Capital Formation in the Crypto Era
Until recently, all an entrepreneur had to do to launch an Initial Coin Offering ("ICO") was find a programmer to write an Ethereum smart contract in Solidity, post a whitepaper and circulate a wallet address. Capital would come roaring in.
Of course the entrepreneur risked an enforcement action by the SEC's Cyber Unit, which could include a freeze on assets, disgorgement of the funds, a ban from participation in the capital markets for two years and possibly fines and jail time.
That's one reason we created Indeco, the "independent ecosystem" for issuers of and investors in security tokens. We felt it should be just as easy for entrepreneurs to comply with SEC regulations as it was for them to go rogue.
Before crypto, compliance was easy. Most venture capitalists used generally the same term sheets and forms for convertible promissory notes and equity investments. Because companies remained private and there was no liquidity or active trading for years, if ever, entrepreneurs could find a good lawyer and then learn as they went along.
Now, with the combination of JOBS Act Regulation Crowdfunding and crypto assets, seed stage companies need to perform like public companies or risk alienating investors and losing access to capital.
We've developed a complete platform and end-to-end solution to support companies from the inception through launch and beyond. This platform includes the security token, crowdfunding portals compliant with the major SEC exemptions (Reg CF, Reg D and Reg A+), forms, training, community and partners.
Our ambitious goal is broad acceptance of a new type of security that is neither equity nor debt, but rather a pure crypto asset that replaces the wasteful, expensive and predatory capital markets with a direct connection between issuers and investors on the blockchain.
Benefits for the issuer of this form of security token include the following:
- There is no dilution of equity holdings in the company.
- Investors have no control of the company, board seat or votes. Project team has full creative control.
- Less paperwork and administration than equity and debt, mostly automated.
- Never has to be paid back (like debt).
- You don’t have to wait years and go public or sell your company to get liquidity and generate real wealth.
Benefits for investors:
- Rapid liquidity.
- Ongoing periodic distributions, bonuses and payment streams.
- Ease of management, storage and records.
- Increase in value based on project performance, not company execution.
- Opportunity to contribute to success through participation in the supporting community.
Major Milestones toward a Security Token Offering
We've devised a system that will support entrepreneurs in reaching substantial capitalization for their projects through a Security Token Offering ("STO"). Here are the steps:
- Preparation for Regulation Crowdfunding (Reg CF) campaign.
- Developing whitepaper
- Honing economic model
- Producing pitch video and infographics
- Writing risk factors and disclosures
- Legal and accounting review, corporate governance
- Launching and closing the Reg CF Campaign
- Filing Form C with the SEC
- Unveiling Deal Page on CryptoLaunch
- Promotions and Growth Campaigns
- Raising $1,000,000 over 90 days
- Continuing fundraising under Reg D 506(c)
- Preparing Private Placement Memorandum
- Marketing to Accredited Investors
- Pitching, closing and funding
- Preparation for Reg A+ Security Token Offering
- Preparing and filing form 1-A with the SEC
- Responding to SEC comments
- Achieving qualification for public STO
- Launching Security Token Offering, Raise up to $50M
- Developing channels and partners
- Promotions and pitches
- Closing and funding!
With our model, the entire process can take as little as 120 days. Much of the work for the Reg CF will be useful for the Reg D and Reg A+. Until sufficient funds are raised, all focus is on capitalization.
Entrepreneurs will have a dedicated support team to see them through the process.
The process can seem daunting, but our assumption is that entrepreneurs are at a very early stage, and all of these materials can be developed in a team effort, through an interactive process. Entrepreneurs will have complete control over all results, including the deal page, video, graphics, promotions, social media posts and any SEC filings.
Deliverables and Source Material through Reg CF
Before getting started, it's helpful to organize source materials into a few files and folders for efficient review. Here are some suggestions for assembling source material for particular deliverables.
The whitepaper will serve several functions, including the business summary for the Form C, PPA and Form 1-A. The whitepaper should describe the economics of the security token, the broader project purpose, costs and product/market fit. The whitepaper is essentially a business summary.
Source material for the whitepaper can include pitch decks, graphics, videos, flyers, ads, business plans or brief narrative summary of business and spreadsheets. Any source materials describing business, marketing and economics is helpful.
Due Diligence and Corporate Governance
Entrepreneurs can streamline the entire process by creating a special purpose entity for the eventual issuance of the security tokens. We'll review the current corporate structure and suggest an approach that will support the issuance of crypto assets in a crowdsale.
Source material can include the following documents:
- Articles of Incorporation/Organization
- List of directors, executives, officers & key team members
- Capitalization table
- List of Intellectual property
- Copies of any outstanding loan documents
- Tax ID number
- Corporate address, state of incorporation
- Introduction to lawyers, accountants and other service providers (if any)
- SEC filing codes
- List of patents, trademarks and assignments
Form C Filing
In order to raise funds under Reg CF, a Form C must be filed with the SEC. An accounting review is required, but an audit is recommended. This is to save time in the Reg A+ filing, which requires an audit. One of the reasons for creating a special purpose entity is to save time with the audit.
To prepare the Form C, we'll need the following:
- Brief bios/resumes or linked-in connections for directors, executives, officers & key team members
- Social security numbers and home addresses for directors and officers for Bad Actor Check
- List of material customers, vendors, products and agreements
- Reproducible graphics for marketing purposes
- Comparable companies/competitors (particularly public ones)
- Major risk factors
- Copies of available financial statements
- Current expenses
- Pro-formas (grown of expenses, projected revenue)
Development of the Deal Page and Video for the Reg CF Portal
You'll provide (or we'll produce) the following:
- Logo, corporate colors and identity manual
Growth and Promotions Plan
We'll collaborate on the development and execution of a marketing plan to mobilize fans, customers and community in support of the token pre-sale, compliant with Reg CF advertising rules.It's helpful to organize the following:
- Customer, supplier and partner email lists
- Access to social media accounts and plan for maintaining those accounts
- List of champions, influencers and fans
- Current investors and advisors
That's enough to get through the initial Reg CF launch and get some capital in the door. Once sufficient funds are raised, the next steps are initiated to continue the momentum for capitalization.
This entire system is designed to provide the capital necessary to execute on your plan as efficiently as possible. If done correctly, the whole process will be fun, enlightening and ensure the success of your endeavor!