Okay, super.
Well, good evening, everyone, good afternoon, or good morning, depending where you are
in the world.
I know we have people from all over the world joining us today.
This is session 10, financing models for NFTs and the metaverse, which is probably like,
you know, financing models for organizations in this world.
This is a very interesting topic.
And it's also a very interesting topic to think about how we can do, in how we can handle
in this period, because it's a very complicated topic.
It is a very legally intensive topic.
And it is a topic where even people with a ton of experience in this topic will go to
specialized lawyers with even more experience in this topic to seek advice.
And I know in our course we have a mixed level of knowledge about these types of topics.
In fact, for I think many people, a very low level of knowledge about securities law,
and I'm sure there's some people that have more advanced knowledge.
The way I was thinking about this was, it would have been easy to overwhelm everyone with
facts, figures, datas, cases, etc.
But I'm not sure that helps anyone.
Whereas I think what might be the right approach and the right answer here is leave with some
very simple frameworks, some very simple ideas.
And these simple ideas though, are applicable over and over and over and over again.
I have, I think, a quite sophisticated understanding of this topic, but the way I think about it
in practice is actually very simple.
And so my goal today is to get less than 10 ideas in your head, maybe six or seven.
And these ideas will help you in many different ways.
They will explain why many things are the way they are in the financing environment.
I see this constantly on my Twitter feed that people are confused about why things are financed
the way they are financed.
We will see where the risky areas are and where legal risk might be.
Now, you're not going to learn the legal risk from this course.
What you should learn is when you're within 100 miles of potential legal risk so that
you go find someone qualified, a securities attorney, or really what you want, to help
you think through what your legal risk might be.
This is what I hope to accomplish today and so I really simplified my slides and I hope
this will work.
So let's jump in.
And really there's two things.
We're going to go into two sections.
What are the key frameworks within US securities law that change financing models?
I'm going to go into the financial, that's the financing models in use today.
And you'll notice I'm going to be focused exclusively on US law.
And the framework that we will cover here is a very US-specific framework.
Almost no other country thinks about it in exactly this way.
And then you might say, well, why are we doing that?
It's a global field.
It's a global industry.
Why are we just focused on what the Americans are doing?
And the reality is, the reason this is the case is that the startup industry in general
and I think very large parts of the crypto industry in general and large parts of the
NFT and the metaverse industry in general and the broader technology industry in general
in the broadly speaking English language world or Europe and US world tends to be concentrated
in the United States.
China has a very different model.
Russia has a different model.
But in the world that public blockchains are heavily used in that world, what we tend to
see is that there's a heavy concentration in the United States.
And given that heavy concentration in the United States, the laws and regulations of
the United States tend to be fairly, they shape the space for everyone else.
And so a lot of what you see is the United States, it might be very specific to America,
but it really does shape the space tremendously in a lot of what we see.
So this is what we're going to talk about.
I can't possibly disclaim this session enough, like this is not legal advice.
It wouldn't even be legal advice in the United States and the United States should still
set a, I know 20 times more than this presentation and I wouldn't do any of these things without
a lawyer.
And it certainly doesn't apply outside the United States because these are the US rules.
So with all of these caveats and all of these ideas, let's jump in.
And I was laughing when I wrote the title for the section, some relevant snippets of US
securities law, and this is exactly what it is.
US securities law is a gigantic body of work, of case law, with all types of nuanced and
edge to edge cases that have been over time established.
And here we're going to have four slides and fairly large font to talk about.
But what I was trying to do is distill the parts that might matter for people and might
matter in a practical way.
So this is how does, where does all come from, actually came from the Great Depression.
It is wild, but it's true.
The basis for most of these laws is from 1933 and 1934.
Now there have been modifications of these laws of run.
They have been new laws over time, but the basic laws are from there.
It's all we need to know for the slides.
That's all we need to know.
Now, here is the single most important concept you need to learn today.
And quite frankly, the single most explanatory concept in the whole financing world of startups
and crypto assets in general, of which NFTs and Metaverse are a subset.
The concept is that the United States defines a security that needs to be registered using
the Howey Test.
And it is not designed prescriptively as it is in other jurisdictions.
So in many other jurisdictions, people or legislators say, a security is these 17 specific
things, derivative contracts, bonds, options on publicly traded securities, etc, etc, etc.
And so you can go down the list and say, is my thing one of these things?
And if the answer is no, then it's not a security and you can kind of go off and do whatever I'm
planning to do.
The United States is different.
It's principles based in how it approaches this.
And in that case, you have to analyze each specific potential security individually.
And the principles are quite abstract.
They fit here on this page.
And what this is, how we test this is, you need to look at this potential security and ask
yourself four questions.
And if the answer is yes, to all four questions, then it's a security.
And if the answer is no, to any one of the four questions, it's not.
And if you know, that's great, it's going to be hard to become a security.
And the reality is is most things that most people will think of, most casual, naive or
even like, kind of medium sophisticated ideas that people will think of for raising money
do turn out to be securities under this test, which is bizarre, but yet true.
