In 20-20 hindsight, did you ever wish you documented your key decision points as a record of how you got to where you are today? Over a 30 years career, I have only done this five times, and this is the fifth.
Blockchain Holdings, Inc. (“BHI”) has recently launched a simultaneous offering of Common Shares and XScrip™ Equity Security Tokens. As I sit on the Board, here are some of the key decision points that happened between myself and the founder, Alan Forbes. Keep in mind that this is my recollection and, if you talk to Al, he may have a different list of key points. But this is my article, so it’s how I remember things.
LIGHTENING FAST
November 2018
A small group of us were sitting around thinking about how to monetize the Company’s assets and technology revenue streams, which are substantial. Luckily, Al had a lot of assets and contributed them for this deal. Thanks Al!
We decided to offer an asset backed equity security token called XScrip™. These tokens are backed by:
– 100% of the revenue from production agreements for 1.04 billion barrels of hydrocarbon (oil and gas). That’s a lot of oil and gas…
– Exclusive use of patented geothermic fuel cell technology to reduce hydrocarbon lifting cost, reduce environmental impact, and future commercialization revenue. (This is important because as the oil and gas price fluctuates, the geothermic fuel technology would still reduce lifting cost no matter what the price).
– Revenue from commercialization of patented clean energy and water technology. (There will be a separate article on this as it has broad commercial and humanitarian applications. It was fun sitting around with Al not asking the question of does the technology work, but how do we store the water and deliver the energy to villages that had no infrastructure.)
There was a lot of thinking that went into the type of assets to include in the deal. The benefit of bundling a natural resource, like oil and gas, and the technologies was a thoughtful decision. Not only is operational synergy created, but we believe the sheer reduction in operating costs of the oil and gas production makes the optics of the bundled investment opportunity attractive. (Are you listening Shell Oil?). Including both not only leverages the continued oil and gas demand, but it also increases the investment and usage of environmentally friendly technology like the Company’s patented fuel cell technology. [1]
WHY WE DID WHAT WE DID
(MORE THAN THE BACK OF A NAPKIN BUT STILL SOME ASSUMPTIONS)
We discussed doing a traditional securities offering, but none of us wanted to be still in the listing process 10 to 12 months from now, and we certainly didn’t want to spend up to a million bucks to list.
A general point to make is that, in general, a digital currency allows for a global audience with 24/7 trading. The middleman commissions are also removed unless there is a secondary market exchange fee. Al and I have both been in the public and private capital markets, and we were strong advocates in opening up investments to a broader investor pool. While public capital market listings are fine (albeit expensive), they are usually allocated to the major investment firms before it hits the public at Alpha+. Private equity deals are largely through word of mouth and highly illiquid. If you were sitting in Omaha, unless you are Warren Buffet, you probably wouldn’t have heard about this offering.
TIMELINE
December 2018
– Decision made: The Board decided to launch an equity backed security token through an Ethereum ERC20 compatible coin, the XScrip™ Token. The decision process for this was lighting fast versus going down the path of a traditional security offering. We also decided to have the XScrip™ Token be SEC compliant through a Reg D 506 and Reg S filing. This decision was made not only to take the high road, but also to separate us from the many crypto’s that launched that did not have the financial information, assets, and management, much less regulatory compliance to back up its offering.
– Decision made: This will be an equity offering at the parent company, BHI, level. The thinking is that an equity offering would be far closer to a traditional offering by giving the investor “shareholder” rights. Our belief is that a lot of quality investors are not just looking to invest in assets, but also to invest in the management and long-term business prospects. In other words, owning a bunch of technology is fine, but it’s far more lucrative to be an owner of a company that has a vision for global commercialization in numerous verticals.
– Decision made: Hire an intern. Yeah Caitlin! She has removed a lot of the technical and research burden off of us. She also types faster than Al and me.
