The Gamification of the Blockchain

Depending on your generation, you may be shocked to learn that the movie business is dwarfed by the financial might of the videogame market. The latest Star Wars movie, The Last Jedi, has generated $1.3 billion worldwide. In the videogame world, Candy Crush Saga, a 2012 released mobile game with more than 2.7 billion downloads, is estimated to have generated more than $4 billion. It is still going strong as one of the 10 highest grossing mobile applications in 2018.

Games are as much about telling stories as movies. The Legend of Zelda series launched in 1986. The saga follows Link, a Hylian from the land of Hyrule. He attempts to save both Princess Zelda and Hyrule from Ganon, using the Master Sword which can only be found through many trials and tribulations. Through gameplay – through a series of games – we learn about Hyrule, its “people” and its rulers. And we grow to bond with Link as we follow him from childhood into his adult years.

Likewise, the use of games has become increasingly important in the field of education. By engaging students in “games” where they earn points, rewards and recognition for academic achievements, they are more likely to see improved results.

It also has spurred the growth of emerging technologies like virtual reality and augmented reality. For a few months in the summer of 2016, you couldn’t find a young person who wasn’t in an augmented reality world exploring Pokemon Go on their cell phone.

So what does this have to do with blockchain?

On November 28, 2017, Axiom Zen unleased a virtual cat game on the Ethereum blockchain. In December, CryptoKitties virtually halted transactions flowing through that blockchain for nearly two weeks. The game, which generated more than $5 million its first week, helped illustrate to a new group two key components of Ethereum. First, the transmission of value – money – through the token value of Ether could be done seamlessly, cheaply and quickly (although the last two were impacted by the very success of the game). And second, it demonstrated the ability of developers to deploy applications on the decentralized blockchain using smart contracts.

A CryptoKitty is essentially a unique playing card. Each one (described by the game producers as a “breedable Beanie Baby”) has a 256-bit unique code. The gender-fluid Kitties, when combined with another Kitty, produce virtual offspring with up to 4 billion possible genetic variations. A secondary market then values the uniqueness of the Kitty, resulting in profit based on a combination of luck and growing demand for the collectible.

A CryptoKitty sold for more than $100,000 during the first week of the game, with the average Kitty selling for “merely” $25. Every 15 minutes a new Kitty is released for the first year by the “system”. The starting price is set as the last five sold plus 50%. Remember, you need two! Some Kitties can breed every minute (that’s the characteristic that led to the $100,000 off-spring), while others must wait a full week.

CrpytoKitties aren’t the future of on-line gaming. But they do illustrate that people are interested in games with an element of gambling and financial risk. This is a truth that must be acknowledged to explain the over-exuberance in these early days of the cyptomarkets. Of course, the same thing should be said about the early days of the Internet financial markets too.

The real lesson – aside from people’s love of gambling- is that crypto is about more than moving money quickly and seamlessly using blockchain. The promise of Ethereum and so many other newer cryptocurrencies is that the chain will power decentralized applications. As a bonus explaining how the next Facebook, YouTube or whatever else will run on the blockchain is now a lot easier. And it is all because of a simple game using simple “smart contracts”.

So while today’s games – and today’s applications – are mostly run on centralized servers, the gamification of the blockchain has begun. Blockchain is about more than tokens and money. It is about the ability to utilize worldwide computing power to more efficiently breed and transact one CryptoKitty at a time.

The Case for a Registered Crypto Exchange

Presently, 21 national securities exchanges are registered with the Securities and Exchange Commission. The primary way to legally and easily trade a registered security in the United States are through a national securities exchange. Yet, no exchange is dedicated to the rapidly growing issuance or sale of cryptographic assets, like cryptocurrency.

The explosion in tradeable cryptocurrencies has predictably raised eye-brows of the SEC. In July 2017, the SEC issued a cautionary report to inform potential issuers of initial coin offerings (ICOs) that cryptocurrencies, which functionally act as securities, must be registered or fall under an exemption prior to being sold – just like any other security. Likewise, the SEC noted that any company engaging in exchange activities must register as a national securities exchange or operate under an exemption from registration.

