Roger Royse's presentation on Blockchain Basics. This deck covers the basics of blockchain technology. This is part 1 of 1.

1. Idea to IPO
December 18, 2019
Blockchain Basics
Roger Royse
rroyse@rroyselaw.com
www.rroyselaw.com
Research Assistant: Natalie Ryang

2. Roger Royse
• Founder of Royse Law Firm
• Advises Technology startups on complex tax structuring, high-stakes business
negotiations, and large international financial transactions.
• Author of Dead on Arrival: How to Avoid the Legal Mistakes That Could Kill
Your Start-Up
• Teaches Blockchain for Stanford Continuing Studies and Corporate Tax at
Golden Gate University School of Law.

3. BlockChain Basics
• The trust protocol
• Technology
• Business cases
• Legal environment

4. Blockchain is:
• Psuedononymous
• Immutable
• Transparent
• Secure
• Immediate
• Frictionless
• Trustless

5. Blockchain” Distributed Ledger Systems
Public internet-based digital ledger that records transactions between
parties in the network
Peer-to-peer and Decentralized: no central authority, contrast the
client/server model
The ledger includes all transactions since date of creation
Transactions are secured by public/private key encryption
All participants become “nodes”
–Each maintains an identical copy of the ledger
–Each entry records participants exchanging value

6. Evolution of the trust protocol
• Double entry accounting enabling commerce and corporation
Source: Investopia where they describe double
accounting entry

7. How Blockchain works
• Triple entry accounting
Source: Cryptocurrencytalk website where they describe
triple entry accounting

8. Evolution of the trust protocol
• eCash in 1993: early private and secure digital cash
• Early peer to peer network: Napster, BitTorrent
Source: Images from Wikipedia

9. How Blockchain works
• (R)Evolution: Centralized, Decentralized, and Distributed
Source: an image from Everys website where they describe different types of ledgers

10. Evolution of the trust protocol
• Financial Crisis of 2008 affected trust in intermediary
Source: Medium where they describe what
happens after a financial crisis

11. Evolution of the trust protocol
• The rise of bitcoin
Source: money.cnn.com

12. Evolution of the trust protocol
• Ether and dApps
Source: Coinweez website where they describe
decentralized applications

13. 1. Evolution of the trust protocol
• Tokenization
Source: Fast Charge Payment Gateway website where they
describe credit card tokenization

14. The problems Blockchain solves
• Eliminate the trusted intermediary
Source: Blockchainlion website where they describe Blockchain and Government

15. What Blockchain does: The Ledger of Everything
• Internet allows digital transfer of information
• Blockchain allows digital transfer of products
• Reduces cost of verification
• Reduces cost of networking

16. Part 1: Technology
• Distributed Ledger
• Decentralized
• Cryptographically secure
• Consensus mechanisms
• Hashes
• Miners

17. Overview Of “Blockchain” Distributed Ledger Systems
When an exchange occur:
1. The exchange is encrypted
2. All the nodes in the network communicate with each other and record the exchange
3. Consensus algorithm assures validity of the transactions
4. Upon validation, all copies of the ledger are updated
5. “Mining” nodes bundle transactions into “blocks” that are added to the ledger
6. New blocks contain information that refers back to previous blocks
7. All blocks in the chain link together in the distributed identical copies
8. The link is secured by the miner after the correct “hash” value for the block is determined
9. Cannot delete or alter the entries once they have been validated and accepted by the network
1. If a node modified a previous block
1. Will not be in sync with rest of network
2. Would then be excluded

18. Public Key Cryptography
Source: a chart from Aaxix Commerce website where they
describe public-key cryptography

19. Bitcoin Transaction
• Alice has a bitcoin wallet with addresses, each of which refer to a
balance of bitcoin
• Bob creates a new bitcoin address for Alice to send bitcoin to
• Alice tells her Bitcoin client to transfer 3 BC to Bob. The client signs
her request with Alice’s private key.
• Anyone on the network can use Alice’s public key to see that the
request is from Alice (psedonymous).

