Form 1-A
You state that you provide support for over 100 digital assets. Please tell us how you have determined which of these digital assets may be securities.
No reply letter found.
Refer to the first full risk factor on page 44. Please provide your analysis how the "support" you provide for digital assets that are securities and how the use of the dual fee structure for digital assets that are securities does not facilitate or cause you to engage in transactions in unregistered securities.
No reply letter found.
Please provide your analysis regarding how the following activities are executed in compliance with the federal securities laws: lending activities (e.g., earning interest in digital assets and exchanging cDAI and DAI tokens) on the Compound Finance app and staking activities (e.g., earning rewards in the form of digital assets) on the Rewards app.
No reply letter found.
Please provide your analysis how you concluded you are not required to register as an exchange or a broker-dealer under the Exchange Act. Please address the following in your response: your disclosure that you "launched the Exodus Platform for buying, holding, using and selling crypto assets"; that you support almost 10,000 pairs of digital assets that can be directly exchanged; that, as of July 31, 2020Rest of the question
approximately $2.3 billion of digital assets have been exchanged for another digital asset within the Exodus Platform; and that you have a dual fee structure in which you charge a monthly flat fee to exchanges on which U.S. persons trade tokens that could potentially be considered securities by regulators.
No reply letter found.
Please provide your analysis how you concluded you are not required to register as a clearing agency or a transfer agent. In your response, address your statement on page 78 "that the provision of a platform that provides a connection to an exchange through an API does not result in the entity providing the platform being deemed to be a transfer agent."
No reply letter found.
Please disclose here and in your Offering Summary that, in order to purchase Class A common stock, an investor must establish an account on the Exodus Platform and use Bitcoin, Ether or USDC, that there is no required minimum amount of securities that must be sold in this offering, funds received will be placed in an escrow account until closing, and that the shares of Class A common stock will not be distributedRest of the question
until the closing of the offering.
No reply letter found.
Please disclose that each share of Class A common stock will be represented by a digital Common Stock Token and that you reserve the right to discontinue the usage of Common Stock Tokens and revert to traditional or other methods of share certification.Rest of the question
Also clarify whether, at closing, the Common Stock Tokens will be tradeable on the ATS and whether it is a condition to closing that the Common Stock Tokens are tradable on an ATS.
No reply letter found.
Please state that the offering shall commence within two days of the offering statement being qualified. Refer to Rule 251(d)(3)(i)(F) of Regulation A.
No reply letter found.
Please reconcile the offering termination terms in the third paragraph with the fifth full paragraph on page 103.
No reply letter found.
We note your disclosure on page 1 that you "reserve the right to discontinue the usage of Common Stock Tokens and revert to traditional or other methods of share certification." Please disclose the consequences of discontinuing Common Stock Tokens on the ability of holders to trade your common stock on the ATS or through other means.Rest of the question
Also, disclose in Plan of Distribution the reasons why you may choose to discontinue the usage of Common Stock Tokens and how you will inform investors if you choose to do so.
No reply letter found.
Please disclose the transfer restrictions referenced in the carryover paragraph on pages 12, and clarify what you mean by "peer-to-peer transactions." In addition, please describe the material features of the transfer agent's whitelisting and how it is implemented, and discuss whether, and if so how, whitelisting will include monitoring peer-to-peer transactions and other transfers for compliance with federalRest of the question
securities laws.
No reply letter found.
Please identify, if true, that tZERO is the ATS on which your Common Stock Tokens may trade. Also clarify whether tZERO is the ATS currently involved in ongoing discussions with regulatory authorities described in the second full risk factor on page 36. Additionally, tell us the status of the process to have your Common Stock Tokens traded on the ATS and what, if any, additional steps you need to take in this regard.
No reply letter found.
Please reconcile your disclosure on page 7 that your "Class A common stock may be traded exclusively on a closed alternative trading system," your disclosure on page 24 that you "may allow [y]our Class A common stock to trade on an ATS that supports the use of [y]our Common Stock Tokens" (emphasis added), and your disclosure on page 96 that your "Class A common stock will be available to trade on [an] . . .Rest of the question
alternative trading system" (emphasis added).
No reply letter found.
We note your disclosure that U.S. federal and state and foreign laws may prohibit you from making available your platform or certain of its functionalities in all jurisdictions and that you use geo-blocking technology to prohibit the Exodus Platform and certain of its functionalities from being accessed in certain jurisdictions. Please identify these jurisdictions and functionalities.Rest of the question
In addition, please expand this risk factor or add a risk factor to describe in greater detail the potential liability related to the services you provide on your platform, including potential liability related to the use of each of the apps you offer in your app store and potential liability related to the actions of each of your thirdparty API providers. We are subject to export control, import, and sanctions laws and regulations that could impair,
No reply letter found.