There is no question that several of the thousands of this year’s ICOs or those in the pipeline are in fact securities. SEC observers know it is only a matter of time until the SEC takes strong enforcement action to shut down the illegal system that funded over $3,350,667,608 into ICOs during 2016 and thus far in 2017 alone. But the sheer volume of transactions and the overwhelming success of selling investment opportunities on the blockchain lead to one inevitable conclusion. Over the next several years, more and more issuers will want to offer their securities using blockchain’s distributive ledger technology and allow their resale in secondary markets. And the SEC already made it clear, only a registered exchange is permitted to act as the conduit for trading securities.

There are several structural reasons why the existing registered exchanges like NASDAQ and the NYSE are going to be reticent about changing their centralized exchange into one that functions on the blockchain. Challenges exist because of technological hurdles and entrenched political issues with stakeholders, including the broker-dealer network and transfer agents that a blockchain based exchange threatens to displace. On the other hand, the creation of a blockchain exchange is inevitable.


Some Data

During Q2 2017, issuers used ICOs to raise approximately $729 million, compared to the only $235 million raised from venture capital groups. In addition, there is hundreds of billion of market capitalization. ,

For perspective , 2017 has seen roughly $52.6 billion in U.S. venture capital-backed deals – which were surpassed by ICO raises in June and July of 2017. Issuers raised $51,207,390 under Regulation Crowdfunding between May 16, 2016 and October 23, 2017. In the first 18 months post effectiveness of the Regulation A amendments, issuers have raised about $1.8 billion. There is practically no market for resale for any of those offerings (although a small handful is in fact available for trading).

Why Care?

Obviously a great deal of excitement was generated by the confluence of the Bitcoin explosion with a white-hot pent-up demand for investment opportunities normally only open to venture capital groups. Pent-up demand exists because small and mid-size businesses historically avoid selling investments in their company – or else afoul of securities laws.

Instead, these companies are now selling cryptocurrencies best described as “utility tokens.” Determining how this differs from a “security token” has frankly resulted in a lack of clarity. One thing is clear, however. Stringent enforcement actions face unwary token issuers in the coming months and years.

An Analogy to Help Understand What’s Happening

Imagine that an entrepreneur has come up with the engineering design for a self-driving semi-truck truly capable of moving goods across the country without a driver. The prototyping and semi-truck building is highly capital intensive, so off goes the entrepreneur to raise money. Certainly if he attempts to raise money for the company by selling equity, he will need to comply with securities laws. Those laws are complicated to the uninitiated and slow and cumbersome to the eager entrepreneur. Instead of selling ownership in the company, our entrepreneur friend decides to announce that the self-driving semi-truck won’t run on regular gasoline. Or diesel. It will use special fuel.

Now instead of selling interests in his company, he sells barrels of special fuel to investors. And these investors can either store the special fuel or start buying and selling it right away. And although that special fuel isn’t actually used by the semi-trucks that haven’t been designed yet, the investors happily partake in the effort to fund the company and to have special fuel that they can immediately sell. Depending on the market conditions, they can make a lot of money on the idea that soon the entrepreneur’s semi-trucks will run on special fuel. The entrepreneur finally gathered money necessary to startup his semi-truck business- despite that many challenges beyond raising capital (product risk, market risk, regulatory risk) remain forefront.

But here’s the glitch. If you asked those investors what they’d prefer: special fuel or an equity piece in an exciting company that was creating a new mode of driverless transportation – we already know the answer. Moreover, those investors faced with the choice of a six month (or indefinite) holding period or instant liquidity, hands down will pick liquidity. In short, investors want the best elements of a utility token (the fuel that runs a product) – the ease of purchase and liquidity. At the same time they want to own a piece of the action.

Securities law won’t change overnight. But we must recognize that millions of people are putting billions of dollars into utility tokens because we have somehow failed. Securities law is about transparency. It isn’t about regulating something making it too expensive, daunting, slow and, thus, useless.