20. BC Transactions
• BC transaction is verified by the nodes
• Then sits in the Memory pool or “Mem Pool” until….
• “Miners” bundle the transactions of the past ten minutes
into a block
• If user has enough BC, transaction will be deemed valid and bundled;
otherwise will be rejected

21. The Block, or Record of Transactions
• Transactions are grouped together in “blocks”
• Each block links together to create a sequential timestamped chain
• Each block contain information about transfers (and any other data)
• Block has a “header” to organize the data base. The Header contains
• A “hash” or unique fingerprint of data in the block
• Timestamp
• A hash of the previous block

22. Verification of New Blocks
• In a centralized system, a trusted authority would verify transactions
and create and store the “blocks”
• In a distributed system, the collective must verify
• How can we trust the block? Who is allowed to store information on
the chain?

23. Verification (Bitcoin)
• Miners bundle data into a block and create a hash
• A hash function maps data of arbitrary size to data of fixed size.
• values returned by a hash function are called hash values, hash codes, hash sums, or hashes.
• Bitcoin uses “nonces” to create different hash values from the same data
• A “nonce” is a random number added to data in the block prior to hashing
• The new hash value is based on the previous hash value, the new transaction block and a
nonce.
• Each hash must have a certain number of leading zeros
• Miners must create many nonces until they produce a hash with leading zeros
• Requires expensive, difficult trial and error calculations (“mining”)
• The high cost of mining prevents fraud
• Solving the puzzle is “Proof of Work”
• Miners awarded BC for solving the puzzle (reward)
• The hash is broadcast and other nodes verify that the hash meets the requirements
(consensus)
• State updated every ten minutes (calculates balances)

27. Consensus Mechanisms: Proof of Work
• Artificially makes it computationally costly for network users to
validate transactions
• The benefit of making it costly to validate transactions is that validation can
not be influenced by the number of network identities someone controls, but
only by the total computational power they have
• Rewards them for trying to help validate transactions
• Block reward and transaction fees for every valid hash
• Reward is used so that people on the network will try to help validate
transactions

28. The problem with Proof of Work
• Bitcoin requires massive amount of energy

29. Delegated Proof of Stake
• Delegated PoS
• Consensus determined by elected delegates
• Micali’s Algorand
• Lottery system that randomly selects writers of the block from among users
• Chia Coin
• Proof of Storage

30. Consensus Algorithms: verified by miners
•Proof of work
• The most utilized consensus
algorithm for a blockchain
• Every computer (node)
competes to solve a
mathematical puzzle
• Winning node earns the right to
write the next block and
receives an incentive for that
work
• Energy and cost: requires a
large amount of computing
power
•Proof of Stake
• An alternative consensus
algorithm for a blockchain yield
• Instead of mathematical
contest, miners put up a stake
in return for the right to
validate the network
• Stake as a non-revocable
security deposit against fraud or
inaccuracy

31. Forks and Double Spend
• Suppose Alice transfers the same bitcoin to 2 different people?
• And the nodes verify them both?
• Who wins?

32. Forks and Double Spend

33. Double Spending Problems
The double spend problem:
Preventing someone making a purchase
with digital cash from reusing the same
token to purchase again
Source: an image from Steemit website where they describe the
double spend problem

34. Consensus when the BC forks
Miners will pick the longest chain

35. Integrity of the Blockchain
• Small change in data will change the hash and break the chain
• The 51% Attack: 51% of the miners could theoretically collude to
approve false transactions but no one has that much computational
power
• Creating extra nodes to mine is expensive

36. Permissioned and Permissionless networks
Source: Blockchainhub website where they describe blockchain & distributed ledger technologies
Permissioned Permissionless
Faster Slower
Managed upkeep Public Ownership
Private Membership Open & Transparent
Trusted Trust-free
Legal Allegal

37. Part 2: The Business Case

38. The Dark Side: MT Gox
Source: Japan times

39. Source: CNN Money
The Dark Side: Silk Road

40. I. Intro: Market Opportunity in Blockchain
• Bitcoin is a $200 Billion market as on end of 2017 (McKinsey)
• By 2027, 10% of Global GDP will be on the blockchain
• VCs invested $1 billion in bitcoin in 2017
• 2017 ICO market of $5 billion
• IBM has invested $200 million into blockchain and IoT

