Quick Take

  • Blockstack is raising more money to build out its blockchain, registering its token under Reg A+ (a first for a crypto project.)
  • Despite the qualification allowing it to conduct a security sale, the company doesn’t view Stacks as a security token
  • Some industry members are doubtful that the Reg A+ model will benefit crypto companies, since Reg A+ generates more success for companies with an easily understood product

Blockchain startup Blockstack garnered the first Regulation A+ clearance for an initial token offering, but that doesn’t mean other crypto startups should rush to do the same, according to industry experts. 

The Securities and Exchange Commission (SEC) cleared Blockstack’s $28 million token sale under the Reg A+ framework, which allows companies to conduct an initial public offering (IPO) with fewer regulatory hurdles. Sort of like an “IPO lite.” Such offerings are capped at $50 million, and in turn, smaller companies don’t have to contend with the more stringent disclosure and accounting standards of a traditional IPO.

Still, while Blockstack has cleared the way for other crypto companies to utilize the fast-track, according to Darren Marble, CEO of Issuance and Reg A+ expert, they probably won’t.

“I think Reg A+ is a great fit for established businesses, but not a great choice for startups,” he said. “And by and large, most blockchain or crypto are pre-product or pre-revenue.”

Marble said the Reg A+ route is great for companies with a physically built product, like a car, but a company like Blockstack isn’t the right fit because it isn’t offering a consumer product that will relate to the average investor. Other Reg A+ IPOs have come from the likes of product companies like Chicken Soup for the Soul, a popular anthology franchise. Blockstack doesn’t offer a product most people understand, according to Marble, and neither do many other startups in the crypto space. 

“This is probably the absolute worst type of company to raise money from retail investors in a Reg A+,” he said. 

Still, the visibility of being an industry first could benefit Blockstack, with the novelty of winning the race to a security token ICO driving interest. 

Although the Reg A+ framework is faster and more efficient than a traditional IPO, and is designed as a sort of “mini” IPO, Marble said the amount of work will still likely deter emerging crypto companies from trying, and succeeding, in their own Reg A+ token offering. 

“You need a marketing partner, legal partner, there’s tons of paperwork relative to a Reg D,” he said. “It will deter the vast majority of companies that might get excited about this coming to the space.”

Indeed, Blockstack already raised $47 million through a Reg D offering, which doesn’t require SEC approval and is only limited to accredited investors. Reg A+, in contrast, is open to all with the caveat of SEC approval.

Reg A+ has been negative for some companies

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However, there are more reasons to be wary of Reg A+ pursuits, with LongFin still casting a long shadow over the regulatory path. The cryptocurrency company used the framework to conduct an IPO on Nasdaq before incurring a fraud lawsuit from the SEC and tanking much of its value before its delisting. 

In the wake of the Longfin debacle, Nasdaq sought to step up its standards for Reg A+, proposing an SEC rule change, which was approved by the regulator in late June, requiring a minimum two-year period from the time of launch to seeking Reg A+ approval. 

Still, other experts think that Blockstack’s move could open the door to other crypto firms following suit, according to Mason Borda, CEO of TokenSoft. Borda said he’s seen interest from companies seeking to take similar technology toward Reg A+ since 2017. 

“Anytime a new regulatory path is charted under the SEC, issuers use it as a template to do the same,” he said. “We’re expecting a significant uptick in demand for going down a similar route.”

Indeed, YouNow did the same thing soon after, registering its ethereum token, Props, with Reg A+. The announcement came a day after Blockstack’s approval.

Blockstack says it’s not a security

What’s striking about Blockstack, however, is that the firm doesn’t think its token “Stack” is a security.

So why register it in a mini security sale? 

According to Blockstack CEO Muneeb Ali, Stacks are a utility since its blockchain is live and there are tangible applications for the token. The company sought Reg A+ approval since certain jurisdictions could see the token as a security. Ali said on the U.S. side, they’re proceeding with an “abundance of caution” and complying with security tokens. To be sure, Stacks don’t represent equity in Blockstack and they don’t pay dividends. 

That raises a number of questions, including whether these tokens will be allowed to trade on open markets, such as Coinbase or Binance. Ali said for the most part, the onus is now on exchanges. The tokens are set to trade on peer to peer exchanges, but in the U.S., these exchanges would need be registered securities exchanges in order to be compliant. This could limit Stacks to trading on exchanges like Huobi and Binance. An anonymous project manager agreed with Ali’s view.

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Blockstack said exchanges could trade the token if they decide it doesn’t qualify as a security, and the project would be exposed to no legal risk. 

Yet, others aren’t so sure Blockstack is off the hook. An anonymous industry source raised questions surrounding Blockstack’s burden in a trading situation.

“Is the token going to have any trading restrictions embedded to prevent illegal trading?” they asked. “Are they planning to use a transfer agent? What do they think of 12g rule in their context?”

However, Ali said the hope is these questions will eventually fall away from Stacks with SEC guidance proving the token isn’t actually a security, mitigating the concern. In the event that the SEC clarifies its definition of securities, Ali said Blockstack would backtrack on its A+ offering, and Stacks would remain a plain old utility token rather than its dual status.



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