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Compliments of our colleague Sanjay M. Shirodkar.

The SEC is open for business – first come, first served.

The Division of Corporation Finance is returning to normal operations. The SEC staff has indicated that, absent compelling circumstances, it expects to address matters in the order in which they were received. Staff members are available to answer questions relating to filings and other federal securities law matters, but their response take some time.

The SEC Staff has created an avenue for expedited basis assistance. Such requests should be directed to CFEmergency@sec.gov.

With respect to registrants that omitted or removed delaying amendments from their registration statements, the SEC staff noted that it will consider requests to accelerate the effective date of those registration statements if they are amended to include a delaying amendment prior to the end of the 20 day period and acceleration is appropriate. In cases where the SEC staff believes it would be appropriate for a registrant to amend to include a delaying amendment, the SEC staff expects to notify that registrant.

With respect to pending no-action letters, including those under Exchange Act Rule 14a‑8, the SEC staff expects to respond to these requests in the order received.

Here is a link to the guidance from the Division.

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By Trent Dykes, Ossie Ravid and Jennifer Tornow

Just a reminder to those who have Delaware corporations: your annual report and franchise tax payment are both due by March 1. At this point, you have likely already received from Delaware your notification of annual report and franchise tax due, which is sent to a corporation’s registered agent in December or January of each year. Delaware requires these reports to be filed electronically.

There are two methods that you can use to calculate the amount of Delaware franchise tax due for your corporation (the Authorized Shares Method and the Assumed Par Value Capital Method), which result in vastly different amounts due. The default payment amount listed on your notification is set by Delaware using the Authorized Shares Method, which will almost always result in a much higher amount due for startups with limited assets.

For corporations using the Authorized Shares Method, the minimum franchise tax is $175 and the maximum franchise tax is $200,000. For corporations using the Assumed Par Value Capital Method, the minimum franchise tax is $400.

Effective for the 2017 tax year, a new fixed annual franchise tax of $250,000 was applied to certain large publicly traded corporations (Large Corporate Filers) identified by the Delaware Secretary of State.

Franchise taxes are generally due in arrears for the prior calendar year. However, note that Delaware requires corporations owing $5,000 or more for the prior year to make estimated payments for the current (going-forward) year’s franchise tax with 40 percent due June 1, 20 percent due by September 1, 20 percent due by December 1 and the remainder due March 1. The penalty for failing to make a timely filing and payment is $200 plus penalty interest of 1.5 percent per month on the unpaid tax balance (and your entity will not be in good standing with Delaware until paid, which can cause delays if your company is anticipating a financing or sale).

Here are some examples showing how the different methods can dramatically impact the amount of Delaware franchise tax due:

Authorized Shares Method

The franchise tax rate for the Authorized Shares Method is as follows:

  • 5,000 authorized shares or less (minimum tax) = $175
  • 5,001 – 10,000 authorized shares = $250
  • and for each additional 10,000 authorized shares or portion thereof = add $85
  • maximum annual tax is $200,000

For example, under the Authorized Shares Method, a corporation with 15 million authorized shares would pay $127,665 (i.e., $250 plus $127,415 [$85 x 1,499]).

Assumed Par Value Capital Method

To use this method, you must give figures for all issued and outstanding shares and total gross assets in the spaces provided in your annual franchise tax report. Total gross assets shall be those “total assets” reported on the US Form 1120, Schedule L (Federal Return) relative to the corporation’s fiscal year ending the calendar year of the report. The tax rate under this method is $400 per million or portion of a million. If the assumed par value capital is less than $1 million, the tax is calculated by dividing the assumed par value capital by $1 million then multiplying that result by $400.

Under this example, using the same corporation above having 15 million authorized shares of stock with a par value of $0.01, gross assets of $1.2 million and issued shares totaling 10 million, the Assumed Par Value Capital Method of calculation would result in a franchise tax due of only $800 (i.e., $1.2 million / 10 million = $0.12 * 15 million = $1.8 million, rounded up to the next million, so $2 million. $2 million / 1 million = 2 * $400 = $800).