41. How long will it take for Blockchain to become ubiquitous?
• Blockchain is a foundational layer with applications built on top of it
• In internet, the economic value has gone to the application layer e.g.
Google, Amazon and Facebook who have built applications on top it
• Will blockchain go the same way?
• Will the most value be derived from the DApps built on top of the Ethereum
blockchain, or will it remain with the Ethereum blockchain itself?
• How long will it take for Blockchain to become ubiquitous?
• TCP/IP was born in 1972 by U.S. Department of Defense and it took 30 years to
shift foundations on which our world operates

42. Simple Economics of Blockchain
• How blockchain technology will shape innovation in digital platforms
• Blockchain technology will lower the two key costs
1. Cost of Verification: reducing the cost of verifying transaction
2. Cost of Networking: creating a digital marketplace without a trusted
intermediary
• Result: Increased competition, lower barriers to entry, lower privacy
risk, and shared investment and infrastructure
• Challenge the market incumbents and open opportunities for data ownership,
licensing, digital advertising, incentivizing product adoption, auctions, and
reputation systems
http://www.nber.org/papers/w22952.pdf

43. Zero Cost Verification
• 70% of value of BC is cost reduction
• Costless verification – all parties agree on information
• When costs of verification exceed benefits, markets fail
• Verification may required information disclosure (leakage and privacy)
• Non Excludable - public
• Excludable Information
• Self censored
• Cheap talk

44. Network Effects in Blockchain
• A network effect (also called network externality or demand-side
economies of scale) is the positive effect described in economics and
business that an additional user of a good or service has on the value
of that product to others.

45. Is Blockchain foundational or disruptive?
• Foundational: General Purpose Technology (GPT)
• BC has features of a GPT as it enables innovation and productivity
across many industries, like steam engine, electricity and the internet
• Like internet, Blockchain will create new foundations on which how
economic system is operated

46. Blockchain, a disruptive technology
• Blockchain technology displaces industries
• “Dis-intermediation”
1. Supplement existing industries
2. Private BC for secure real time exchange of data
• Example: Australia Stock exchange, Maersk Shipping (dominant
players)

47. Cryptoeconomics:
• Cryptoeconomics is the use of economic incentives and cryptography
to design new kinds of systems, applications, and networks.
• Specifically about building things, and has most in common with mechanism
design – an area of mathematics and economic theory
• Cryptoeconomics apply cryptography that takes economic incentives
and economic theory into account.
• Example: Bitcoin, ethereum, zcash and all other public blockchains are
products of cryptoeconomy
https://www.coindesk.com/making-sense-cryptoeconomics/

48. Three systems from Cryptoeconomics
• Reliable consensus without having to rely on a central trusted party
• Improving consensus systems: e.g. Ethereum’s plan to migrate to proof-of-state
1. Consensus protocols
• After solving consensus problem, build applications that sit "on top" of a blockchain like ethereum.
• The underlying blockchain gives us (1) a unit of value that can be used to create incentives and
penalties, and (2) a toolkit with which we can design conditional logic in the form of smart contract
• The applications we build with these tools can also be a product of cryptoeconomic design.
2. Application Design: Incentives used to prove applications
• Cryptoeconomics also includes the practice of designing much smaller sets of interactions
between individuals. The most notable of these are state channels e.g. Bob and Alice transactions
over blockchain
3. State channels: moving transactions off the BC

49. Ethereum
• Transaction based “state machine”
• Will read inputs and transition to a new state
• Uses miners, Proof of Work, and rewards with Ether
• Developed by the Ethereum Foundation, a Swiss non-profit,
• Unlike bitcoin, Ethereum is turing complete
• Value aware
• Block chain aware
• State

50. Ethereum – 2 accounts
• Externally owned account
• Public private keys
• Can send Ether
• Contract Account
• Public address, no private key
• Stores data and runs smart contracts
• Collects Ether
• Ethereum, Virtual Machine (EVM)
• Runs smart contracts
• Charge a fee (“gas”) for each computational step
• Solidity – high level language in which smart contracts are written