Please disclose here that, in addition to the voluntary self-disclosure you submitted in July 2019 to OFAC, you also received an OFAC administrative subpoena on December 7, 2018 seeking information regarding potential transactions with individuals in Iran. Use of Proceeds, page 52
No reply letter found.
Please state whether or not any of the proceeds will be used to compensate or otherwise make payments to your officers or directors or any of your subsidiaries. In this regard, we note your disclosure on page 87 that "Mr. Gernetzke is also eligible to receive . . . commission-based payments on certain fundraising targets" and that "[u]pon completion of this Offering, Mr.Rest of the question
Gernetzke may receive a discretionary cash bonus at the discretion of the board or Mr. Richardson." Refer to Instruction 2 to Item 6 of Part II of Form 1-A. Business
No reply letter found.
We note your disclosure regarding your personnel, subsidiaries and operations outside of the United States. Please describe your operations outside of the United States, including a description of your international personnel, your international subsidiaries and your agreements with international third-party API providers so that investors understand the scope of your international operations.
No reply letter found.
We note your disclosure on page F-12 that in July 2020 you signed an API agreement with a digital asset company whereby you agreed to provide various services to the company involving development of software tools for their asset network and users. If material to your business, please describe this agreement and the services you will be providing.
No reply letter found.
Refer to the first paragraph on page 71 and the third full paragraph on page 73. Please clarify here and in the offering circular summary, if true, that you do not charge for the use of your Platform and that you earn revenue only if a user utilizes the services of one of your API providers for which you receive transaction and non-transaction based API fees. Our App Offerings, page 73
No reply letter found.
Refer to the first full paragraph on page 74. Please clarify why you believe that the app stores have decreased your reliance on market volatility and the movement of digital asset prices, and discuss the ways in which your business is affected by market volatility of digital assets. In addition, please disclose whether you hold the digital assets you receive as payment or convert them into U.S.Rest of the question
dollars upon receipt. We note the second full paragraph on page 75 and the last sentence of the carryover paragraph on page 76.
No reply letter found.
Please disclose the parties and the term and termination provisions as well as any other material provisions of: (i) each of your agreements with the six exchanges that you use for your Exchange Aggregator functionality; (ii) your agreement with NextGen in connection with the SportX app; and (iii) your agreement with the company that has developed the Rewards app.Rest of the question
In addition, discuss what measures, if any, you take to ensure that the app providers are complying with state, federal and international law and the extent of liability you have for the activities of third-party API providers. We note the carryover risk factor on pages 18-19.
No reply letter found.
Please identify the exchanges you use on your platform, and disclose whether the fees you receive pursuant to your API agreements with the exchanges are paid in Bitcoin or other digital assets, and, if so, how and when the values of such digital assets are determined.Rest of the question
In addition, please disclose the digital assets that NextGen pays to Proper Trust AG in exchange for integrating the SportX API into the Exodus Platform and how and when the values of those digital assets are determined. Also, please describe the revenues you earn under your agreement with the entity that monitors and creates staking pools and whether those revenues are paid to you in the form of digital assets.
No reply letter found.
We note your disclosure on page 75 that "[a]t this time, no revenue is earned by Exodus from the Compound Finance app." Please disclose the material terms of your agreement with the provider of the Compound Finance app, including those that relate to fees or payments you may earn pursuant to the agreement. Also, briefly explain the business rationale in hosting an app from which you presently do not earn revenue.Rest of the question
Rewards, page 76
No reply letter found.
Please revise to describe "staking" and provide additional detail regarding how your Rewards App allows users to participate as validators.
No reply letter found.
We note your disclosure on page 76 that "[a]s [you] look towards [y]our next stage of growth, [you] plan to invest significant resources into developing a robust media strategy and generous referral program that inspires new and current customers to continue exploring the financial freedom offered by crypto assets." Please disclose an estimate of the cost and time frame for the material components of your growthRest of the question
strategy and describe the referral program.
No reply letter found.
We note your disclosure on page 84 that you "may have previously inadvertently allowed [y]our software to be downloaded by individuals or entities located in countries or territories subject to U.S. trade embargoes, and submitted a voluntary self-disclosure regarding these apparent violations to OFAC." To the extent material, please describe these transactions, including the countries involved.Rest of the question
Please also discuss the potential for reputational harm from these transactions and the OFAC subpoena, and describe the maximum dollar amount of the potential penalties related to the potential non-compliance addressed in the OFAC subpoena and in the voluntary self-disclosure.
No reply letter found.
To the extent that your executive officers are paid in Bitcoin, please disclose this fact and how and when you determine the value of the Bitcoins paid as compensation. In addition, clarify (i) whether Mr. Gernetzke's stock options are for Class A or Class B shares of common stock, (ii) whether the shares of common stock reserved for issuance pursuant to the 2019 Plan are Class A or Class B shares of common stockRest of the question
and (iii) whether the number of securities underlying unexcercised options disclosed on page 89 are Class A or Class B shares of common stock.
No reply letter found.