– Decision made: Find a broker dealer that has a broad-based network and is FINRA registered. Like us, the reader probably gets inundated to attend a family conference or join this or that “exclusive” networking session which becomes very repetitive and, in some instances, costly. In a lot of cases, these events are overhyped. I call the vast majority buckshot events as you never know whether someone at these events will be a “hit” and interested in your deal. Besides, really, how many cocktail weenies can you eat…. Since our target investor base is only accredited and foreign investors, we needed someone that would be on the sell side on a targeted basis at the very beginning. Candidly, this is a work in progress. There are many broker dealers, but very few that have experience in digital currency and that has access to accredited investors and institutions on a global basis. Warning: there are a lot of individuals out there saying they are “connectors.” Make sure they are in compliance with the broker dealer regulations, as not only can they get in trouble, but your company could be subject to recession of the investment and more. The only analogy I can think of is that the company-broker dealer relationship is a lot more than speed dating; It’s more like marriage – whoever you find better be honest and trustworthy.
– Decision made: Public relations. A lot of companies spend 10-15% in their first year on marketing. They may be right, but we made a decision that while we have a website (https://www.bhi.holdings), and participate in several social media sites like LinkedIn, the vast majority of our target investors do not surf the net looking for deals. Deals are usually presented to them by a broker dealer/investment bank. We are currently using the website only for someone, once they hear about the deal, to find more information and enter the website’s investor portal. If we are wrong, hey, you may see us a lot more on Twitter!
– Decision made: Let’s take a break for Christmas and New Year’s.
January 2019
– Decision made: We know we want to make a general recommendation for those that don’t want digital wallets to be pointed to several depositories. In this new digital world, depository companies are popping up like mushrooms. We don’t want to blindly pick one, so we are taking our time to make sure the depository has the security, insurance, and indemnity provisions that an investor will find acceptable. This is a work in progress.
– Decision made: Intercompany agreements and discussion about board resolutions. We want to get our house in order before we launch.
February 2019
– Decision made: We decide that we are calling our offering information an Executive Summary to further distinguish ourselves from the White Papers that are proliferating the industry. A seemingly trivial issue but important. If you are like me, I get a White Paper submission multiple times a month from company X or company Y. They look suspiciously similar. The Wall Street Journal even did an article about how way too many White Papers are plagiarized. [2] We also made a decision in the Executive Summary to do a brief explanation of the difference between a utility, security, and equity security token. This idea came up as I met with the head of blockchain implementation for a multibillion-dollar insurance company and asked how many people in his company knew what blockchain was, much less digital currency. He said less that 1%.
– Decision made: With the newness of equity backed security tokens, we were concerned about whether our target of accredited and institutional investors will understand the XScrip™ Token. To resolve this, we decided to do a simultaneous offering of tokens and common shares. The thinking behind offering common shares as well as XScrip™ Tokens is that traditional investors will understand, and have a greater sense of confidence, in a common share offering. For corporate governance purposes, and less strain on the brain, we are offering Class A common shares and XScrip™ Tokens as Class B. Both have the same rights. Whether we sell Class A or XScrip™ Tokens, the total offering is up to $28,000,000 for a cumulative total of 18,024,886 Class A and XScrip™ Tokens at $1.5334.
-Decision made: Those that are investing in the digital currency world will appreciate a security token with substantial asset and revenue backing. After the initial 12-month lockup period for the XScrip™ Token, the Company plans to list on a digital exchange to provide further token liquidity. Since the common shares and token price are pegged on a 1:1 stable ratio and are convertible, the common shares, upon conversion to the XScrip™ Token, can be subsequently sold on a digital exchange. This multiple investment option and exchange listing solves the problem of traditional private equity investments – lack of liquidity.
WHERE ARE WE TODAY
The executive summary, subscription agreements, private placement memorandums, financials, etc. are in with the attorneys. The backend web stuff is almost done (thanks to Caitlin as neither Al or I have the patience, time or understanding to figure this stuff out). Still to do is find a good (emphasis on good) broker dealer, exchange for secondary market trading and depository. Overall an exhilarating project.
Stay tuned.
About the author: Gary Sumihiro is the founder of Sumihiro Investments, LLC and global strategic advisor and board member of a number of companies, including Blockchain Holdings, Inc.
Contact: sumihiroinvestments@gmail.com
[1] Information about IEP Technology Inc. can be found at: https://www.iepm.com/
[2] The Wall Street Journal’s article, “A Flood of Questionable Cryptocurrency Offerings,” can be found at: https://www.wsj.com/graphics/whitepapers/