51. How Ethereum Works
PoW consensus mechanism
Double Spend
GHOST – Greedy Heaviest Observed Subtree
Pick the path with the most computations (highest block number)
Full and Light Nodes
Full node downloads full chain
Light node uses Merkel trees and only down loads headers
Gas and payment
Computations require a fee to execute
Gas, gas price and wei – measures of Ether

52. Ethereum
• ERC721 token for tracking unique digital assets
• ERC20 token standard
• Issued on the Ethereum network and can be exchanged for other currencies
• ERC20 standard makes the assets more easily interchangeable and ensure
they can work with Dapps adhering to the same standard.

53. Dapps:
• Ethereum is a "decentralized appstore" where anyone can publish
their apps (Dapps)
• What is a Dapp?
• Unlike Apps (e.g. Uber, Gmail), a Dapp does not require a middleman to
function or to manage a user's information
• Dapp Features
• Open Source
• Decentralized
• Incentivized
• Protocol

54. Governance
• Governance is a self-sustaining mechanism for change
• Allows for maximum improvement and growth for all participants
• Possible outcomes
• Autonomous – the code runs unchanged
• Existing systems – corporations, courts, regulators, developers, cartels
• Government censorship
• International legal institutions
• Private corporations

55. Smart Contracts are…
• Smart contracts are computer protocols that facilitate, verify, or
enforce the negotiation or performance of a contract, or that obviate
the need for a contractual clause.
• Smart contracts usually also have a user interface and often emulate the logic
of contractual clauses.
• Smart contracts are stored on the blockchain where all parties have a
copy of the contract
• All contract transactions are stored in chronological order on
blockchain for future access, along with the complete audited trail

56. Smart Contracts: Pros and Cons
• Pros
• Autonomy
• Trust
• Backup
• Safety
• Speed
• Savings
• Accuracy
• Cons
• Need coding skills
• No regulation
• Need for intermediation
• Not suited to complex
relationships
• Need for dispute resolution
• Need for oracles

57. Oracles
• Oracles find and verify real world data and events and submit this info
to the blockchain to be used by smart contracts
• Software oracles may parse text for information
• Hardware oracles may submit sensor data
• Human oracles submit events or outcomes

58. Tokenization and ICOs
• ICOs in Q1 2018: $6.3B
Source: Coindesk website where they compare ICO size in 2017 and 2018

59. Tokenization and ICOs
• Tax
• Tax perspective: Is token equity?
• Presale and SAFT
• IRS view
• Legal
• Anti-money laundering and KYC
• Patent issues
• Securities
• Federal, foreign and state laws
• Regulation
• Is my token a security?
• A currency?
• A commodity?
• Privacy
• Data Ownership

60. Securities Law
• What is a security?
• SEC Definition
• Under Section 2(a)(1) of the Securities Act, the term “security” is defined as: – any note, stock, treasury
stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of
interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of
deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call,
straddle, option, or privilege on any security, certificate of deposit, or group or index of securities
(including any interest therein or based on the value thereof), or any put, call, straddle, option, or
privilege entered into on a national securities exchange relating to foreign currency, or, in general, any
interest or instrument commonly known as a “security,” or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or
purchase, any of the foregoing

61. Securities Exchange Act of 1934
With this Act, Congress created the Securities and Exchange Commission. The Act
empowers the SEC with broad authority over all aspects of the securities industry. This
includes the power to register, regulate, and oversee brokerage firms, transfer agents, and
clearing agencies as well as the nation's securities self regulatory organizations (SROs).
The various securities exchanges, such as the New York Stock Exchange, the NASDAQ
Stock Market, and the Chicago Board of Options are SROs. The Financial Industry
Regulatory Authority (FINRA) is also an SRO.
The Act also identifies and prohibits certain types of conduct in the markets and provides
the Commission with disciplinary powers over regulated entities and persons associated
with them.
The Act also empowers the SEC to require periodic reporting of information by companies
with publicly traded securities.

