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Blockstack’s Reg A+ Token Offering – A Groundbreaking Moment for Corporate Finance?

Sep 20, 2019

Did you feel that?

No, it wasn’t another earthquake.

But, it was certainly groundbreaking.

I am referring, of course, to Blockstack’s Reg A+ Token Offering.

On July 12, 2019, Blockstack broke new ground by becoming the first company in history to receive approval from the SEC for a public securities offering whereby its investors would receive “tokens” – called Stacks (STX) – in the company as opposed to traditional “shares.”

These security tokens do not represent an equity stake in the company. Instead, they will used by investors as a medium of exchange for apps, services, and name registrations on the Blockstack network – setting a new course for companies to create a security out of a digital asset known as a utility token.

Blockstack’s offering closed with the company having raised a total of $23 million from more than 4,500 individuals and entities including includes Union Square Ventures, Lux Capital, Recruit Holdings,1 Arrington Capital, Hashkey Group, Fenbushi Capital, Frontier Ventures and Spartan Group.

According to its Edgar filing, Blockstack raised $15.5 million of the $23 million through its Reg A+ sale in the U.S. and another $7.6 million through its Reg S offering in Asia.

At first glance, the offering closed $5 million shy of the $28 million approved for sale by the SEC. However, Blockstack co-founder Muneeb Ali revealed that the company was also in discussions with international investors for an additional $5M+, which may be distributed in a separate private placement or in a follow-on SEC-qualified offering.

According to public reports, Blockstack management spent ten months and approximately $2 million to gain SEC approval and essentially create this new regulatory roadmap for public token offerings.

But, is a new regulatory roadmap enough to transform the IPO landscape and fuel an STO (“Security Token Offering”) boom?

Not quite. But it’s a start.

While this is certainly reassuring for those who believe that digital finance embodies the global economy of the future, there is still a long, long way to go.

It remains to be seen how the market will respond to these modern public offerings.

Ultimately, like any public offering, success will be gauged by aftermarket performance. The two main factors that will determine aftermarket performance are 1) investor demand and 2) liquidity.

Hence, there needs to be a strong appetite for these token offerings coupled with reliable exchanges to support the trading of security tokens in the secondary market.

Here’s the rub: At the moment, such exchanges only exist outside the U.S.

According to news reports, Blockstack is presently in discussions with international exchanges for potential listings of Stacks (STX) tokens in October 2019 or later. However, even if these listing were to occur, U.S. individuals would not be able to trade on such initial international exchanges, leaving them with very limited liquidity options.

This represents a significant impediment to the success of not only Reg A+ token offerings, but to all U.S.-based token offerings in general.

There is hope that U.S. regulators will act sooner rather than later to grant approval to at least one token-based Alternative Trading System (ATS). Hours following its qualification of Blockstack’s token offering, the SEC granted similar approval to YouNow, Inc.’s token offering – indicating that the Commission may be becoming more comfortable with digital assets as well as more amenable to giving American retail investors an opportunity to participate in these modern asset classes.

While Blockstack’s SEC qualification is certainly groundbreaking, time will tell if it was indeed earthshattering.

[1] It was announced on August 22, 2019 that Recruit Holdings, the $50 billion Japanese internet giant behind Glassdoor and Indeed, has made a strategic investment in Blockstack PBC. It has been reported that as part of the deal, Recruit Holdings would be purchasing STACK tokens.

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