Startups Archives - That's Not Market

Airfox SEC Cryptocurrency Alt-Coin Settlement Is Everything Coin Issuers Hoped to Avoid – Securities Act Analysis Applies to Token Issuances

Airfox settles with SEC and treats tokens like the securities they are

CarrierEQ, Inc. (Airfox) did an initial coin offering in October 2017. They raised about $15 million to finance their digital token-denominated ecosystem for playing with ads.

Not bad, right? After all, lots of people were saying how ICOs were a cheap, non-dilutive way to raise money because SEC rules didn’t apply.

The SEC didn’t agree, as it warned in the DAO Report.

For its trouble, Airfox will pay a $250,000 penalty, which is not too bad.

However, they must also:

Register the tokens under the Exchange Act; and
File periodic reports with the SEC.

So far, expensive but still less than $15 million.

Airfox says they’re pleased with the result:

“We are pleased with these developments. We believe by reaching this resolution with the SEC and MSD, we are removing uncertainty and positioning Airfox to grow our blockchain platform within a regulatory framework,” said Victor Santos, CEO and co-founder, Airfox.

I doubt it. They must also offer rescission rights to everyone who bought their tokens from the Company.

Here we go.

Airtokens were issued at about $0.014 per token (they issued 1.06 billion tokens for $15 million). They are currently worth about 1/10 of that. If you invested, would you get your money back if you had the chance?

For their sake, I hope Airfox had another source of funding.

Expect more of this from the SEC:

“By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws,” said Steven Peikin, Co-Director of the SEC’s Enforcement Division.

Other notes:

The Massachusetts Securities Division was also involved, and it has been active in trying to police these activities.
Paragon Coin also settled with the SEC. Paragon wants to integrate blockchain and the cannabis industry.

The Airtoken ecosystem.

Why Startups Fail – Crowdfunded Tech Startup Shuts Down With Open Letter to Backers

Despite successful crowdfunding campaign, tech startup KANOA shuts down after bad product review without sending out products.

KANOA, would-be producer of some sort of wireless earbuds, shut down. They announced their demise with an open letter to their backers.

They began with their founder’s initial capital spent on market research and design study by an engineering firm.

It appears that their crowdfunding may have been a pre-order campaign, but information is scarce at this point.

KANOA, crowdfunded tech startup, describes its demise

However, KANOA has said that they hired internally and engaged a contract manufacturer. They began to ship a few units, but they were absolutely savaged by one YouTube review, which seems to have been the knockout blow. Ironically, according to the reviewer, KANOA reached out to him as an influential personality to review the earbuds and garner publicity. iTwe4ks has about 486,000 subscribers, and some of his videos have exceeded 1,000,000 views. He did like the free t-shirt, if that is any consolation.

KANOA claimed in their farewell letter that they are in negotiations with investors for funding or an acquisition, but they do not have enough money to continue operations. Backers or pre-ordering customers are out of luck. They will not be fulfilling more orders.

Some farewell letters give a detailed post-mortem explaining what went wrong. They leave a memorial to what went wrong.

It is difficult to see what happened to KANOA, or at least what KANOA thinks went wrong, other than they ran out of money. Too many employees? Ineffective design and manufacturing? Lack of market?

No. They were too honest and transparent:

Unlike on typical crowdfunding platforms we allowed backers to ask for refunds at any time. This policy kept us honest, but also added vulnerability once we had made major financial commitments. Setbacks and some bad publicity, like reviews of non-shippable beta units, stirred our audience. Most significantly and to our unpleasant surprise, our investors recently backed out of our funding round. We do not blame them, but this was a pivotal setback since capital was essential for ramping up production.

Perhaps the actual story will be uncovered in the class action lawsuit. However, a lawsuit is unlikely if there is nothing to go after.

When Innovation Is More Than Technology: Software Company Allows Customers to Steal Their Software

Freakshow Industries implements innovative business model for its music tech software by letting customers “steal” the software.

As Freakshow says:

We fight crime by legalizing it. You can’t break an agreement you never made.

