Mark Schonberger is a partner in Goodwin’s Real Estate Industry Group, and in its Digital Currency + Blockchain Technology practice. He specializes in corporate and securities law with an emphasis on real estate companies and fund formation, including crowdfunding. He also advises on Reg. A offerings as well as SEC regulation of initial coin offerings and cryptocurrencies. In this Q+A, he covers how he began working in this space, how companies are using ICOs to raise money, and where he thinks things could be heading.
How did you first get involved in blockchain and ICO clients?
I got involved through the real estate crowdfunding work Goodwin has done. We did one of the first Reg. A+ deals ever for our client Fundrise and – what is the expression, imitation is the sincerest form of flattery? – it became a model for a lot of others. As a result, we’ve had a lot of in-bound inquiries because when you file a Reg. A deal, the name of the law firm and the name of the person who’s doing it are on the cover.
You do work related to crowdfunding and the blockchain – which came first, how are those two related, and how do they function together?
Crowdfunding became a big thing first. With the early blockchain tokens and ICOs, people thought they weren’t securities, or they tried very hard to not make them securities. As a result, they didn’t need to deal with any of the securities laws. In December 2017, the SEC came out with an enforcement action and a bunch of memos and alerts that basically made it clear that the SEC has never seen a token it didn’t consider a security. So, to the extent you think your token isn’t a security, you’re going to have the burden of proving that and chances are you’re not going to be able to convince the SEC. The way I describe it is that all of these ICO issuers and blockchain startups got religion, and they’re now looking for a way to offer their tokens – which they now acknowledge are securities – in a way that maximizes their ability to sell to the largest group possible. And that’s where I can add value with my Reg A+ experience.
Did the SEC actions have a chilling effect on the ICO craze? What are some of the new ways companies are seeking to raise money in the “aftermath”?
It’s just making it so that now companies aren’t coming to lawyers to try and figure out a way to get around their token being considered a security. Instead, most entrepreneurs know it’s a security and are in uncharted water. Now, the question is: how do you sell tokens in a way that everyone can buy them? There are two ways to do that. One is to do a full-blown registration, and they’re able to go public and do an IPO. The problem with that is that it’s a relatively long and expensive process and it doesn’t allow you to do a lot of marketing.
These ICOs want to be out there telling their story, and under traditional registration rules you’re not allowed to do that. Under something like Reg. A and Reg D’s 506(c), which came along with the JOBS Act, you can advertise and market more freely so you can reach a larger audience, although 506(c) only allows accredited investors. With what I call “true crowdfunding” under Regulation CF, you can sell to everybody, but you can only sell on a licensed portal and you can only raise a little over a $1 million in a 12-month period.
Reg. A is sort of the panacea in some ways because it allows you to sell to both accredited and non-accredited investors – it allows you to “test the waters.” And you can do a lot of marketing, both pre-filing and during and after the qualification process, so there’s a lot of interest in being able to do that. Unlike doing a publicly registered deal on an exchange, it also allows you to avoid getting each state’s approval, even if you don’t list on any stock exchanges.
The big downside (if you are averse to public reporting or scrutiny) is that you’re a quasi-public company and you have ongoing periodic reporting requirements, and if significant events occur, you have obligations to report those as well. One of the advantages is you can initially submit it confidentially and at some point in the process, once you’ve cleared the comments, you can make the decision to file it publicly.
What kinds of companies are coming to you with blockchain initiatives? What issues are they dealing with?
Most of them are startups, but they don’t have to be. Somebody like Fundrise had been around for a couple of years doing private placements and then decided to do a Reg. A offering when it became available in 2015. Crowdfunding in the global sense had been around for a number of years, back to the late 1990s, but started taking off more in the mid-2010s. The big issue in selling securities over the internet is how to drive traffic to your website. Traditionally a registered offering was sold through underwriters with big networks of brokers who, when an offering came out, would sell to their clients. So even though there’s the opportunity to reach millions by putting the offering on your website, how do you get the crowd to see that? You do that by advertising, by name recognition that has been built up over time. Fundrise had that. Realty Mogul had that. But if you’re coming to this fresh, you’ve got to drive traffic.
The idea here with ICOs and tokens is that it’s such an exciting space and they’ll get a lot of free publicity and PR so that they can drive traffic on their own and offer the securities that have now qualified under Reg. A, on their websites.
How do you help issuers reach their potential investors?
We can be the issuer’s quarterback in this process. In addition to our legal work, we can put people in touch with marketing firms and/or consultants who specialize in this area. But a lot of times these groups, especially in the blockchain and ICO space, they’re pretty savvy. What they need to be aware of is how to navigate the securities laws, and what is the best vehicle for them to do that. If they need to get money quickly, typically they would do a private placement, although they are limited to accredited investors. If they’ve already got some seed-round funding, then they may have the dollars to hire professionals like us and others. We help them understand how to do a Reg. A offering, what’s involved, what the timing is, what the pitfalls can be.
What will be talking about in five or 10 years in the blockchain world?
I think blockchain, the concept of having an open-source ledger that everybody can access and transfers can take place immediately, is something that is here to stay. I think what it may allow businesses to do quickly and efficiently is something that will continue to expand, just like the internet. I don’t know about Bitcoin and Ethereum, I don’t know if they’re here to stay as a replacement for fiat, but their value will come when people use it as a real currency. Also, it will be interesting to see whether fiat currency will figure out how to be traded as virtual dollars. If there are avenues for people to trade their tokens which are not like the NYSE or Nasdaq, and people create alternative trading systems where people can easily trade directly – and entrepreneurs are jumping into the space quickly, I think the sky’s the limit.