Please disclose the interest rate on each of the promissory notes disclosed in this section and the current amount outstanding on the notes with Jon Paul Richardson and Daniel Costagnoli.
No reply letter found.
We note your disclosure that the federal district courts of the United States shall be the sole and exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. Please state here that investors cannot waive compliance with the federal securities laws.
No reply letter found.
To the extent your officers and directors intend to offer the securities, please disclose whether they intend to rely on Exchange Act Rule 3a4-1 and briefly explain the basis for their reliance. In addition, describe the plan of distribution for the shares offered by the selling shareholders, including how you will determine when the selling shareholders' shares are sold relative to newly issued shares.
No reply letter found.
We note your disclosure on page 103 that, in order to purchase Class A common stock in this offering, an investor must pay the purchase price in Bitcoin, Ether or USDC and that the value in U.S. dollars of the Bitcoin, Ether or USDC used to purchase shares of the Class A common stock is calculated at the point at which the purchaser transfers such digital assets to the account of the escrow agent.Rest of the question
Please disclose here and in the Offering Summary: (i) how you will calculate the value of these digital assets; (ii) how and when you will communicate this valuation and the number of shares of Class A common stock to the investors; and (iii) whether the investor will be able to withdraw the subscription based upon how you value the digital assets used for payment of the Class A common stock.
No reply letter found.
Please disclose here and in your Offering Summary whether you will return the digital assets to the investors if a subscription is rejected or payment is to be refunded, and, if the value of the digital assets used for payment has changed, what means will be used to determine the amount and form of the refund.Rest of the question
In addition, disclose whether investors may withdraw their subscription prior to the close of the offering and whether the investors have any rights prior to the closing and the distribution of the Class A shares of common stock. Please also add a risk factor describing the attendant risks, including that investor funds could be held in escrow for up to one year.
No reply letter found.
You state that the ATS transactions of Common Stock Tokens will be executed on the Ethereum Blockchain. Please describe the "gas" fees required to execute these transactions, how the fees are determined, and which party is responsible for paying these fees.
No reply letter found.
Please address the following regarding your accounting and disclosure for your digital assets: • Revise your disclosure here and throughout your filing to clarify how you value your digital assets for aggregate fair value disclosure in Note 2 of your interim financial statement and Note 3 of your annual financial statements and for impairment testing purposes.Rest of the question
Specify what market(s) you use to value these assets and separately tell us how these market(s) are the principal or most advantageous market(s) as stipulated in ASC 820-10-35-5. • Revise your disclosure to clarify how you determine the unit of account for impairment testing purposes. • Revise your disclosure to clarify how you determine cost less impairment for determining realized gains/losses on disposition. • Revise your disclosure in management's discussion and analysis to include discussion of your realized gains associated with digital assets. • Tell us why it is appropriate to include the net change in digital assets as an operating activity in your statements of cash flows instead of separate purchases and sales as investing activities. Reference for us the authoritative guidance you rely upon to support your classification.
No reply letter found.
Please revise your annual and interim statements of operations and footnote disclosures to provide your earnings per share information as required by ASC 260-10-45 and ASC 26010-50. If you do not believe that these disclosures are required, tell us why in your response referencing the authoritative literature you rely upon to support your position.
No reply letter found.
Please revise your disclosure to: • Provide disaggregated revenue as required by ASC 606-10-50-5 and/or to provide revenue by product or group of products as required by ASC 280-10-50-40. In this regard, it appears that revenue by each of your app offerings (i.e., Exchange Aggregator, Compound Finance, SportX and Rewards) as disclosed beginning on page 73 may be appropriate.Rest of the question
• Provide the geographic information about your revenues as required by ASC 280-1050-41. Otherwise, tell us why this disclosure is not warranted and reference for us the authoritative literature you rely upon to support your position.
No reply letter found.
Please file the form of subscription agreement and escrow agreement to be used in connection with this offering and the employment agreement with James Gernetzke.
No reply letter found.
Refer to your response to comments 2, 3, 4 and 5. While we do not have any further comments at this time regarding whether the activities identified in these comments are being conducted in compliance with the federal securities laws, our decision not to issue additional comments should not be interpreted to mean that we either agree or disagree with your response.
No reply letter found.
Refer to your response to comment 12. Please disclose the status of the process to have your Common Stock Tokens traded on the ATS and the additional steps, including an estimate of how long each step would take, if you sign an agreement to have your Class A common stock traded on the tZERO ATS.
No reply letter found.
Please address the risks related to complying with the broker-dealer financial responsibility rules, including, for example, compliance with Exchange Act Rule 15c33(b) related to establishing and maintaining physical possession or control of a customers' digital asset securities.
No reply letter found.
Refer to your response to comment 17. So that investors understand the scope of your international operations, please disclose here and in your offering summary that, for your most recently completed fiscal year, all of your revenue was earned in non-U.S. jurisdictions with 92% earned in APAC in fiscal year 2019.Rest of the question
In addition, please disclose here and in your offering summary the percentage of revenue earned from your three largest customers in fiscal year 2019.
