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Today in brighter crypto news: SEC says tokens are securities
Crypto news got a little boost last week after a dark month of crashes, stablecoins and birthdays. The SEC ruled that two ICO issuers, CarrierEQ Inc. and Paragon Coin Inc., were in fact selling securities instead of so-called utility tokens.
“Both companies have agreed to return funds to harmed investors, register the tokens as securities, file periodic reports with the Commission, and pay penalties,” wrote Pamela Sawhney of the SEC. “These are the Commission’s first cases imposing civil penalties solely for ICO securities offering registration violations.”
From the release:
Airfox, a Boston-based startup, raised approximately $15 million worth of digital assets to finance its development of a token-denominated “ecosystem” starting with a mobile application that would allow users in emerging markets to earn tokens and exchange them for data by interacting with advertisements. Paragon, an online entity, raised approximately $12 million worth of digital assets to develop and implement its business plan to add blockchain technology to the cannabis industry and work toward legalization of cannabis. Neither Airfox nor Paragon registered their ICOs pursuant to the federal securities laws, nor did they qualify for an exemption to the registration requirements.
This behavior — a sort of “damn the torpedoes” for the fintech set — was all the rage at the beginning of the year as no clear guidance was available for filing security tokens — essentially pieces of company equity — versus utility tokens which were, in theory, used within the company ecosystem. In fact, ICOed companies contorted themselves into all sorts of knots to appear to fit their “utility token” within the torturous confines of securities law.
“We have made it clear that companies that issue securities through ICOs are required to comply with existing statutes and rules governing the registration of securities,” said Stephanie Avakian, co-director of the SEC’s Enforcement Division. “These cases tell those who are considering taking similar actions that we continue to be on the lookout for violations of the federal securities laws with respect to digital assets.”
The SEC fined both companies $250,000 each. Future ICOs, at least in the U.S., would do well to keep this in mind.
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SpankChain spanked
SpankChain, a cryptocurrency aimed at decentralized sex cams, has announced that a hacker stole about $38,000 from their payment channel thanks to a broken smart contract. They wrote:
At 6pm PST Saturday, an unknown attacker drained 165.38 ETH (~$38,000) from our payment channel smart contract which also resulted in $4,000 worth of BOOTY on the contract becoming immobilized. Of the stolen/immobilized ETH/BOOTY, 34.99 ETH (~$8,000) and 1271.88 BOOTY belongs to users (~$9,300 total), and the rest belonged to SpankChain.
Our immediate priority has been to provide complete reimbursements to all users who lost funds. We are preparing an ETH airdrop to cover all $9,300 worth of ETH and BOOTY that belonged to users. Funds will be sent directly to users’ SpankPay accounts, and will be available as soon as we reboot Spank.Live.
The hacker used a ‘reentrancy’ bug in which the user calls the same transfer multiple times, draining a little Ethereum each time. The bug is the same one that previously affected the DAO.
The company pointed out that a security audit on their smart contract would have cost $50,000, a bit more than the amount lost. “As we move forward and grow, we will be stepping up our security practices, and making sure to get multiple internal audits for any smart contract code we publish, as well as at least one professional external audit,” they wrote.
I’ve reached out to the company for clarification but in short it seems the spanker has become the spankee.
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The Hack Fund will use crypto to give startups early liquidity
Now that “utility” tokens have become a popular and international way to fund major blockchain projects, a pair of investors are creating a new way to turn tokens into true equities. The investors, Jonathan Nelson and Laura Nelson, have created Hack Fund, an early stage investment vehicle that allows startups to launch what amounts to “blockchain stock certificates,” according to Jonathan.
“Our previous business model exchanged equity from startup companies for services, and wrapped that equity into funds that we then sold to investors. These fund investors have included family offices, institutions, and high net worth individuals,” said Jonathan. “However, Hack Fund represents a new business model. Because Hack Fund leverages the blockchain, investors all over the world at all levels can participate in startup investing by trading blockchain stock certificates. Also, its SEC compliant structure means that it is also available to a limited number of accredited investors in the US.”
The team originally created Hackers/Founders, a tech entrepreneur group in Silicon Valley, and they now support 300,000 members in 133 cities and 49 countries. Hack Fund is a vehicle to support some of the startups in the Hackers/Founders network.