62. Securities Act of 1933
Often referred to as the "truth in securities" law, the Securities Act of 1933
has two basic objectives:
Requires that investors receive financial and other significant
information concerning securities being offered for public sale; and
Prohibits deceit, misrepresentations, and other fraud in the sale of
securities.

63. State Blue Sky Laws
States also regulate the sale of securities in their states
National Markets Improvement Act of 1996 (NSMIA)
The NSMIA amended Section 18 of the Securities Act to pre-empt state “blue
sky” registration and review of specified securities and offerings. The
preempted securities are called “covered securities.” The NSMIA also amended
Section 15 of the Exchange Act to pre-empt the state’s authority over capital,
custody, margin, financial responsibility, making and keeping records, bonding or
financial or operational reporting requirements for brokers and dealers.

64. Is a Token a Security?
Howey Test: a transaction is an “investment contract” if:
1. It is an investment of money
2. There is an expectation of profits from the investment
3. The investment of money is in a common enterprise
4. Any profit comes from the efforts of a promoter or third party
The SEC takes the position that some cryptocurrencies may be
securities

65. SEC Chairman, Jay Clayton
“I do not believe that digital tokens such are Bitcoin, when used to
replace currency as a medium of exchange are securities.”
“Then there are tokens, which are used to finance projects. I've been
on the record saying there are very few, there's none that I've seen,
tokens that aren't securities. To the extent something is a security, we
should regulate it as a security, and our securities regulations are
disclosure-based, and people should follow those and provide the
information that we require.”

66. SEC Scrutiny of the ICO and Enforcement
• The SEC’s Office of Investor Education and Advocacy is warning
investors about potential scams involving stock of companies claiming
to be related to, or asserting they are engaging in, Initial Coin
Offerings (or ICOs)
• Fraudsters often try to use the lure of new and emerging technologies
to convince potential victims to invest their money in scams.
• These frauds include “pump-and-dump” and market manipulation
schemes involving publicly traded companies that claim to provide
exposure to these new technologies

67. SEC Actions
DAO Token – model described by one of the DAO founders as similar to “buying shares in a
company and getting…dividends”
Munchee - restaurant meal reviews
SEC halted cease and desist – unregistered securities
ICO targeted investors, who had an expectation of future profits, rather than users of the
products, with intention to use proceeds to develop application and future “ecosystem”,
which would increase the value the MUN token
Marketing materials stated additional development and ecosystem would increase the
price of the MUN token and could trade on secondary market within 30 day after ICO
Recent ICO Subpoenas

68. Rule 10(b)-5 Private Right of Action
Section 10(b) of the Securities Exchange Act of 1934 gives shareholders a
private right of action to seek damages for securities fraud
Rule 10b-5 forbids “any person, directly or indirectly, . . . [t]o make any untrue
statement of a material fact” in connection with the purchase or sale of
securities
Ripple XRP Class Action Lawsuits are an example

69. Securities Law Compliance
1. Public offering (S-1 registration)
2. Reg CF, Reg D, Reg A, Reg A+, Reg S
3. Crowdfunding
1. Initial disclosure requirement
2. Exemption from registration: Up to 1.07 million in 12 months period
3. Issuer disclosure requirement

70. Are Cryptocurrencies Commodities?
• CFTC definition: “Commodity”
• Until Congress clarifies, the CFTC has concurrent authority, along with
other state and federal administrative agencies, and civil and criminal
courts, over dealings in virtual currency – March 6, 2018 US Dist. New
York
• This decision allows the CFTC to proceed with a fraud enforcement
case against CabbageTech Corp., doing business as Coin Drop
Markets, and its CEO

71. CFTC
A commodity, as defined in the Commodity Exchange Act, includes the
agricultural commodities enumerated in Section 1a(9) of the Commodity
Exchange Act, 7 USC 1a(9), and all other goods and articles, except onions as
provided in Public Law 85-839 (7 USC 13-1), a 1958 law that banned futures
trading in onions, and all services, rights, and interests in which contracts for
future delivery are presently or in the future dealt in; (2) A physical commodity
such as an agricultural product or a natural resource as opposed to a financial
instrument such as a currency or interest rate. See 7 USC 1a(9)
In a preliminary injunction order issued March 6, 2018, U.S. District Court for
the Eastern District of New York ruled that the CFTC has concurrent authority,
along with other state and federal administrative agencies, and civil and
criminal courts, over dealings in virtual currency. This decision allows the CFTC
to proceed with a fraud enforcement case against CabbageTech Corp., doing
business as Coin Drop Markets, and its CEO

