(upbeat orchestra music) >> Hello there and welcome to this CUBEConversations. I'm John Furrier here in our Palo Alto studios. This is theCUBE, Cube Signal program. Here with Grant Fondo, partner at Goodwin, CUBE alumni, been on before, thanks for coming back in. >> Good to be back. >> Partner at Goodwin, one of the best law firms around ICOs and just corporate government. He's a security guru, regulatory guru. We've talked in the past there's a YouTube video out there. Check it out. Search for Grant Fondo, you'll find our previous interview laying out the ICO playbook. Update. Let's get the update to the playbook. So, ICO's kind of in a winter state now, but still ICO's going on. Signal announced massive traction with their ICO. They're going to do an insider kind of private sale, looks like and then open it up. They got millions of people. So that's interesting. But then ICO stabilized. You got Siemens at 20 million range. What's the current update from the ICO front? >> So I think in the US, the current update is sort of post Munchee. So there was a SEC enforcement action and then Commissioner Clayton made certain statements about ICOs and then the net on that is I think it has provided greater clarity about issuing utility tokens in the US. Clayton's statement essentially was that they haven't really, the SEC really hasn't seen any utility tokens that are really utility tokens. The Munchee decision emphasized that in some regard. So with the Munchee decision, some of the things that they focused on was the marketing of the token. Even though they essentially, the SEC assumed that the token was a utility, had tremendous utility essentially on the platform, but what the SEC did was looked past that and said okay, what's the practical reality of that? And so what they focused on, they focused was the marketing. So how is that company marketing the token? Are they selling to people just to use it on a platform? Or are they selling it much more broadly to investor, kind of crypto-investors, VCs, that type of thing? Also there were some certain marketing statements where the company was actually trying to drive up their, emphasize that the price of the token would go up in value. They also focused on the fact that it was going to be on an exchange. And so what they, what they said was listen, this token is not a pure utility token. What it is is a token for people to buy with the idea, hope and expectation that it will go up in profit. >> So they basically, Munchee decision was targeting guys who were throwing everything at the wall? They seem to be. >> Yeah so it's funny. I think that's a little bit of a misinterpretation. So there's, clearly there were statements in there that you sort of shake your head a little bit. But I think that misses the picture of the Munchee decision if you focus on oh well we won't make those sort of statements. You need to look at, and focus on also, what were the other underpinnings of that, that enforcement action and what was the message, combined message with that, with the July 25th guidance that they issued and then Clayton's statements. And I think the message is that utility tokens are going to be a tough road in the US going forward. They certainly have not identified what a valid utility token would look like. So I think it's, it's a little bit of a, they've created greater clarity, but also a lot of uncertainty as well. >> I was having a conversation with some friends. And we were talking about ICOs. As you know we're bullish on ICOs. But the conversation turned towards two bipolar positions. Man this is a crypto, so awesome, blockchain, innovation, take down the incumbent, decentralize the apps, this is the future. And then the other side, from very smart people, is man that's fraud, don't associate yourself with ICOs. So there's a little bit of a Wolf of Wall Street wolf of ICO kind of mentality going on where they see the pink sheets, the old over the counter market that they made the movie Wolf of Wall Street around. People are nervous about that. I'm not saying that's happening, but there's a vibe there. What's your reaction to that? And I'm sure you might have conversations about the same kind of reaction. >> Yeah my reaction is this is a seat change. And it's going to happen and it's happening. And I equate it to the internet in many ways. And so I think you have to go in eyes wide open. I think you have to understand the regulatory risks if you're a company doing it. You know, there's not a certain path to do it in the US. And you have to evaluate that. There's, you can go offshore and there's certain paths that way. But as someone who's potentially going to purchase tokens or digital currency, and I sort of separate them between like the Bitcoin and Ethereum, which is more digital currency, and then tokens which are some of the ones we've been talking about. >> Close to 1,400 now out there. >> I would assume there's even more at this point. So they're literally popping up every day. And I think you have to, like the internet, I think there will be winners and losers. There'll probably end up being more losers than winners. I think the regulatory environment will get more certain. And then there's going to be, and that's fine. You have to go eyes wide open and you may lose your money in it, and then there's the category of pure fraud. And so that, there's always, whenever there's an opportunity, the criminals come jumping in. Or people take advantage of a situation where maybe they would not have otherwise. And that's going to be a portion of it too. But I think you can get a pretty good read on some of these whether this