Blockstack Commences “Testing the Waters” for Possible Security Token Issuance Under Reg A+

In an email distributed yesterday (May 31), Blockstack announced the commencement of “Testing the Waters” for a potential security token offering (STO) under the Reg A+ security exemption. Last month Blockstack Token LLC filed a Form 1-A and offering circular with the Securities and Exchange Commission (SEC) to raise up to $50 million in the STO for “Deferred Delivery Agreement for Stacks Tokens.”. The offering circular was updated earlier this month.

In the email, Blockstack stated:

“Although the SEC has not yet qualified the offering statement, we are pleased to open pre-registration as a part of the “testing-the-waters” phase of our planned sale of Stacks tokens. Pre-registering now helps us gauge interest and also verifies your identity, making it easy to complete your purchase if and when the sale is qualified.”

Being able to gauge investor interest in a security offering prior to actually selling the security is one of the characteristics of the Reg A+ exemption. Blockstack is using the Coinlist service to facilitate the STO.

Blockstack noted that completion of pre-registration does not complete the purchase of Stacks tokens, and you are not obligated to purchase the amount of Stacks tokens you indicate during your pre-registration, or any Stacks tokens at all.

To date, not a single Reg A+ STO has been qualified by the SEC. Yesterday, the SEC Director of Corporate Finance, Bill Hinman, commented on the qualification process stating it has been a “deliberative process” yet they hope to see some of these issuers succeed.

Many crypto industry insiders have pegged Blockstack to become the first Reg A+ STO offering to be approved by the SEC.

Blockstack has captured the support of some high profile investors including the Harvard University Endowment Fund.

Reg A+ benefits from the fact that both accredited and non-accredited investors may participate in the offering and the security may become tradable immediately.

Western Canada’s RED Mountain Resort Set to “Test the Waters” on StartEngine

RED Mountain Resort, one of the Western Canada’s oldest resorts, announced it was launching its very own “Testing the Waters” (TTW) campaign on equity crowdfunding platform StartEngine this Tuesday (August 23rd). 

RedSharing details about the resort RED CEO, Howard Katkov, stated:

“RED started as a ski club that was owned by the community. You can feel it in the spirit of the place, the camaraderie, the spark. We have done everything in our power these last 12 years to keep that flame alive and this StartEngine campaign is simply the latest expression of our intent to keep RED independent and thriving. Our shared community values and the current consolidation of the resort industry make NOW the perfect time to help save this ‘endangered species’. We’re ‘ReBooting’ the Red Mountain Ski Club Community Ownership Model from 1947 — only this time the clubhouse will have wireless!”

Katkov then noted:

Graava-Snowboard-600x400“RED Mountain is an endangered species within the ski resort world. We have the snowfall, vertical drop and world-class terrain to go boot-to-boot with the Big Guys, but have consciously maintained our mom ‘n’ pop/weird uncle feel for over 100 years. We’re tired of seeing families priced out of a premier ski vacation by chains. And we think that RED Mountain’s preservation as a fiercely independent, non-corporate entity is beyond worthwhile.”

All funds from the campaign will go towards improving the resort, which includes additional run development for expanded cat skiing on Mount Kirkup, building a new resort restaurant along with the clubhouse and mountain cabins at the top of Grey Mountain. Other items are chairlift extension for milt-mountain access, spring/summer multi-use top to bottom trail expansion for hiking and mountain biking. Katkov added:

“See, we aren’t just ‘keeping it real’ for us. We’re keeping it real for everyone. This is serious. That’s why we call ourselves a Keystone Species. We believe that keeping a place like this thriving betters the sport for everyone in a time where families that love this mountain lifestyle are getting priced out left and right. Skiing and snowboarding should never become elite sports. That’s just wrong.”

Snapwire Skips Reg A+ for Reg CF Crowdfunding on StartEngine

snapwire on StartengineSnapwire, a photo start­up that  allows brands to crowdsource photos for their social and marketing needs, announced that is had successfully filed and launched a Reg CF / Title III equity crowdfunding campaign under new rules provided by The JOBS Act that went into effect in May. The offer is live on StartEngine now but an interesting fact is that Snapwire did 2X Testing the Waters )TTW) campaigns under Reg A+.  The first TTW went live on SeedInvest and the second was posted on StartEngine. On one the the TTWs, SnapWire generated over $13 million in indicated interest. Now indications of interest are not binding and the experience from other campaigns is that typically less than half of that number will still around but still that was a decent showing of investor intent. In the end, Snapwire made the decision to go with Reg CF.  The justification came down to one big issue: cost.

