>> Announcer: Live from San Juan, Puerto Rico, it's theCUBE, covering Blockchain Unbound. Brought to you by Blockchain Industries. (Caribbean music) >> Welcome back, everyone. We're here for exclusive CUBE coverage in Puerto Rico for Blockchain Unbound, a great conference where entrepreneurs and leaders are all here, coming together at a global level. You've got investors, you've got entrepreneurs, you've got the ecosystem developing. We've got it covered for you, I'm John Furrier, your host of theCUBE. Next guest, Joe Mohen, CEO of Chimes, industry executive, a lot of experience doing an ICO, doing some great work, Joe welcome to theCUBE. >> Thank you, it's a pleasure to be here. >> So, tell us first what Chimes is doing. You've got an interesting approach with music. What are you guys doing? Is there an ICO in the future? Have you done an ICO? Give the quick update. >> Okay, sure. Chimes is a digital media company, and we are consolidating music-related search results on Google in a similar way to what Amazon did with IMDB, consolidating film and television results many years ago. Amazon built an audience of about quarter of a billion to half a billion monthly users, and we expect we can create an audience on that order of magnitude over time. Just like IMDB is the third largest entertainment website in the world, it is our objective to create the fourth largest one. >> What's the value proposition there? Acquire audience, use that audience to tokenize? How does the token economics fit into all this? >> Well, first, like any media company, the first thing you have to get is an audience, right? I remember I interviewed for a job at CBS when I was out of college, and in the interview they said, "Do you know what we make here?" And I said, "You make TV shows." They go, "No, we make audiences." So we have to make an audience with a good product. The audience will be driven primarily by search, okay? But we also do have a double ICO in our future. First, we monetize the big audience. You can monetize with advertising, but that's not enough to make big money anymore, right, we all know that. So we have a layer of crypto products over and above that that we're going to be launching, including, for example, inter-country commerce, hiring producers in another country, hiring songwriters, et cetera, but automating that so we can do it on scale with smart contract. So we are creating a micro-currency that we can use on the website. We're doing an ICO for that but that's not for the purpose of raising capital. >> That's more part of the business model. >> That's part of the business model. >> That's not the financial aspect of it. >> Correct, and that's done so we can scale international commerce with automation. We're doing an actual ICO for the equity, for securities tokens as well. I've done a full IPO myself. My first company, I had Microsoft and Novell as my shareholders and it was a full S1, full registration. >> Interviewer: You went through the whole process. >> Yeah, but I also did a Form 10 once, ten years ago, for another reason. So what we're doing is possibly the first, certainly one of the first, but I think the first registration with the SEC of a company actually doing an ICO. And we're doing that using, I don't want to call it a loophole in securities laws, but there is a provision in the 1934 Securities Act called Section 12G. And what this does is it allows us basically to go public by telling the SEC we're doing it without having to delay it to wait for their permission. A Form 10 looks just like an S1, but when you file it, it's automatically effective 60 days after you file it, period. And so what we're doing is-- >> Period, full stop, no issues, no questions. >> Joe: No issue, right. >> So do you have to fill out all the same paperwork, the S1, >> Correct. >> the normal format, do the business plan, the normal paperwork? >> Joe: No, right, in 1930-- >> But there's no comments coming back? You just chip it to them? >> Comments come back and you have to clear them, just like with a prospectus, just like with an S1, however that doesn't delay it becoming effective. It's effective 60 days later. >> So they can be commenting during the 60 day time clock going on, but after 60 days, you're in. >> It's effective. So we'll continue to clear comments, but the thing is, with tokens, who knows how long that'll take? Is the SEC going to shepherd something through with crypto, or are they going to make it take five years? I don't know! Who knows? So, the thing is, we are complying with all of the laws for registration, but 60 days after we file it, it's effective. What we're doing is, in the pre-sale for the tokens, we're not issuing the tokens themselves to the buyers of the pre-sale for six months. The reason for that is they will have met the statutory holding period. So once the Form 10 is effective, those buyers can sell freely on token exchanges-- >> And what's the statutory holding period, six months? >> Generally six months. There's a few exceptions for affiliates, like an insider like me. >> I'm confused, a holding period kicks in before or after six months? >> After six months, the statutory holding period is satisfied. >> So you're going to wait to delay them anyway six months. >> Joe: Yes. >> So that covers the holding period. >> Correct, and then we file the Form 10, and 60 days later, they can trade and anybody can buy them. >> So do you file a Form 10 before the six month holding period? >> It'll be at about the same time. The reason being is because we have to get all the ducks in a row to be a public company. >> Cutting edge advice here, this is fantastic. So you're basically going to be the first ICO that actually files with the SEC. >> Correct. >> I mean, who does that, nobody. You! >> Watch us! >> John: That's awesome. >> Basically, we're using a provision, it's like we went back in time to 1934, got them to put something in the 1934 Securities Act for the purposes of ICO's, and then we came back to 2018 with the time machine-- >> Are you from the future? Back to the future! You went back and jerry rigged it. Hey, we