Here is a helpful Franchise Tax Calculator spreadsheet provided by Delaware to assist in estimating your franchise taxes (note there is a different calculator for each of the 2017 and 2018 tax years, make sure to use the 2018 calculator). In addition to the franchise tax, there is also a $50 filing fee for the annual report.

Also, be careful of scams and other deceptive practices that use the Delaware franchise tax payment as cover. The official notification of annual report and franchise tax due is issued directly from Delaware (although it will likely be routed to you through your registered agent). The Delaware website describes two recent scams.

Additional considerations

If you are a company incorporated in Delaware but conducting business in another state, you must qualify to do business in that state and pay the franchise tax (if any). California, for example, imposes a minimum franchise tax of $800 on corporations “doing business” or registered to do business in California. A corporation is doing business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or if it satisfies any of the conditions in California Revenue and Taxation Code section 23101.

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By Trent Dykes, Ossie Ravid and Jennifer Tornow

Just a reminder to those who have Delaware corporations: your annual report and franchise tax payment are both due by March 1. At this point, you have likely already received from Delaware your notification of annual report and franchise tax due, which is sent to a corporation’s registered agent in December or January of each year. Delaware requires these reports to be filed electronically.

There are two methods that you can use to calculate the amount of Delaware franchise tax due for your corporation (the Authorized Shares Method and the Assumed Par Value Capital Method), which result in vastly different amounts due. The default payment amount listed on your notification is set by Delaware using the Authorized Shares Method, which will almost always result in a much higher amount due for startups with limited assets.

For corporations using the Authorized Shares Method, the minimum franchise tax is $175 and the maximum franchise tax is $200,000. For corporations using the Assumed Par Value Capital Method, the minimum franchise tax is $350 and the maximum tax is $200,000; however, for the 2018 tax year, the minimum will increase to $400.

Effective for the 2017 tax year, a new fixed annual franchise tax of $250,000 will apply to certain large publicly traded corporations (Large Corporate Filers) identified by the Delaware Secretary of State.

Franchise taxes are generally due in arrears for the prior calendar year. However, note that Delaware requires corporations owing $5,000 or more for the prior year to make estimated payments for the current (going-forward) year’s franchise tax with 40 percent due June 1, 20 percent due by September 1, 20 percent due by December 1 and the remainder due March 1. The penalty for failing to make a timely filing and payment is $200 plus penalty interest of 1.5 percent per month on the unpaid tax balance (and your entity will not be in good standing with Delaware until paid, which can cause delays if your company is anticipating a financing or sale).

Here are some examples showing how the different methods can dramatically impact the amount of Delaware franchise tax due:

Authorized Shares Method

The franchise tax rate for the Authorized Shares Method is as follows:

  • 5,000 authorized shares or less (minimum tax) = $175
  • 5,001 – 10,000 authorized shares = $250
  • and for each additional 10,000 authorized shares or portion thereof = add $75 (to be increased to $85 effective for the 2018 tax year)
  • maximum annual tax is $200,000

For example, for the 2017 tax year, under the Authorized Shares Method, a corporation with 15 million authorized shares would pay $112,675 (ie, $250 plus $112,425 [$75 x 1,499]).

Assumed Par Value Capital Method

To use this method, you must give figures for all issued and outstanding shares and total gross assets in the spaces provided in your annual franchise tax report. Total gross assets shall be those “total assets” reported on the US Form 1120, Schedule L (Federal Return) relative to the corporation’s fiscal year ending the calendar year of the report. The tax rate under this method is $350 (to be increased to $400 effective for the 2018 tax year) per million or portion of a million. If the assumed par value capital is less than $1 million, the tax is calculated by dividing the assumed par value capital by $1 million then multiplying that result by $350.

