Planning for token launches with Miles Jennings

Transcript

[Music] hi everyone um yeah sorry I can't be there uh today with you guys but um I'm uh excited to to be giving this presentation um we'll be walking through a bunch of uh different components of of token launches um and I you know hopefully by the end of it you'll have a good sense of of kind of the complexity of the problem but also um you know confidence in the idea that there is a kind of pathway through um so in in my role here um at andreon um you know I work with all of our portfolio companies and try and keep them on the right side of the law um before this I was a partner at Le Watkins which is a big

International firm um started my career in London actually and um you know there I worked with a lot of uh you know various companies in the space on these these similar problems so you know just as a starting point one of the the kind of threshold issues um you know that a lot of Founders kind of or a lot of questions that Founders have is is like why you know why should they care about this stuff um and you know is this kind of really just a legal challenge that they can kind of um you know push off to their outside Council or to you know their their in internal counsel and and what I try to express to them right is that the the importance of this this problem right this is not um you know a you know contract that you're trying to

get negotiated and get the best term terms on um the how you launch a token is is fundamental to your business right it will dictate the it can introduce existential risk to your business uh it will Define the market that you can access uh it will Define the you know relationship that you have with uh users and customers um and you know it will really kind of dictate the or can dictate the success or failure of your business so as a result of that um you know this typically isn't a a pro process or project that that Founders want to hand off to um you know third parties right they typically want to grab the reins here uh and and dig in now as a result of that right it's very

important to understand right where kind of the the boundaries are what the limits are and and what the kind of um foundational principles are that you're dealing with right so that you can actually kind of solve this problem yourself um you're never going to have a a lawyer that's able to answer every single question because you're have a lot of questions as you go through these processes so what I like to do with our Founders is basically give them kind of foundational principles for how kind of Securities laws work how all of the the the various kind of legal constructs work um within this space so that they're then able to kind of go through this process uh and with a with a better understanding of what it is um you know that they're trying to achieve um from a legal perspective so that they don't

have to rely so much on you know third parties uh to give them information because at the end of the day with the regulatory uncertainty in this space right a lot of this is kind of feeling your way through the dark uh and so we're we're here to to kind of help you along that path so um today's presentation is going to be broken down into four parts when are you ready to launch a token some token launch strategies hard and fast rules for token launches um and how to structure your your organization all of these uh presentations have um you know papers behind them that that we've written um and so you can kind of have additional resources to look to and then obviously I'm I'm kind of available and I'll be over there for for demo day um for each section I will do a pause for a brief

moment to to do a Q&A uh and so if you if you do have any any questions at that point um feel free to to jump in so when are you ready to launch a token you know this is a critical kind of piece of all of it I will say that the number one U mistake that companies make in this space is launching a token too early um and that comes with a ton of risk tokens do not um solve problems and they don't uh you know they don't magically turn your product into something that will be successful uh and as a result of that there are a lot of of of um you know a lot of companies try to get to the the token very quickly but at the end of the day um you know you really do need to

put into a lot of work um before you get there and we'll walk through kind of the various components of that first one is finding product Market fit so Jason uh gave a great presentation on product Market fit in web 3 and and I won't go into those details I will just stress why product Market fit uh is important ahead of time right as I was just saying tokens um are not kind of a uh magical you know solution to creating uh consumer demand or product Market fit or or anything um you know relating to a successful project really what they do are are they just give you leverage and they can kind of accelerate things um and so as a result of that um you know a lot of you'll see a lot of companies in

this space have kind of gotten into a token very quickly because they they think that that's what's going to drive users to their product but at the end of the day right if the only reason that users are coming to the product is because they can get a token they're likely going to sell that token and then once the price depreciates so far that there's no longer kind of really a financial incentive to use the product um you're quickly going to to lose your consumers so as a result of that right um you know having a product that people actually want um is something that is critical now this is I don't don't speak lightly of this this is a very very hard um uh element of all of this as Jason said this is kind of the the whole thing about startups is is trying to build

something that has product Market fit um within web the web 3 space people have kind of jumped past that because they see that the token is being the product but that's not really the case and Eddie also gave a great presentation to you all about kind of Designing the token and what it can do so all of those things are things that need to be focused on you need to have a clear plan um with with what product Market fit is clear line of sight on that before launching the token and the reason that that is so important is is not only that that the token can kind of um really change the incentives change user behaviors do all sorts of things that are very very difficult to undo um but post token launch you are going to be operationally constrained in what you can do with your project and as a result