No reply letter found.
Refer to your response to comment 20. Please expand the discussion regarding the ways in which your business is affected by the market volatility of Bitcoin and other digital assets because: (i) the majority of the fees earned pursuant to your API agreements are paid in digital assets, (ii) you pay your employees in Bitcoin, and (iii) each month, you convert a portion of your Bitcoin holdings into U.S.Rest of the question
dollars, with a general target of ensuring that half of your total cash holdings are held in Bitcoin and the other half in U.S. dollars.
No reply letter found.
Refer to your response to comment 22. Please quantify the percentage of fees you earn from SportX, Wyre, and the Exchange Aggregator paid in Bitcoin, other digital assets, or U.S. dollars. In addition, please clarify when and how the value of the digital assets owed to and received by you as payment under the API agreements is determined.
No reply letter found.
In tabular form, please identify each selling stockholder, state the amount owned by each prior to the offering, the amount offered for their account and the amount to be owned after the offering. In addition, at the bottom of the table, provide the total number of securities being offered for the account of all stockholders and describe what percent of the pre-offering outstanding securities of each class theRest of the question
offering represents. Refer to Item 5(d) to Part II of Form 1-A.
No reply letter found.
Refer to your response to comment 10. To the extent you choose to discontinue the usage of Common Stock Tokens, clarify whether you will also file a current report on Form 1- U. If not, tell us why this would not be required by Rule 257(b)(4).
No reply letter found.
Refer to your response to comment 11. Please clarify how the transfer agent will use its whitelisting process to monitor peer-to-peer transactions and other transfers for compliance with federal securities laws.
No reply letter found.
Refer to your response to comment 30. To the extent that you offer shares of Class A common stock because associated persons declined to offer their shares, please tell us how you will ensure the change in offering allocation does not exceed the offering limits in Rule 251(a)(2).
No reply letter found.
You state that your Class A common stock may be traded exclusively on a specific ATS or, alternatively, in peer-to-peer transactions limited to other stockholders or certain eligible counterparties. Please tell us the legal basis for restricting the transferability of tokens to the extent you describe and how you intend to enforce these restrictions against token holders who attempt to dispose of tokens via otherRest of the question
means. Additionally, revise the carryover risk factor on pages 32-33 to describe the risks to Class A common stockholders of the transfer restrictions, including to the extent more restrictive than transfer restrictions on traditional untokenized common stock.
No reply letter found.
Refer to your response to comment 33. To the extent known, please quantify the range of the gas fees necessary to process a transaction on the Ethereum Blockchain.
No reply letter found.
You state that as a result of this offering, you will become subject to the information and reporting requirements of the Exchange Act. Please tell us whether you intend to register under the Exchange Act concurrently with this offering or, alternatively, you intend to rely on the exemption from registration under Exchange Act Rule 12g-6.
No reply letter found.
We acknowledge your response to prior comment 34 and your added disclosures on pages F-10 and F-27. As previously requested, please tell us the names of the market(s) used to value your various digital assets held and tell us how these market(s) are the principal or most-advantageous market(s) as stipulated in ASC 820-10-35-5.
No reply letter found.
We note your disclosure that you are working to obtain a "listing" of your Class A common stock on an ATS. Please revise here and throughout to clarify that securities are not listed on ATSs but are or may become available to trade on ATSs. The Offering
No reply letter found.
Refer to your response to comment 11. Please clarify here and throughout that your Common Stock Tokens, although not restricted to trading on a specific ATS, may be incompatible with some or all ATSs. In addition, please disclose whether or not investors may transfer shares of Class A common stock even if there is no means by which to transfer the corresponding Common Stock Tokens.
No reply letter found.
Refer to your response to comment 5. Please balance your statement on page 6 that the development of your crypto asset app store decreases your reliance on market volatility and movement of digital asset prices by including a summary of this risk factor in your Summary Risk Factors section on page 7.
No reply letter found.
Refer to your response to comment 6. Please disclose how you calculate the value of the digital assets you receive as fees pursuant to the SportX, Wyre and the Exchange Aggregator API agreements. In addition, please disclose when the value of the digital assets you receive as fees is calculated under your API agreements with SportX and the Exchange Aggregator, and disclose the digital assets you receive as paymentRest of the question
under the SportX API agreement.
No reply letter found.
Please describe the procedures stockholders must follow to effect secondary, peer-to-peer transfers of Common Stock Tokens in order ensure that the transfer is reflected on the book-entry records of the Transfer Agent. Please also describe the process to remedy discrepancies in the event transfers have not been reflected on the Transfer Agent's records.
No reply letter found.
