does that give you guys pause, as well as the SEC, I give you guys pause when you see a company that that has like two people in a garage, and all of a sudden, they have $80 million to play with, like, they could go to the Mars essentially. But they're still small, small, small companies with a failure rate of 99%, Does that concern you? Well, I
think the problem is that companies seem to spend however much money they raised in a given amount of time, no matter how much they raise it, some sort of like magical law of the universe. And so when you're raising, you know, a couple hundred million dollars, all of a sudden, that starts to become a kind of a serious amount of money. And so what I'm seeing is a lot of companies or projects that raised massive amounts of capital last year are now like, oh, what do we do? Because, you know, they're sitting on a huge amount of money, they're trying to figure out treasury management, do we convert to Fiat, do we keep it in crypto, all of a sudden are $200 million is now 25 million, because, you know, the markets down and then it's back up. So I think there's a lot of kind of open questions that are being sorted out on the fly. And and, you know, in many cases, companies are learning the hard way that maybe having all of their assets and crypto is not the right move. But, you know, it's an open question at the moment. Well,
yeah, I think the growth has been so rapid and so
hard to keep up with, not only from a regulatory standpoint, but also from the standpoint of those using the technology and you make a great point, if you raise too much money, what are you doing to manage that Treasury and to preserve assets for the, for your project and for your token holders, and
and the folks that raised the money don't always want to be focusing their time on that kind of thing. They want to be focusing time on development and moving the project along. So there's a lot of considerations and, and again, around cyber security issues, key management, do you keep your assets in crypto because of the fluctuation of volatility and market so there's a lot of things to think through. And sometimes, you know, the ability to raise 150 million dollars worth of ether in one month. It has its problems do it poses problems, and hopefully, people are starting to think through those things and, and managing those issues.
Yeah, I just realized that the best thing about this panel is that if any one of us said the wrong thing, we can take the market in about 15 seconds to be a little more careful
than my usual cavalier attitude towards all this.
Will the US have to play catch up to regulations that are happening worldwide? Malta, we said Malta, with China is changing regulatory positions all the time, are we playing catch up? Are we leading? what's the what's the position? The SEC,
I think we're leading I think we've been out
we brought a series of enforcement cases, but we brought them in very impactful and deliberative way in cases where we thought we were sending messages or stop fraud,
we are actively engaging with entrepreneurs and practitioners through these meetings in a way like I've never seen before at the commission. And it's really an open door policy.
We are coordinating internationally and domestically with our other regulatory and law enforcement partners around issues in the crypto space. And I think each jurisdiction has its own regime to deal with and its own laws to deal with and some jurisdictions are more discreet or they have one financial regulator for the entire ball of wax. That's not the case in the United States. There's many financial regulators there's a states that we have to deal with as well. So but I've always felt like we are leading the pack and in nations are looking to what we're doing and we're looking to what they're doing to we're sharing knowledge so the global issue and there are issues to be dealt with on that scale but I do think that uh, you know, we're trying to he did do it in a responsible way. So it
so you would you would wager that and I've seen a lot of the rulings the the vast majority of time that the folks that you go after literally being fraudulent as opposed to creating something that is new, so there's not there's not a bias against technology, but it's bias against being a bad actor, right? Correct. Okay, we have just a few minutes left, I like I like these futuristic ones. 10 years from now, I just graduated from Stanford, and I have a great idea for for, I don't know, implanting microchips of the cats or whatever, and how am I raising my seed round? Am I going to you guys Am I doing Ico? Tom, tell me about that, that vision next 10 years, if all goes according to plan,
I think it probably looks a lot like it does today. I think the the, you know, there's, there's a lot more money in the world, and there are people who can help you. And so the, it'll probably re re aggregate around people who actually create value. And the really best entrepreneurs are going to look around and say, Okay, I could raise money from a lot of people who do I, they want involved with my company who can actually help me and you know, a little bit of a, I think a contrarian thesis that I have is that a lot of crypto and the value in that ecosystem will actually re centralize in Silicon Valley, just like we did for, you know, self driving cars, and transportation as a service and share economy and social and you kind of go back for the last 30 years, even though it often starts outside Silicon Valley, it's tends to re aggregate here. And I think it's because the tribal knowledge of how you start a thing how you get to product market fit, how you scale a business, and how you do that over three years, going from nothing to a billion dollar company. That's tribal knowledge that sits in the heads of a relatively small number of people. And most of those people are in like a 20 square mile radius of this place. So I suspect it actually looks a lot like what it looks like today. But the actors are different. And the skill sets that you need are different and how you raise subsequent rounds will be different. But actually, it will look you know, like 50,000 foot view, it'll probably look a lot like it does today. Good
as long as the apartments stay as inexpensive as they are maybe matter halts
Go for it. Yeah, no, I would agree with that. I actually very much agree with avichal contrarian view. So maybe not so contrarian, or we're both contrary let's put it that way. No, I do think that, you know, there is a really strong concentration of talent here, which you really can't replicate in any other way. I think it will probably look similar. But I do think there will be, hopefully, from Valerie and her friends at the SEC, a little bit more clarity around some of the gray zones that still exist, just so that entrepreneurs have a process to follow, because I think in many cases, folks want to be compliant. And even after checking with multiple the top law firms, they're still not sure about certain points. And, you know, I think in the next decade will certainly have clarified what a lot of those answers are.