of that it is very very difficult to have a token out and then completely pivot or change course or make material changes to your underlying protocol and as a result of that right your your product your your protocol is somewhat you know needs to be somewhat fully baked at the time you launch a token um for legal reasons that we'll get into right and so really if you've you know launched a project launched a token and you don't have product Market fit then what you've kind of done is is put yourself on a path where anything you now try and do has a lot of risk to it and so it's it's really like you're in a straight jacket trying to get out and and it's it's not one that we've really seen people be successfully be able to

Pivot out of so cannot emphasize enough product Market fit is is massive so you want an actional plan of decentralization so in the token strategies portion of the presentation we'll go into to kind of why decentralization um is is important from a legal perspective but it is one of the the core launch strategies that we suggest projects take um given the the kind of legal Frameworks that apply within the the web3 space so a plan of decentralization then becomes very very important and we've written um you know Frameworks for how to put together plans of decentralization but really what you're looking at is is trying to you know turn the the kind of you know autonomous software that you're working on the protocol that you're working on into uh

public infrastructure as it compared to something like a proprietary Network right you want it to look more like email as opposed to something like Facebook um and as a result of that right that is a very complex um project there are you know a ton of different facets um where decentralization uh plays a role and so if you look at you know any given project you know let's say a layer one blockchain right you need to have decentralization at the computational level you need to have uh you know decentralized nodes on your network and you need to have um you know the decentralized validator set um you then need to have a plan for decentralized development right if if your project is the only one or if your team is the only

one that's continuing to develop within that ecosystem then inherently the future of that ecosystem is dependent on you which is not decentralized so you need to have a a plan for decentralizing development um you need to have decentralized governance in some form this doesn't just mean token based governance you can also have um governance at the validator set or at the node level um where people are adopting um you know up dates to to the code but at the end of the day right what you what you can't have is is unilateral control over kind of the ecosystem going forward um you need to have decentralized value acral right if all of the benefit and value of the system acrs to you then that really looks like a corporate Network in web 2 like a

Twitter or Facebook right so you want value ACR to be dispersed across kind of the ecosystem uh and then you need a broad you know usage and accessibility anyone should be able to access if this is public infrastructure right it should be used by a broad you know swath of the public and it should be accessible by anyone so when you look at that right in the complexity of of decentralization right it it inherently leads to handing over control right from uh your company right to the general public as a result of that that is why right going back to the first point why product Market fit is so important to have at the outset right before you launch a token because the decentralization is going to

inherently make it very very difficult right for you to Pivot and change the product post having decentralized somewhat really that is is is kind of why these two pieces kind of work hand inand together and suggest that product Market fit is is something that you really want to have ahead of launching a token the third piece here is is having a a compelling token economic model tokens are not magic beans yes you can just create them but at the end of the day right unit economics apply to tokens uh the same way that they apply in the real world so what does that mean um it means that you know endless incentives paying people to use your product in ways that is completely unsustainable um really isn't going to work just because

the tokens are being minted out of th a at the end of the day right all of those incentives um right will impact the ultimate price of a token um and you know can lead to it it collapsing um it also means right that tokens need some type of economic value driver to them um now if you look across uh the ecosystem the best example of this is ethereum right which you know through use of of the the pro or use of the blockchain uh you know fees are burned um and uh that burns ethereum and as a result of that that provides some price stability and an economic model for the actual token um we haven't seen as many kind of successful uh economic models for tokens at the app layer you know like within

defi gamings and gaming companies and things like that um but you know those are are are kind of actively being worked on in in uh you know quickly and and uh ultimately this is fundamentally something that is necessary now there are tokens that don't have economic models um you know Bitcoin doesn't have one um and mcoins don't really have one um but at the end of the day if you want a a project that has you know potential for like long-term economic success right you do need to have some type of economic design to the token and you do need to be careful about incentives it's perfectly fine to you know to subsidize growth early on in a protocol's life but eventually that economic model and the economic units uh do or economic unit economics do need to um come to bear so