Creating products in the digital world can be difficult. Anyone can steal and reproduce your products at will. Copy protection is weak and generally only hurts your paying customers by making their experience inconvenient. I have a pile of license fobs as testament to this.

Some companies provide freeware and simply don’t charge. Others put out a tip jar. Freakshow Industries takes it a step further and provides a link for customers to steal their software.

It does not come without a cost. First, the thief must endure a Q&A with insults around why he or she chooses not to pay, with options including ‘Money is Tight,’ ‘Software Should Be Free,’ ‘I Am A Dick,’ and “I Changed My Mind and I Want to Pay.’ Each provides some additional commentary and ways for the thief to do a little on their part, such as pay less than full price or to provide a tip. However, the ‘I Am A Dick’ tab replies with “Well there is no fixing that. Download away asshole.”

Why would Freakshow do this? Resigned to their fate, perhaps? As they say:

Stolen product licenses are fully functional, they are just not eligible for any upgrade stuff. We do not otherwise taint these licenses in any way.

Also, if you steal a license then we’ll be using our own discretion around just how much we’re going to support you. Just be a good person and we’ll probably help you out. Yeah.

Don’t get us wrong. We would definitely rather you actually buy our software. But we realize that some people, for whatever reason, just won’t. So, if you’re going to be that person, then we would rather you steal directly from us than catch some shitty computer cancer from whoever else would be hosting our work.

Basically, stealing is inevitable and they don’t want to make life worse for their legitimate users. They also recognize the risk involved in acquiring pirated software on the streets, or at least through p2p networks. They probably also recognize that users of cracked software may actually come back and buy stuff if they decide they like it. Freakshow also provides easy access to links for buying their other merchandise, like t-shirts. Nonpaying customers may become paying customers, of some sort or another, eventually.

Whatever their reasoning, it is refreshing to see a company that cares about its users, paying and otherwise. It is refreshing to see a new take on this issue.

Obviously developers want to sell their products, but no amount of wishing is going to offset the reality that the cost to reproduce and distribute digital goods is zero. If you make your software unwieldy to validate and use, people will crack the copy protection or go elsewhere. Cultivating these users may actually turn them into paying customers, even if they wind up paying for other goods and services apart from the original software.

Freakshow Industries previews its Backmask plugin.

Equity Crowdfunding Risks and Liabilities – Yes, They Do Exist

Sorry startups, you actually have to be careful with equity crowdfunding disclosures. There is substantial risk of liability for securities fraud.

Based on discussions with the equity crowdfunding-curious, people seem to believe that equity crowdfunding is the wild west where anything goes. Raise lots of money and do it cheaply! Do what you want, say what you want and the SEC does not care! Look at the Form C’s, there were probably no lawyers anywhere near them. Think of the savings!!!!

None of that is true.

Done correctly, an equity crowdfunding offering should be done with as much care as any private placement. The actual information requirements are more extensive than a typical Rule 506 offering. Most importantly, crowdfunding issuers are subject to the same liability as any other securities selling issuer.

Securities Act Section 4A(c) provides that an issuer will be liable to a purchaser of its securities in a transaction exempted by Section 4(a)(6) if the issuer, in the offer or sale of the securities, makes an untrue statement of a material fact or omits to state a material fact required to be stated or necessary in order to make the statements, in light of the circumstances under which they were made, not misleading . . .

Sound familiar? What is the difference between this liability and private placements? Equity crowdfunding is done publicly to more people who are potential claimants.

What does this mean for issuers? It means the Form C and the offering page on the platform site need to be done carefully and in compliance with SEC rules. Those rules sound a lot like watered down Regulation S-K rules for MD&A, description of securities, related party transactions, etc… If you have never complied with them, good luck doing this without experienced help.

Well, at least the platforms are safe, right? They are just dumb pipes for crowdfunding deals and have no responsibility for what the issuers do on their site, right?

Well, no. While the SEC did not impose issuer liability on the platforms, it specifically declined to exempt the platforms from liability under Section 4A(c). Why? So investors could bring suits against the platforms to make sure that the platforms take steps to keep from becoming conduits of fraud.