So let's go through them.
The first part of the task is an investment of money.
This is the most straightforward.
If you're volunteering at your local church, this is not going to be a security.
This is an investment of money.
Now money doesn't mean fiat dollars if you sell a security and you take, Ethereum,
for example, that's still going to meet this test.
So it can be considered an investment of money.
It's not an investment of US dollars, investment of money more broadly.
The second test in a common enterprise.
So this is the way I think about it is something that has a definable mission, organision, goal etc.
It's interesting people try and get around this by saying, oh, but there's not a legal
entity here or, we call ourselves decentralized, but that doesn't matter so much.
Like the SEC is going to look at this point conceptually, that this a common enterprise
where, we're going to try and do something together.
And the most simple base example is, a company.
So if I founded a company and this company was supposed to sell NFTs, and it was called
6529 NFT Limited or Incorporated.
And I say, would you like to buy shares in my company?
Yeah, it's a common enterprise where other companies were going to do something.
So the interesting thing is, like, no, I'm not going to do it with a company.
I'm just going to sell you these tokens and we're decentralized,
and it doesn't matter so much,
like the legal form doesn't matter so much.
Does this have a coherent and cohesive set of activities?
The third leg of the stool with the expectation of profits.
Are people buying what it is you're selling for the way they are buying any other investment
vehicle?
If someone sells you a very nice six course dinner, it might be an investment of money
in a common enterprise that I've run, but not buying with an expectation of profits.
So someone sells you a pair of NIKE shoes, not buying them with an expectation of profit.
I'll hold that example and come back to it later.
If someone sells you a boost-up in a game, probably not something smart for the expectation
of profits.
If someone sells you something that says, yeah, buy this token, we are going to moon because
of ABCDE reason, we start to get problematic.
We still have to meet all the tests, but we start to get problematic.
By the way, dumb level disclaimers don't work.
So you see this all the time in our space.
Someone says something that is absolutely, certainly, without a doubt, financial advice,
and then at the bottom of their Tweet says, not financial advice, NFA,
it doesn't count for anything, doesn't mean anything.
Nothing about that is relevant.
The substance is what you do.
Fourth part, to be derived from the efforts of others.
And this is the part that crypto teams really try and focus on.
Which is saying, is there an identifiable group of people who are working to make this
a success?
Are there insiders?
And the reason it's interesting from a regulatory perspective if there are insiders, the theory here
about legislation, disclosure, and what have you, is about information asymmetry.
If there are insiders, they might know more about the project than you do.
And if they know more about the project than you do, then they might withhold information
from you and sell you a security.
And you might be taken advantage of.
What's something that would not meet this test?
Well, very famously, the United States has said and continues to say that Bitcoin is not
a security.
And they believe that a combination of mining and wallet holding and how transactions are
processed is sufficiently decentralized.
But the fourth leg doesn't get triggered.
There's kind of other two legs do exist for Bitcoin, right?
People buy Bitcoin, an investment of money.
Bitcoin is kind of an obvious common enterprise, right?
Trying to make a store value or payment network.
Most people are buying Bitcoin with the hope that the price of Bitcoin goes up.
But the, they're saying it's not an identifiable team that's driving the value of Bitcoin and
that it's derived from the efforts of others.
It's like a commodity.
It's like, if you buy a barrel of oil, people say, oh, well, no, that's not a security.
No, is the value of oil in some very, very weird abstract way derived also from the
efforts of others?
Sure, sort of, but there's not like one producer of oil that has specific power over
the characteristics of oil.
There's many producers around the world.
There's many users around the world.
There's no real information asymmetry in oil that someone needs to come and disclose.
And it's viewed, for example, that Bitcoin has also reached that point of decentralization,
if not information asymmetry.
So what are things that almost certainly are securities in the token space?
Obviously, if I, we had said, if we have 6529, NFTs Inc, and I go out and say,
hey, would you like to buy 10 of the 100 shares?
I have this really great idea.
I'm going to mint NFTs and Tweet about them.
We're going to make lots of money together.
That is a trivial security.
It's an investment of money and a common enterprise and expectation of prices to be derived from
the efforts of others, aka me.
Where a lot of people go wrong is they say, oh, well, if we do this as a token, we're
somehow going to get away from this, right?
If we say, oh, we're going to mint 6529 Dow tokens, and they're going to get a
share of the revenue from all the other NFTs 6529 mints, without going into great
detail in the situation specific areas, that has risked that it's a token security.
The fact that it's not specifically shares in the company doesn't change anything.
It's an investment of money and a common enterprise expectation of profit to be derived by the
efforts of others.
The fact that I said it's a token, not shares in the company, doesn't really count for anything.
So if there's only one thing you remember today, it's this.
Remember these four prongs, it's like 15 words.
And when you see someone offering something as of does this, is this likely to look like
this, right?
It's okay, well, so what does it matter if it's a security?