Under this example, for the 2017 tax year, using the same corporation above having 15 million authorized shares of stock with a par value of $0.01, gross assets of $1.2 million and issued shares totaling 10 million, the Assumed Par Value Capital Method of calculation would result in a franchise tax due of only $700 (ie, $1.2 million / 10 million = $0.12 * 15 million = $1.8 million, rounded up to the next million, so $2 million. $2 million / 1 million = 2 * $350 = $700).

Here is a helpful Franchise Tax Calculator spreadsheet provided by Delaware to assist in estimating your franchise taxes (note there is a different calculator for each of the 2017 and 2018 tax years). In addition to the franchise tax, there is also a $100 filing fee for the annual report.

Also, be careful of scams and other deceptive practices that use the Delaware franchise tax payment as cover. The official notification of annual report and franchise tax due is issued directly from Delaware (although it will likely be routed to you through your registered agent). The Delaware website describes two recent scams.

Additional considerations

If you are a company incorporated in Delaware but conducting business in another state, you must qualify to do business in that state and pay the franchise tax (if any). California, for example, imposes a minimum franchise tax of $800 on corporations “doing business” or registered to do business in California. A corporation is doing business in California if it actively engages in any transaction for the purpose of financial or pecuniary gain or profit in California or if it satisfies any of the conditions in California Revenue and Taxation Code section 23101.

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Yesterday, the SEC issued an enforcement order regarding Munchee’s token offering and SEC Chairman Jay Clayton released a general public statement on cryptocurrencies and ICOs.  For those who previously read our post about the SEC’s report in the DAO, much of this might not be a surprise – although the SEC staff did answer the call of discussing so-called “utility tokens.”

The SEC action against Munchee is notable to us because Munchee had at least some argument that its tokens had utility. As quick background, the Munchee app is built around a crowd-sourced restaurant review concept.  The Munchee app was built before the token offering.  The Munchee tokens (MUN) were designed to function as an internal currency for “use in the Munchee app for rewards and interactions.”  Munchee had a somewhat polished white paper, replete with disclaimers and carefully avoiding terms such as “ICO” and “investors,” and a management and advisory team with relevant technical and industry experience.  For those of us working in this space, this fact pattern is familiar – and did not feel like the edge cases that had previously caught the ire of the SEC, such as a massive loss of investor capital or a recidivist promising 1,354% profit in less than 29 days.

So what takeaways can other potential token issuers glean from the Munchee order? How much “utility” is needed?

Almost every token issuer desires its tokens to be “utility tokens,” not “security tokens.”  For those new to this space, don’t be confused by the industry parlance, which was created just a few months ago and has taken off like wildfire.  Fundamentally, the concept is that a token with “utility” should carry an expectation of use, not an expectation of profits, under the Howey test for investment contracts.  (Our prior blog discusses the elements of this test.)

Here are some guideposts to consider when evaluating your token’s claims of utility:

  1. What if my app is built?  The Munchee order acknowledges that Munchee had “created an iPhone application (‘app’)  for people to review restaurant meals.”  Many issuers want to argue they are selling a “minimally viable product” that has immediate utility in the hands of the holder.  The SEC clearly regarded the app alone as inadequate and decided to highlight this fact at the very beginning of the order summary.  The SEC order emphasized that the app was subject to improvement, that the ecosystem and its participants (advertisers, reviewers, restaurants) did not exist, and that MUN could not buy any good or service. At a minimum, the SEC is signaling that an adequately advanced version of the app is needed with meaningful use for the token at the time of the offering.
  2. What if I give my tokens “more” utility at issuance?  Read paragraph 35 of the Munchee order. The SEC was obviously not enamored with Munchee’s “utility token” argument.  Paragraph 35 was logically unnecessary to the SEC’s conclusion (dicta).  The SEC stated:  “Even if MUN tokens had a practical use at the time of the offering, it would not preclude the token from being a security.”  Even more notable, the SEC broadly characterized the US Supreme Court case of Forman for the proposition that “purchases of ‘stock’ solely for purpose of obtaining housing” is not the purchase of an “investment contract” (emphasis added).  This suggests that if there is an expectation of profits, even if that is secondary to the more predominant expectation of use, a token may be a security.  While we may debate this, or hope that the SEC did not really mean this in a paragraph that is technically unnecessary to the order, it is difficult to ignore – especially given that it said basically the same thing in the DAO report.
  3. What if my “Howey test score” shows my token has low risk of being a security?  One of the more amusing things we have seen around the ICO craze has been the creation of a very thoughtful spreadsheet attempting to reduce the analysis of whether a token is a security to a series of yes/no questions where answers are ascribed values that are summed into likelihood of being a security.  Many companies populate this spreadsheet as part of their internet research about ICOs, before calling counsel.  While as securities lawyers we appreciate that this device has focused attention on a key issue, there is an obvious garbage-in-garbage-out problem.  The SEC chose to mention that Munchee had conducted this exercise and stated that the sale of its tokens “does not pose a significant risk of implicating the federal securities laws” – which obviously is inconsistent with the SEC order.  This seems like apt caution for the hundreds of token issuers who have reached the same self-serving conclusion.
  4. Can I sell my tokens to crypto-investors?  As the Munchee order illustrates, the SEC may regard selling to crypto-investors as indicia of selling securities. If you are selling a prepaid use right, then why not sell this right to the end user? The SEC noted that Munchee did not market or sell to current users of the Munchee app, in restaurant industry media or to restaurant owners. Selling large amounts of products or services to identifiable investors is not how people typically sell software seat licenses, concert tickets, prepaid products, or other non-security assets.
  5. Should I build in deal features that cause price appreciation?  The SEC profiled several features of Munchee’s token model that may cause token value appreciation – from creating a tiered membership plan that increases reviewer payouts based on the amount of tokens they hold (which constrains supply), to “burning” tokens in certain situations (which reduces supply), to promising to support trading on secondary markets (which allows capturing appreciation and may reduce any illiquidity discount), to supporting liquidity by buying and selling token from its own holdings (which promotes liquidity).  These types of features make a token feel like an investment vehicle, not a use right.
  6. Lots of non-security assets increase in value – from homes to baseball cards.  Can I discuss this in my token sales materials?  This is the sort of language that causes purchasers to expect profits.  The SEC cites to lots of examples of this from Munchee in ordering them to cease sales of tokens – from simply stating MUN would rise in value, to its description of deal features designed to achieve this outcome, to endorsing statements of third parties recounting significant gains, to comparisons of MUN to prior ICOs and digital assets that created profits.  People don’t sell non-investment assets with extensive allusions to increased asset value.
  7. Should I keep it out of my white paper and just discuss token appreciation on Telegram?  There is no real difference.  The SEC almost showed off how much social media and non-offering document review it conducted.  The Munchee order cites a wide variety of disclosure outlets – from websites, to promotional videos, to articles, to blog posts, to podcasts, to Tweets, to Facebook posts. In addition to the direct marketing efforts of the Munchee team, the SEC highlighted Munchee’s endorsement of other people’s public touting of the opportunity to profit and the more than 300 people promoting the MUN offering through social media (including translating MUN offering documents into multiple languages for countries in which the app was unavailable).

There are many other interesting aspects of the Munchee order and the public statement concurrently released by SEC Chairman Jay Clayton, such as:

  • The SEC plainly characterized the exchange of Bitcoin or Ether for MUN as an investment of money.
  • The SEC did not meaningfully discuss the “common enterprise” element of the Howey test (an element that many practitioners have emphasized in great detail).
  • SEC Chairman Jay Clayton provided the following entertaining example of what may and may not be a utility:

For example, a token that represents a participation interest in a book-of-the-month club may not implicate our securities laws, and may well be an efficient way for the club’s operators to fund the future acquisition of books and facilitate the distribution of those books to token holders. In contrast, many token offerings appear to have gone beyond this construct and are more analogous to interests in a yet-to-be-built publishing house with the authors, books and distribution networks all to come. It is especially troubling when the promoters of these offerings emphasize the secondary market trading potential of these tokens. Prospective purchasers are being sold on the potential for tokens to increase in value – with the ability to lock in those increases by reselling the tokens on a secondary market – or to otherwise profit from the tokens based on the efforts of others. These are key hallmarks of a security and a securities offering.