The SEC believes that the platforms should take steps to protect themselves. Congress provided them a defense if they could not have known of an untruth or omission in the exercise of reasonable care. In other words, the “head in the sand” defense will not work. In addition, I have seen them provide and even require standard language and provisions in their issuers Form Cs and offering pages. I doubt the SEC will ignore this if this becomes misleading.

As the SEC stated:

These steps may include establishing policies and procedure that are reasonably designed to achieve compliance with the requirements of Regulation Crowdfunding, and conducting a review of the issuer’s offering documents, before posting them to the platform, to evaluate whether they contain materially false or misleading information.

We are coming up on the one year anniversary of equity crowdfunding. It is still very early in the equity crowdfunding world to see where the liability issues will shake out. However, it is clear that the SEC and the state securities regulators take these liability issues seriously, and the issuers and platforms should too.

Equity Crowdfunding. Missing Category: Liability

Equity Crowdfunding Publicity, Or What Not To Do

Rules on marketing and advertising your equity crowdfunding campaign are more restrictive than you think. Startups accostomed to blogging your every thoughts and feelings beware.

When the SEC adopted the crowdfunding rules under Regulation CF, it included severe restraints on a company’s ability to publicize its crowdfunding campaign. Many people think the SEC allows general solicitation and it applies to everything. Wrong. It does not apply to crowdfunding.

You know those cool tombstone ads in the Wall Street Journal showing off an IPO? That shows the type of information that your crowdfunding notices can include.

A crowdfunding advertising is limited to:

a statement that the issuer is conducting a crowdfunding offering in reliance on section 4(a)(6) of the Securities Act of 1933
the name of the platform
a link directing the investor to the intermediary’s platform;
the terms of the offering; and
factual information about the legal identity and business location of the issuer, limited to:
- the name of the issuer of the security
- the address of the issuer
- phone number of the issuer
- website of the issuer
- the e-mail address of a representative of the issuer and
- a brief description of the business of the issuer.

The description of the terms of the offering must be limited to:

the amount of securities offered;
the nature of the securities;
the price of the securities; and
the closing date of the offering period.

That’s it. Some short bullet-pointy info dots.

There’s no “this is the Internet and I can say whatever I want.” There’s no “This is the new world and old rules don’t apply.”

Is it limiting? Yes.

Is there a reason? Yes.

As with public offerings, there is a required disclosure document, in this case Form C. The SEC wants to make sure you have access to it before you make an investment decision. The SEC does not want a hyped-up ad to entice you to purchase before you have the ability to review 50 to 100 pages of required disclosure.

Any good news? Well, the company does not have to file the notices with the SEC. The company is not limited to newspapers. The notices can go anywhere, such as social media or the company’s website.

Also, the company can communicate with investors through the crowdfunding platform. The SEC believes that this ability will facilitate the wisdom of the “crowd” in crowdfunding. The company must identify itself as the company and not as “Random Guy Who Believes Company Will Be the Next UBER x Google.”

Old timey Ford tombstone. Crowdfunding companies need to get used to this.

JPMorgan Beating Startups to the AI Revolution. Artificial Intelligence to Eat White Collar Jobs – Is Going Solo in the Freelance Economy the Answer?

It is not just startups shaking up the AI world. JPMorgan discusses its artificial intelligence program. Going Solo in the Freelance Economy starts looking better.

When I left Big Firm, it was for personal reasons. I did not leave shaking my fist at a horrible culture and history of injustice. I did not experience that. I started thinking about a professional life staring at a different set of walls. I began to question my place in the Big Firm ecosystem and whether I could succeed without the safety net. Lucky me, I could.

For many attorneys, the choice will not be theirs to make. Technology is coming for their jobs.

Junior attorneys in bigger firms spend most of their time in some sort of document review and document processing roles. This is necessary grunt work, and it is how junior attorneys learn, when they pay attention.

Billable rates have continued to increase, and clients push back when they can. However, discovery in litigation and due diligence in transactional work must get done. What happens when software can take the place of expensive junior associates?

It is about to happen.