“HACK Fund, through its Hackers/Founders heritage, has a large, unique global network,” said Jonathan. “This provides Hack Fund with unparalleled reach and deal flow across the global technology market. There are a few blockchain-based funds, but they are limited themselves to blockchain-only investments. Unlike typical venture funds, HACK Fund will provide quick liquidity for investors, leveraging blockchain technology to make typically illiquid private stocks tradeable.”
The idea behind Hack Fund is quite interesting. In most cases investing in a company leads to up to ten years of waiting for a liquidity event. However, with blockchain-based stock certificates investors can buy shares that can be bought and sold instantly while company performance drives the value up or down. In short, startups become liquid in an instant, which can be a good thing or a bad thing, depending on the founding team.
“HACK Fund is a publicly traded closed-end fund. The fund’s venture investments are valued on a quarterly basis by an independent third party, audited and posted to the blockchain for all token holders to review. There are no K-1 statements issued, there is no partnership/LLC, rather HACK Fund is an investment company akin to Berkshire Hathaway which invests in the same manner as early-stage venture capital,” said Jonathan.
The $100 million fund raise has already kicked off across Asia, Middle East, Latin America and to a small number of accredited investors in the US. The fund will be rounded out with $2 million from retail investors who will be able to buy some of the tokens on October 29th through BRD wallet.
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Venture capital investment in US companies to hit $100B in 2018
So many new unicorns valued at $1 billion-plus, countless $100 million venture financings, an explosion of giant funds — it’s no surprise 2018 is shaping up to be a banner year for venture capital investment in U.S.-based companies.
There are more than 2.5 months remaining in 2018 and already U.S. companies have raised $84.1 billion — more than all of 2017 — across 6,583 VC deals as of Sept. 30, 2018, according to data from PitchBook’s 3Q Venture Monitor.
Last year, companies raised $82 billion across more than 9,000 deals in what was similarly an impressive year for the industry. Many questioned whether the trend would — or could — continue this year, and oh, boy has it. VC investment has sprinted past decade-highs and shows no signs of slowing down.
Why the uptick? Fewer companies are raising money, but round sizes are swelling. Unicorns, for example, were responsible for about 25 percent of the capital dispersed in 2018. Those companies, which include Slack, Stripe and Lyft, have raised $19.2 billion so far this year — a record amount — up from $17.4 billion in 2017. There were 39 deals for unicorn companies valuing $7.96 billion in the third quarter of 2018 alone.
Some other interesting takeaways from PitchBook’s report on the U.S. venture ecosystem:
- Nearly $28 billion was invested into early-stage startups in 2018, with median deal size increasing 25 percent to $7 million last quarter.
- Ten funds have raised more than $500 million this year and another five, including Lightspeed Venture Partners and Index Ventures, have closed on more than $1 billion.
- Companies based on the West Coast were responsible for 54.7 percent of deal value in 3Q but other regions are catching up: New England (12 percent), the Mid-Atlantic (20 percent) and The Great Lakes (5 percent).
- Investment in U.S. pharma and biotech has reached a new high of $14 billion already in 2018.
- Corporate venture capital activity is heating up. This year, CVCs invested $39.3 billion in U.S. startups, more than double the $15.2 billion invested in 2013.
- VC-backed companies are exiting via buyouts more than ever.
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VCs say Silicon Valley isn’t the gold mine it used to be
In the days leading up to TechCrunch Disrupt SF 2018, The Economist published the cover story, ‘Why Startups Are Leaving Silicon Valley.’
The author outlined reasons why the Valley has “peaked.” Venture capital investors are deploying capital outside the Bay Area more than ever before. High-profile entrepreneurs and investors, Peter Thiel, for example, have left. Rising rents are making it impossible for new blood to make a living, let alone build businesses. And according to a recent survey, 46 percent of Bay Area residents want to get the hell out, an increase from 34 percent two years ago.
Needless to say, the future of Silicon Valley was top of mind on stage at Disrupt.
“It’s hard to make a difference in San Francisco as a single entrepreneur,” said J.D. Vance, the author of ‘Hillbilly Elegy’ and a managing partner at Revolution’s Rise of the Rest Fund, which backs seed-stage companies based outside Silicon Valley. “It’s not as a hard to make a difference as a successful entrepreneur in Columbus, Ohio.”
In conversation with Vance, Revolution CEO Steve Case said he’s noticed a “mega-trend” emerging. Founders from cities like Pittsburgh, Detroit or Portland are opting to stay in their hometowns instead of moving to U.S. innovation hubs like San Francisco.