Well it matters because if it is a security in the United States, and I'm going to summarize
but this is effectively right, you either have to, A, register it with the Securities and
Exchange Commission.
B, sell it only to a certain set of sophisticated investors, or C, take advantage of the crowdfunding
exemptions registration.
These are your only options.
There's no fourth option for practical purposes.
So, who are these sophisticated investors who can buy unregistered securities?
They fall into two categories, Accredited Investors and Qualified Purchasers.
Accredited Investors is the one you hear about casually.
Online, it's the bigger category, it's the more common category, it's the lower standards
category, Qualified Purchasers is a more institutional category.
Don't 100% quote me on this, but the, the, I think every Qualified Purchaser is also
an Accredited Investor, but not all Accredited Investors are Qualified Purchasers, I believe
that's correct.
Let's look at that Accredited Investor standards.
You have to meet one of the standards, not all of them.
You have annual income over $200,000 for the last two years or $300,000 if you include
your spouse or partner, and you believe, you have a reasonable belief that supplies for
the upcoming years.
Or you have a net worth of over a million dollars excluding your primary residence.
So excluding your home equity.
This can also be jointly with your spouse or partner.
Or, you meet certain professional criteria.
You hold one of the securities industry certifications licenses that you've studied and passed the
test work, Series 765 or E2.
You're a high level officer, director in the company that's selling the security.
You're a client in the family office, it's itself a credit investor.
Or for in a fund, you're a knowledgeable employee of the fund.
Or there's some other legal rules for legal entities.
But basically, it is you're rich or kind of rich,
or, you have financial services expertise.
A Qualified Purchaser is similar type of things but with higher numbers, 5 million up to 25 million.
We can ignore it for the purposes of discussion.
And the theory here is, either you're rich, in which case if you go buy an unregistered
security and you want given all the information you needed to properly evaluate it,
and it turns out that it was risky and it turns out that you lose your money.
Well, it's okay, you're rich.
You can survive it.
That's theory one.
Theory two is, well maybe you're not rich but maybe you're like, have deep expertise in the financial services
industry or meet the professional criteria
and so you can take care of yourself.
You can make the correct decisions.
It is a paternalistic model of regulation.
It divides the world into two buckets.
It divides the world into people who can make these decisions by themselves and either have
the expertise to make good decisions or the financial wherewithal not to be wrecked by
these decisions.
Which is not to say that people who make $200,000 a year couldn't buy an unregistered,
a sufficiently large amount of an unregistered security to also destroy their lives financially.
It's not actually the case that they won't do that.
And then people will you say look, it's too risky for you.
You need more protection, more information, less risk of information asymmetry. For people
to be able to sell this to you,
they need to come in and disclose a lot more information.
The... I think this was sort of uncontroversial a few decades ago.
And with the democratization of finance in general, the internet in general,
and then really much more so with crypto.
I think there's an interesting debate on this. This debate, by the way, tends to lean one way
when prices are going up and a different way when prices are going down.
But there's an interesting debate on if this is for the good of the people who are not
Accredited Investors or if it's bad for them, you know.
Does it exclude them from exciting and potentially valuable investment opportunities, or does it
protect them from scams?
Is this excellent protection for the unsophisticated or is this a way for the rich to get richer
and everyone else not to have access to the same opportunities?
There is also, you know, some people who feel that this legislation is no longer exactly right.
Many states allow gambling.
They allow lotteries.
Those things are obviously bad for the unsophisticated.
They allow anyone to participate in them.
Seems strange that this would be allowed.
They're allowed to invest, quote unquote, in lottery tickets, but they're not allowed
to invest in potentially, a bad investment.
We're not going to conclude on this topic, but these are the types of issues that are...
Right.
So this is who is allowed to purchase unregistered securities.
Now what does registration mean?
Basically you have to file for an IPO.
It's that type of, well, we have to make an S1 as a registration statement.
You send it to the SEC.
They read it.
They ask you questions.
They ask you to make changes.
You send it back.
They read it.
So on and so forth.
And then you can sell, generally, shares to the public or other financial instruments, which
generally shares.
And then you have a whole bunch of ongoing reporting requirements.
When do you have to file financial statements with the SEC?
What things do you need to disclose?
What are your officers doing?
Are they buying or selling shares?
When are they trading?
When are they not trading?
All of these things are actually pretty good things.
But, they are things that are hard to do in a natively crypto context.
But they're also expensive.
Even for a fairly small company preparing to file, or do a registration, will be a seven
figure cost and probably seven figures of annual compliance.
And so you can't really be a person who wants to run a half million dollar common enterprise
and practically speaking, file.
So they say, well, okay,
we have a solution for that,
that's the crowdfunding exemption,
and this is Reg A.
Reg A is the exemptions to registration.
But there was a specific one done for crowdfunding.
You can do effectively a light form of registration if you're crowdfunding within certain hurdles,
20 million and 75 million respectively.
And so you don't have to go through the whole full regulatory regime of being a public company
like Google.
You do have some reporting requirements, you can't just go out there and put your hand
up and say, hey, look, I'm crowdfunding,
I don't have to do anything.