a robust organizational structure something that's very different uh in web 3 than compared to um you know other Industries is the organizational structure that companies use um which which inherently kind of depends on on the decentralization so you know a normal startup is typically a C Corp in Delaware uh or you know a corporation somewhere um formed around the world and that's kind of it right you have shareholders and and that's your your whole structure so it's it's fairly easy it's fairly boring um within web 3 uh it's very different you typically have an organizational structure that includes a foundation um one that in you know potentially includes a dow that has you know token based governance um you

have your C Corp um and then you also need to have kind of third parties that are brought into this ecosystem that are also developing within it so the complexity there is is much more significant uh and you know we'll spend the the fourth part of this presentation is going to be all about kind of organizational structure so we'll get into to kind of the the the nitty-gritty on all of that but to suffice to say is that that organizational structure is something that you can't really um punt on because it it basically dictates um how you will operate in a decentralized fashion post token launch so as a result of that having all of these pieces in place ahead of time you know prior to token launch is is critical and you know these pieces take time to put in place they can take you know up to three or

six months um to actually get you know foundations in place and get all of the the pieces in place to actually go through with the token launch so it's something that you need to plan for um early and then operational Readiness so there are a a ton of things that are you know as compared to a you know a traditional company there are a ton of things that you need to do in order to launch a token and be prepared to have a publicly you know listed token so you know fundraising can be very difficult for instance post token launch be sure that you have adequate Runway to you know continue to develop and and participate in your ecosystem post token launch um and so you know that is that is a a very key area where um you know a

lot of projects end up failing because they don't have they haven't properly prepared for the long-term post token launch um the mechanics of a token launch are also very complicated there's you know that just for instance um you know establishing custodial relationships uh can take months um given that there aren't a ton of of custodians out there um and you know setting up uh employee incentives and partnership incentives and all of that can just take a significant amount of time um and is so is worth you know getting started on early um and then you know you just need to be prepared about how those incentives are structured at the end of the day if you have a publicly listed token um you know an incentive that was you know great when that token's price was High um might no

longer have much incentive behind it if the token price is low and so as a result of that right designing the incentives um making sure that you have kind of long-term uh you know incentive alignment amongst um you know the people that are involved in your ecosystem is really critical and so you know these are all things that really need to be hashed out prior to the Token launch um because post token launch you know again your hands are somewhat off the wheel uh and you lose a lot of control and as a result of that it's much harder to kind of fix these problems if you haven't kind of planned for them ahead of time okay so here we'll talk about basically how do you actually go through with launching the token and what are the considerations involved to ensure that you're not on the wrong side of of the

law again this is is probably the area where you are taking on um the most risk in your Project's life cycle um and you know there's a lot of regulatory uncertainty and so at the end of the day um you know you want to be very confident what it is you're doing um you know there's a lot of of noise in the market around like you know which path you should go on um you know people always complain about uh tokens not being available to them you know anytime a project basically um you know takes a strategy that doesn't just result in retail uh investors or retail users being able to sell their tokens on the market um you know you do see some

consternation um but obviously you know you shouldn't be designing your project um with the goal of of kind of enriching people that uh were you know using your project just to to make money so um going we'll launch into these here there's there's basically the way that I kind of like to go through this framework is is to describe kind of what the risks are that you're that you're dealing with right and then we'll talk about various strategies that you can use and what their risk profile looks like across these three vectors so generally speaking right there are you know three real risks associated with token launches the first one is is legal and so this results in the fact that you know Securities laws are uh applicable

to in the United States are applicable to tokens and that really constrains kind of how you can issue them fundamentally right what securities laws are trying to do is protect people that are investing their money into assets right where those assets have high potential for information asymmetries right and what I mean by that is um where you know there might be uh one party in the market that has a lot more information about an asset than another uh and that would then allow that party to take advantage of investors so if you think about uh Apple stock right um Tim Cook and you know the management team at Apple has a lot of information about uh apple as a company you know how many

units of of the iPhone they've recently sold right that would enable them to um you know basically trade um more effectively than the general public when it comes to Apple stock as a result of that right in order for Apple stock to be listed publicly uh they have to disclose things about Apple to the public right and that whole disclosure regime is something that's been around for you know for now for 80 years and and it's it's worked very well now within crypto right the argument is that tokens right because they relate to you know autonomous software right that functions more like public infrastructure as proposed to proprietary technology like what Apple