72. CFTC
The CFTC does NOT have regulatory jurisdiction under over markets or
platforms conducting cash or “spot” transactions in virtual currencies or other
commodities or over participants on such platforms. T
The CFTC DOES have enforcement jurisdiction to conduct civil enforcement
actions against fraud and manipulation in virtual currency derivatives markets
and in underlying virtual currency spot markets.
The CFTC does have both regulatory and enforcement jurisdiction under the
CEA over derivatives on virtual currencies traded in the United States. This
means that for derivatives on virtual currencies traded in U.S. markets, the
CFTC conducts comprehensive regulatory oversight, including imposing
registration requirements and compliance with a full range of requirements for
trade practice and market surveillance, reporting and monitoring and
standards for conduct, capital requirements and platform and system
safeguards.

73. Financial Crimes Enforcement Network
US Department of Treasury
The mission of the Financial Crimes Enforcement Network is to safeguard the financial
system from illicit use, combat money laundering, and promote national security through
the strategic use of financial authorities and the collection, analysis, and dissemination of
financial intelligence.
Money Services Business Registration
Bank Secrecy Act compliance
Suspicious Activity Reports
OFAC (Office of Foreign Assets Control)

74. FINCEN FEB 13 LETTER
Financial Crime Enforcement Network (FINCen), Dep’t of Treasury letter to Senator Ron
Wyden (D- Ore)
1) A developer that sells convertible virtual currency (i.e., bitcoin, ether, ripple, etc) including
in the form of ICO coins or tokens, in exchange for another type of value that substitutes for
currency is a money transmitter and must comply with AML/CFT requirements that apply to
this type if MSB ( and register as a MSB with FInCen - a form filed annually and disclosure of
some financial information).
2) An exchange that sells ICO coins or tokens, or exchanges them for other virtual currency,
fiat, or other value that substitutes for currency, would typically also be a money transmitter.
3) FInCEN AML/CFT rules likely do not apply to ICO structures where (a) the tokens are offered
as securities - SEC jurisdiction and their AML/KYC requirements or (b) future interests in
commodities - CFTC jurisdiction and their AML/KYC requirements.

75. Exemption from Registration
• The private company issuer (aggregated with predecessors and companies
under common control) may sell up to $1.07 million of securities in a 12-month
period [adjusted for inflation]
• Individual investments in all crowdfunding issuers in a 12-month period are
limited to:
o If either their annual income or net worth is less than $107,000, then the
greater of:
 $2,200 or
 5 percent of the lesser of their annual income or net worth
o If both their annual income and net worth are equal to or more than
$107,000, then
10 percent of the lesser of their annual income or net worth (up to a
maximum of $107,000)
o Issuer may rely on intermediary’s calculation of investor limits, unless issuer
knew it was or would be wrong
• Process is expensive and burdensome
Reg CF Crowdfunding

76. • Investment must be through the online platform of an “intermediary”
broker or funding portal
o Intermediary must register with the SEC and FINRA
o Issuer can only use one intermediary in any concurrent offerings based off of
crowdfunding exemption; however, multiple crowdfunding offerings may be
conducted using different portals so long as the aggregate amount in the
same 12-month period does not exceed the 1.07 million limit
o Many limitations on what entities can be intermediaries (e.g., must be good
actor)
o Stringent limitations on having financial interests in issuers using platform
o Only allow issuers if reasonable to believe they are compliant, and there is no
reasonable basis to think there is a potential for fraud
o Cannot accept commitment from investor until investor has account with
platform, and platform provides needed information
o Must make sure investors aren’t exceeding their caps, and that they
acknowledge and understand the risks
o Must provide communication services between investors and issuer
o Many other requirements and filings
Crowdfunding