should put this Form 10 in there! >> Joe: There you go! That's right. >> It could come in handy some day during the crypto bubble. >> Joe: That's right. >> So let's back to the cryptocurrency thing. I think you're onto something that I think is a tell sign that I haven't seen yet. I've been seeing some formation of it. You are using two types of tokens. Your business model is do security token for funding, trade that puppy through the Form 10. Utility token, a separate ICO for the product, and that's going to have one token, two tokens? >> There's one utility token, so to speak, one currency token, and that has its own regulations that you have to manage to also. But that's designed to appreciate, but not to go up 17 times. >> Okay, I want to dig into that for a second, because you mentioned scale. You're going to scale your business model with the utility token. That's the purpose of the utility token. So let's get into how you're going to do these smart contracts. Let's just say that a producer in Europe somewhere, in Italy, says, "Hey, I'm going to do something "with Joe in the UK." And they form a collaboration. >> Joe: That's right. >> Do they use that utility token or a new token gets created? >> No, that utility token. It's called a Chime, the Chime token. And what happens with that token is you can build in the contract administration through the token. Right now, you can do international deals. People do them every day. The difficulty is if you've got an audience of a half a billion people a month, for example, to do that on scale and automate it... Right now, if you do a deal with somebody in Japan, you, the American, has to have an American lawyer and a Japanese lawyer. And if there's a dispute, good luck suing. I, one time, a customer in Hong Kong, owed me a million and a half bucks and he's like, "Sue me." I'm in New York, he's in Hong Kong, and good luck. >> Did you do the New York thing? I'm flying over there and going to break your legs! >> We bitched and complained, threatened them, and ultimately we settled on 30 cents on the dollar, so we did, that's exactly what happened. With a situation like this, with smart contracts, neither side has to hire two sets of lawyers in the other country-- >> So Chime takes care of that. You want Chime to take care of that administrative inefficiency? >> Correct. The company might still get involved in administering exceptions but not everyone single one. What the smart contract does is it allows you to scale international business. The key is international business, and that's a new efficiency into the market, and that's a great-- >> And in the business model, what does that scale mean to you for operationalizing it? More people, do you have to hire them? >> More cash. No, less people and more cash because there's more automation, right? It means more software development-- >> Where's the cash coming from? >> We have a lot of revenue products. Like the obvious, like every other website, we have subscription revenue and advertising revenue. Subscription revenue comes from like... You know how IMDB is the LinkedIn of the TV and film business? So we'll have that too. >> It's not really large, though. It can be. >> Amazon could make it larger if they wanted to. They have their reasons for doing it the way they do it. But, in our case, I'll give you an example of some revenue products. Let's say you want to crowdfund a project. So let's say you want a bunch of Taylor Swift fans to crowdfund a project for her to do a duet with Kanye West. Sounds preposterous, but it's goofy enough. You'd be amazed, Stormy Daniels is crowdfunding a project for her legal bills with Donald Trump, and I betcha it's going to get funded, right? >> John: I would agree. >> So there's a lot of nutty stuff that gets crowdfunded. >> The wisdom of the crowd is actually efficient. >> Yes, that's right, and the whims of the crowd. But also, I'll give you another example. Let's say people want, if they go to a webpage about an artist, the band All American Rejects, for example, and Wheeler, one of the band members... Ten years ago, you could have given your niece a gift of a CD of All American Rejects. Well, good luck now. They wouldn't even know what a CD is in many cases, right? But what you could do is say, "Hey, you know what? "I'll give you a gift of a Google Hangouts chat with him, "And I'll pay $200 for that, or $500 for it." >> It's probably a bot, but anyway, how do you make this happen? This is really important. You're creating value by allowing people to collaborate in a way that's different, so that scales. Is that going to be done in the Chime contract or it's all going to be part of one currency? >> One currency, that's right. We're very careful. We brought in as an advisor, Rod Garrett, who gave one of the keynotes here yesterday. Rod Garrett is the money supply economist from UCSB, but he was also former VP of the New York Fed, he was the leader at the New York Fed for cryptocurrency. Rod is one of the smartest people I've ever met. >> You know him? >> Very well now, and you know what, Rod can explain the most complex things in simple words, which means he actually understands them. So we've actually used Fisher's equation to help model the utility token value over time. And, again, it's designed to appreciate, but we don't want nutty appreciation because then it'll be useless as a currency, right? We have fixed supply, the Bitcoin principle, the fixed supply and stable market so we can keep it reasonably stable. >> You're using the utility token to create value on your network so the creators can capture that value. >> Correct. >> That's what you're doing with the utility. The security is the money making side. How are you backing the security token, with equity or cash flow? >> Equity, and very important, really important, if you did a percentage of revenue or royalties, it wouldn't work, and I'll tell you why. It wouldn't scale, because we're looking five years out, 10 years out, for this to be a good investment. We want investors to buy it. And if you, let's say you need to do a secondary, because an acquisition