“The sense that you have to be here or you can’t play is going to start diminishing.”
“We are seeing the beginnings of a slowing of what has been a brain drain the last 20 years,” Case said. “It’s not just watching where the capital flows, it’s watching where the talent flows. And the sense that you have to be here or you can’t play is going to start diminishing.”
J.D. Vance says that most entrepreneurs don’t need to move to Silicon Valley.
Here’s why. #TCDisrupt pic.twitter.com/0mFPeTuHLe
— TechCrunch (@TechCrunch) September 6, 2018
Farewell, San Francisco
“It’s too expensive to live here,” said Aileen Lee, the founder of seed-stage VC firm Cowboy Ventures, amid a conversation with leading venture capitalists Spark Capital general partner Megan Quinn and Benchmark general partner Sarah Tavel .
“I know that there are a lot of people in the Bay Area that are trying to work on that problem and I hope that they are successful,” Lee added. “It’s an amazing place to live and we’ve made it really challenging for people to live here and not worry about making ends meet.”
One of Cowboy’s portfolio companies opted to relocate from Silicon Valley to Colorado when it came time to scale their business. That kind of move would’ve historically been seen as a failure. Today, it may be a sign of strong business acumen.
Quinn said that of all 28 of Spark’s growth-stage portfolio companies, Raleigh, North Carolina-based Pendo has the easiest time recruiting folks locally and from the Bay Area.
She advises her Bay Area-based late-stage companies to open a second office outside of the Valley where lower-cost talent is available.
“We often say go to [flySFO.com], draw a three-hour circle around San Francisco where they have direct flights, find a city that has a university and open up a second office as quickly as possible,” Quinn said.
Still, all three firms invest in a lot of companies based in San Francisco. Of Benchmark’s 10 most recent investments, for example, eight were based in SF, according to Crunchbase.
“I used to believe really strongly if you wanted to build a multi-billion dollar company you had to be based here,” Tavel said. “I’ve stopped giving that soap speech.”
Aileen Lee (Cowboy Ventures), Megan Quinn (Spark Capital), and Sarah Tavel (Benchmark Capital) on whether or not Silicon Valley is on the wane for investors #TCDisrupt pic.twitter.com/SOpn7p0eNQ
— TechCrunch (@TechCrunch) September 5, 2018
Underestimated talent
A lot of Bay Area VCs have been blind to the droves of tech talent located outside the region. Believe it or not, there are great engineers in America’s small- and medium-sized markets too.
At Disrupt, Backstage Capital founder Arlan Hamilton announced the firm would launch an accelerator to further amplify companies led by underestimated founders. The program will have cohorts based in four cities; San Francisco was noticeably absent from that list.
Instead, the firm, which invests in underrepresented founders and recently raised a $36 million fund, will work with companies in Philadelphia, Los Angeles, London and one more city, which will be determined by a public vote. Aniyia Williams, the founder of Tinsel and Black & Brown Founders, will spearhead the Philadelphia effort.
“For us, it’s about closing that wealth gap to address inequity in tech,” Williams said. “There needs to be more active participation from everyone.”
Hamilton added that for her, the tech talent in LA and London is undeniable.
“There is a lot of money and a lot of investors … it reminds me of three years ago in Silicon Valley,” Hamilton said.
Silicon Valley vs. China
Silicon Valley’s demise may not be just as a result of increased costs of living or investors overlooking talent in other geographies. It may be because of heightened competition abroad.
Doug Leone, an early- and growth-stage investor at Sequoia Capital, said at Disrupt that he’s noticed a very different work ethic in China.
Chinese entrepreneurs, he explained, are more ruthless than their American counterparts and they’re putting in a whole lot more hours.
Doug Leone of Sequoia Capital says founders in the US and China both want to change the world, but Chinese founders are a little more desperate (and you see it in the crazy work ethic they have).#TCDisrupt pic.twitter.com/dPxsRTbJoq
— TechCrunch (@TechCrunch) September 6, 2018
“I’ve had dinner in China until after 10 p.m. and people go to work after 10 p.m.,” Leone recalled.
“We don’t see that in the U.S. I’m not saying the U.S. founders oughta do that but those are the differences. They are similar in character. They are similar in dreams. They are similar in how they want to change the world. They are ultra-driven … The Chinese founders have a half other gear because I think they are a little more desperate.”