That's not how it works.
But it's a lighter form,
it's a significantly lighter registration form.
So, practically speaking, if something is a security, you can sell it using one of three
ways. One, to Acredited Investors and Qualified Purchasers. Two, to the public, host registration.
Three, to the public under the crowdfunding exemptions, but within certain limits on how
much you can raise.
These are, or if it's not a security, you don't have to do any of these things, but then it
really has to not be a security.
On this section, this is what I would like you to remember.
The Howey Test and these three models for securities, Acredited Investors, registration,
Reg A crowdfunding exemptions.
Now, how does this translate to real life?
How does this translate to what people do?
Well, the primary model for financing technology startups, remains venture capital firms.
What are venture capital firms?
Venture capital firms are investment funds who have a general partner who is a company,
but you can think of it as the people running the fund, and limited partners, who are the
investors.
The investors and venture capital funds are Accredited Investors or Qualified Purchasers
because units of a venture capital fund are definitely securities.
And who are these famous institutional investors?
Well, interestingly, the largest institutional investors in the world are pension funds.
So, it's kind of funny that like, when you think of institutional investors and they're very big
and not like a common person, it's primarily the retirement savings of school teachers
and firefighters that have been aggregated, but because they have been aggregated, a very large
number, will then have people managing those retirement savings.
A one of the things those people do is invest those retirement savings into venture capital
funds will then go and invest in the service.
Other buckets of typical investors, sovereign wealth funds, some corporate treasurers, family
offices, which is just a fancy word for effectively, an investment team for a really, really rich
family.
An ultra high net worth or a high net worth individuals.
But really the biggest investor in venture capital funds tends to be pension funds,
they have more money than any of these people.
So VCs are both allowed to invest in unregistered securities and also have the orientation skill,
mental desire to invest in technology startups.
The... most of the, pretty much all of the infrastructure firms in NFT space, all of the gaming firms
in NFT space, many of the metaverse firms in NFT space and some of the project teams
in the NFT space, Yuga, dual, etc etc, have raised money from venture capital funds.
Why?
Because it is safe, easy and fast.
Venture capital firms can make a decision fairly quickly, and by making that decision,
they can write a cheque, for $2, $5, $10, $20 million.
You do not, you can sell them normal equity,
you don't have to go through any complicated convolutions of designing some unique instrument
to make sure that it's not a security.
You know, say, look, you can buy shares in our company and you, the entrepreneur, don't
have to worry about any regulatory risk.
They're very much allowed to buy shares in your company, and this practical aspect tends
to be fairly dominant in how these firms are financed because most of the other ways
you can do it, are actually pretty complicated.
You're certainly, you're certainly not going to go registered to go public as a startup,
right?
You don't have the capacity or the money, you're not right, mature enough.
So this tends to be if you're going to sell a security, a very easy and fast way to do
it.
What else are we seeing?
Well, we see DAOs and DAOs is one of my pet peeves in the space because DAO literally
means something very different.
It says it right there in its name, Decentralized Autonomous Organization.
DAOs were meant to be something like smart contracts that engaged in economic activity.
They were actually decentralized and autonomous when first thought of in this way.
Today people use the word now very differently.
They use it as a group of people doing something.
A group of people doing something is neither decentralized nor is it autonomous.
It is, a group of people doing something.
And when you have a group of people doing something, if they're not careful, one of the
things they will discover they are doing, is selling unregistered securities to people.
So my conceptual problems with the way that terms are being used aside, what do we see
in terms of DAOs in the NFT space?
Well, we see DAOs that are effectively correctly legally organized and compliant.
These DAOs usually have registered a company, an LLC.
They usually KYC check the information and write down your name and social security number
and address of everyone investing.
And they ask them to provide documentation or self-certification that they are accredited
investors.
A good example of this is Flamingo DAO.
Flamingo DAO does all these things.
It is a DAO, they call themselves a DAO, but effectively they're a company.
And effectively they comply with similar hurdles for their members as venture capital funders.
There are some differences in how they make decisions.
All the down members can contribute to decisions, where the venture capital fund investors typically
do not contribute to the decisions.
But from a legal financial infrastructure perspective, it's very, very similar.
Then there's what the NFT projects tend to call DAOs, which are all over the map, very
poorly organized.
I think in many cases very poorly thought out.
And some of them are going to get in trouble because they are in fact, the type of activity
that really should only be opened under US law, without judging whether it's right or
wrong, to Accredited Investors and they're not limiting to Accredited Investors.
And some of them are not going to get in trouble with the SEC in any way, but are kind of lying
to the members.
You know, you see DAOs of the type that say, oh, you're a DAO, and you're in the DAO if you own the
projects NFTs.
But the equity is owned by someone else, the governance of that equity is owned by someone
else, the decisions are all made by someone else
and sure, there's a DAO council and they'll ask the people their opinions here or there.
Well, I mean, that's no different than having a customer advisory board.