has that you actually can design these systems to eliminate information asymmetries um such that you know a disclosure regime and and registration under discu laws is not necessary so if you think about ethereum as compared to apple right you can see significant differences along that risk profile right um ethereum You can see how much it's used you can see what projects are building on it which projects are you know being used the most um and you know you can see that there are you know just thousands and thousands of developers building on top of it as opposed to a single company driving um you know the development of the protocol so as a result of that right the IDE idea is is that the information asymmetries don't

exist and there is no Reliance on managerial efforts of some team and therefore um you know the token should not be treated uh like the security and so there therefore right should be freely tradable and treated more like a commodity like gold so so that is the the legal framework for you know how tokens can exist uh in the United States and and we'll get into kind of how that that impacts the the the launch strategy um obviously you know on the legal side right the SEC and the current chair um have been very uh had a lot of animosity towards the industry um you know the chair has said that every you know digital asset other than Bitcoin is a security um but fundament he doesn't have a legal basis um for those

statements there very much is a pathway to to launching tokens in the US uh that is compliant and again you know ethereums um uh had an ETF recently that was approved um which shows that that you know even the secc now believes that ethereum is a commodity they actually made that um you know statement in 2018 but the current chair was playing a bit of politics and trying to um you know basically slow the industry down so so there is a pathway but the legal risk is significant right this can be existential to your company a you know an SEC investigation can cost over a million dollars class action lawsuits can cost several times that um and at the end of the day uh it's really important to mitigate this risk and

ensure that you're on the right side of things so then there's commercial risk broad token distributions uh can increase legal risk just because of the nature of how the laws apply but at the same time if you don't have a broad token distribution then you're increasing your commercial risk right if you're not accessing let's say you exclude the United States entirely from your token launch um then obviously you're taking on Commercial risk uh because you're not uh accessing you know us persons so the the the breadth of your your token launch really kind of um you know dictates what kind of commercial risk you're taking on and as a result of that um you know that has to be factored in when you're deciding what your launch strategy is uh and then there's operational risk right so the the having as I was saying you know

previously on getting ready for a token there's a lot of operational complexity that comes with having a token this impacts you know how your Communications work how your um you know your organizational structure is set up and you know how you basically continue ongoing development so and you know as I was saying right it's very hard to to to Pivot your product um you know post token launch so there's a lot of operational complexity that's introduced by having a token and that's a a further risk that you need to kind of be aware of as you you go through um you know your token or as you design your token launch managing these risks so there's really three strategies for managing those three risks that we just went through decentralization is is the primary strategy right so ethereum is

decentralized right now has very good certainty under us law and and what you're basically doing here is as I was just saying right you're trying to reduce the Reliance of token holders on managerial efforts right of the initial development team um such that Securities laws are not implicated you're trying to to reduce information asymmetries the the simplest way to describe the decentralization test is is called the the Bahamas test right and what that basically says is if your team disappeared and went to the Bahamas tomorrow right would that impact the token price and and if it would then the argument is that Securities laws probably should apply if it wouldn't

then the argument is that Securities laws shouldn't apply so so how do you get there we'll get into kind of how you you you set up your plan of decentralization but really the the core kind of thesis right is that you're building you know public infrastructure um and because of the nature of blockchains that infrastructure can function in an autonomous way right and you're basically building something for other people to build on top and if you've done that successfully um then uh you know you will uh be in a position where where you are sufficiently decentralized and you don't need to worry about the application of of Securities laws so this is decentralization is is the best law longterm strategy it's why um you know most people are building in web 3 right to build this this these core you know

public infrastructure properties um as opposed to building proprietary technology um but it is the most difficult and so it and it does take a very long time there is no um simple you know you cannot just flip a switch uh and become decentralized and so you know it is something that needs to be thoroughly planned out um and something that that you know does take a long time as a result of that right the complexity of decentralization and the difficulty and the length of time that it takes to get there you know other strategies are necessary right so let's say you can't decentralize early on what what do you do does that mean that you can't launch a token no there's there's other strategies so the the two other primary strategies are excluding the US and restricting transferability so on