Much of this, however, has been said before and still, somehow, Silicon Valley remained the place to be for investors and startup entrepreneurs.
The reality is, those engaged in tech culture are always anxiously awaiting for the bubble to pop, the market to crash and for “peak Valley” to finally arrive.
Maybe, just maybe, Silicon Valley is forever.
Here’s more of our coverage of Disrupt 2018.
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The Winklevoss stablecoin is one small step toward crypto acceptance
A stablecoin is a cryptocurrency pegged 1-to-1 with another “stable” currency. In most cases, these coins are pegged to the US dollar and, as such, allow for true transfers of actual fiat currencies between parties using the blockchain. If you’re nodding off right now thinking about this, I would posit that these moves, however minor right now, are an important step forward in cryptocurrency acceptance.
The latest stablecoin to hit the virtual streets is the Gemini Dollar. This coin comes on the heels of the much-ridiculed Tether, a stablecoin created in 2014 that has been the the brunt of much criticism including suggestions that the team has been artificially pumping the currency with wash trades.
The new currency by Winklevoss-run Gemini is pegged directly to the US dollar on the Ethereum blockchain. This means that for every Gemini Dollar there is one actual dollar in a bank account. The Gemini Trust Company holds the deposits and has been officially accepted by the New York Department of Financial Services, the regulatory body associated with banking and finance.
The GD, in other words, is the first stablecoin to gain a truly official imprimatur.
“As the financial technology marketplace continues to evolve, New York is committed to fostering innovation while ensuring responsible growth. These approvals demonstrate that companies can create change and strong standards of compliance within a strong state regulatory framework that safeguards regulated entities and protects consumers,” said Department of Financial Services Superintendent Maria T. Vullo.
From the release:
DFS issued a limited purpose trust company charter to Gemini in October 2015 to operate a virtual currency exchange through which it offers customers services for buying, selling, sending, receiving, and storing virtual currency. DFS issued a limited purpose trust company charter in May 2015 to itBit, now Paxos Trust Company, which operates the itBit exchange, to offer services for buying, selling, sending, receiving, and storing virtual currency.
The NYDFS requires that the Gemini dollars “are fully exchangeable for a U.S. dollar” and that Gemini will maintain records of their movement. The requirements also include controls including AML and OFAC controls to present money laundering or terrorist financing. An independent accountant will examine the fiat-holding bank account to ensure that all of the stable coins are accounted for. You can convert and withdraw Gemini Dollars directly onto the Ethereum blockchain.
What all this means is that there is now a stable, regulated coin that should offset some of the traditional volatility of crypto. It’s an interesting – if limited – move by a big player in the crypto space.
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Coinbase’s Brian Armstrong: ‘I’d love to run a public company’
Brian Armstrong, the CEO of cryptocurrency trading platform Coinbase, wants to take his company public — maybe on the blockchain.
Onstage at TechCrunch Disrupt SF 2018, Armstrong dished on his ambitions for the future of Coinbase.
“We are self-sustaining,” Armstrong said. “You know, we’ve been profitable for quite a while. We don’t have any plans to raise additional capital at this point, but never say never … Someday I’d love to run a public company.”
Armstrong didn’t rule out going public on the blockchain. He said he’s even considered going public on his own platform.
“I think it would be very on mission for us to do that because, of course, we are creating an open financial system,” he said. “Companies could list their stock, which are really tokens, and instead of a cap table, you tokenize the cap table. But I don’t have any decisions on that to share at the moment.”
An innovative exit would be very on-brand for Coinbase. As one of the earliest players in crypto-mania, the company has certainly had to make things up as it goes. It’s worked, as Armstrong said; the company is profitable and was the first-ever cryptocurrency startup to garner a billion-dollar valuation.
Founded in 2012, Coinbase is backed by IVP, Spark Capital, Greylock Partners, Battery Ventures, Section 32, Draper Associates and more. The company was valued at $1.6 billion in August 2017 with a $100 million Series D last year. The financing was reportedly the largest-ever for a crypto startup.
Watch the full interview with Brian Armstrong below.
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PayPal revamps its app to remove clutter, add more personalization
PayPal is revamping its mobile app. Again. In an effort to keep pace with newcomers like the bank-owned Zelle, PayPal says its new app will focus on making it easier to use its core features – that is, sending and requesting money. That means many of the app’s homescreen buttons – like Offers, Donate, Order Ahead and others are being tucked away underneath a new “More” menu to eliminate some of the clutter.