The gap between JOBS Act crowdfunding and what has happened in the ICO market is wider than any ocean. We must recognize that while the power of the blockchain will revolutionize the Internet, our ability to fund companies cannot be sustained while we sell imaginary fuel instead of an upside of investment in a high-growth enterprise.

The blockchain will evolve slowly over the next few years. As we begin to see the enforcement ramp up to stop fraud, we cannot forget that our regulatory scheme must adjust to honor the opportunities that investors demand.

*A special acknowledgement to Amanda Salvione, Esq. at Radix Law for her input and assistance.

Real Money for Fake Things and Steve Bannon

Remember Steve Bannon? The leader of the alt-right, former Chief Strategist to the President of the United States and Executive Chairman of Breitbart News has a much more complicated past than most know. And one of the stops on his journey coincided with the birth and explosive growth of cryptocurrency.

After serving as a Naval Officer, Bannon made his way to Georgetown University to earn a master’s degree in National Security and to Harvard to receive an MBA. He then went to Goldman Sachs for a period of time before he started his own investment bank. As part of his compensation relating to the sale of Castle Rock Entertainment, he received on-going royalties for a handful of television shows, including Seinfeld. He produced 18 films during the 1990s. For a couple years, Bannon was the head of the Biosphere 2 project located in southern Arizona. The project focused on space colonization and under Bannon’s watch, scientific research relating to the Earth’s atmosphere and climate change.

In 2006, he convinced his old colleagues at Goldman Sachs to invest $60 million in a Hong Kong company called Internet Gaming Entertainment (IGE). And in 2007, he took over the company as its CEO.

During the 2000s, before the emergence of mobile games, the world of gaming was dominated by giant Internet games called massively multiplayer online role-playing games (MMORPG). These games allowed players from around the world to participate in competing with (and against) each other in a massive online world where completing tasks could earn you virtual currency. That “gold” was then used to purchase equipment, skills and other items that made a player’s character more powerful. The more you played the game, the more likely you were to be successful because you’d earn more gold.

The incredibly popular World of Warcraft has had more than 100 million player accounts created over its lifetime. For a monthly fee, a player can play and work hard to earn virtual gold to buy virtual goods.

IGE and Bannon hired Chinese workers, who for $4 an hour could “farm” virtual gold. This fake currency was then sold for real money for people who wanted to progress more quickly in the game. The players who couldn’t devote as much time playing the game were now on the same level – or way ahead of their fellow players. All it cost was a few real dollars to buy virtual gold. Was it a legitimate use of the free market to advance in the game or a glorified cheat?

The makers of World of Warcraft didn’t think too highly of this business model. Not only was it affecting the “enjoyment” of legitimate players (a claim in a class action lawsuit against IGE), but the makers of the game weren’t getting a cut of the money. The accounts of the “farmers” were shut down by the makers of the game. And IGE melted away.

Steve Bannon went on to become the head of Breitbart News in 2012. His involvement with the alt-right news site led to his involvement with Donald Trump. And he helped coin the term “fake news” to describe mainstream news sources.

The founder of IGE, who convinced Steve Bannon to help raise money from Goldman Sachs and take over the company was a former child actor, Brock Pierce. He was best known for his work on Mighty Ducks and its sequel. IGE grew to more than $250 million in annual revenue selling virtual gold for real money.

Brock Pierce has also found something else to do. While Bannon went to work for Breitbart and Trump, Pierce became chairman of The Bitcoin Foundation. Modeled on the Linux Foundation, Pierce is focused on guiding the development of the Bitcoin blockchain and public policy relating to Bitcoin.

Mobile apps embraced the IGE business model. While a player can earn tokens through gameplay in many mobile games, a player can also advance by purchasing tokens directly through the app for real money.

At the same time, players are no longer limited to using real money to buying game tokens. Now they can use Bitcoin or other cryptocurrencies to buy the “fake” money. Which begs the question: what is “real” when fake money is used to buy fake tokens to buy fake virtual items?