excluding the US right that's just that's simple that sounds that is what it sounds like right you basically geoblock us persons from participation in aird drops and you forgo US exchange listings this is a a good interterm strategy you can you basically design your your tokemon to be compliant with with regulation s which is a a Securities Law in the United States that that You Know Your Law Firm will be generally pretty familiar with the third one is restricting transferability um so basically you you issue you know tokens but they're transfer restricted so users are not able to basically go and list those tokens on a Unis swap or on a secondary exchange and trade them um or you use offchain points right which does the the same thing the whole point that

you're trying to prevent right is for from secondary markets developing for the token that us persons have access to um the idea being right that if if no one has access to those secondary markets then they're not going to be able to invest in the tokens and if they're not able to invest in the tokens then you're not really going to have a problem under Securities laws so this can also be a good interterm strategy it's not a replacement for decentralization um but it can limit the utility of incentives right if you're uh if people are for instance you know a lot of layer one blockchain networks work by um Distributing tokens to people that are running you know computational resources for the network if those people need to be able to sell those tokens in order to run their Network um then obviously uh the fact that you're

using transfer restricted tokens might really impune that uh incentive and and really decrease it its overall value to people and that might um hurt your overall networks uh opportunity so um okay so let's look at the risk profile of so for decentralization right you have very low legal risk if you can actually you know get to sufficient decentralization um you have very low commercial risk because decentralization inherently enables you to have very broad token distributions right you can access the US market and pretty much you can access any Market in the world but it does have high operational risk right decentralization is very very inefficient that is probably the number one complaint um that Founders have it's it's it's very counterintuitive right um

you know as a Founder your entire um you know life is is is kind of wrapped up in your startup and it's very difficult to go from kind of building something that is solely focused on on your company to you know flipping a switch and having that be functioning more like public infrastructure you know to give you one example like um you know people often refer to their own project as as kind of like you know a protocol as their project as as their company's project when at the end of the day it's actually you know a public resource if you've effectively decentralized so the operational risk is is quite High when it comes to decentralization which is why um you know you do want a lot of planning uh and it's also why you want you know your entire team and your

entire company to understand what the parameters are uh of decentralization what the plan is um and so that you can try and mitigate that risk now on the flip side right another one thing that you see because decentralization is so hard you see a lot of decentralization theater in web 3 so what this means is people launch a token say they're decentralized but they're not and you know they still hold uh you know significant control over their ecosystem uh and let's you know they they kind of are are the ones pulling all the louers now this is obviously very tempting because what it it does is it enables you to still move very efficiently right so if you don't have product Market fit it's a lot better to have control than

to not have control because then you can pivot more easily but decentralization theater kind of negates the entire legal Theory upon which decentralization as a legal strategy is based right if you are you still have your hands on the wheel if you're still controlling the ecosystem um then all of those risks I was talking about with respect to Apple right still apply um you're going to be able to manipulate the price of the token you're going to have information asymmetries about your protocol uh and therefore you know arguably Securities laws should apply um to your system so uh you know decentralization theater is one of the things that we are you know constantly trying to fight against um it is a a plague within the space um and it is something that that

should be avoided to to the extent possible we'll go on to the exclude strategy so here again you know very low legal risk right if you are launching a token that is just available to non- us persons then you're not going to have a lot of risk under us Securities laws now that risk isn't zero um right because regulation s does have various this the way that you issue tokens outside the United States does have a lot of requirements that you uh abide by and you know because blockchains are permissionless and censorship resistant right people can do whatever they want with those tokens so it is somewhat impossible to limit the Flowback of tokens to the United States so the legal risk is not zero but it is substantially reduced and I can tell you that we've had projects that have done uh you know

excluded to the US um but because of their profile have gotten um you know investigation letters from the SEC almost immediately um but in those instances we've been able to very effectively tell the SEC to go pound sand um because uh those those projects have basically you know checked all the boxes with respect to um how they issued their token and and made sure that they were doing everything reasonable to keep it outside the US from an operational perspective right so so commercial risk here though is very high because they're excluding the US right so the US is probably the the biggest market for um you know blockchainbased uh products and as a result of that excluding the US um you know can lead to a lot of consternation and so it's very