You state that any ATS you may use may have the ability to support trades in Class A common and transfers of Common Stock Tokens, but Common Stock Tokens may not be supported by all ATSs that trade Class A common. Please tell us whether you contemplate making the Common Stock Tokens available to trade on an ATS which would not support trading of the Class A common.Rest of the question
We may have additional comment on review of your response.
The Company acknowledges the Staff’s comment. The Company has revised the disclosure on the cover page and pages 11, 35 and 112 to clarify that the Company is currently engaged in discussions with ATSs, including tZERO, which the Company believes would be able to both permit the Class A common stock to trade on the ATS and have the technology to facilitate the transfer of the Common Stock Tokens.Read in the reply ↗Rest of the answer
If the Company were to determine that no ATS had the ability to facilitate the transfer of the Common Stock Tokens, this would not preclude the Company from choosing to make its Class A common stock available on an ATS; the Class A common stock would then be traded in the same manner as any other company’s common stock. The Common Stock Tokens are merely digital representations of the Class A common stock and cannot, and never would, be traded on an ATS or any other platform. If an ATS has the technical capabilities to enable transfers of the Common Stock
Tokens, the transfer of the Common Stock Tokens can then be used to represent transfers of the Class A common stock, but its sole purpose would be as a digital representation of the trading that occurs in the actual Class A common stock.
Refer to your response to comment 32 of our October 16, 2020 letter. Please revise here and throughout to clarify that you will not use a third-party escrow agent and that you will hold the subscriptions in a separate account until closing.Rest of the question
In addition, please disclose in Offering Summary and Plan of Distribution how you intend to return subscriptions to participants if the offering is terminated or expires prior to closing.
to the Staff’s comment, the Company has updated the disclosure on the cover page and pages 11, 42 and 114 of the Offering Circular. Read in the reply ↗
Please disclose the annual compensation for the fiscal year ended December 31, 2020. Plan of Distribution, page 109
to the Staff’s comment, the Company has updated the disclosure on pages 94 and 96 of the Offering Circular. Read in the reply ↗
Refer to your response to comment 30 in our letter dated October 16, 2020. Please describe the plan of distribution for the primary offering and clarify whether officers and directors will offer and sell shares on your behalf.
to the Staff’s comment, the Company has updated the disclosure on page 111 of the Offering Circular. Read in the reply ↗
You state in the second full risk factor on page 42 that each selling stockholder has granted custody of the shares and power of attorney to you to facilitate selling shares on their behalf. Please disclose this here and on the offering circular cover and briefly describe here whether selling stockholders may revoke this power of attorney and, if so, the process for doing so.
to the Staff’s comment, the Company has updated the disclosure on the cover page and on pages 42 and 111 of the Offering Circular. Read in the reply ↗
Refer to your response to comment 2. You state on page 11 that holders of the Class A common stock may transfer their shares even if there is no means by which to transfer the common stock tokens. Based on this disclosure, it is not clear what the tokens represent. The disclosure in the filing indicates that the tokens represent the Class A common stock, akin to a stock certificate.Rest of the question
However, if this is the case it is not clear how the Class A common stock can be transferred if the token cannot be transferred. Please explain how the Class A common stock can be transferred separately from the token. Moreover, if this is the case, please explain what the token actually represents and how the token should be characterized.
The Company acknowledges the Staff’s comments and has updated the disclosure on the cover page and on pages 11, 12, 35 and 113 of the Offering Circular.
The Company respectfully advises the Staff that the Common Stock Tokens should be characterized as an innovative digital method of representing ownership of shares of Class A common stock. The Common Stock Tokens should not be confused or conflated with the actual shares of Class A common stock.Read in the reply ↗Rest of the answer
In addition, the Common Stock Tokens should not be interpreted as creating additional restrictions on what would otherwise be freely tradable shares of Class A common stock.
Common Stock Tokens are digital representations of shares of Class A common stock. Common Stock Tokens are not themselves common stock or any form of security.
The technology that underlies Common Stock Tokens will allow the Common Stock Tokens, as representations of the Class A common stock, to be transferred on a blockchain network, and the technology that permits such transfers also notifies the Company’s Transfer Agent of the movement of Common Stock Tokens, so that the Transfer Agent can record the movement in its books and records as the actual movement of shares of Class A common stock. However, the Company recognizes that this technology is innovative and stockholders may want to transfer shares of their Class A common stock in circumstances where the Common Stock Tokens are not supported. if a holder of Class A common stock desires to effect a transfer of Class A common stock in circumstances where there is no means by which Common Stock Tokens can be transferred, the transfer can still be effected by recording the transfer in book-entry form on the books and records of Securitize, in the same way that a traditional stock transfer would be recorded. Furthermore, while the transfer of Common Stock Tokens does create an immutable record of the transfer on the blockchain network, and the decision by a stockholder to transfer shares using the traditional book-entry method would not result in a record of the transfer on the blockchain network, the validity and binding effect of Securitize’s book-entry records would not be affected by a discrepancy in the blockchain network.