sounds like pretty sketchy or not and you just have to be realistic about it. >> And you guys are doing a good job. The Goodwin practitioner community is really working hard. I mean I always say, my feeling on this, we've talked about this before, is that the internet bubble was a bubble, but everything played out. You can buy pet food online. You can have stuff delivered to your home. So I think the same thing's happening with ICO. I think the things that are coming out that's innovative will end up happening. The question is the compressed nature of how fast forward this bubble is. I mean look at the NASDAQ growth during the dot-com bubble stage. And look at the crypto market total market cap. It's so fast forward. It's happening faster than even the dot-com bubble. How do you keep up? I mean, what's your day like? Do you go through research notes? I mean, you're talking to clients. It's a fire hose. >> Yeah it is, but it's a great time to be a lawyer in this space too. So a lot of it's dealing with clients and trying to figure out how do we deal with the regulatory situation. Advising them, connecting with foreign council as well. Dealing, there's been some enforcement activity both on the state and federal level. So I'm dealing with that as well. Advising them through that process. So, I mean, it's a fun time to be a crypto lawyer, an ICO lawyer. And I think too that what is also part of it you're seeing here that's fun and interesting is that regardless of how you feel about ICOs, one of the great benefits of it is you have all these different companies that otherwise would have never thought about using the blockchain or hadn't focused on it. And they're suddenly using the blockchain and this technology. So you've mentioned about how fast forward it's going. How quickly things. I think these have accelerated this change and this disruption by five to 10 years. And I think that's an enormous impact that is a positive impact. And so no matter what happens with the coins that you buy or may not buy, that's going to be a change that's going to be with us going forward. >> Talk about the regulatory update. There's obviously concerns in whether you're investing in crypto or investing as an individual or a fund or as an entrepreneur trying to build a business. What are the regulatory things that people should be aware of now? That's different than before or that's maybe more prominent. How would you talk about the regulatory? >> So I think there's a couple of buckets. So one is if you're the company doing the ICO you've got to address whether that token is a security. I think the SEC has said most of them or all of them are securities. You have to deal with that reality. If you're trying to create a cryptocurrency you have to look at are we going to be registered by FinCEN? And so I think you need to assess those. I think if you are part of the ecosystem helping these sales, so let's say that you're doing the marketing for one of these token sales. Or you're an advisor who's trying to bring in other investors or things of that nature. You have to look at what's called participant liability under the SEC rules. And so you have to be aware of what you're doing whether does that create exposure to you or your company if that token ends up being an unlicensed security. Likewise, if you're an exchange, moving these tokens or facilitating the sale of these transactions. You now have to think about am I, should I be registered with FinCEN, should I be registered with the SEC? So those are really kind of issues, core issues that you have to deal with. And then as an investor, I think generally investors would be viewed as the victim by these regulatory agencies so I don't know that there's real exposure from a liability or litigation perspective, but I do think it's more, again, like doing the due diligence and eyes wide open and understanding that if it fails, you may not, may not have any recourse. >> So everyone wants their tokens to go up. That seems to be the trend. Let's parse through the concept of utility and security we did, but now I have a token out there. An ICO, and I plan to take and ICO, or I'm ICO. What's the role of exchanges in all this? Because good tokens should have liquidity. People should be exchanging tokens. Some people hold the tokens or hoard them. But the role of an exchange. Do I plug with an exchange? Do I do my own exchange? What's some of the law around that? Because you know if I'm an ICO candidate I'm like hey I'm going to launch my token. It's going to be a secondary token, but I'm going to run my own exchange. And of course, list my token on the big exchange so people can trade it and the price will go up. >> Yeah so that's-- >> So that's natural reaction. >> So that to the SEC is going to sound like a security. So one of the things you have to address is if you're going to do this in the US or bring in US money is, I think it's a real risk to put the tokens up on an exchange. >> Is there hybrid models? Cause I can see a utility vehicle and saying hey we're a utility like the arcade example we used before. But what good is a token if the price doesn't go up right? So say that utility doesn't go fast enough in all this arbitrage, can I do a hybrid utility and security? >> I think it's hard, I mean it depends on how it's structured. One way to do, potentially to do a hybrid. And this has not been tested as far as with a utility token. But the SEC has, sanctions is not the right word, but it said what's called passive bulletin boards, are not securities exchanges. So that's in the context, imagine, you essentially say here's the platform for