important right when you do decide one these strategies to effectively communicate right there is really no um uh there's no uh replacement for for an effective communication strategy and it's something that you want to be very clear with users on finally there's very low operational risk associated with with the Reas strategy so when we were talking about you know decentralization and that introducing a lot of operational risk this is kind of on the opposite end of the spectrum you can still be centralized you can still have your hands on the wheel uh and you can still um you know be adjusting your product and things like that so as a result of that right the the you know excluding the US strategy really gives you an opportunity um to let's say lengthen the pathway to decentralization

that you have right you can use this at the outset to um you know Tinker with what your protocol looks like with a live token and then eventually decentralize over time and then you know prior to the the token being available in the US all right so the restrict strategy somewhat similar to the the excluding the US strategy in in terms of its risk profile very low legal risk right um now you don't want to be out there marketing your points as as an investment product you don't want to be making a complete mockery of Securities laws just because you think you found a loophole um there there are pro projects that have done that um to to you know to to create consternation but at the end of the day uh if if used effectively this this strategy um is is pretty

pretty reasonably safe uh it does introduce you know commercial risks like the exclude strategy um as I was saying earlier you know it it does decrease the value of incentives um because people will not be able to take the tokens that they receive and sell them on secondary markets um and so if that's what you know you were depending on um then it's not really going to be workable um but at the end of the day I I would argue that that that is not really a user behavior that in most cases you want um you know if you're operating a web three game right you don't really want people farming tokens and then dumping them on the market um as that will you know negatively impact your economy but in the case of like a layer one or a decentralized you know physical

infrastructure Network um it is important to for sometimes is important for people to be able to sell tokens to pay for the you know the equipment Hardware that they're running that keeps the network ongoing and so in in those cases right this is is less of an attractive uh option now just taking a step back how do you put all of these together right I spoke a little bit about using exclude strategy but basically the the restrict strategy and the exclude strategy should be viewed as as kind of um ways to extend your overall timeline to achieving decentralization right you can mix and match these strategies um to basically give yourself more time to get further decentralization so maybe that means um you're let's say a layer one blockchain

right and you you know you have a decentralized validator set but you don't really have any developers developing smart contract protocols on top of your blockchain well in that case right it might be hard to make the argument that you're decentralized enough um to to be safe under Securities laws so what you could consider doing right is using the restrict strategy or the uh exclude the US strategy right to give yourself more time to have your protocol operational have the token out there either outside the US or or nontransferable right and allow more developers to come into your ecosystem after which point right at some point you kind of decide okay now we're sufficiently

decentralized uh and now we know you know can can um either you know allow the token to be listed in the United States right or you can turn on transferability with respect to the the token um so really these are these are about Pathways right let's say you're doing a a web three game you could do something similar where uh let's say you in the US right you could make us persons El to receive non-transferable tokens and for non us users right they could receive you know fully transferable tokens and that that kind of that would allow you to have you know incentives within the game right would have you know uh users outside the United States be able to you know participate in markets uh and then eventually you know as your game decentralizes over time uh you then um

you know kind of remove those restrictions right and allow basically kind of you know the full ecosystem to flourish so there's a lot of ways to kind kind of mix and match these and design them obviously you need to be careful not to undermine one of the strategies right by by kind of the way that you combine these so just as an example but if you're doing an exclude the US strategy you should not be heavily marketing your token in the United States um that that kind of fundamentally undermines the purpose or you shouldn't be listing the token in the United States right so there are things that you need to do in order to make sure that you're you're firmly Within These um but you can use these basically to to kind of construct a strategy so here are five rules to take away these are fairly simple but these

are things that you should absolutely remember because um you know failure to do these are are catastrophic all right number one do not sell tokens to the public in the US right I cannot uh Express this significantly enough there this is the number one fact pattern that the SEC hates um people generally stop doing this in 2017 or 18 um but you know every kind of cycle uh you know some creative entrepreneurs um figure out ways to describe token sales to the general public in a different way such as you know protocol control value things like that um and there's just there's just no excuse at the end of the

day um selling tokens to the public in the US um is is an own goal and it is the most likely thing that you could do to lead to an investigation and enforcement action number two make decentralization your Northstar as I was saying you know the the exclude the US strategy restrict strategy are really um just placeholders for ultimately getting to decentralization decentralization is the entire point of this technology right to build software that functions like uh like public infrastructure as opposed to proprietary software so if you are building an onchain product right decentralization should be the direction that you are headed or onchain protocol um and and there's just really no substitute for it three communication