There have been a number of articles lately about first generation artificial intelligence tools for this type of work and their early adopter law firms.

Last week, Bloomberg reported on JPMorgan’s COIN, or Contract Intelligence, program. It reviews commercial loan agreements, something that consumed 360,000 hours of work by lawyers and loan officers each year. That task now takes seconds, has fewer errors, does not ask for vacations or have the other baggage associated with human employees.

In addition, JPMorgan’s machine learning and big data system helps automate software coding.

In legal circles, litigation document review was seen as the low-hanging fruit for AI software. However, any white collar position that provides a service that is based on rote activities can and will be replaced by software. It may not be tomorrow, but it is sooner than you think. JPMorgan is already planning to license its service to its bigger clients who are staffed to the rafters with white collar “thought employees” who are about to be replaced by code.

Many people believe their job cannot be at risk to computers because computers do not have the judgement capabilities of humans. But:

As for COIN, the program has helped JPMorgan cut down on loan-servicing mistakes, most of which stemmed from human error in interpreting 12,000 new wholesale contracts per year, according to its designers.

The software is doing other tasks that lots of humans now perform:

For simpler tasks, the bank has created bots to perform functions like granting access to software systems and responding to IT requests, such as resetting an employee’s password, Zames said. Bots are expected to handle 1.7 million access requests this year, doing the work of 140 people.

I am not writing this as a doom-and-gloom article about lost employment. I think this is ultimately a good thing. No one knows about the opportunities that will arise from this shift.

It does mean that people should recognize the shift and their place in it. Stability, comfort and complacency in large organizations has been an antiquated notion for a while. Maybe Going Solo and finding your place in the Freelance Economy is a path forward.

Artificial intelligence drives the Freelance Economy, eats white collar jobs. Some large enterprise companies are beating startups to the AI revolution.

Better Than Bitcoin? Fund Manager Discusses Disruptive Tech In Finance

Former co-head of largest bond fund discusses what can really disrupt entrenched businesses.

: Not the most disruptive finance technology.

Kicking Bitcoin while its down, Mohamed El-Erian penned an article for CNBC about how technology is taking on finance. In his words “via a democratization process that could gradually reconfigure a notable part of the institutional landscape, particularly in consumer finance, while challenging regulators to adapt.”

While most people would think “Bitcoin,” El-Erian doesn’t even consider it a good example. He claims its impact, “both actual and potential, is relatively limited when compared to ongoing attempts to enhance and democratize lending, borrowing, investing, and payments and settlements.”

El-Erian notes his take on the sequence for disruptive tech:

A bold innovation suddenly lowers entry barriers for certain activities;
Mechanisms emerge to enable a larger part of the population to participate in what is deemed desirable but, until now, had been hard to access;
As the disruptive forces gain traction, existing business models face difficult adaptation challenges, and regulators begin to fall behind; and
The situation is often amplified by a natural human tendency to overproduce and over-consume hitherto restricted goods and services.

He sees this happening in finance, though the pace is less frantic and less disruptive. According to El-Erian, examples include:

Internet-driven lending and borrwoing clubs
peer-to-peer initiatives in consumer financial services
Digital wallets
Mobile transfers

He suggests that they reduce costs and provide “fairer risk-pooling outcomes and better credit underwriting.” He doesn’t mention that none of these ideas are particularly new. He does mention that the prospects for each vary considerably.

While this was not the most insightful article on the subject, it is hard to dismiss El-Erian’s statements, given his former position as CEO and CIO of PIMCO, home of the largest bond fund.

Why Startups Fail – Mint vs. Wesabe

In an old blog entry (that I just found), one of the founders of Wesabe thinks back to why his company lost to Mint.com and shut down. For those who don’t remember, Mint was high-flying personal finance site that was sold to Intuit in 2009 for about $170 million.

Wesabe and Mint went head-to-head. Mint won. Here's why.

Marc Hedlund writes an honest article about his take on why Wesabe eventually shut down. First, he knocks out four myths, including that Mint launched first, had a better name and design and went viral.