The Company respectfully advises the Staff that the intention of the Common Stock Tokens is to provide holders of the Company’s Class A common stock with an easier way of facilitating transfers of their shares, not to restrict transfers.
In light of your response to comment 2, it is not clear as to the mechanics of how the Class A common stock will be transferred if it is available for trading on an ATS. Please provide a step-by-step description of the steps holders must take to transfer the Class A common stock if it is available for trade on an ATS, including the role of the transfer agent and token in that process.Rest of the question
Moreover, if the token represents the Class A common stock, please explain how the Class A common stock can be made available for trade on an ATS that does not support the transfer of the tokens.
to the Staff’s comment, the Company has updated the disclosure on page 113 of the Offering Circular. Read in the reply ↗
Refer to your response to comment 5. Please provide a step-by-step description of the steps holders must take to transfer the Class A common stock in peer-to-peer transactions, including the steps necessary to ensure that the transfer of the Class A common stock is reflected in the transfer agent’s records, as well as the role of the token in peer-to-peer transactions.Rest of the question
Please also describe the process required to remedy discrepancies in the event a peer-to-peer transfer is not properly reflected on the transfer agent’s records.
to the Staff’s comment, the Company has updated the disclosure on page 112 of the Offering Circular. Read in the reply ↗
You state that you expect Common Stock Tokens to be available within nine months of qualification of this offering statement. Please provide us with your legal analysis as to why the issuance of Common Stock Tokens does not represent the issuance of a security different from the uncertificated Class A common stock.Rest of the question
In your response, please provide a detailed explanation of why a single class of securities may be held in different forms with different rights and privileges under applicable state law. In this regard, comparing the Tokens to stock certificates appears inappropriate given that stock certificates are the security, rather than a representation, and a security cannot be simultaneously held in both book-entry and certificated form. We also note your response to comment 6, in which you state "[t]he Common Stock Tokens should not be confused or conflated with the actual shares of Class A common stock."
Exodus acknowledges the Staff’s comment. Exodus has removed the language in the Amended Offering Circular that compares the Common Stock Tokens to a common stock certificate, and has revised that language on pages 1, 5,
34, 40, 74 and 111.
In regard to the other questions raised in the comment above, Exodus respectfully submits the following response.
Exodus has filed its Amended Offering Circular in order to sell, under Regulation A, a single security, namely, shares of its Class A common stock.Read in the reply ↗Rest of the answer
Within nine months of the qualification of this offering, Exodus intends to make available to purchasers of its Class A common stock a digital representation of purchasers’ Class A common stock, which Exodus calls the Common Stock Tokens. Such issuance of Common Stock Tokens, whether it occurs in nine months or at any other time, is irrelevant to the Company’s offering of Class A common stock, because the Common Stock Tokens are not a security.
Before turning to a detailed analysis of why the Common Stock Tokens are not securities, it may be helpful to again consider as a factual matter what those tokens are and are not. Those Common Stock Tokens are a digital representation of the Class A common stock. That is all they are. What this means, in practical terms, is that an owner of Class A common stock can see a representation of the Class A common stock she owns, and she can see this representation in her digital wallet, in the form of the Common Stock Tokens.
The Common Stock Tokens, however, are not the Class A common stock. The Class A common stock is a security whose ownership is recorded solely on the books of the Transfer Agent. The Common Stock Tokens give no ownership interest in the Class A common stock. In addition, the Common Stock Tokens themselves carry no economic, governance, or other rights. The Common Stock Tokens cannot be traded independently of the Class A common stock. The Common Stock
Tokens are digital markers; they are devoid of any legal rights or economic value.
As a result, contrary to the assertion in your comment, the Common Stock Tokens do not create “a single class of securities [that] may be held in different forms with different rights and privileges under applicable state law.” There is a single class of securities – the Class A common stock – which may be held in only a single form – on the books of the Transfer Agent. All rights and privileges of the Class A common stock attach solely to the Class A common stock; no rights or privileges attach to the Common Stock Tokens.
Similarly, you have noted our “response to comment 6, in which [we] state "[t]he Common Stock Tokens should not be confused or conflated with the actual shares of Class A common stock." This is a critical point, and it is absolutely true. We reiterate: the Common Stock Tokens -- which have no legal, economic or other rights associated with them – should not be confused or conflated with the actual shares of Class A common stock – which have all relevant legal and economic rights, the ownership of which is determined solely by the books and records of the Transfer Agent, and the ownership of which is not affected one iota by the “ownership” of the Common Stock Tokens.