is everything I I cannot stress how important communication is the you know outside of selling tokens to the US public right um the thing that most often gets companies in trouble is how they talk about their projects post token launch right so if you were to take two things away here um I would say number one do not talk about your token prior to launching your token the reason for that is that the SEC could step in and stop you from launching your token which would be very catastrophic obviously so don't talk about your token prior to launching it second um do not talk about it like it's a financial product don't talk about its price right don't talk about how it's going to go up

in value don't talk about it as though people should invest in it um there there's a ton of different elements to communication right if you're decentralized you know if you're pursuing the decentralization strategy your communication needs to reflect decentralization that means your communication needs to be reflect that that you're talking about public infrastructure not about something that you control right that's an area where Founders commonly um run a foul where they're they'll talk about you know our protocol is doing this it's like no it's public infrastructure right um very simple one here right is that your protocol right should be named something different from your devco right consensus ethereum right it's not it's not you know ethereum devco so uh at the

end of the day right these things are are fairly um sound fairly straightforward but like Ina ous and somewhat and seemingly inconsequential statements um can be existential for your project uh if you go look at like you know the complaints filed in coinbase where they've listed a bunch of different tokens that are all you know that they say are all um Securities you'll very clearly see that like the statements that they've they've clued in on are you know misconstrued but you can see why the SEC focuses on them as being evidence as to why the project is centralized so very important to kind of um get that right secondary markets are very kind of risky area right so you want to be very careful um

you know announcing that your project is available on a given exchange can introduce a lot of uh risk to your project and this is something that the SEC also clues in on uh in addition right um you know engaging market makers to you know act on us exchanges uh is really you know just a sale of tokens to the US public so per rule one uh is something that you very much want to avoid now this creates somewhat of a problem where you have um you know there are a lot of tokens out there that have high market caps and low um uh low floats where there's you know there's not a lot of lot of volume out there um but you know there's different strategies for kind of increasing volumes um you know including stuff outside the United States including

using the exclude strategy and the and the restrict strategy to get a broader token distribution um and we don't have time to go into those but but there are ways you can kind of combat that stuff but needless to say right um you know Focus on us exchanges and focusing on liquidity there and you know using market makers is all kind of very very high-risk activity and then fifth token lockups should always be at least one year from token launch the you the SEC has back in 2018 there's a case called telegram where they like successfully enjoined a company from being able to telegram from being able to issue a token because uh of the way that the lockups were structured right and it

this is a currently a very very significant Focus area for the SEC um there is really just there's there's a legal basis for why the one-ear lockup is what it is um but it's this is just a fundamental thing that you should abide by there are some projects out there now right that are are pushing the limits on this and going across it and and I could not think that there is a better thing that you could do to to to get an SEC investigation later letter um almost immediately following your launch so so this one is a a kind of no-brainer within web 3 projects generally are structured like this right you you generally have four components you have uh your original developer company so that's your startup you have you set up

a foreign Foundation that's kind of your token issuer and your token launch vehicle it can also be uh you know administering an ecosystem fund right funding more development within the ecosystem it can also be coordinating um you know your decentralized governance uh and ongoing kind of development work um you know if you have token based governance then you'll have a dow right these can basically have some you know controls over protocol upgrades um over parameter changes uh and use of of the treasury right that that kind of token based governance in that regard particularly over the treasury really helps Foster decentralization if you give token holders control the P strengths the treasury for the ecosystem right then that really means that

they're in the driver seat and that's a very kind of important fact for for the overall decentralization uh and then you have people that are building on top of your your your ecosystem or with building within your ecosystem so if you're a layer one these are the people that are building you know various smart contract protocols if you're a smart contract protocol these are people that are building you know various apps uh you know if you look at forecaster as a good example um this would be all of the clients that are being built on on top of farcaster uh currently including warcast um but there's a whole host of of others so there there are kind of two you know significant problems that have have Arisen as a result of of these uh this organizational structure um that that companies have been using the first