According to a release, Snapwire explained;

“As good as the new deregulation is for small businesses, it can still be expensive for a startup, costing up to $100,000. Furthermore, companies still need to go through standard SEC filing requirements, which can be a three-to-four-month process. Snapwire initially began working with SeedInvest last year to see if there would be public interest in Snapwire.”

Under Title IV or Reg A+, an issuer may raise up to $50 million from both accredited and non-accredited investors. But for smaller issuers, Snapwire makes a valid point -Reg CF may make sense for smaller amounts. Both Reg CF and Reg A+ may allow a smaller firm avoid some of the perils of working with a VC that may be more interested in an exit instead of building for the long term.

Snapwire is an interesting service for photos / imagery. Most stock photo services suck and are expensive. Even the most prominent ones (no names mentioned) are not worth the toll.  In fact, this is an interesting intersection of technology and creativity disrupting a pretty sleepy business.  Snapwire’s user base has grown to more than 285,000 photographers with 14,000 registered buyers. When you really need a specific image, Snapwire may be the site to find it.


Rayton Solar Is Testing the Waters: Uses Regulation A+ For New Cost-Effective Source of Energy Technology (Video)

Rayton 5

This week, Rayton Solar, Inc. (Rayton Solar), announced it was testing the waters of Regulation A+ through crowdfunding platform, StartEngine. The California-based solar panel company is seeking to attract more investors as it prepares to develop a cost-effective source of energy through essential particle acceleration manufacturing technology.

RaytonThe company, which previously secured $2.8 million through crowdfunding platform Fundable, stated it has linked particle accelerator technology and solar energy production by creating a silicon cutting technique, which notably has the potential to reduce solar panel manufacturing costs by at least 60% while becoming 25% more efficient. 

Silicon is the most expensive component of a solar panel and Float Zone Silicon (FZ) is 10 times as expensive as the market standard Czochralski Process Silicon (CZ). By reducing wafer thickness to 3 microns and eliminating waste – Rayton is able to utilize FZ economically. No other solar manufacturer in history has been able to economically use FZ, which provides Rayton with the potential to produce up to 24% efficient solar panels.”

The process is shown below.

Rayton 1

Rayton Solar also revealed the standard industry manufacturing process wastes half the raw silicon due to the saw blade that is used to cut silicon. Its manufacturing technology solves this project because it is a zero waste process. The company noted:

Rayton“Solar energy is the fastest growing source of renewable energy, and the solar panel market is slated to grow from $24.2 billion in 2014 to more than $180 billion by 2021. Rayton Solar’s objective is to create the world’s most cost-effective solar panels to reduce energy costs, offset carbon footprints, and believes it can transform the energy source of the world.”

Andrew Yakub, CEO of Rayton Solar, shared:

“The solar industry has seen tremendous growth over the past couple years and we have reached the point where it is just about to overtake fossil fuels as the least expensive source of energy on the planet. We know solar is the most sustainable energy source for the future of humanity. Solar needs a slight push to get it over that threshold where it can compete with fossil fuels. Rayton Solar’s technology is that push.”

Television personality and scientist, Bill Nye, is also working with Rayton Solar on the project and tested out the company’s technology. Check out his experience.


Testing the Waters is ALL About Transparency

Testing the Waters SwimmingTesting the Waters, or TTW as it is called, is being successfully leveraged during Reg A+ crowdfunding campaigns. The concept is pretty simple.  For issuing companies that want to raise capital online, using TTW allows them to gauge investor interest.  Investors may register with a listing platform to express “indications of interest” as to how much they may be willing to commit if the company proceeds with selling securities under Reg A+.  For individuals expressing their interest it is a non-binding statement they may walk away from at any time.  No harm no foul.  If a company receives sufficient indications of interest they may then choose to move forward in a securities offer.

A good example of TTW may be had with Elio Motors, one of the first companies to sell equity under Reg A+, as enacted under Title IV of the JOBS Act.  Indications of interest topped $30 million as over 9200 “reservations” were made.  When Elio finally listed the offer, investors committed about $17 million to the offer thus about 50% of the initial commitments stuck along for the ride. Discussions regarding whether the offer was a good investment, or not, were robust from day one.