77. • Issuer disclosure requirements
o File basic business, offering details in Form C with SEC; then display publicly
o Amend Form C if any material changes occur via Form C/A
o File updates (Form C-U) with SEC within five days of certain milestones
(such as enough commitments, offers, or closing of issuance)
o File financial statements meeting GAAP, and GAAS or PCAOB if applicable
 Audited if offering exceeds $500,000, except first time issuers need only have
independent CPA review
 Reviewed by an independent CPA if offering is between $100,000 and $500,000
 If $100,000 or less, certain information from tax forms and CEO-certified financials
 In any event, if more trustworthy financials available than are required (i.e., if
audited or CPA-reviewed are available), use those instead
o File annual SEC reports via Form C-AR
o File Form C-TR to terminate annual reporting obligations in five days of
eligibility (e.g., became Exchange Act issuer, has fewer than 300 recorded
holders or not more than $10 million total assets)
Crowdfunding

78. • Accredited investors only who may self verify
• $200,000 annual income current year and prior two years
($300,000 jointly) or
• $1,000,000 net worth excluding personal residence
• Issuers are prohibited from making general solicitations
• Direct communications to persons with whom the issuer or its
broker has a “pre-existing, substantive relationship” are not
considered general solicitations
Private Offerings Under Rule 506(b)

79. 506(c) Offering
Rule 506(c): issuers can offer securities through means of general
solicitation as long as:
oAll purchasers are accredited investors; and
oThe issuer takes “reasonable steps” to verify the purchasers’
accredited investor status

80. • A determination of “reasonable steps” requires consideration of:
o Nature of the purchaser;
o Amount of information the issuer has about the purchaser; and
o Nature of the offering, terms, amount, and method of solicitation
• The SEC has provided a non-exhaustive list of methods to verify status:
o Review IRS forms that report income e.g. Form W-2 or K-1;
o Review documents for asset details e.g. bank or brokerage
statements; or
o Obtain confirmation from CPA, lawyer, SEC-registered investment
advisor, or broker-dealer that reasonable steps were taken to verify
accredited investor status
General Solicitation

81. • The oldest exemption issued by the SEC
• Although it allowed non-accredited investors to invest, was rarely used,
because of high compliance costs relative to the maximum funds raised
o $5 million maximum offering
o Did not preempt state law registration, requiring registrations in many states
• The JOBS Act included legislation to create what is nicknamed
“Regulation A+”, an upgrade to Regulation A
• The new Regulation A keeps the allowance of non-accredited investors,
and features two kinds of Regulation A offerings, called “Tiers”:
o Tier 1, with a $20 M maximum, does not preempt state law registration, but has low
federal compliance burdens
o Tier 2, with a $50 M maximum, preempts state law registration, but has high federal
compliance burdens including ongoing semi-annual, annual, and current disclosures
Reg. A – History

82. Issue 506(b) 506(c) Reg. A Tier 2
State law
regulations?
Preempted Preempted Preempted
Maximum amount
raised?
Unlimited Unlimited $50 M in 12 months, up to
$15M of which from
current holders
Per investor
maximums?
Unlimited Unlimited Up to 10% of greater of
unaccredited investor’s
net worth or net income;
unlimited for accredited
Investor limitations Unlimited
accredited, and
35 sophisticated
non-accredited;
self-certification
standard
Accredited
only, and issuer
must take
steps to certify
they are
accredited
Unlimited accredited (self-
certified), unlimited non-
accredited
506(b), 506(c), and Reg. A Tier 2

83. Issue 506(b) 506(c) Reg. A Tier 2
Issuer limitations No bad actors No bad
actors
Cannot be public,
shell company, bad
actor, those failing
certain SEC
compliance rules
Solicitation,
advertising
Banned Soliciting of
anyone is
allowed
Testing for interest,
soliciting OK
Initial disclosures Non-accredited:
Equivalents of what they
get in registered offering,
plus anything accredited
investor can get
For accredited, see 506(c)
Optional;
must be
available to
answer
questions
Financial statements
for past two years
disclosed, plus
offering circular
with audited
financials
506(b), 506(c), and Reg. A Tier 2 (cont.)