people, buyers and sellers of our token to exchange it between each other. We're not in the middle, we're not taking any transaction fees. And so there's a path to that and that may not be attractive to certain ICO companies but that is a potential path where you can provide liquidity. >> So like a Craigslist, or like a bulletin board. >> Craigslist. >> The old school, you know, bulletin board days. >> Yes, people still use them. >> John: They still use the word bulletin board? >> Yeah. >> Good news, okay. >> Grant: Exactly. And so that.. >> Social network? >> Yeah, that's a path to do it. You can also, if you do create a system where the token does not leave the exchange, excuse me leave your platform, so it's a closed loop token. That's a potential path that you can do. Again, may, it may-- >> So there's solutions for people who need to have some sort of interaction between token holders. >> Grant: Yes. >> Without going pure exchange in the sense of trading and having a market cap and all that stuff. >> Yes, I think it's many clients would say that it's less attractive from a marketing perspective. But there are, there are potential paths. There's also the path that we're seeing more and more which is securities tokens. I think when you and I met last time we had just started touching on that, but I think that-- >> Explain. What's the big change? >> So the concept is the securities token is you're basically going to treat it like you are going to treat it as security. You're going to own it and you're going to go to the SEC and get it registered through like a Reg A+, which is essentially is a 50 million or less raise. That's sort of a common one we're seeing. And so in that context, you are saying it's a token, but it's a security. You don't have to give up equity. There's other ways to do it so you can give up a percentage of the revenue. Sort of treat it like a divided. And in that way it's a regulated entity and you're not taking that risk about are a utility token or not. >> That's a good path and it makes sense. Depending on the ICO. Okay let's talk about bounties. As you know we love bounties, love the concept of bounties. Media business would call promotions spiff, channel partner, whatever, people use promotional incentives. Bounties are popular, you've seen bug bounty in open source being used. Tried to get Kelsey to, Kelsey kind of addressed it a little bit, but it's more of a legal thing now. What's the status of bounties? You mentioned before we came on that gets the SEC's attention. >> So the bounty is designed to sell the token. So you're in your fundraise round for example. And you put out a bounty so that people will go sell the tokens. I think it creates issues with the SEC. Part of it is it's very hard to control that bounty. So you're going to have people who are trying to make money selling your token. And they are potentially going to make statements that are going to indicate or make statements the SEC is not going to like. So it's something-- >> Or promises. Said basically to sell the deal. Broker dealer almost, right? >> Correct. So there's a couple of issues. Not only from the company perspective that you've got somebody out there who's probably marketing your token in a way that the SEC's not going to like and so that creates potential exposure but also from the bounty person, the person doing the bounty, there's potential exposure. But are they essentially doing a broker or are they acting as a broker dealer or other type of seller of unregistered securities as a participant for example. And so it's not something we generally recommend to our clients. That said, if you are going like more of a true utility tout, there's nothing wrong with like a reseller agreement. So you could structure something most of these bounties tend to be like hey if you bring us x amount of token sales, we'll just give you something. There's no real strong contractual arrangement. But if you are a company that has traditional resellers, and the purpose of the sell of these tokens is for that customer to use it on your platform, I think you can structure things so you have reseller agreements. >> So it's really case dependent. If you're using bounties >> Very case dependent. >> as an arbitrage to sell the deal versus actually part of your business model, that's kind of the way you look at it. >> Yes, I think that's a distinction and I think that's a distinction, no guarantees, but I think the SEC would understand. I mean, it's all part of it. They're looking at the picture. Are you trying to just make this token go up in value or is this token really supposed to be used on your platform? >> Alright so question for you. Since we last talked, I think it might have been two months ago, may have been 60 days or so, I can't remember the actual when you came in last, it seemed like yesterday. What's changed, what have you learned, what's new? What's surprised you? What's interesting that's happened over the past few months? >> So I don't think any of the regulatory action has surprised me. I think we sort of knew that was probably coming. I think what's surprised me though is that every time there's been guidance issued by or an enforcement action issued by the SEC, we now also have state actors, Massachusetts has become pretty active. Texas has also been active. You would think that it would dampen or slow down the market and it really hasn't. So I've been surprised that it almost has led to more phone calls. Not just about, oh are we in trouble, but more in the context of okay, we really recognize we need lawyers. We need to try and do this right. But it hasn't, the enthusiasm