Disclosure: I’m not a lawyer so don’t construe this as legal advice.
On October 23rd, Gab published a Medium blog post announcing their token sale. I was really impressed by the model Gab is using to raise money for their token. In August 2016, Gab launched a private beta of their social media product. In August 2017, Gab raised a seed round from over 1,000 investors for $1.07MM under the Title III Jobs Act. This allows them to publicly solicit investors who are either accredited or non-accredited. As I write this post, Gab has over 200,000 users and is the 16,603rd most visited site in the United States. Gab is now raising a second round of funding via a token sale using Reg A+.
Reg A+ allows companies to raise up to $50MM using public solicitation from both accredited investors and non-accredited investors. The tokens can be traded immediately, and investors will know there will be no legal uncertainty about them. The downsides for a company to raise money this way is that they are required have semi-annual public reporting including audits, it’s more expensive than raising a traditional financing round and it could take a few months to get regulatory approval. I don’t view these as downsides, but rather stamps of approval that give investors confidence that the token and the company issuing it is legitimate.
What does this mean for companies utilizing token sales moving forward?
Ideally, I’d love to see a company bootstrap a product and then raise a seed round. The seed round can be straight equity or a combination of equity and a promise of tokens down the line. After two years (two years of audits are needed for Reg A+), then the company can raise a token sale via Reg A+. This will solve many of the potential legal issues that tokens face today. More transparency and protection are needed for token sales, and I believe Reg A+ filings are the best way to pursue a legal token sale.
If you are a lawyer or an expert on token sales, I’d love to hear feedback on this approach or alternative approaches to token sales.