The Blockchain is a Magical Book

After “What the heck is a Bitcoin?” the next most common question is “What is Blockchain?” Although really quite simple, it harkens back to a time when it was normal to ask, “What is the Internet?” So at the expense of an analogy – one that will leave the younger reader with another follow-on question – and could leave a more technical reader chaffing at the crude attempt to simplify something groundbreaking – remember the 1980s.

During that decade, it was ubiquitous to carry a day planner. A day planned is a physical book containing your appointments – and your key contacts. At that time, you housed your full contacts on your desk at work or at home in a Rolodex. But you carried around the key numbers that you may need to call while moving about. In this day planner, you wrote down your appointments and any other important notes from that appointment.

Of course, if you lost that day planner, your life was completely destroyed. There was no backup or second copy.

So imagine that each time you wrote something in that day planner, your entry automatically copied in a duplicate book. For security, that copy was made far away – maybe in Portugal. Then, automatically, another copy replicates in Tokyo. And another in Australia. Copies made over and over again until thousands of copies of your book are held in other places around the world.

Now, imagine that in your copy of the day planner in Dubai, someone changes an entry. We know that entry is false. No other copies throughout the world contain it. A third party cannot alter this magical book because we have so many copies that verify the true contents of the day planner.

The blockchain makes a backup copy of the data you produce and sends that information throughout the Internet, making copies of that data and preventing alteration by a hacker or other bad actor. All the blockchain is doing is reproducing information in a decentralized way, onto computers throughout the world, and making sure it isn’t hacked.

By itself, this seems basic. And it is. Using computers in a decentralized way is the concept of the Internet. But blockchain contains two components that differentiate it. First, a big company does not own the computers on a blockchain network. They are “peers”, operated by a series of different people and companies for pay. This means it is decentralized. Second, the blockchain is trusted because every other computer in the system verifies reproduced information.

This is the basic underpinning of Bitcoin and thousands of other coins. More importantly, this system is driving the innovation of tens of thousands of decentralized and trusted applications.

To have a system that is decentralized and trusted, like our magic day planner, is a very important innovation. And this is for more reasons than a mere distrust of banks and other centralized institutions. It is because now we have a system to transmit information – and more importantly, currency – throughout the world in a way that is much less expensive and practically impossible for large corporations or governments to control.

And to the younger reader – yes- a day planner is Outlook without email. And get this. We had to use a pay phone to call one of those important numbers when travelling on the road. I’ll explain the pay phone another time …

The Most Valuable Currency in the World

Can you guess what the most valuable currency in the world is?  You can buy 1 Euro for $1.24 in Germany using US dollars. Or for $1,300 USD, you can buy 1 ounce of gold. Or you can buy 1 bitcoin for $8,500. Which one is most valuable?

Throughout history people have used various currencies for transactions. In the earliest days, bones and teeth of various animals were used to trade for goods. There were a limited number of animal bones or animal teeth of a certain kind, which gave value to the ones used to transact for other things. Other civilizations used particular shells or other items to denote value.

The Gold Rush that occurred in the United States in the 1800s was basically an opportunity for people work to dig something up out of the ground, something with limited volume, and then use that as money.  There was a great deal of trepidation when the United States moved off of the “gold standard” because that was used in order to back up real US currency.  However, we have now grown used to the fact that the United States government controls the number of dollars that are in circulation, that that number is tied to the value of something, and that we can count on the dollars not to fluctuate too greatly on a day to day basis.

So which currency is the most valuable?

Notice the way your day functions. What do you use to make a transaction? Here in the United States, the United States Dollar is worth the most.  It is worth more than gold.  It is worth more than real estate.  It is worth more than bitcoin.  Why?  Because you can buy things with it.

Money is used to buy things.  It is used as a store of value that can be easily transferred in order to purchase things to eat, for shelter, for clothing, and the other things we need on a day to day basis.  When was the last time that you went to the grocery store and asked to pay using a diamond?  Or you said “Hey, I have got a whole bunch of Japanese Yen, can I use it?”