It's just if you told people, if you bought this NFT, you're part of our customer advisory
board or community advisory board.
It doesn't sound as appealing as being part of the DAO.
And so what's going on there is I think they're misleading people for people to attribute more
value to their token.
And it's not great.
I think it's going to be very hard for most non-legally organized DAOs to operate in a
compliant manner the way they're doing it.
I'm not going to judge any specific project.
I don't know all the facts of an expert projects.
But I believe there's certain quote unquote DAOs operating in the space that effectively, are
violating security law.
They might not be doing it on purpose, but they are effectively doing it.
Well, Token Offerings.
This is a very big deal in the quote unquote ICO era of 2017-2018, where everyone and their
brother, mother, sister, parent was going around saying, well, we're going to do ICO.
We're going to sell you this token,
it will fund our operation,
and we're going to make the "X for Y", the token for doctors to organize their medical practices,
or what have you.
The reality is the vast majority of these ICOs were actually securities,
and eventually the SEC cracked down on them,
and people stopped doing it because they don't want to get in trouble.
I believe a typical fungible token ICO is very hard to do as a not a security.
Or if I want to be more precise, it is very hard to make it not a security, but also achieve
the objectives that the organizer of the token is likely trying to achieve.
What do I mean by that?
Well, most of the time people who are doing an ICO are trying to raise money to do something.
They have an idea.
They woke up one morning and said, oh, I want to do, execute this idea,
I know I need a team to do it and in order to get that team, I need money to hire that
team and to do marketing and what have you.
And because of this, I need to raise money.
The reality is most things of that genre are going to end up meeting the Howey Test.
You're going to sell the token to people who are going to buy it with an expectation
of profit.
It's definitely an investment of money.
There's almost certainly a common enterprise.
And, it is most likely reliant on the efforts of others, namely you.
And so the issue here is you can make a token offering that is not a security,
it's just unlikely that you want to.
But that's usually where the problem was, not that it's impossible to do it.
It's just that once you do it, it's not likely to meet your objectives because your objectives
usually work.
Of the... in the genre of, I want to build something and I need money to build something and I'm
the person who's going to build that thing that I'm trying to build,
and that ends up generally likely not being sufficiently decentralized to not be a security.
So I'm skeptical of most token offerings not being securities.
Now, NFT sales, this is new.
This is very interesting,
and I suspect there is a little bit more fertile ground here to do it correctly while
also, plenty of pitfalls to do it incorrectly.
People can sell NFTs, which is underlying there's a form of token.
And do all types of things.
It could be a piece of work;
I'm an NFT photographer,
I sold a piece of work.
It could be a PFP, then a PFP process.
It could be a token that gives you some type of utility in a game or application,
there are many reasons.
Generally, if it's this type of thing like I just described, but they are buying something
and that thing that they're buying is an object,
but if it was sold pre tokens, I went to the gallery,
I bought a painting.
I went to the real estate agent, I bought a piece of land.
These things are not securities.
These things are perfectly fine as financing methods.
These things are income or revenue to the person selling them to you,
and they're not a financial instrument, right?
Where people get in trouble though, and how I think people are going to get in trouble
with NFts is,
they say, oh, yeah, you buy this cool NFT,
and it's in the, it will have a share of the project DAO and the project DAO is going
to get 50% of the royalties from all the trades that happen later with the NFTs
and also 10% of the primary sales of future NFTs so that DAO is going to be valuable and
you'll have a share of the Dow,
well, congratulations,
you've made a security.
The real life equivalent would be you go to a gallery and you say, and the gallery is
like, oh, I'm going to sell you this painting,
and when you buy this painting and have a really beautiful painting, it's by G. Taring.
and also, I am going to give you one 10,000th of the profit of my gallery for the rest of
eternity.
That part that I'm going to give you one 10,000th of my profit of my gallery for the rest of
eternity, that part turns that key card in painting into security.
We don't have case law in this area yet.
There hasn't been enforcement in this area yet.
I do think that though, both of these statements are going to be true.
I think there's a lot of opportunities to have effectively community based funding that
is not a security in a way that is hard to do with fungible tokens because you can solve
something that has value in and of itself, whereas a fungible token,
it's very hard to have value in and of itself.
If XCOPY, they did an example, wants to do all types of projects in the NFT field,
and XCOPY sells a piece of one of one art for 100 ETH or 666 thrusters for however
specific result or an open edition for one ETH.
This is fine.
None of these things are securities.
XCOPY will have earned a lot of money.
It will have been given to XCOPY by people who broadly believe in the XCOPY brand, universe,
etc.
They might even be expecting a profit, but they're not going to call an enterprise with XCOPY.
They own an XCOPY painting.
XCOPY is off to go do something else, they're not going to call an enterprise together.
So, I believe this ability to reach out to your community, customers, fans, whatever you
want to call them, and sell them tokens directly that are, in this case, non-fungible, is a
viable fundraising method here.
I also believe quite a few people are going to screw it up.