is still really there. >> So it's validation in the fact that they're issuing guidance, in my opinion. But I think it brings the question of man, I need help on this thing. People are then they got to call in the pros. Alright the other thing that's interesting about these guidances, if I can get your reaction to is has it really set the rules of the road yet? What I'm trying to look for is what are the rules of the road? I drive on the right side of the road here in the US, I stop at the stop sign, I can get through things. But the rules, what's changing, what's stable? Obviously securities tokens is solid, right? That's a good rule. >> Yep. >> John: What rules of the road are developing? >> So I think, using your analogy, I would say that what the SEC has said if you go over 20 miles an hour, probably more like 10 miles an hour, you're speeding and that's a security. But we're not going to tell you if the floor is 10 miles an hour. So it may be that if you go two, three, five miles an hour, we're also going to give you a ticket. And that's sort of the environment we're in. We know where there's the danger zone where you've crossed that line. What we don't know is where is the safety zone. And so that, that I think in some ways is where that guidance has come. I think where that is pushing people though, is is more offshore and I think that's always a risk. I was involved in digital currency several years ago with certain regulators and that's when I think the government was more interested in stamping it out. And there was a huge offshore movement. You're seeing that with token sales now too. The companies that want to be in the US are moving offshore. So hopefully, my goal and hope is that the regulators avoid that problem. I do think that it's, the regulators still are not looking to crush this industry, they're trying to regulate it. And I do think that's a big change. I'm not saying that there aren't going to be people hurt. >> It's better. >> It's better. >> Not great. >> Not great. >> They're not moving fast enough basically is the issue right? Or... >> Yeah, I also think that companies... For a company that's going through that process, it's sort of still extraordinarily painful. So I'm not saying in any way that the regulators are having a light touch, but I do think there's also recognition here that we don't want to destroy this industry. And I think Congress is the same way. >> And you do a great job, you guys are pioneering a whole new class of law. Documents, agreements are all being kind of re-casted and re-imagined with crypto. >> Grant: Daily. >> It's daily. Well I've got to ask you the final question. As things progress, things are happening, you've got a lot more deals under your belt now. You guys are doing great over there at Goodwin, you're the top set of law firms doing crypto deals. So I got to ask you. What are you advising clients now? I mean obviously you're trying to zig and zag at the right time based on guidance. Make sure everyone's covered and the risk reduction. But at the same time, you guys have also been, I don't want to say super aggressive, but you've balanced aggressiveness of opportunity recognition capture with risk management. What's your current advice now? >> I think if, generally it is really take a hard look at the securities token. I think that that, it's not the perfect path for everybody, there's costs, expense, et cetera. But I think if you really want to do a token in the US, you want to be safe, I think you've really got to look hard at going down the securities token route. The other one is to go purely off shore. And do, pick a venue that is relatively crypto friendly. And do everything offshore which means no US money. Not even at the soft stage early on. And also have the token go on and if you're going to put it on an exchange, don't put it on an exchange that has US people buying and selling tokens. That is sort of the two paradigms that we're seeing. I think anything in the middle, then we're advising, alright, let's talk about pure utility token here. Where, I mentioned it before, where the token stays, doesn't go outside the platform. Or where you've set a fixed price on the token. Or if you do create some type of token do a passive bulletin board. Those are models still to be explored. I don't think many companies are doing them. But those are sort of the paths. I think that the utility token that we've been seeing in the last six months now is a pretty difficult path to go. >> And the offshore thing, Kelsey Lemster, who was on Tact Partner at your firm, was just talking with me about, it might not be the best thing with the tax reform in the US. >> Grant: Yeah. >> So what's your state now on that? Do you still advising offshore? Or does it kind of depends now based upon decision making on whether you're a security or not? >> Yeah, so with Kelsey, he's talking about tax issues. And historically with these tokens, the tax issues were very significant and there was a push to go offshore for those reasons. And there was also always a push about whether you go offshore for the regulatory reasons. We're not going to touch the US. I think those are both things that companies have to figure out and intersect. So we had companies that ultimately decided not to go offshore because the tax advantages were not that significant. Maybe they'd lost a lot of money during the course of their three or four years and so they decided we can offset those gains. Also there's aggravation with going offshore. And so you have to build that in, getting money back from the Cayman Islands or elsewhere there's a process versus just