So the most valuable currency of all is the one that allows you to buy things in the country that you need to buy things in.  That means the United States Dollar is worth a lot less in Europe, than it is in the United States.

So what holds all this together?  It is the ability to change stores of value, whether that be other currencies or precious metals into local currency.  For example, it is very easy if someone were to hand you Euros to accept that as payment, because you could simply go down to either your bank or a company that changes money and make that into US dollars.  You can also accept gold.  There is an easy way to know approximately how much US dollars you can get in exchange for gold.  However, imagine somebody came to you with Malaysian ringgit. If they did that, you would say no. Why?  Because it is incredibly difficult to turn that into United States currency.

This means that the ability to exchange is one of the most essential values of money.  So, it is true in the world of cryptocurrency that the exchange is king.  Without the ability to exchange cryptocurrencies into local currency that allows you to buy things, you have nothing.

At the beginning of the cryptocurrency boom, there was the thought that bitcoin and other cryptocurrencies would be used as a way to replace US dollars or other local currencies. We are quite far from that.  Who knows what the future holds, but for now local currency continues its reign. You will always be able to purchase things in that local currency. Until that time, without an exchange, your cryptocurrency is worth nothing.

Policy makers know this. This is the easiest place in the cryptocurrency ecosystem in order to push forward with governmental power. We have already seen it in China and we are beginning to see it in Korea and India. Keep your eye on the cryptocurrency exchanges. It is the only thing that can change cryptos into the most valuable currency in the world.

Real Crowdfinance Finally Becomes Legal … Soon

After 24 months of comment, review and consideration the Securities and Exchange Commission finally adopted the final rules relating to equity crowdfunding on October 30, 2015, by a 3-1 vote. My hopeful prediction that we were a “solid six months away…from crowdfunding becoming legal” was certainly optimistic. The long anticipated enactment adopts an exemption from securities registration for Internet based securities offerings. This will allow businesses to raise up to $1 million every 12 months in capital from regular ‘ol non-accredited investors … aka the “crowd”. These crowdfunding rules comprise the last major set of rules called for in Congress’ April 5, 2012, legislation. They are the rules for Title III of the JOBS Act.

The rules take effect 180 days after publication in the Federal Register – so we are looking at legal crowdfunding in May 2016.

In my October 23, 2013 post, SEC Proposes Crowdfunding Rules, I highlighted a few points of interest from the behemoth rules proposal totaling 585 pages. The final rules are even more complex in their 686 pages of analysis and rules. So to spare you the agony of a complete recap, I again take a 1,000 foot view instead of an in-depth analysis of the final crowdfunding rules.