Legal and analytical framework for determining whether the Common Stock Tokens are a security
I. Analysis under the federal securities laws and the Howey test
The Common Stock Tokens are not a security under the definition of “security” set out in the Securities Act of 1933 (the “Securities Act”) or the Exchange Act of 1934 (the “Exchange Act”), because they are not any of the instruments listed in those definitions, including definitions like “stock,” “bonds,” “notes,” or any instrument. In addition, the Common Stock Assets do not meet the four-part test assessing whether they are a form of “investment contract” as set out in SEC v. Howey.1
A. The Common Stock Tokens Are Not Any Type of Instrument Listed in the Definition of a Security
The Securities Act and Exchange Act contain almost identical definitions of the term security; for example, they both list a number of familiar financial instruments as securities, including stock, notes and bonds. 2 The Advisers Act of 1940 (the “Advisers Act”) and the Investment Companies Act of 1940 (the “Investment
Company Act”) also contain definitions of the term “security” that are arguable broader than the definitions provided in the Securities Act and the Exchange Act, but we do not believe those definitions are relevant for this discussion.3
1 SEC v. W.J. Howey Co., 328 U.S.
293 (1946).
2 Securities Act of 1933 15 U.S.C. § 77b(a)(1), defining the term
“security” to mean “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.”; Securities Exchange Act §3(a)(10), defining the term “security to mean “any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, 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 instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.”
3 The definition of a security under the Advisers Act is the same as under the Investment Company Act, which the SEC and its Staff have said is broader than under the Exchange Act. In the Supreme Court case Marine Bank v. Weaver, 455 U.S. 551 (1982), the SEC argued that the issue of whether a particular instrument is a “security” depends on the context, including the statute being applied, and that the Investment Company Act “presents a significantly different context” (i.e. the regulation of the operation and management of investment companies) than the context of the Exchange Act (i.e. the issuance or trading of such securities), because the investor protection considerations are difference under these two statutes. SEC Staff Brief for the United States as Amicus
Curiae, Marine Bank v. Weaver, at 23-24, 38, 40. In a subsequent no-action letter, the Staff of the SEC reiterated this position, adding that the definition of a security under the Investment Company Act is necessarily broader, in finding that a certificate of deposit subject to the request for relief would be a security for Investment Company Act purposes, despite the Supreme Court’s finding in Marine Bank that a certificate of deposit would not be a security for Exchange Act purposes. However, we do not believe this analysis is relevant here because Exodus is not acting as an investment adviser and does not fall within the definition of an investment company.
Digital assets, or digital tokens, such as the Common Stock Tokens, are not listed as financial instruments in the definition of “security.” In addition, the characteristics of Common Stock Tokens do not fit within the enumerated lists of financial instruments. For example, the Common Stock Tokens lack any indicia of being a stock, note, bond or similar financial instrument, because the Common Stock Tokens serve only as a digital representation of a person or entity’s ownership of Class A common stock. The Common Stock Tokens have no intrinsic value, and a person who held only Common Stock Tokens would have no economic, governance or other rights, such as the right to receive dividends or vote for directors, in or with respect to Exodus. Only a person who holds Class A common stock receives the economic, governance or other rights associated with the Class A common stock, and it is only the Class A common stock that has any value.
Therefore, the Common Stock Tokens are not securities under the definitions provided in the Securities Act and Exchange Act.
B. The Common Stock Tokens Are Not Investment Securities
The definition of security in the Securities Act and the Exchange Act also contains the term “investment contract,” which has become a sort of “catchall” for instruments that do not meet the other definitions of a security. The SEC has taken the position that many crypto assets are securities under the Securities Act and the Exchange Act because they are investment contracts,4 and virtually all of the federal courts that have examined whether a crypto asset is a security under Securities Act and Exchange Act also have focused primarily or exclusively on whether those assets are investment contracts.5
4 See, e.g., Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Exchange Act Release No. 81207 (July 25, 2017); William Hinman, Former Director, SEC Div. of Corp. Fin., Remarks at the Yahoo Finance All Markets Summit: Crypto, Digital Asset Transactions: When Howey Met Gary (Plastic) (June 14, 2018).
5 E.g., Balestra v. ATBCOIN LLC, 380 F. Supp. 3d 340, 352–53 (S.D.N.Y 2019) (applying the Howey test to determine whether the ATB Coin is an investment contract–and in turn, a security); SEC v. Blockvest, LLC, et al., No. 18CV2287-GPB(BLM), 2019 WL 625163, at *7 (S.D. Cal. Feb. 14, 2019) (finding that the BLV token was a “security” because it met the definition of an “investment contract” under the Howey test); SEC v. Telegram Group Inc. et al., No. 19-cv-9439 (PKC) (S.D.N.Y. March 24, 2020) (applying Howey to the “Gram” cryptocurrency as the mode of analysis for an unconventional scheme or contract alleged to fall within the securities laws).
The term investment contract is not otherwise defined in the Securities Act or Exchange Act. However, beginning with the seminal Supreme Court case SEC v. W.J. Howey Company,6 federal courts and the SEC have defined an investment contract to include a contract, transaction or scheme that meets all four of the following elements: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profits (4) to be derived solely (or, according to lower federal courts, primarily)7 from the efforts of others.