If you are considering a token offering, talk to your securities counsel about whether your tokens are securities and how to sell them compliantly. If you have already sold tokens hoping they were utilities, or have received an inquiry from the SEC, talk to your securities counsel.  Note that Munchee entered into a settled order that did not name any of its officers or directors and avoided a civil penalty – in part, because Munchee immediately shut down token sales, returned investor funds and cooperated with the SEC staff.

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Compliments of over 100 of our DLA Piper colleagues around the world, DLA Piper has launched Finance Rules of the World, which gives you answers to key legal questions that you may consider when initially looking at financing or investing in particular jurisdictions. The interactive Finance Rules of the World website lets you compare regimes across more than 35 jurisdictions in EMEA, Asia Pacific and the US in the areas of borrowing and lending; issuing and investing in debt securities; establishing, investing in, marketing and managing hedge funds and debt funds; entering into derivatives contracts; giving and taking guarantees and security; loan transfers and portfolio sales; financing or investing in energy and infrastructure; FinTech products and uses; and tax issues. You will need to register to access the information.

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Article prepared by and republished courtesy of our colleagues Luke Gannon, Scott Thiel and Hayden Lau; originally published here:
https://www.dlapiper.com/insights/publications/2017/09/the-sfc-comments-on-icos/

The Securities and Futures Commission of Hong Kong (the SFC) has debunked the myths that no securities laws apply to ICOs. In its first direct statement on the subject, the SFC fired a warning shot at issuers and intermediaries of ICOs and token offerings, reminding them that they may be conducting regulated activities and therefore, may be required to be licensed by or registered with the SFC, irrespective of where they are located.

This statement was released one day after the crackdown on ICOs in the People’s Republic of China, which has become one of the biggest cryptocurrency and ICO markets in the world.

The SFC statement warned that certain digital tokens offered in an ICO may be “securities”, and related activities (eg dealing in, advising on, or managing) may constitute “regulated activities” under the Securities and Futures Ordinance, such as where such tokens resemble:

  • “Shares” in a corporation representing equity or ownership interests – eg right to receive dividends and entitlement to the corporation’s surplus assets upon winding up
  • “Debentures” in creating or acknowledging a debt liability – eg repayment to token holders the principal of their investment on a fixed date or upon redemption, with interest paid to token holders
  • An interest in a “collective investment scheme” – eg if token proceeds are managed collectively by an ICO scheme operator to invest in projects with an aim to enable token holders to participate in a share of the returns

Issuers, sponsors and advisors to digital tokens and ICOs captured by the definition of “securities” should be cognizant of the licensing, prospectus or authorisation requirements under the law, and the potential exemptions that may be available to them. Operators of cryptocurrency exchanges should also beware that they may be engaging in the secondary trading of such tokens, and may also be subject to the SFC’s licensing and conduct requirements.

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The Venture Alley by Trent Dykes And Andrew Ledbetter - 1y ago

One of the more interesting phenomena in early-stage investing is the recent emergence of initial coin offerings (“ICOs”), token generation events (“TGEs”), or similar distributed ledger or blockchain-enabled means for raising capital. Much has been written, including by many skilled lawyers in the technology sector, about whether the tokens issued in these structures involve “securities” – and, frankly, some of it is unhelpful. Hungry for something that seems like crowdfunding, but that actually works to raise meaningful capital for promising technology initiatives, many in the technology space really want these structures to work.

Unfortunately, most historical questions about whether an instrument is a security are poor analogues for complex, novel, technology-enabled business models.  Cases on this topic tend to address payphone routes, variable annuities, viatical or life settlements, tenancy-in-common programs, real estate general partnership interests, and other low-tech topics.  Sneak peek: most of the time, such investments are securities.