They are going to accidentally create securities or in some cases on purpose, but I think in
most cases, accidentally, and they will have some enforcement in a couple years against some
of these accidental ones.
They're not going to be able to chase around all of them because there's a lot of them,
but they don't generally need to chase around a lot of them,
they just go after a handful of them.
And what happened last year was, they went after a handful of them and then everyone got worried and
there was less, there was less, fewer ICOs after them.
And so, to me, this is the most interesting and new area in the financing space.
Is there a way to use NFTs or, what are the ways to use NFTs in a compliant manner?
They went, I don't believe in all these things.
I get it, I get it, and the rules should change.
Yeah, I actually think the Howey Test needs to be updated or the Acreditor Investor rules
need to be updated to account for the types of Web3 projects we're seeing.
I do not believe that if you're spending points to ETH and you get part of the royalties
of an NFT DAO, you actually need to have a million dollars in net worth to be able to do it.
But that's going to involve changing the regulations of the United States and I don't
think it's going to happen imminently.
It maybe will happen in a few years, but it's not the case today.
As I want to say, well, I live in, making some, I live in Kenya, these things don't
apply in Kenya.
Okay, they might not.
The SEC rules obviously do not apply to you in Kenya.
I don't know what rules do apply in Kenya though, so you should check.
And then you probably have to be a little bit careful if you have US participants that
are practically, you have an enforcement risk.
Probably if you have a small project in Kenya, that would have been a security under US securities law,
but under Kenya, it's a 50 ETH project.
No, it's probably practically going to bother you.
This is not legal advice.
But if it becomes large and huge and successful, I don't know, you never know, the US regulatory
authorities can be quite globally ambitious at times.
So, you still need to be careful, my suggestion.
And I think there are interesting things to explore that are not securities.
So I am going to wrap up here.
It's been about an hour, so I can take some questions.
So let's take it again from the beginning.
Step one, is it a security or not?
If it is not, right, you can sell it to anyone.
If it is, you either need to do an IPO, which practically speaking, you're not going to
do, or you need to sell it only to Accredited Investors, or, you need to take advantage of
the Reg A exemption for crowdfunding, which is also not totally none, not totally trivial.
And so what that means in practice is because of these limitations imposed by the United
States, even in this highly decentralized world, most things are funded by VCs.
It remains difficult, I believe, to do a compliant, fungible token offering.
It is very possible to do a non-compliant NFT offering.
But there might be interesting ways to start building communities with NFTs that are not
securities, and that do lead to a more decentralized model of financing than, than...
what we have seen without non-fungible tokens.
So, let's go to questions, and hopefully I have not absolutely bored everyone to death.
This is, I think, the least artsy session we're going to do, but I do think it is important.
I need to open Discord so I can get fed the questions.
(63 seconds pause)
The first three questions are about Nouns.
We're starting off with the hard questions.
Let me read all three questions and I'll try and answer them together.
Can you speak about the Nouns DAO model?
It seems like the most sensible and successful type of DAO model I've seen
and seems to circumvent the securities issues put forth.
Would you consider Nouns an autonomous smart contract
or a group of people working together?
Are Nouns SEC compliant in your point of view?
Well, the Noun smart contract is for sure a smart contract,
it's for sure an autonomous smart contract.
Creating a Noun every day until eternity.
That part is fairly DAO-like from the way that I think of DAOs, the old fashioned way.
The way the treasury is allocated is not autonomous, right?
There are DAO proposals and people who are holders of DAOs, vote on the proposals
and they vote to send it out to space or to buy skateboards for kids or what have you,
generally lovely things that they vote for.
But they're not autonomous. An autonomous thing would not have humans in the decision making, right?
How Bitcoin allocates block rewards is autonomous.
You know it's an autonomous because you don't have to get a bunch of people every ten minutes
to vote if this person needs to get a block reward or if this other person who's got a block reward,
if they've made a nice proposal, or, so on.
Are Nouns or some parts of Nouns SEC compliant? I can't answer that question,
and I'm not going to answer that question for more or less anything because I'm not qualified to answer that question.
I'm not an attorney, I'm not a securities attorney.
I would feel comfortable, I guess, saying, you know, if XCOPY mints a one-of-one piece of art
and that piece of art is just that piece of art, that's not a security. I'm pretty comfortable saying that.
But what I don't want to get into, and if you notice, I'll never say this on Twitter either,
is starting to get into the more ambitious projects and certainly projects that put the word DAO in their names
and then having to fine-tune the differences between one or another or the third or the fourth or the fifth,
but what about this one or what about the other one?
It's not my position to come out and say, oh, no, 6529 said this, whatever project is not about nouns, right?
So, out of giving the exact same answer, whatever people had asked this question of.
And so, even my non-answer, don't take it as an answer, don't take it as like, oh, 6529 didn't say that this wasn't a security,
it means you think it is a security. That's not what I'm saying either.
I am saying I've thought about this topic very, very carefully and I've thought about it before this class,
I've thought about it for the last year and a half on my Twitter feed and you will never find a Tweet that says,
I think this project is a security or I think this project is not a security.