Okay, this is a tricky one for you, what's the what would you expect the next 10 years to look like, for for this space,
I think our current chairman and our current division director at the Division of Corporation Finance are very keen on efficient, efficient capital formation, and using the way for people in in a way that's promoting innovation and promoting the growth of public companies. And so we're very receptive to new technologies that can add to those efficiencies, and add to investor protections and market integrity. And I think folks are coming in with more and more sophisticated ideas and starting to see how they can kind of come into compliance. So I think over the next couple years, you're going to see breakthroughs, you're going to see people kind of finding a way through that may be a model for others to use. And if it makes sense. And then long term, I think you'll see the implementation of this technology and kind of new and exciting ways that we we can't even anticipate right now what are
the timelines for these regulations? Because one of the most frustrating things I see is you see like a news story somewhere that says, sec said x, and it has no no real bearing on anything in reality, but they just somebody just said something. What are the timelines on final regulations, maybe you can go back to some of the regulations previously like
the crowdfunding equity crowdfunding laws that came out a couple years ago.
I mean, I think I think folks have been using crowdfunding and Reggae Reggae, plus reg D. I don't know the numbers, but our chairman just recently spoke at a conference in Nashville incited some of those statistics and I think so you'll see the use of those
capital raising rules that are meant to kind of ease the regulatory burdens. But you know, you might see the use of Icos in a way that we didn't expect before, but in a compliant way to raise money. But how
long would How long does it take until there's a document that says do this, not this,
some of that depends on the industry. I mean, we we we've had for years, ways for people to come in and ask us for either exempted relief, interpretive relief, no action letters. And so my prediction is that folks will start
reaching a point where they'll come up with a plan that makes sense for them as a business and
and they'll present something to the commission staff, and then we'll have to act on it. And and we've done that in many, many different areas where we've given either interpretive relief, interpretive guidance or no action relief, okay.
And these guys are looking like puppies at you. So how can they get in touch with the SEC to get a little more information, like they just walk into the office or what's there,
now we have a firstname.lastname@example.org mailbox and we get literally,
you know, dozens, hundreds of inquiries through there. And if folks want to reach out to us for a meeting, we we usually reach back out and ask them for, you know, more information, a project and white paper a presentation. And then we set up a meeting with the, with the right people in the room, depending on what the if the implementation is capital raising, you know, it's folks from my division, if it's trading platforms, it's folks from the vision of Trading and Markets. If it's some structured product, it might be someone investment management, but we have the right people in the room to kind of talk through and have a meeting with folks. All right. Wonderful. Where
I want to ask, like, what's the wackiest Ico idea that you've seen?
You guys have any that you can think of?
I think it's kind of crazy that we have this concept at all.
There's no no one that I want to call out. But I think it's kind of a crazy I mean, if you'd round there's like, if you step back for a second, you're like, Okay, rewind 10 years, somebody anonymously publish as a white paper and says, here's this thing and I'm gonna invent this thing and trust me there will be this like string of digits and people will pay you real money for the string of digits and then you can take those two digits and sell them to somebody else and I'll give you real USD back you've been like that's bananas like what are you talking about? That makes absolutely no sense. So the fact that we're even having this conversation is already I know
I got I got some prime numbers right here as you said, you guys up thank you very much for this. This lends a lot of clarity and I hope everybody was was enlightened right. Alright, thanks a lot, guys.