going to a B of A down the street. So I think it's all these things that you have to counterbalance and like we mentioned, it's just everything's changing very rapidly and so it literally is like a day by day assessment of what's the next path. >> It's like the big set of waves coming in, it's really awesome. Final comment I'd like to get. I'm looking at a hedge fund, fund of funds deck from a crypto currency bond of funds, so now you're seeing funds of funds and bonds, and hedgefunds. So a couple of bullet points I want to get your reaction to. New investible asset class. Un-corelated with others. value creation as massive scale. Nascient markets with liquidity unlike VC. Inefficiency provides opportunity. Those are kind of the main bullets on the first page. (laughing) >> I think my reaction-- >> No regulation, regulatory concern, we got tax. It sounds great, I should jump right in. >> So, the advantage to the cryptocurrency is skyrocketing. I mean we've had kind of a pull back a little bit over the last week or so, but some of them are back up today. So I think it is, there is a lot of opportunity and I think some of the opportunity they're talking about, so we represent a number of hedge funds and others who create kind of financial products with this. Some of the opportunities, you look at the stock market. The stock market now is really hard to basically game the market in the sense of not cheating, but like doing arbitrage where if you go to one exchange and buy the stock from there and sell it in another, that type of thing, very hard to make money. There's a lot of sophisticated players, a lot of technology. You're talking literally, what was that movie about where they were able to do a trade like a millisecond faster and it gave them an advantage. That's what you're talking about. Here in the crypto space, you don't have that sophistication yet, so there are companies who are figuring out ways to buy and sell currency in the same currency and make money in that transaction. Maybe they buy from one exchange at a dollar and it's selling at a dollar 20 at the other exchange so they sell it. So I think there is a lot of opportunity. Ultimately these are being regulated. Even the cryptocurrencies are regulated. Some are regulated by FinCEN. The exchanges are regulated by FinCEN. So there's regulation, but there's a lot of opportunity. >> A lot of arbitrage certainly. >> Grant: Yep. >> Big time. >> Yep, so it's a really fascinating market. Very sophisticated market. Again, eyes wide open if you go in and invest in it. >> And this really talks about the make up and the personality of the people involved if you can handle the wave, you should get out there. Hence the reaction to some people look at it as a little bit nervous, they're the risk averse folks. You've got to be, you have to have a stomach for this. You know. >> You do. You also have to be smart. Like you shouldn't put all your money in it. You shouldn't pull out your 401k money to start investing in any asset class. You have to invest enough that if you lose it, it's not going to be life changing. >> Well a lot of smart people that I know, and I know that a lot of people who were really into this and see great opportunity, certainly there's the bad actors in there, but I love this opportunity, I think it's a once in a generation movement. I think it's the biggest wave that's hit since many generations so really awesome. Congratulations on the work you're doing. Any new update on Goodwin front? >> No, it's just been a fascinating time for us. And it has, we've got a ton of people doing a lot of interesting stuff. And literally every day we hear a new project. We're like wow that's a really interesting application of this technology. Or a different use case. And our clients are coming to us. I mean that's the beauty of Silicon Valley and that model is we learn things from our clients so we love having those meetings. I think you're just going to see tremendous change. Literally week to week. >> How's your VC client base? They're probably engaged heavily at this point. I'm hearing a lot of folks on the VC side. Not feeling like they're being left out, but they're seeing this as a new way. They certainly have been called out here in the hedge fund. Unlike VC. I mean classic venture capital's been out for a while. >> It's a new paradigm for them. I think they're grasping with it. I think that in some ways it's attractive to them because it does provide for their LPs. It provides much greater liquidity than a typical VC investment which is a five to 10 year wait. But they're also, people are saying they're being replaced and they're having issues where companies no longer want to go to VC, they say why should I give that equity and control when I can get the money through different means. So I think it's disrupting their world. I think they're slowly, not slowly they move pretty quick, they're adapting to it. I think that there's tremendous value to having VCs involved in the ecosystem. >> I mean they should do it, I mean they should take a little bit of their fund because just the opportunity to get appreciation and again, liquidity in an unregulated market is an opportunity. >> It is an opportunity. And they're in it, they're exploring it and stuff. >> Grant Fondo, partner at Goodwin, check out Goodwin. Great firm on the ICO front. They're the top in Silicon Valley and around they world. They've got great tax law, Grant, good friend of theCUBE. Thanks forc coming on again, appreciate your commentary. An update on the ICO playbook. I'm John Furrier, this is CUBEConversation. Thanks for watching (upbeat music)