TTW allows an issuer the option to move forward with a Reg A+ offer.  If they choose to proceed, listing shares under the exemption is not an inexpensive exercise. Better to have an idea as to whether the offer may successful or not up front.

On the other side, TTW allows potential investors additional time to review an offer.  Some platforms will publish a preliminary offering circular allowing individuals a good amount of time to read, review and discuss the offer. There is a collective element of shared perspective at play. Good for the investor and good for the company.

Virtuix, raising capital on SeedInvest, is another good example. The creators of the Omni active VR platform generated over $30 million of indicated interest during their TTW period. Now they are attempting to raise up to $15 million under Reg A+.  Investors have committed just over $5 million today.

While TTW is great for Reg A+, oddly it was left out of Reg CF or Title III of the JOBS Act.

Under Reg CF, companies may only raise $1 million but having the ability to measure interest first is still a powerful tool.  Incorporating TTW also gives the company the chance to engage with potential investors.  The sooner questions arise as to the structure of a potential offer – the better.

WeFunder Team in FargoWefunder, perhaps the most active platform in the Reg CF space, recently stated;

“Given the data so far, we expect 25% of the companies on Wefunder to fail at their fundraise after spending up to $10,000 on legal and accounting costs. We will feel horrible when this happens. We believe the regulations hurt first-time entrepreneurs, whose only error was trying to fundraise too early, before they were ready. These entrepreneurs can ill-afford to waste money. Under present law, before talking with potential investors, startups must have their lawyer draft a Form C, convert their cash accounting to GAAP, and perform a CPA review. This can cost thousands of dollars. While these costs should be incurred before money changes hands or a binding commitment is made, it serves no investor protection interest to force an entrepreneur to spend their limited cash before they are allowed to learn if anyone even wishes to invest. Creating a similar “testing the waters” provision as in Regulation A+ solves this issue.”

Congress is currently debating a change to Reg CF that may add TTW to the rules.  If this bill passes, this will be a win for issuing companies who will no longer have to gamble on raising money and a win for investors.  Transparency on both sides of the equation is the best investor protection that will ever exist. Let’s hope Congress gets this one right.


Three Policy Issues that will Hold Regulation Crowdfunding Back

Road Closed Detour

On May 16, 2016, the Securities and Exchange Commission’s rules implementing Title III of the JOBS Act will come into effect, allowing companies to raise funds under Section 4(a)(6) of the Securities Act. The SEC made some important improvements over the proposed rules that will make Regulation Crowdfunding more accessible for small issuers. However, there are a few outstanding areas where issuers would benefit if the SEC or Congress revisits its regulatory and statutory language.

Allowing Single Purpose Funds

Four SEC Commissioners Voting on TItle III White Aguilar Klein PiwowarMany commenters wrote to the SEC requesting that it allow single purpose funds when investing in issuers conducting offerings under Section 4(a)(6). This would assist issuers by having cleaner capitalization tables and provide benefits to investors because this structure would permit a single fund manager or adviser who could ensure that the issuer respects the rights granted to those investors.

However, when crafting the exclusionary language regarding the eligibility to rely on Section 4(a)(6), Congress seemingly followed the exclusionary language contained in Rules 504 and 505, the previously existing federal exemptions for small capital raises. Those exemptions expressly exclude SEC reporting companies and investment companies. So, too, with the statutory language for Section 4(a)(6) crowdfunding.

US_Congress_02Given the specific statutory exclusion, the SEC had no room to maneuver to allow single purpose funds. Interestingly, Congress went even further and prohibited those investment companies that are exempted from Investment Company Act registration from being eligible to use Section 4(a)(6). Without that language, the SEC could have been creative and allowed for single purpose funds that are exempt from the definition of investment companies under Section 3(c)(7) of the Investment Company Act by defining purchasers in a transaction in compliance with Regulation Crowdfunding as “qualified purchasers”, in much the same way the SEC did for providing the benefits of state preemption to qualified purchasers in offerings taking place under Tier 2 of Regulation A.

To allow for single purpose funds, Congress will need to revisit the statutory language authorizing crowdfunding under Section 4(a)(6) Securities Act and possibly the statutory language of Section 3 of the Investment Company Act as well.

Testing the Waters

Testing the Waters SwimmingSecurities professionals and issuers know that raising capital can be expensive. The expense is worth it if the issuer is able to raise the funds it needs. Still, there is no guarantee that the issuer will be successful. That is the role of “testing the waters”. The SEC has allowed for testing the waters in larger offerings, and could have done so for Regulation Crowdfunding.