On Tuesday, the SEC issued a SEC report on tokens as securities, using The DAO as a lens for analyzing the issue. Sneak peek:  DAO Tokens are securities. Double-sneak peek:  many tokens are securities.

Overview of SEC Analysis

The SEC began by emphasizing that the definition of “security” is flexible, must be adapted to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits, and focuses on substance (not form) and the underlying economic realities. It then analyzed DAO Tokens under the “investment contract” test for a security, which generally treats as a security an (i) investment of money (ii) in a common enterprise (iii) with a reasonable expectation of profits (iv) to be derived from the entrepreneurial or managerial efforts of others.

Top Seven Takeaways

If you want an element-by-element analysis of the SEC report, you should read it. That analysis is only about four pages – pages 11-15 of the report. (I have read it five times start to finish, each time noticing some nuance I find interesting.) But in this blog we wanted to share a few of the takeaways we suspect are most notable for a company thinking about a token sale:

  1. “Common enterprise” is a simple inquiry when funds are pooled – The SEC did not even separately discuss this element. It just asserted there was a common enterprise and observed in passing that investor funds were pooled to fund projects.
  2. “Use” or “functionality” expectations may be irrelevant – Some commentators (including law firms) have suggested that a token having utility and functionality on a platform may position the token as more like a license or similar use right, rather than a security. In part, this reflects that securities involve an expectation of investment profits, not an expectation of consuming or using the item purchased. However, the SEC report did not really discuss this theory at all – and DAO Token holders had access rights to a platform that gave them an opportunity to consider and help shape the future of blockchain technologies. Instead, the SEC reports states that investors were “motivated, at least in part, by the prospect of profits on their investment,” implying that a token may be a security even if investment is a secondary expectation behind other primary, non-investment expectations, such as the token securing platform access, use, or functionality. Debatable as this might be, it is certainly an interesting takeaway.
  3. Waiting to sell tokens until a platform is built may actually demonstrate investor reliance on others – Similarly, while some commentators (including law firms) suggest building the platform before selling the tokens that will fuel the platform (so the tokens have utility and functionality like a license or similar use right), the SEC report prominently profiled these efforts in concluding investors were relying on the significant efforts of others for investment returns. The SEC referenced the team that built the protocol, designed the smart contracts, built the website, and otherwise worked in support of the foundation and the ICO.
  4. Techniques to avoid money transmitter issues may actually create securities problems – Some commentators (including law firms) have suggested that money transmitter issues can be avoided by steps like baking into the protocol an algorithm regarding the amount of tokens in circulation and dispersing control of the platform broadly. But these features were both highly relevant to the SEC’s conclusion that investors rely on the efforts of others for investment returns. Building the protocol in advance was evidence of reliance on the efforts of others, and dispersing control (through pseudonymity and broad dispersion of tokens) prevented token holders from taking action thereby making them reliant on the efforts of others.
  5. Voting rights are not significant efforts of investors – Holders of DAO Tokens had rights to vote on projects before funds were deployed for projects, but this was not enough to make token holders actively involved in managing the business. This may not be a huge surprise (for example, voting rights are one of the most notable features of stock, which is widely regarded as a security), but it is a question we have heard several times.
  6. Token offering “participants” may have liability – The SEC warned that “participants” in unregistered, non-exempt offerings may face liability. The SEC did not explain what constitutes “participation” in a token offering, but just referenced those having a necessary role in the transactions such as soliciting offers. This test seems likely to reach those drafting white papers or other investor-facing materials, designing the website that markets the ICO or TGE, or otherwise soliciting investors. The SEC also took the time to remind readers that violations of Section 5 of the Securities Act do not require scienter – in other words, it is irrelevant whether or not people know they are selling unregistered securities.
  7. Shot across the bow at token exchanges – After explaining when registration as a “national securities exchange” is required, the SEC observed that the most commonly used exemption from this requirement is for alternative trading systems operated by registered securities broker-dealers. Many token exchange platforms are not run through registered broker-dealers. Token exchange platforms should carefully consider whether any token listed on the platform is a security and likely adopt policies and procedures to actively avoid listing such tokens.

