Initial coin offerings have gotten a bad rap—in many cases, deservedly so. Sure, there were blockchain projects with sound dreams and solid business plans. But as the bitcoin bubble swelled in late 2017, ICOs became synonymous with predation: get-rich-quick schemes that involved taking money from anyone who was willing, in return for worthless crypto tokens.
Since then, the Securities and Exchange Commission has been trying to clean up the mess. The rules are vague, but this much has become clear: Most ICOs are securities offerings, and require all the protections and disclosures of selling stocks. That basically takes them off the table for ordinary investors. Blockchain startups now typically fund themselves with sales of shares (or tokens) to so-called accredited investors, institutions, and wealthy individuals.
But now one blockchain startup thinks it’s found a way to get you and me involved again in token sales—with the SEC’s blessing.
“I hate the term ICO,” says Muneeb Ali, cofounder and CEO of Blockstack, which is building a platform for decentralized apps. Last week, the company filed an application with the SEC to sell its tokens, called Stacks, under an exemption called Regulation A+. The pathway came into being as part of the JOBS Act passed by Congress in 2012, and allows businesses to raise $50 million each year from ordinary investors. Blockstack believes that, if approved by the SEC, it would be the first to use the exemption to sell a crypto token.
Tucked in the filing was a disclosure about another Blockstack investor: Harvard Management Company, which oversees the university’s endowment. It’s listed alongside two other investors that together hold a stake valued at about $11 million, purchased in an earlier token sale (Harvard’s exact share wasn’t disclosed). Though a few big institutions, including Yale and two Virginia pension plans, have invested in crypto-focused funds, Harvard’s involvement is unusual in that it appears to have taken a direct interest in the tokens of a blockchain network. Harvard Management Company declined to comment.
Why look to ordinary investors when you’ve already got Harvard signed on? The answer relates to how decentralized projects grow.
Token sales are a necessary evil in the blockchain world. In addition to raising cash, they’re a good way to get lots of people involved with your decentralized network—users and developers who then have a stake in seeing it grow. As long as the tokens have some concrete use, the idea is that they’ll become more valuable as the network expands, bringing returns to the original investors. In this way, ICOs helped blockchains like Ethereum initially get off the ground.
When the SEC cracked down on ICOs, established blockchains like Ethereum and Bitcoin appeared to get a free pass. As SEC director of corporate finance William Hinman put it last year, Ethereum was “sufficiently decentralized,” with a large community and no central entity, to make its token more like a commodity such as gold. But the SEC’s definition of decentralization was vague, leaving companies that hadn’t yet launched wondering if they’d get the same pass.
“That’s a risk I’m not willing to take,” says Ali. So he’s attempting to use Regulation A+ to get around the bind. Ali started Blockstack as a research project four years ago while working on his PhD at Princeton. The vision was grand: to rebuild the internet in a decentralized fashion, with applications reborn with more user privacy and control. Google Docs is replaced by Graphite Docs, for example; Afari looks a little like WhatsApp. In place of Google Cloud or AWS, the apps work with the help of a constellation of computers on the Blockstack blockchain. The company gives developers the tools to build apps on the platform and lets them roam free.
But it’s early days. So far Blockstack is home to about 80 applications, but only a few thousand people are using them. As my colleague Tom Simonite wrote last year, apps like Graphite Docs are perfectly usable, and come with some privacy comforts. But the ecosystem is glitchy; what’s the good of a collaborative document editor if none of your collaborators are using it? Ali believes that in time, more high-quality apps will attract those users. But it’s a challenge, he admits, when developers can easily build on Android or iOS and know they’ll be in front of a billion or more potential customers. Ali plans to use the money raised through the Stacks offering to increase the incentives for developers.
Blockstack has gotten this far by selling tokens valued at $47.5 million to accredited investors, including Harvard. With the SEC’s crackdown, restricting offerings in this way has become a more popular choice for blockchain startups, says Peter Van Valkenburgh, director of research at Coin Center, a blockchain think tank. Typically, companies sell their tokens to venture capitalists and large institutions with the expectation that their project will go live someday and the platform will be deemed “sufficiently decentralized,” as Ethereum was. That would allow the early investors to resell their tokens widely. But it’s a risky bet, and doesn’t let you bootstrap your community from the start. “You’re cutting out a lot of users for your token because an accredited investor is going to be a rarefied person and not necessarily using the token on your platform,” says Van Valkenburgh.
Blockstack’s proposed offering, Ali says, is intended to help the company get to that point of decentralization a bit faster. It hasn’t been approved yet, but Ali is optimistic. The SEC declined to comment. “It seems like we’re getting close to the finish line. I think it’s a big deal for [the SEC], because as soon as they approve a project it sets a precedent for what they’re looking for.” Otherwise, he says, they’ll look to offer their tokens elsewhere, blocking customers from the US.