Because, if I get into being the securities regulator, well, that's not my job
and I don't have all the information, I don't even have all the knowledge.
And so, I don't want to make wrong decisions in either direction as a matter of policy.
I don't want people like, oh, I don't think it's a security that it turns out it is and someone says, well, gosh, 6529 told us it was a security
and then I bought it because I didn't think it was regulatory risk.
And now, Gary Gensler thinks that whatever DAO is a security, 6529 has led me astray.
I do not want to lead you astray.
And I certainly don't want to do the opposite either.
Like, if something turns out that it's not a security and I'm worried a little bit, but maybe I'm too conservative,
I certainly don't want to say something inappropriate on a project.
So, I'm just not going to answer that question for any project as a matter of policy.
I've already seen something come in for prison and company.
I'm not going to answer for that either.
But part I do feel comfortable answering about the Nouns DAO, which is not part of the Howey Test.
Right, per se, the Nouns DAO in aggregate is not 100% autonomous.
So, the Nouns do vote on how to spend their pressure.
So, that part requires humans.
That doesn't mean it's a security,
doesn't mean it's not a security.
It just says it's a smart contract is taught.
And I think that is fairly close to a DAO the way I used to think about.
All right, next question.
Will the way the US handles NFT projects legally be followed by the rest of the world or can other countries do their own things?
I think it's going to be a mix.
I think the general US policy on securities tends to be more restrictive than most of the rest of the world.
I think that's going to continue.
I think most of the rest of the world is more principles, no,
less principles based and only principles and like good principles or bad principles.
I think it is more prescriptive on what's a security and what's not a security,
and I suspect that's not going to change.
Whereas the US approach tends to be more principles based.
I think that's not going to change either.
So I don't think there's going to be some kind of end-to-end global convergence on this topic.
What is your take on Gary Gensler refusing to allow spot BTC EFTs,
and just stalling any project. Wall Street protection delaying cryptos for CBDC adoption, can't seem to see any logical reason?
I don't know, I mean, Gary likes BTC.
So Gary might not like, Gary as far as I can tell, is something close to Bitcoin Maxion.
So I don't think the reason is Gary doesn't like BTC, because if there's one crypto that he does like,
it is in fact BTC.
What I think the SEC's official position is, is something along the lines of, it's still not comfortable with the way the BTC spot markets are working.
They might be wrong.
They might be right. They might be wrong, but in a way that it is because of their own intellectual biases or maybe they see some things we don't.
I mean, the crypto market participants, institutional participants have not exactly covered themselves in glory,
this cycle.
So, I don't know. I don't want to judge. My guess is, my guess is that they should approve one and they're not.
But I wouldn't like, put my hand 100% in the fire that I'm 100% certain that they're wrong.
I think they're wrong but I'm not sure they're wrong.
So there might be, there might be information that we don't have,
answers to.
But we don't, sorry, we don't have visibility into.
But they do. I don't know.
Okay. How do you avoid. Can you avoid security status if the "work" is being done by the person receiving the income instead of by the "work" of others?
I'm a little concerned because the question came with quotes around the word work.
So I'm assuming it just I'm reading without quotes or not saying like, oh, fake work or pretending that the work is being done by others.
Look, if the person receiving the income is doing the work to receive the income without knowing the specific idea being shared here,
that's generally not a security, that's generally income.
Right. If I say I'm going to...
Don't make Martinis for people and sell them and people are going to pay me money for making the Martinis. That's fine.
That's not a security.
And the SEC is not concerned that there's information asymmetry between me, the Martini maker and me, the person collecting money for making Martinis.
Because presumably I know what I'm... I know all the information about what I'm doing.
So,
but it's hard for me to exactly imagine what
that is.
So...
Okay. Next question. Without being financial advice, but perhaps being cultural advice.
Are there any funding models that seem particularly appealing or interesting to you on Web3 currently
besides being an artist minting work who has managed to find a collector audience aside?
Okay. This one's tricky. I'm going to...
I don't know for sure.
I've been thinking about this.
So I'll try and share some ideas.
I don't think they're great, to be honest.
If I had like fully fleshed out great ideas, I'd already be doing them.
So for sure, artists selling art,
is great.
It works.
For artists who have found their audience or an audience
I think it's transformational.
They should pay whatever taxes are due in wherever they live so they dont get in trouble for that.
But other than that, its just the team, it's a whole new exciting world for that. So I think... I know you said not that model, but I am reiterating, it's a great model.
I think a second model of which,
probably the best example is Gary V.
Or it's easy to see Gary V, I'm not sure it's the best example, what should be done but
I think there's clearly an opportunity for personalities to monetize their own personality.
I mean, the V friends.
Or bought primarily.
I think without in any way wanting to cast dispersions on the artwork.
I think people bought them as a bet on Gary V as an affinity with Gary V.
Gary V has been very active on social media since the beginning.
And I think if someone who was, I wouldn't say that Gary V and I hope he doesn't take his own way.