Then, Hedlund discusses what he saw were the drivers behind the success of one and the failure of another. At the end of the day, it comes down to familiar themes recognized by those of us who work with businesses, particularly startups.

“I think in this case, Mint totally won at the first (making users happy quickly), and we both totally failed at the second (actually helping people).”

Mint gave people what they wanted and made it easy. Wesabe wanted to help people change their financial behavior, which is a value judgment with which the consumer himself/herself may disagree.

Hedlund notes that some of the things founders obsess over are really not important:

“You’ll hear a lot about why company A won and company B lost in any market, and in my experience, a lot of the theories thrown about – even or especially by the participants – are utter crap. A domain name doesn’t win you a market; launching second or fifth or tenth doesn’t lose you a market. You can’t blame your competitors or your board or the lack of or excess of investment.”

He does get to the crux of the issue about how to succeed:

“Focus on what really matters: making users happy with your product as quickly as you can, and helping them as much as you can after that. If you do those better than anyone else out there you’ll win.”

That’s it. Give people what they want to meet their needs and solve their problems.

Hedlund still believes that there are problems to be solved. However, imposing your judgment on people’s behavior will not have the same success as meeting people’s needs and desires.

“So, yeah. Changing people’s behavior is really hard. No one in this market succeeded at doing so – there is no Google nor Amazon of personal finance. Can you succeed where we failed? Please do – the problems are absolutely huge and the help consumers have is absolutely abysmal. Learn from the above and go help people (after making them immediately happy, first).”

Bitcoin Edges Closer to Mainstream As It Attracts Serious Venture Capital

Bitcoin seems to moving away from its seedy reputation as a digital currency for the underworld.

Coinbase, a San Francisco based startup founded in June 2012. It provides a Bitcoin “wallet and platform where merchants and consumers can transact with the new digital currency bitcoin.” If you look at their ‘About‘ page, their kitchen looks spiffy.

Coinbase announced a $25 million funding round led by Andreessen Horowitz and including Union Square Ventures and Ribbit Capital, both existing investors. This brings their funding to $31 million, including the $6 million they announce on their website. Representatives of Andreessen Horowitz and Union Square will join Coinbase’s board.

According to Bloomberg, other high profile VC firms have invested in Bitcoin companies, such as Tim Draper and Founders Fund. Otherwise, we have seen novelty acts in this space, such as the Winklevoss Bitcoin ETF.

Much of the trepidation around Bitcoin stems from the regulatory issues. Basically, many people (me included) expect the U.S. federal government to view Bitcoin with hostility, despite recent noises that they are okay with it. To that end, Coinbase says that they will be spending a lot of money for licenses with state regulators.

How Start-ups Can Increase Their Odds of Success

I had a discussion the other day about how start-ups can increase their odds of success. Since I do a lot of work with start-ups, in legal and consulting roles, I offered three tidbits of advice:

1. Business Idea. Do not pick an idea simply because you think it is cool or you will get rich. For example, the start-up graveyard is littered with music industry apps created by people who believed it was their entry into a “cool” industry.

Find a problem that you think you may share with many people and build a solution. This is what good businesses do. They induce customers to pay them to make the customers’ lives easier in some way. Yes, this includes the Facebooks and Twitters of the world who are good at aggregating and identifying users to make advertisers’ jobs easier in targeting an audience.

2. Pick the Right Team. It is important that founders surround themselves with people they trust to be committed to the venture and, most importantly, to produce quality results. The start-up world is populated with many “flakes,” but the founders need to be able to trust that their associates will do what they commit to do. I have seen this over and over. People show up with visions of options and IPOs and foosball tables, but when it comes to actually working and producing results, enthusiasm and attendance fade.

3. Know When to Step Aside. Very often, the skills necessary to start a business are different from the skills needed to grow a business. For example, founders often underestimate the importance of a skilled and talented sales person. This is a skill set just as computer programming is a skill set, and they does not necessarily overlap. In addition, managing an ongoing enterprise is much different than managing the birth of an enterprise. A skilled manager can often be the difference between a hobby with some potential and a successful, growing business.