  • Companies’ ability to advertise crowdfunding offering. An issuer can only advertise by directing potential investors to the funding portal. There is still no open season for social media.
  • Cancellation period. Investors may cancel their commitment up to 48 hours prior to the deadline identified in the offering materials.
  • Individual investment limitations and net worth calculations. The final rules clarify that the investment limit reflects the aggregate amount an investor may invest in all Regulation Crowdfunding offerings for a 12 month period from any issuer. A “lesser of” approach to determining which category applies to an investor’s maximum contribution based on net worth or annual income is adopted. As an example, an individual with a $50,000 salary and net worth of $105,000 can contribute up to $2,500 in a given 12 month period (or 5% of their annual salary, as it is less than their total net worth), as opposed to under the proposed rules where that investor could have contributed up to $10,500. An individual with an annual income of $150,000 and total net worth of $80,000 can only contribute up to $4,000 under the final rules, as opposed to $15,000 under the proposed rules.
  • Implementation of “Funding Portals”. Funding portals are seen as the “gatekeepers” that help to provide investor protection, according to SEC Commissioner Aguilar. FINRA published applicable rules for intermediaries prior to the SEC vote and was only waiting for the Commission to implement the crowdfunding rules. Unlike broker dealers, the funding portals cannot offer investment advice. The final rules generally remain the same as proposed here, except that the definition of “platform” was modified slightly to be more technical. Platform means “a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities.” The instruction that intermediaries can also engage in back office or other administrative functions was added to the final rules.
  • Audits are “out” for the most part. SEC Chair Mary Jo White stated in her opening statement that in considering comment letters, the final rules exempt first time issuers from having an audit requirement when raising money through equity based crowdfunding to reduce overall costs. If you read my 2013 post, you’ll know the proposed requirement that businesses raising in excess of $500,000 must prepare audited financial statements was disappointing. Others echoed this concern. The final rules only require first-time crowdfunding issuers submit reviewed financial statements when raising between $500,000 and $1,000,000. Additionally, Chair White said “issuers conducting smaller offerings would not be required to file tax returns, as proposed, but rather would be required to disclose specific information from the returns, which should address privacy concerns.” So an issuer won’t have to publicly disclose their entire tax return, but will need to disclose certain relevant information.
  • On-going audit requirement is also “out”. Most importantly, we were also successful in getting the SEC to avoid imposing an on-going reporting requirement that also required for issuers to undergo an audit in perpetuity. Annual reports simply need to be certified by an officer of the issuer.
  • Specific disclosures are mandated. The broad requirement regarding disclosure of any material information necessary to make the statements made was adopted as well as a requirement for disclosure of payments to an intermediary (disclosed as a dollar amount or percentage), location of the issuer’s website that has the issuer’s annual report and date of report availability, whether the issuer or any predecessor has failed to comply with ongoing reporting requirements under the crowdfunding rules. Financial disclosure requirements and contents vary depending on the size of the offering.
  • Intermediaries’ are able to hold financial interest. The final rules allow an intermediary to be compensated with a financial interest in issuers that conduct an offering on the intermediary’s funding portal, as long as it is disclosed to investors. The intermediary can only be compensated with the same type of security being offered to crowdfunding investors. This means no preferential treatment for the funding portal!
  • Ability to simultaneously conduct multiple offerings. The SEC provided clarification to conducting simultaneous offers pursuant to different exemptions and allows businesses to raise money via crowdfunding without that offering impacting a company’s ability to also pursue other forms of exempt capital raises (as long as it complies with requirements for each applicable exemption). In short, this isn’t an “either/or” proposition. Issuers can crowdfund and also raise money the old fashioned way.

So, the adopted final rules show some victories for us while also keeping certain less practical requirements in place (like the requirement that businesses publish their financial statement on their company website).

All in all, will issuers and investors flock to crowdfunding with all these complex rules? Probably not. But we can be optimistic that a handful of brave issuers will successfully prove that equity crowdfunding is an important part of not only a company capital structure, but also of a successful strategy to connect with the company’s customers.

* A special thanks to Amanda Salvione for her assistance. One person should never have to read 686 pages of anything from the SEC alone.

Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Reg A+ is here!!! But is it crowdfunding?

There has been a potentially game-changing development in the world of crowdfunding. The SEC, while unable for a host of reasons to approve rules governing Title III of the JOBS Act (which permits true crowdfunding), did approve the final rules for Title IV. When the SEC trotted out the proposed rules, all the interest groups – including state securities administrators – came out in full force. I am happy to report that the crowdfunding community won the day, in no small part to relentlessly educating the SEC staff that championed this change.

There is a seldom used exemption that allows for sales of securities called “Regulation A”. In recent years, less than 20 offerings a year were being conducted using this Regulation A. To try to jumpstart use of that exemption, Congress wrote legislation to legalize an enhanced Regulation A.

In the new rules, the SEC divides the new Regulation A into two tiers. Tier One is a basic rehash of the old unused exemption, which gives power to each individual state to approve or disapprove of an offering.

Tier Two is colloquially referred to as “Reg A+”. And it really provides a great opportunity for companies to begin raising money online. Reg A+ eliminates the various state securities agencies from reviewing the offering at all.

The highlights:

• A company can raise up to $50 million.
• The SEC has to approve the offering.
• The company, while raising money, has semi-annual reporting requirements.
• The company is required to have audited financial statements.
• Under certain circumstances, the company may exceed the 2,000 shareholder limitation without triggering public company reporting requirements.