The PayPal homescreen had gotten a little too busy with all the extra features it has been promoting, which aren’t central to the PayPal experience. For example, it threw in a button suggesting “Invest with Acorns,” after taking a stake in the mobile investing app that rounds up purchases and automatically invests the extra change on your behalf. It has been pushing its Order Ahead functionality for years, even though no one thinks to launch a payments app when they’re hungry. Now these buttons no longer get top billing and valuable homescreen space.
Above: PayPal’s app today, before the update
However, even though PayPal is removing a lot of these extras from the homescreen, it’s not actually giving its “Send” and “Request” buttons more room. In fact, they’re getting a little less.
Today, those buttons are in the center of the homescreen, hosted in a big, greenish-blue banner. The updated app relocates them to a bottom bar.
However, it reverts the app’s color scheme to PayPal’s more familiar dark blue-and-white branding, so the relocated buttons are actually easier to see.
The homescreen instead dedicates most of its room to a new personalized notifications section.
Here, users will see alerts about money they’ve received or payment requests from others in big, blue cards you can swipe through horizontally. Below this, is a strip of profile icons and names of those you’ve recently paid – the theory being that PayPal is often used among the same set of family, friends or businesses. This makes it easier to make your next payment to one of your “regulars.”
Beneath this strip, your PayPal balance is displayed, while other notifications and settings are accessed through small buttons at the top of the screen, as before.
The overall design feels more in tune with PayPal’s brand than the last update. Though the prior big revamp, which was over two years ago, modernized things up a bit, it did so with too-light icons, small fonts and odd, off-brand color choices.
PayPal says the new app is rolling out now on Android to select markets, including Australia and Italy. It will then roll out to the U.S. and other markets worldwide, followed by a release on iOS.
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Gusto raises $140 million to go after small business payroll and benefits with more gusto
Gusto, which sells payroll, benefits and human resources management and monitoring services to small businesses, has raised $140 million in its latest round of funding.
The company said it will use the money to add new services to increase payment flexibility for employees. The company launched a new service called Flexible Pay, which gives employees a way to get paid no matter when a company’s pay schedule dictates. It seems sort of like a payday loan, where a percentage of the salary is taken by Gusto for providing money upfront.
The late-stage round was led by T. Rowe Price Associates portfolio, MSD Capital (the family investment fund for Michael Dell), Dragoneer Investment Group and Y Combinator’s Continuity Fund.
Previous investors, including General Catalyst, CapitalG, Kleiner Perkins, 137 Ventures and Emergence Capital, also participated in the round.
The company claims that it processes tens of billions of dollars in payroll and offers a range of benefits, including health insurance, 401(k) plans and college savings plans.
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Thousands of cryptocurrency projects are already dead
Two sites that are actively cataloging failed crypto projects, Coinopsy and DeadCoins, have found that over a 1,000 projects have failed so far in 2018. The projects range from true abandonware to outright scams, and include BRIG, a scam by two “brothers,” Jack and Jay Brig, and Titanium, a project that ended in an SEC investigation.
Obviously any new set of institutions must create their own sets of rules and that is exactly what is happening in the blockchain world. But when faced with the potential for massive token fundraising, bigger problems arise. While everyone expects startups to fail, the sheer amount of cash flooding these projects is a big problem. When a startup has too much fuel too quickly the resulting conflagration ends up consuming both the company and the founders, and there is little help for the investors.
These conflagrations happen everywhere and are a global phenomenon. Scam and dead ICOs raised $1 billion in 2017 with 297 questionable startups in the mix.
There are dubious organizations dedicated to “repairing” broken ICOs, including CoinJanitor from Cape Town, but the fly-by-night nature of many of these organizations does not bode well for the industry.
ICO-funded startups currently use multi-level marketing tactics to build their business. Instead they should take a page from the the Kickstarter and Indiegogo framework. These crowd-funding platforms have made trust an art. By creating collateral that defines the team, the project, the risks and the future of the idea, you can easily build businesses even without much funding. Unfortunately, the lock-ups and pricing scams the current ICO market uses to incite greed rather than rational thinking are hurting the industry more than helping.
The bottom line? Invest only what you can afford to lose and expect any token you invest in to fail. Ultimately, the best you can hope for is to be pleasantly surprised when it doesn’t. Otherwise, you’re in for a world of disappointment.
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