Concern Over Legal No-Man’s Land of Initial Coin Offerings Inspires New Digital Coin Investment Model: JOBS Crypto Offering
Through their endorsements and partnerships, headliners like Floyd Mayweather, Paris Hilton, Jamie Foxx, and DJ Khaled have brought a lot of attention and excitement to the “crypto” or bitcoin investing space, where investors are witnessing a sort of free-for-all of offerings promising big returns. But risks of Initial Coin Offerings (ICOs) also highlighted the seemingly fictional nature of some of these cyber-investing ventures while drawing the attention of the SEC.
Floyd Mayweather posted FaceBook messages earlier this year encouraging his followers to purchase Centra, Stox, and Hubiits tokens using Bitcoin or Ether, new virtual currencies that can be exchanged directly without the traditional middleman of a bank or credit union. DJ Khaled also endorsed Centra. The validity of each company’s offering has come under suspicion, but, because of the decentralized nature of Bitcoins and other digital currencies, investors have had little recourse. Similarly, Paris Hilton endorsed LydianCoin on her Twitter feed, subsequently deleting the tweet after Forbes reporters uncovered past legal issues of the company’s founder; and Jamie Foxx tweeted an endorsement of Cobinhood, a Taiwanese startup that soon came under scrutiny for controversial practices that included unfair token bonuses.
In July 2017, the SEC ruled that ICOs would be treated as the sale of a security. This means that ICOs must be registered like IPOs and can only be offered to accredited investors, which limits the investor pool based on income and net worth while raising the costs to the company attempting to raise funds via ICO.
Fast-forward to December 2017: the SEC froze the assets of a company called PlexCorps, describing the company’s ICO as “a full-fledged cyber scam.” The company had raised about $15 million from investors in the U.S. and abroad through an ICO it filed in August. The SEC is charging PlexCorps with violating anti-fraud provisions of the U.S. federal securities law. PlexCorps owner Dominic Lacroix is also being charged with violating the registration provision of federal securities law.
“At first glance, ICOs were an exciting way to open up investment access because of the potential crowdfunding aspect. They looked like a great opportunity to let small investors into an investment world traditionally ‘owned’ by the wealthy, while giving startups a new way to raise capital outside of the venture capital system,” says Gregory Keough, CEO of Finova Financial. “But the new regulations the SEC enacted in response to the scammers who were invading the market, recent SEC crackdowns on fraudulent ICOs, and the continued regulatory uncertainty have shut out the little guy and killed the crowdfunding aspect of the ICO offering.”
Unblocking the ICO Path: New Opportunity
That disappointment soon turned to inspiration for Keough, a serial entrepreneur with a track record of creating financial products for un- and underbanked consumers. Keough soon saw a way to open up the ICO, using the regulatory directive of the JOBS Act Regulation A+ to create an inclusive opportunity for the smaller investor and entrepreneur.
“This is a game changer. We realized that we could structure an offering under JOBS Act Reg A+ that fits perfectly with our mission to create a more inclusive financial system for everyone, including those people who haven’t been able to benefit from the existing investment structures,” says Keough.
The strategy was a perfect fit for Keough, whose focus has long been on creating financial products for un- and underbanked consumers – both as CEO and co-founder of social impact-focused Finova Financial, as well as through his earlier work through Mobile Financial Services, a joint venture created by MasterCard and Telefonica to develop mobile financial solutions that accelerate financial inclusion for customers in 12 countries in Latin America.
From the Ashes of ICO Arose JCO
Working with Cooley, LLP, Keough created a new class of cryptocurrency investment: the JCO, or JOBS Crypto Offering, which allows for companies to issue securities to the general public in exchange for cryptocurrency or other digital funds in compliance with SEC regulations.
According to Keough, this new entrant to the crypto-investment space combines the regulated structure of an Initial Public Offering (IPO) with a crowdfunding component that makes it an entirely unique financing process.
Looking to solve the problem encountered by the above-mentioned celebrities and others who invested in early – and sometimes fraudulent – crypto offerings, Keough and his legal partners sought to close the loophole that made ICOs a target for scammers in the first place: Unlike an ICO, a JCO is restricted to established companies with proven financials. In a JCO, the established company offers simple agreements for future tokens or launches a blockchain smart-contract, token, coin or other blockchain-based protocol for the specific purpose of purchasing a to-be-identified future regulated security. Ownership of these securities – called tokens – is represented by entries in the blockchain and is registered via a Simple Agreement for Future Tokens (SAFT) with the SEC.
Meanwhile, the company pursues an initial public offering of tokens by filing a registration statement under the Securities Act. The tokens are listed on an alternative trading system that is compliant with Regulation ATS under the Securities Exchange Act of 1934.
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Finova: The Perfect JCO Test Case
Keough’s company, Finova, offered a perfect test case for the new JCO approach. Established by Keough and partner Derek Acree in 2015, Finova has raised over $100 million in funding from leading Silicon Valley VC’s and Wall Street private equity funds. By December 2017, the company had revenues of over $2 million, and over $5 million in contractual payments inbound. Finova’s stable growth and credentials would offer an attractive investment opportunity and their JCO would be the world’s first.
Finova is backed by leading Silicon Valley and international venture capital firms, wall street private equity firms, prominent tech entrepreneurs and others, including investors MHS Capital, Refactor Capital, CoVenture, Compound, and 500 StartUps; leading fintech entrepreneurs Sam Hodges, co-founder and managing director of Funding Circle; Jake Gibson, co-founder of NerdWallet; Al Hamra Group, a private company owned by the ruling family of Ras Al Khaimah, United Arab Emirates, and others.
Finova is run by an executive team with more than 100 years of combined experience in successful startups as well as established companies in financial services technology, including leadership roles at MasterCard, Telefonica, Morgan Stanley, TMX Finance, and PWC.
Finova has earned a 4.58 out of 5 stars with Consumer Affairs, was named U.S. Firm of the Year for Lending Innovation by the 2017 Fintech Awards, and was named to KPMG’s Fintech 100 list of the world’s leading financial technology innovators in recognition of its mission to design financial services products that offer a powerful alternative to the emergency cash lending marketplace. Keough, who is one of the few living recipients of the Central Intelligence Agency’s (CIA’s) Intelligence Star Medal for extraordinary courage in the line of duty, was named “Gamechanger™ of the Year” in 2017 by ACQ Global, was a finalist for Ernst and Young’s Entrepreneur of the Year, recognized as Washington’s Top Technology and International Leaders, Latin America Top Banker of the Year, and others.
JCO: The Path to Crypto-Investing for General Public
Kicking off the first phase of Finova’s own JCO by offering a Simple Agreement for Future Tokens (SAFT) in November, Keough and his partners are on track to file a future registration statement under the Securities Act or engage in a transaction that is exempt from registration under the Securities Act pursuant to Rule 251 under the Securities Act (i.e. Regulation A+) with the SEC. They envision a future where this JCO model becomes a common vehicle using cryptocurrency for equity investments and a new blockchain, crypto path to an initial public offering.
“We think the JCO has the potential to have a massive impact on the way startups raise funds, while creating some much-needed regulatory clarity in the crypto-investing space,” says Sheel Mohnot, partner, 500 Startups.