84. Issue 506(b) 506(c) Tier 2
Ongoing disclosures Form Ds Form Ds Yes, if 300+ holders;
annual, semiannual, and
current events. But special
exemption from Exchange
Act registration until over
$75M float.
Share restriction Restricted for a
year
Restricted for a
year
Unrestricted; affiliates still
have some limits
Allowed securities? ABS not
specifically
banned
ABS not
specifically
banned
Asset backed-securities
banned
506(b), 506(c), and Reg. A Tier 2 (cont.)

85. Regulation S
Regulation S is a "safe harbor" that defines when an offering of
securities is deemed to be executed in another country and therefore
not be subject to the 1933 Act.
Two safe harbors: an issuer safe harbor and a resale safe harbor.

86. Issuer
Law
• Securities Law
• Tax
• AML/KYC
• Anti Fraud
• FINCEN
• CFTC
• FTC
• Investment Company Act
• Exchange Act
$
Step 2: Build
Platform
Step 1:
Pre-Sale
$orCrypto
SAFT
Investors
Step 3: ICO
Tokens
Investors
The ICO
Team
• Legal US
• Tax US
• Foreign Legal
• Compliance
• Marketing
• KYC/AML
• ICO Economies
• Blockchain
Technical
Utility
• Use of Token
• Secondary Trading
• Scarcity
• Voting + Democratized

87. US Platform Co. Cayman ICO Co. Singapore ICO
Foundation
$
$
SAFT
$
tokens
Token Securities Compliance
Step 1
Step 3: Cash to
US Co.
$
Step 2: ICO
Issuance
1) 506 – All accredited
2) 506/Reg S foreign targeted offering
3) Non US offering
4) Foreign Utility Tokens – not a security
5) Reg A+
6) Register with SEC
7) Sec 4(a)(2) private offering
Resale
Rule 144 (12 month holding)
Section 12(g)
Rule 12g3-2(b)

88. Cryptocurrency Regulations among States
• Delaware’s Blockchain Initiative (DBI)
• Initiated DBI committed to use blockchain technology in 2015
• When distributed ledger technology hit their radar screen in 2015, State
officials immediately understood the ramifications of the technology
• The state’s strong motivation to attract business from companies: improving
services related to registrar, UCC, land titles, personal properties, and
professional license
• The first milestone: The rollout of distributed ledger technology at the
Delaware Public Archives
• The second milestone: “Smart UCC filings”

89. Cryptocurrency Regulations among States
• Wyoming’s Blockchain bills
• Wyoming’s House of Representatives passed two blockchain bills in 2018: Utility
token bill (HB 70) and Bitcoin bill (HB 19)Delaware’s benefit
• HB 70: Utility Token Definition defines a utility token, or “open blockchain
token” as neither traditional money nor a security if it meets some conditions
• HB 19: Cryptocurrency Exemption exempts cryptocurrencies from Wyoming
Money Transmitter Act, an act it impractical for cryptocurrency exchanges to
operate in the state
• Other bills in the pipeline
• HB 101: “Blockchain filings bill”
• HB 126, “Series LLC bill”
• SF 111, “Crypto property tax exemption bill”

90. Cryptocurrency Regulation: Global
• Switzerland: known for progressive attitude toward cryptocurrency regulation .
In February 2019, the Swiss Financial Market Supervisory Authority FINMA
became the first major economy to set out clear guidelines on ICOs
• South Korea : Significant cryptocurrency presence in the past but regulatory
uncertainty and negative prospects
• Singapore: relatively progressive compared to other Asian countries. The
country’s law is attempting to remove distinction between transactions
conducted using fiat currency and cryptocurrency
• Malta: an early pioneer in blockchain and cryptocurrency regulation

91. Tax Considerations
• Equity? Debt?
• Capital asset? Barter exchange?
• Prepaid goods or services?
• Deferral?
• Open - transaction?
• Forward contract ?
• Executory Agreement to Sell?
• Information Reporting
• FATCA
• FBAR

92. ROYSE LAW FIRM, PC
For questions , Contact
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