• AND MOST IMPORTANTLY: these offerings are NOT limited to only accredited (rich) investors. Any non-accredited investor (basically 93% of the public) can invest, provided that they are not investing in excess of 10% of the greater of their net worth or annual income.

The last part is the game-changer. Already being referred to as the “Mini-IPO”, companies will now be able to connect with all their customers and have those customers become something special – owners.

Of course, the cost of compliance for a Reg A+ offering eliminates little start-ups and mom-and-pops. But for companies that were previously unable to raise money online (because of earlier limitations on general solicitation and the current prohibition on raising money for a private company from non-accredited investors online), this is going to open up major doors. Yes – the audit requirements and the fact that a lawyer will need to be involved makes the transaction cost prohibitive for a restaurant that wants to build a back patio, but for the restaurant that wants to expand by opening up five new locations? Reg A+ is perfect!

The dirty secret is that the SEC was also trying to eliminate the use of reverse-merger transactions to get a company public. In the recent past, the easiest way for a company to become publicly traded was to merge into a defunct public shell, avoiding the usual barriers to going public. The result is that a publicly traded Jiffy Lube chain that went out of business in North Carolina was all of a sudden a mining operation in Southern Arizona without much regulatory oversight. By bringing down compliance costs from a real IPO, the Reg A+ offering will give a company a path to becoming publicly traded without the need to resort to that common shenanigan.

These rules will become effective at the beginning of June. It will be interested to see if the SEC takes its responsibility to efficiently turn around these potential offerings seriously. If so, you can expect that this Fall will be full of excitement in the world of online investing. Smart consumer facing companies will take this opportunity to transform their customers into owners.


Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

Regulation A+ passes unanimously

Great news! The SEC commissioners have unanimously passed final rules for Regulation A+.

While we are reading the final rules, below is a great chart from CrowdCheck that explains the differences between Reg D and the new Reg A. In short, this is going to potentially be a game changer in the crowdfunding world. Although this won’t work for small offerings of a few hundred thousand dollars, it will change the face of financing for the companies that are looking to raise a few million.

Click to access Comparison%20of%20506,%20CF,%20Reg%20A.pdf

A Little Note About Intrastate Crowdfunding …

arizona-sealLiving out here in Arizona, we are well known for interesting politics. In the aftermath of Super Bowl 49 we woke up to the introduction of an intrastate crowdfunding bill in the state house and senate. Based on the support of the business community, it is likely that the bill will pass, and Arizona will join the more than 25% of the individual states that already have intrastate crowdfunding.

I found a couple of things particularly interesting about the proposed bill:

More is less. The proposed crowdfunding bill prevents having the problems of The JOBS Act and contains very particular provisions regarding implementation of the new law. Instead of relying on the state securities officials to make any rules, the bill itself contains page after page of specific direction.

The problem is that both opponents of the bill and proponents alike will be able to find some issue with the proposed language. Does that mean that it dies on the vine because the language isn’t quite right (see SEC)?

Also, because the bill is so particular, any changes would require a legislative change. This greatly reduces flexibility in the implementation of the law. If something isn’t right, you’re counting on a legislative fix. And we all know how dysfunctional legislative bodies can be.

It just doesn’t matter. There have been a lot of states that have implemented intrastate crowdfunding laws. And there have been almost no deals completed under those laws. There are a couple reasons for the lack of activity.

First, there is a hard time educating businesses about a fundraising concept that varies from state to state. It is likewise hard to build much media momentum when the story is so hard to tell because of the variety of laws that are on the books.

Second, securities lawyers are terrified of the SEC guidance so far. There is a worry that any use of the Internet (which is available in every state) to raise money in one specific state is going to risk action by the SEC. The fear of triggering the SEC always seems to shut down lawyers …

In short, it is great news that the Arizona legislature has taken up the intrastate fight. But is intrastate crowdfunding the answer for small businesses? Nope.

Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

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