Unanswered Questions?

We have many. We also have lots of views and opinions. We will continue to monitor this area and are interested to hear your views and opinions.

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Much has been written recently on blockchain, Bitcoin, Ethereum, cryptocurrencies and initial coin offerings (ICO). Unfortunately, for non-computer scientists (like me), trying to understand these concepts and their potential implications can be a bit overwhelming. To help all of those non-technologists trying to get their heads around blockchain, Bitcoin, Ethereum, cryptocurrencies and ICOs, I pulled together the following list of resources that I have found useful. As an attorney who represents startup and emerging growth companies, it seems likely that these technologies will prove to be disruptive to how we do business, build new technology, fund startups and even think about employment – much like the initial proliferation of the Internet. Let’s start with a brief overview of these technologies and how they relate to each other.

By this point everyone has probably heard of Bitcoin, the digital currency and first widely publicized application of blockchain technology. Bitcoin is not blockchain, but rather an application based on blockchain technology. Blockchain is a decentralized (peer-to-peer) network that allows connected computers to reach agreement (based on consensus) over shared data. In other words, blockchain is a ledger that creates a record of digital transactions that is open to, and updated by, the public. Here is how Wikipedia defines a blockchain:

“[A] distributed database that is used to maintain a continuously growing list of records, called blocks. Each block contains a timestamp and a link to a previous block. A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. By design, blockchains are inherently resistant to modification of the data. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network. Functionally, a blockchain can serve as ‘an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically.’”

As Collin Thompson explains: “[h]istorically, when it comes to transacting money or anything of value, people and businesses have relied heavily on intermediaries like banks and governments to ensure trust and certainty. Middlemen perform a range of important tasks that help build trust into the transactional process like authentication & record keeping.” In other words, blockchain provides a way of conducting digital transactions without a third party intermediary.

So far, two of the most popular applications of this technology are Bitcoin and Ethereum. At the highest level, Ethereum is an open software platform using blockchain technology that enables developers to build and deploy decentralized applications.  Blockgeeks describe the difference between Bitcoin and Ethereum as follows:

“Like Bitcoin, Ethereum is a distributed public blockchain network. Although there are some significant technical differences between the two, the most important distinction to note is that Bitcoin and Ethereum differ substantially in purpose and capability. Bitcoin offers one particular application of blockchain technology, a peer to peer electronic cash system that enables online Bitcoin payments. While the bitcoin blockchain is used to track ownership of digital currency (bitcoins), the Ethereum blockchain focuses on running the programming code of any decentralized application. In the Ethereum blockchain, instead of mining for bitcoin, miners work to earn Ether, a type of crypto token that fuels the network. Beyond a tradeable cryptocurrency, Ether is also used by application developers to pay for transaction fees and services on the Ethereum network.”

I thought Ben Thompson of Stratechery and Fred Ehrsam of Coinbase provided a great explanation of why all of this matters and the utility of blockchains:

“Ethereum is based on a blockchain, like Bitcoin, which means it has an attached currency (Ether) that incentivizes miners to verify transactions. However, the protocol includes smart contract functionality, which means that two untrusted parties can engage in a contract without a 3rd-party enforcement entity.

One of the biggest applications of this functionality is, unsurprisingly, other cryptocurrencies. The last year [2016] in particular has seen an explosion in Initial Coin Offerings (ICOs), usually on Ethereum. In an ICO a new blockchain-based entity is created, with the initial “tokens” — i.e. currency — being sold (for Ether or Bitcoin). These initial offerings are, at least in theory, valuable because the currency will, if the application built on the blockchain is successful, increase in value over time.