The standard concern for allowing testing the waters is that unscrupulous issuers will use testing the waters to create undue excitement about the offering prior to any disclosure information being filed publicly. Without the protection of the public filing, issuers may more easily use selective disclosures or overly enthusiastic language to create investor interest. With unsophisticated issuers, there is also the concern that after a successful testing the waters campaign, the issuer would not properly issue the securities in a transaction in compliance with the Securities Act.

This concern could be overcome with a properly structured testing the waters provision that works with the remainder of Regulation Crowdfunding. For instance, any testing the waters could be required to be done through a single crowdfunding platform, just as offers and sales are under the rules. The platform hosting the testing the waters campaign would be responsible for ensuring that any issuer, prior to posting its testing the waters materials, is in satisfaction of the platform’s policies and procedures to prevent the dissemination of materially false or misleading information.

Such a testing the waters provision would allow for issuers to determine whether it makes sense to move forward. As it stands, initiating an offering under Regulation Crowdfunding will be a gamble for any issuer.

Exchange Act Reporting

In an apparent tradeoff of reporting requirements, the SEC reduced the ongoing reporting requirements for smaller issuers whose assets do not exceed $10 million while on the other hand made the proposed exemption from full reporting under the Exchange Act conditional as opposed to absolute. In order to rely on the new conditional exemption from full reporting, an issuer must be current in its ongoing annual reports, have total assets not in excess of $25 million, and have engaged a transfer agent to maintain records of the securities issued.

George Washington NYSE Stock ExchangeWhile it is understandable that the SEC would have concerns about large numbers of freely tradable securities floating about the marketplace without regular reporting by the underlying issuer, the conditionality of the exemption sets an unreasonable bar for a small company looking to grow. Recall, full reporting under the Exchange Act requires, at minimum, the filing of an annual 10-K, quarterly 10-Qs, and current reports on Form 8-K. The SEC has previously estimated the time burden for the 10-K as 1,998.78 hours, 187.43 hours for each 10-Q, and an additional 5.71 hours for each 8-K. Those hours assume the use of professionals to prepare the forms and having employees dedicated to the task by the company. Even with the two-year grace period contained in the final rules, Exchange Act registration and reporting would sap any available time and resources and prevent that company from pursuing the interests of its crowdfunding investors – namely, being a growing, successful enterprise.

Majesty of Law Rayburn House Office Building Washington DCBear in mind, the conditional exemption from Exchange Act reporting is only necessary if the company meets the trigger under Section 12(g) of the Exchange Act, which happens when the company reaches 2000 equity holders of record, no more than 500 of which may be non-accredited investors, and $10 million in assets.  Companies may opt to engage a broker that will be the single holder of record for securities issued under Section 4(a)(6). That broker would hold the securities for the benefit of the investors and provide important services to the issuing company and investors by ensuring records are kept correctly and facilitating communication between the issuer and the investors.

Like many other participants in this space that have watched as securities crowdfunding went from a legislative proposal, to enacted statute, and finally to effecting regulations, I am excited for the potential of crowdfunding under Section 4(a)(6) of the Securities Act. Still, there are areas that Congress or the SEC should return to in order to make the underlying statute and rules better for issuers and investor alike.


Andrew StephensonAndrew Stephenson serves as VP of Product Management and Strategy for CrowdCheck, one of Entrepreneur Magazine’s 100 Brilliant Companies of 2015.  Andrew has a wealth of experience assisting companies with understanding and taking advantage of the new landscape of online capital raising — including reward-based crowdfunding, securities crowdfunding, offerings to accredited investors, and exempt public offerings of securities under Regulation A.  Andrew leads a team of CrowdCheck due diligence analysts and regularly contributes to the national dialog surrounding innovation in capital formation.

Regulation A+: Beyond the Hype and What’s Next

Emperor with No Clothing

Recently I’ve been noticing a lot of hype in the entrepreneurial community regarding Reg A+ and there have been a lot of cheerful pitches about the new regulation that would allow young companies “to raise up to $50 million without the expense and complexity of a traditional IPO”.

I am afraid that the emperor has no clothes and what we got is certainly nothing like the equity crowdfunding that the JOBS Act instructed the SEC to create.

To date, only about 30 deals under Reg A+ were filed with the SEC and after a few being withdrawn, there are currently 24 deals that are under review. There are some companies that have filed Form 1-As with the SEC and others that are in the “testing the waters” phase, but no offerings have closed and none have begun to trade.