becomes available, because you're low on money or whatever. Then how do you do a secondary if you've already given away 20% of your revenue to token holders. What if you have to do a secondary or tertiary capital round? How many rounds were necessary for Spotify, I happen to know Spotify, it was six, right? Facebook, Google, how many founds of financing did they do? A lot, and by the way, they still might do more. >> So basically the revenue share is hair on the deal. It really puts a lot of hair on the deal. >> Destroys it, in my opinion, destroys it. It's a dressing thing, but look, if you're really going to grow to a major company and have, be it five or 10 year success, it kills it. This is my opinion. >> What percentage of equity, say they're going to do a 50 million dollar raise, hard cap, soft cap, say 25, that's what seems to be the norm right now, what would be a percentage of equity converting to tokens that you'd see? >> In Chimes' case, we have a Common A class of stock. We're creating a preferred class of stock called a Series T which, if fully sold, would be about 43% of the equity of the company. They had to do it preferred stock, because there's too many, in Delaware Corporate Law, which all the tech companies are all Delaware, common stock would be very difficult to make a token. You can do whatever you want with preferred. So the preferred is more flexible, so it's actual equity, actual shares, it's not a derivative, it's not a rev share, it's not a royalty, it's actual equity. >> It's paper that converts nicely and it scales on the business side. >> So you say, "What's the evaluation?" >> We're selling 100 million dollars worth of the equity, or we're offering 100 million dollars of the equity, the pre-sale evaluation is a little over 200 million. In Chimes' cases, that's because we're not a startup, we're an early stage company. >> How old is the company? >> Pardon me? >> How old is the company? >> Three and a half years. >> So you weren't born yesterday. >> We acquired music databases that were built at a cost of tens of millions of dollars in Europe, funded by the richest guy in Europe, who built it out and then got tired of it, tired of funding it, and then we were able to pick it up basically for equity deals. We picked it up and we're buying a second music database also that's a very big one. So it's not like we're a startup with an idea and a business plan. >> No, you've got assets, and you've got momentum, good management, you obviously know what you're doing. It's awesome. You've got a great scalability mindset. You've got a nicely packaged, clear target. >> That's right, so we're probably a little bit different than a lot of crypto startups, in that, a lot of brilliant entrepreneurs that you see here, but we've been around the block with having to do IPO's, having to do exits, having to do... And you know, I'm a contrarian, right? I was getting a lot of advice yesterday from a lot of really smart people saying, "Hey, raise the money overseas through a foundation." >> "Everyone's doing it!" >> Look, I'm going to take a contrarian approach. >> I'm just going to comply with the law, by doing the registration. And they say, "What if your utility token has to comply "with money transfer laws?" Then we'll comply with them! It's like look, the contrarian approach is, whatever the law is, follow it! It gives us the flex-- >> The thing is you're actually doing what they want you to do, notifying them of what you're doing, and you have a utility! >> By separating out the token into two, one that has the attributes of currency, one that has the attributes of an equity, neither one is screwing up the other. >> I agree, that's really smart, and very novel. A lot of smart people are going down that road because it's actually known things people can understand. Security token is paperwork that you can do. >> Yes, but I'll tell you the other thing that feels very important, a pretty important point to make. By doing registration, the resale can go to anybody. My personal opinion, is you know these second market type of approaches that you can only resale them to accredited investors or to foreign investors or whatever, I think that's mistake. I think what happens is people who take that approach are going to find that the resale value of the token, or the token that has securities is going to be about 10% of what it would have been otherwise. >> If they only do accredited? >> Well yeah, because here's the thing. First, it's not only that they got to be accredited-- >> How do you get around the security token? >> Because it's registered. The waitress working the bar here can buy a publicly traded equity if it's registered, right? She can buy a publicly traded token-- >> That's the Form 10 that you were talking about. >> Right, Form 10 registers the company. The initial batch of trading will be done under 144 because the token holds will evolve over six months, so they can sell them at their leisure, right? There are exceptions, by the way, like an affiliate might have to do some form filing. I would have to file a Form 3, you know, the usual stuff. But, a regular token investor, he can do whatever he wants. And I can call them investors. I can do business in the United States. I don't have to pretend I'm domiciled in a country you've never heard of, right? So it's like look, I'm an American, my staff is mostly American, we do business in America, let's follow American law instead of-- >> Joe, this is a great conversation. We're getting down and dirty under the hood, capital structure, business models, Chimes' really interesting approach. Joe, thanks for sharing that great data here on theCUBE. Section 12G of the 1934 Securities Act. Form 10 is the secret weapon that was built by aliens before us to allow us to get this special clause in there for crypto. I'd love to continue this conversation another time. I think there's four or five things we just identified, great great topics, thanks for sharing. It's theCUBE's coverage here in Puerto Rico, I'm John Furrier, we'll be back with more after this short break. (digital jingle)