This has the potential to be particularly exciting for the creation of decentralized networks. Fred Ehrsam explained on the Coinbase blog:

‘Historically it has been difficult to incentivize the creation of new protocols as Albert Wenger points out. This has been because 1) there had been no direct way to monetize the creation and maintenance of these protocols and 2) it had been difficult to get a new protocol off the ground because of the chicken and the egg problem. For example, with SMTP, our email protocol, there was no direct monetary incentive to create the protocol — it was only later that businesses like Outlook, Hotmail, and Gmail started using it and made a real business on top of it. As a result we see very successful protocols and they tend to be quite old. (Editor: and created when the Internet was government-supported)

Now someone can create a protocol, create a token that is native to that protocol, and retain some of that token for themselves and for future development. This is a great way to incentivize creators: if the protocol is successful, the token will go up in value… In addition, tokens help solve the classic chicken and the egg problem that many networks have…the value of a network goes up a lot when more people join it. So how do you get people to join a brand new network? You give people partial ownership of the network. These two incentives are amazing offsets for each other. When the network is less populated and useful you now have a stronger incentive to join it.’”

Before you get to the list of resources, I thought I would say a few words about how all of this technology intersects with the law. For years, technology and innovation have outpaced law makers’ ability to keep up – a trend that inevitably will continue. In the last two decades this has been most apparent with governments’ inability to find good solutions to issues such as Internet tax and data privacy. The rise of blockchain clearly presents a whole host of new issues that current regulatory regimes are not set-up to address – many of which may be akin to those that regulators grapple with while trying to regulate shared economy businesses.

For example, how do you regulate an industry where there is no large intermediary to target? After years of trying to figure out the application of sales and use tax to Internet purchases and sales, the IRS’s primary target to enforce tax payment appears to be through the large e-commerce retailers. But what happens when there is no retailer intermediating e-commerce, or no Lyft intermediating ride sharing, or no bank intermediating online payment transactions? Some observers believe the ultimate answer will come from self-governance, which would obviously represent a fundamental shift in existing regulatory frameworks for businesses. Whatever the answer ends up being though, blockchain and the applications built upon it do not fit neatly within existing traditional legal frameworks, and regulators will need to balance the need to create laws that protect participants against the risks of chilling innovation. If law makers are not able to strike the appropriate balance, then companies and innovation will likely migrate to jurisdictions with less restrictive laws, which is already apparent in the Bitcoin space (where different states within the United States are taking different approaches as to whether Bitcoin-related companies are “money transmitters” under state law).

Resources that I found helpful:

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DLA Piper is pleased to announce the launch of Prize Promotions Around the World, an updated edition of our popular handbook.

Prize Promotions Around the World is an online tool designed to assist companies across the globe in managing the early development stages of a prize promotion, such as a sweepstakes or a skill-based contest, and to bring to their attention potentially problematic issues.

Key features include:

  • Additional jurisdictions, now with over 35 countries
  • Expansion of topics, including rules on judging and sanctions
  • Interactive map, highlighting the range of risk profiles in different jurisdictions

You may easily browse the guide online or download it in its entirety.

Explore or download the handbook here.

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Our private company clients often ask what kind of revenue or EBITDA multiple ranges they can expect upon a sale or when determining their enterprise value in connection with a financing. This is always a tricky question as value is driven by ever-changing supply and demand and then-current market conditions. Moreover, with yet-to-be-profitable startups, substantial value often lies with their IP, team and/or future prospects.  Accordingly, for a startup, the answer to this question is subjective at best. With that said, one of the better resources I have found for data on these points comes from PitchBook’s various surveys.  Most recently, PitchBook released their Global PE Deal Multiples Report (2017, Part 1), which can be found here. As indicated in their recent report, the median EBITBA multiple for Q1 2017 increased to 7.5X; however, the median revenue multiple decreased to 1.1x (with revenue multiples increasing at the higher revenue levels).  Not surprisingly, in today’s current market, there appears to be an increasing premium on profitability over straight revenue numbers.

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