Regulation A+ Panning for GoldOTC Markets group which has been very active in promoting the JOBS Act, reports that there have been no Reg A+ companies to go public on their markets yet either.

It is clear that Reg A+ is off to a very slow start and I would leave it to my friends – securities lawyers to discuss what went right; meanwhile as an economist I see two major issues I would like you to ponder on.

First – it turned out that raising capital under Reg A+ is much closer to becoming a public company than anyone might want to admit with too many disadvantages typical for a publicly traded company (high cost of reporting and high level of disclosure and scrutiny from regulators) but no visible benefits that a publicly traded company typically enjoys – which is an attention from institutional investors who are also capable of  boosting a rich coverage and triggering a demand from a retailer market aka crowd.

Which brings me to the second issue – there is no evidence yet that institutional investors are interested in companies that exploited a “Do-It-Yourself” aka “mini-IPO” routine without getting a credible investment bank on the payroll.  Anecdotally, none of the 30 Reg A+ deals that were filed to the SEC were submitted by an investment bank.

To drive my point home, I need to clarify that securities trading of large companies and small companies has an entirely different route – and this is why Reg A+ is falling out of favor in the first place.

While an ownership of a large public company (over $1 billion in market capitalization) typically consists of over 80% of institutional investors; a small company (less than $100 million in market capitalization) traditionally has very few institutional investors and relies almost entirely on high-net worth individuals and other retail investors.

One Thousand Dollars in Hundred Dollar BillsThis has resulted in disparity of research coverage. A large publicly traded company has on average 14 analysts covering its every move; while 40% of small companies have no research coverage at all and those are primarily companies with a market capitalization of less than $50 million (typically referred to as nano-cap stocks). Smaller companies have less public float, resulting in less trading volume — which explains much smaller dollar amounts involved and the lack of analyst coverage.

So the Holy Grail here is to be able to communicate your story directly to potential shareholders since fewer broker-dealer firms (or “market-makers”) operate in this space. A catchphrase for those who are on the case: Marketing is King.

For example – have you ever wondered why there are so many “unicorns” these days? As of time of my writing, there are 140 of them with a total cumulative valuation of $505 billion.

Pink Unicorn 2Yes, we can talk about the fact that the Fed has increased the money supply via QE and has simultaneously manipulated interest rates down to unsustainable levels which is a very basic element of an absolutely deadly combination. Since all this excess money supply has to find a home somewhere, some of it has found its way to the most absurd investment vehicles such as, for example, overvalued private company investments lovingly named by VCs unicorns (see my previous article “How To Milk a Unicorn” here).

But the important point of being named a unicorn is marketing – getting attention from the media, creating the hype and driving investors home.

And this is when a highly appraised in the Reg A+ department “testing the waters” comes out of the closet.

Ocean Water Sea WavesSee, any experienced marketer will tell you that  in order to sell a product, you would need essentially at least 100 people that are generally interested (they clicked, they signed up, and they liked you on FB) and only 2 out of those 100 people will end up buying your product.

So a process of “testing the water” when the company asks for hypothetical commitments from potential shareholders might be producing very wrong over-hyped numbers to compare with amount of actual money that the company will be able to raise once the party is over and the cake is eaten. Wink-wink, StartEngine.

That’s when we might start to realize that the whole Reg A+ thing comes down to securing professional market-makers, researchers and getting first and foremost on the radar of institutional investors. That’s quite an unfortunate finding, as we thought that we should just have the most enthusiastic network on Facebook.

DangerSumming it up, while I remain optimistic, I believe a danger here is that with new regulations we forgot that there is not an “after-market” for small companies while encouraging further a culture of hype that celebrates companies based on their following and valuations (and whether they’ve crossed that magical line of $1 billion) – instead of focusing on their impact, whether the business is profitable, the company is well-managed and can actually pay a modest  but sustainable and possibly growing dividend to its retail investors.

Whether you feel the same way – or entirely different – feel free to share with me your thoughts and join the discussion.



Vicoria SilchenkoVictoria Silchenko, Ph.D. is an alternative funding expert, Founder & CEO of business consultancy Metropole Capital Group and Creator & Producer of the Global Alternative Funding Forum. She sits on the Board of Los Angeles Venture Association (LAVA) and is also an Adjunct Professor on “Entrepreneurial Finance” at CalLutheran University., Twitter@MetropoleGlobal