is with respect to Dows um Dows have a lot of issues including that decentralized governance is very hard you should not be relying on Dows to um you know effectively do much of anything right these are um you know democracy is great but it is also incredibly inefficient uh and is is not something um that is going to lead to effective uh solutions to you know for instance trying to find product Market fit on top of that Dows don't have legal existence they don't have an ability to pay taxes and they subject token holders to potential unlimited liability um that is pretty brutal because if you are a Founder in this space uh and you have put your life into this a project um you know it's it's likely that a lot of your

net worth is going to be wrapped up in the tokens that you receive as part of that work um and so if if that entire portion of your net worth is susceptible to litigation and unlimited liability based on um you know just holding the tokens um that's obviously not a very comfortable position for a lot of Founders to be in um and then on the foundation side um because of the use of foreign foundations as token lach vehicles um there's there's two real problems a they're a real world component right so they're trusted um and so if you you know if you give them a ton of power then really you've just shifted a lot of trust from let's say the devco to a board of some foundation and then because they're foreign foundations um you know they often lack

substance in the sense that they you know in a lot of cases they'll just be a board um you know with three directors in the Cayman Islands and I don't think that that really um Fosters the level of decentralization that the the space is going for um you know there are great examples out there like the ethereum foundation um you know Unis swap foundation's done a great job recently as well um but you don't want to just go through the motions here and set something up that's that's really just a facade and not something that actually drives decentralization on the outside one of the solutions that we've been working on is a legal entity structure uh in Wyoming that is called the Duna the decentralized unincorporated nonprofit Association um that goes into effect in July uh and you know we are currently working on with a a bunch of

different projects on on kind of putting a pathway into place there the Duna comes with a lot of benefits um it's it's suitable for most uh companies within the space um if they have a US Nexus um but it's really kind of depends on what the economic model for their tokens is and what their governance model model is um so I don't really have time to get into all of that but I can just say that you know there are a lot of benefits here it they The Entity structure basically allows Dows to function as Dows there's no you don't need to sign up to your member you don't need to kyc users um you know they basically the the law actually abides by whatever the smart contract protocol the governance protocol is for the Dow uh and so as a result of that um it's a

pretty low touch permissionless entity structure um that is is very easy to to put in place and it does solve those three problem problems that I mentioned it does give legal existence it enables dos to pay taxes and it does provide limited liability uh to token holders on the risk side though it does have potential for misuse um you know whenever you're you're kind of operating within a legal framework you need to make sure that you're complying with that legal framework instead of ignoring it and I would say that a lot of projects in this space um you know tend to be moving too quickly to taking that into account um there's potential for complex of law the dun is only available in one state um but it is um you know part of larger entity structure that that's been adopted in about 30 States

um and then there's some lingering tax uncertainties that we're kind of now working with the IRS on to try and to try and solidify this structure on the foundation side there's really kind of two solutions to the you know to the problem of of having lack of substance given their foreign nature one you can use a US Foundation right this can supplement your foreign Foundation structure where your foreign Foundation is really just a token issuer and then you have a US Foundation that's periodically funded right and that operates Grant programs helps guide decentralized governance you know does BD for the project and really just kind of focuses on on yeah building out the ecosystem Can it can also um be the thing that that kind of manages the decentralized governance uh and really pushes things forward there this you

know is a little bit easier because people tend to find that you know the most talent for the you know within the web three spaces in the United States uh and as a result of that this you know enables you to have um keep those employees in the United States but having them work for an organization that's ultimately going to in you know help the decentralization the reason why I focus on the the substance of these foundations is because like if you only have a foundation that kind of launches a token right and then your only other real point of weight in your ecosystem is your your devco it's really hard to argue right that the devco could just disappear so you really want uh some you know an organization that's going to counterbalance the devco and is that also going to be focused on

the crit neutrality of the underlying protocol right you want someone that is not a for-profit business that's going to try and extract all all the value that it can from the ecosystem you're going to want have one that's trying to safeguard it as public infrastructure that anyone can build on top of with the devco just being one entity that happens to be operating within that space the alternative to the US Foundation is to you know doing a UK subsidiary or subsidiary a jurisdiction where there is a good tax treaty with the United States so this structure basically like you put a UK subsidiary under your foreign foundation and then you can employ people in the UK or in Europe that that can then act for the foundation and you know again give substance give create a counterbalance a force within the

ecosystem uh and help you know pursue greater decentralization thanks all [Music]