Governments all around the world are increasingly concerned with the potential abuses of initial coin offerings (ICOs), a new method of fundraising that provide startups with operating capital out of the gate without giving away company equity. For good reason. It seems that virtually every startup these days is looking to fund their ventures with an ICO, and many of them think doing so is a good way to skirt securities regulations. That’s why Gregory Keough, CEO of Finova Financial decided to introduce a new method to raise capital through a hybrid vehicle he calls JOBS Crypto Offering, or JCO.
What is a JOBS Crypto Offering?
Keough likens the JCO to a hybrid between the ICO and an IPO (initial public offering).
“A lot of people are selling securities and trying to make them sound like they’re not securities,” Keough said.” As of September, Forbes reports there had been $2.3 billion raised by ICOs this year. And interest in them seems to be growing.
Unlike the traditional IPO, where investors trade currency for equity in a company, with an ICO, investors trade cryptocurrency for tokens. These tokens are often used as virtual bartering chips for specific actions related to the company issuing them. For instance, at Storj, a decentralized cloud storage startup, your tokens can be used to purchase cloud storage. So, investors getting in on the fundraising push don’t end up with stake in the company but are actually pre-paying for some part of the product. And ICOs are open only to accredited investors, thanks to the SEC that has ruled that ICO tokens are in fact a security.
This creates a conundrum. Companies issuing ICOs consider their offerings a utility token, but the SEC treats them like a security. JCOs don’t come with that baggage.
“The JCO offers more regulatory clarity and security,” Keough said. That’s because Finova has gone out of its way to comply with all SEC regulations and places the JCO in the category of Reg A offerings so that accredited an non-accredited investors can get in on the action, further differentiating it from the ICO.
The Details on Finova’s JCO
“We’re able to tap into VC and traditional money,” Keough said. In other words, he is offering investors equity in his company if they participate in the offering.
But the transaction isn’t conducted like a traditional security. It still involves the blockchain, and investors can still use cryptocurrency to initiate the transaction. Finova will also accept traditional currency.
To develop the concept, Finova commissioned law firm Cooley to assist with the legal framework. Like an IPO, the offering is open initially to a select few investors in a private round called SAFT (Simple Agreement for Future Tokens). Once that round is completed, the JCO is opened up to other investors on a public exchange. Finova will have to register an official public offering through the SEC, and then the tokens are created. If that isn’t done, investor funds are returned to them. Keogh said Finova hasn’t decided which exchange they are going to use yet, but the firm is looking at three separate exchanges.
“We take the equity stack and move it to the blockchain,” Keough said. “The token represents equity in Finova. We see it as an alternative path to the IPO for startups.”
Once tokens mature and investors start receiving dividends, they’ll be dropped into digital wallets. Tokens will then be available for selling back to the company or trading on a secondary market, like traditional securities. Keough believes other companies will want to issue their own JCOs, and it could potentially make the ICO as irrelevant as 8-track tapes. The company plans to sell $600 million in tokens through multiple tranches. Tokens sold earlier will appreciate in value until all are sold. The JCO will officially open in December and make its way to non-accredited investors by late January.
The Past, Present and Future of Equity Fundraising
While the private sale of tokens is limited to $50 million by regulation, Keough said Finova is seeing a lot of interest in its JCO. “There is a tremendous amount of interest in the U.S. and globally for something that has regulatory clarity,” he said. The JCO is intended for more mature companies because, as bigger money comes in, the more regulatory clarity is necessary for investors to feel comfortable getting in. Finova will accept Ethereum, Bitcoin, other cryptcurrencies, and fiat currency.
Finova is so sure of the JCO that they want to help other companies issue their own. He see the JCO as the IPO of the future.
To date, Finova has raised $150 million in equity and debt. Started two years ago, they’ve raised $100 million in revenue. While not yet profitable, they are getting close. Their niche is to provide technology to the unbanked, about 30% of the U.S. population, so they can have access to traditional financial services like lending and bank cards. A balance sheet lender, most of their customers have poor credit scores and no bank account.
“We created a digital service where they can get case the same day based on their most important assets,” Keough said. As a secured lender, they offer lines of credit for automobiles. The customer uses equity in their vehicle to tap into the line of credit when needed. Finova puts a lien on the vehicle until the customer is out of debt.
With a kickstart in Florida, they now operate in seven states with an eye on expansion as they grow their capital stack.