Isn't any danger of being a museum great artist, right?
I don't think people bought the Gary V art with the hope that
someday the moment might want this.
What I think they did was, I feel a bet on Gary V.
I feel an affinity with Gary V.
I want to be part of something Gary V.
So the ability to fund and capture a personality is probably something that's interesting here
that didn't exactly exist.
The work I did was like, okay, well, that's kind of like an artist running an audience.
What I'm really asking 6529 is how do you do something for someone who's not already rich and famous?
Right? Okay, this is a hard question.
Now, first answer might not be what people are looking for, but it's probably okay.
Tokens directed to charitable causes are fine.
So it doesn't match the expectation of profit.
So let's say you set up a nonprofit and your nonprofit goal
is to be cliche and lazy on this was to save the Amazonian rainforest and the way we're going to save it is by buying land and for any NFT you buy,
you get an NFT representing that acre of land, but someone has properly set up a 501(c)(3)nonprofit organization in the United States
and when they issue the NFT and let's say the NFT is, I don't know, 0.1 ETH and you buy this one acre in the jungle and the nonprofit gets the money
they buy the acre, the title of the acre is with the nonprofit, not with the NFT holder.
Again, without being legal advice, etc. etc. all will be okay.
And my sense is, a better user experience.
Than send money to someone,
a charity in this case,
and get an email receipt.
I think once this stuff gets worked out,
I believe it's going to be a more effective fundraising model for charity than what happens now.
I'm just thinking of myself because it like it gave me fries and it makes it a little bit more fun.
If I just sent $1,000 to the Amazonian rainforest charity and got some receipt that said thank you for your contribution
you can use this to deduct it under taxes.
I'm not going to be trying to boring with the funds over the second. I've done my good deed. Let's say, but the funds over the second.
I've sent it and gotten my receipt.
If instead there's a grid of whatever 10,000 acres and each acres and NFT and the NFT actually reflected the grid use a satellite photo or whatever
don't pick out the acres you're trying to save.
And then at the end you have like 10 NFTs instead of an email receipt.
They might also send you an email receipt.
They're like, you have 10 NFTs and I can show them in my wallet.
And I'm like, look, I saved these 10 acres and maybe you'll say, gosh, you're getting ego benefits out of it.
I'm going to say, okay, so what if I get an ego benefits out of it, we save the acres and they're a good thing.
Or maybe I'll say, no, it's not for my ego by me highlighting this in my wallet.
A lot of people look at my wallet. I'm going to help other people learn about this and maybe they'll save more acres.
Yeah, that sounds interesting.
Next bucket.
I would like to see, you're going to say, why don't you do one and the answer is going to be I haven't thought of one yet.
I would like to see some things that are pure down like my OG Definition.
A smart contract that does something with NFTs.
It doesn't, once it's been deployed, it does it automatically forever without human interaction.
That's probably, okay.
What that is, I don't know.
I haven't figured it out. And it's not like it's an it. There are many possible it's there.
But as a general principle, the idea that there'll be some smart contract on Ethereum every minute or hour or day or week.
I've been thinking NFT or selling it and if you're buying it and without the part that there's like a bunch of people in a discord trying to decide something or another.
I like that idea.
I don't know what that idea would be, what it would do.
But I like that idea.
If you're investing in any NFT projects that may be subject to legal issues, do holders have to feel about fear of backlash?
I'll end with this question.
And I think the holders need to think about this in two buckets.
The first bucket is the following.
Will the price of the NFTs in that project, but I'm probably.
If someone comes to a project and says, Oh, we've received or being sued by the SEC because our
NFTs that give rights to their profits of the DAO might be secure. Well, no one's going to like that. Right? So the price is going to go down.
People are going to sell.
Second, maybe they'll be forced to change what they do.
So maybe they'll be less appealing.
Now, will you a holder have a new legal risk?
Probably not.
This is not legal advice.
There was a very strange and interesting case where there was this DAO that was pretending to be autonomus but really wasn't,
and the CFTC kind of said, Oh, I might go after people who voted because they were like part of the team.
Now, I practiced the only one after the project promoters.
There was a dissenting opinion in the CFTC that says, you know, basically this is nuts like.
Since when would people in DAO have to think about this topic?
Um.
And okay.
Um, do I believe this is a major risk? No, I do not.
Do I believe it is zero risk in all scenarios? Like, no, I mean, it's conceivable. Let's say you were not the project promoter.
But you were buyer number one and you bought a bunch of the NFTs and you went out and started promoting it yourself and voting and doing things.
Could you imagine some relatively extreme, but not completely irrational cases?
Well, as you see in the CFTC, you were part of this. You were doing this.
You were kind of like the person selling the unregistered securities you weren't just a buyer of them.
Yeah, conceivably, I can see in certain.
I haven't seen too many things in the NFT space that would have triggered my concern on this topic, but I could imagine it happen.
So.
I will end here. Thank you as always everyone for joining, and see you back on Twitter.
Thank you.