In Howey, the Supreme Court held that the seller of parcels of a citrus grove, when coupled with a contract for cultivating, marketing, and remitting the net proceeds to investors, had illegally offered and sold to investors investment contracts that were securities. The Court noted that the seller pooled the fruit from the citrus groves, and sold the fruit under the seller’s name and the names of its affiliates. The
Court concluded that the seller was “offering something more than fee simple interests in land, something different from a farm or orchard coupled with management services. They are offering an opportunity to contribute money and to share in the profits of a large citrus fruit enterprise managed and partly owned by the [sellers].”8
6 Howey, 328 U.S. at 298-299.
7 SEC v. Glenn Turner, 474 F.2d
476, 482 (9th Cir. 1973); See also US v. Leonard, 529 F.3d 83, 88 (2d Cir. 2008) (“the word ‘solely’ should not be construed as a literal limitation; rather [courts] consider whether under all the circumstances, the scheme was being promoted primarily as an investment”).
8 Howey, 328 U.S. at 299 (emphasis added).
In one of the more widely-quoted provisions of the decision, the Howey court explained that the “investment contract” test it set forth “embodies a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”9
Based on the four elements of Howey, the Common Stock Tokens are not “investment securities.” In fact, the Common Stock Tokens are not reasonably viewed as any sort of
“contract, transaction, or scheme” that would be implicated by the term “contract” in the first place, because they involve no rights, obligations, or commitment on the part of any party to them. Even if viewed as a form of “contract” – and again, we fail to see how they could be – the Common Stock Tokens fail to meet each of the four prongs of Howey. We discuss why this is the case below.
1. The Common Stock Tokens Involve No Contract, Transaction or Scheme
As an initial matter, the Common Stock Tokens are not contracts. The Howey Court stated that an investment contract is a “contract, transaction or scheme” that meets the four-factor test the Court established.10 Black’s Law defines a contract as “[a]n agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.”11 The Common Stock Tokens, however, do not involve or provide for any obligations at all. If a person or entity were to hold only
Common Stock Tokens, and not hold Class A common stock, Exodus would have no contractual or other obligations or responsibilities to that holder. Thus, they do not bear any of the characteristics of a contract. Further, the Common Stock Tokens will not be used for any transaction or scheme associated with Exodus’ business. The Common Stock Tokens are solely a visual, digital representation of how many Class A common stock shares a holder owns. Therefore, the Common Stock Tokens do not satisfy the threshold requirement of the Howey test, and Exodus has determined, at least in part on this basis, that the Common Stock Tokens are not securities.
Refer to your response to comment 2. Please clarify here and in your offering summary section, if true, that if the offering is terminated or if a subscription is rejected for any reason, the company will return the amount and form of payment that was made on the original date of payment.
The Common Stock Tokens Do Not Involve an Investment of Money
The Common Stock Tokens also involve no investment of money as required by the first prong of the Howey test. Investors pay money to purchase Class A common stock. After investors purchase Class A common stock, they will, when and if Exodus develops the Common Stock Tokens, receive the Common Stock Tokens. However, if Exodus does provide investors with Common Stock Tokens, investors will not pay anything, whether cash or otherwise, for the Common Stock Tokens.Read in the reply ↗Rest of the answer
The price of the Class A common stock is set based on Exodus’s valuation of its common stock and does not consider in any way whether or not Common Stock Tokens would be made available by Exodus.
Similarly, were Exodus not to provide investors with Common Stock Tokens, nothing about the Class A common stock – including its value – will change. Because the Common Stock Tokens do not involve any “investment” of money or other value, the first prong of the Howey test is not satisfied. As a result, Exodus has determined, at least in part on this basis, that the Common Stock Tokens are not securities.
9 Id.
10 Id. at 298.
11 Contract Definition, Black’s Law Dictionary (11th ed. 2019).
It appears that you reflect the gross proceeds in your pro forma as adjusted additional paid-in capital, total stockholder's equity and total capitalization. Please revise your table to present only the net proceeds of your offering.
The Common Stock Tokens Do Not Involve a Common Enterprise
The Common Stock Tokens also do not meet the second prong of the Howey test, which requires people to invest in a “common enterprise.” The Howey
Court did not define the term common enterprise, although it did seem to equate the concept with the ability of the investors to “share in the profits” of the citrus fruit enterprise.
Other federal courts have developed at least three different tests for determining whether a contract, transaction or scheme constitutes a common enterprise.Read in the reply ↗Rest of the answer
Like the Howey
Court’s concept, each of these tests require a sharing of profits, or at least economic fortunes. Under the horizontal commonality test, there is a common enterprise if each of the investors shares in profits with each other.12 Under each of the two vertical commonality tests, an investor’s profits must either be correlated with the profits or fortunes of the promoter of the contract, transaction or scheme or at least depend upon the promoter’s efforts.13
The Common Stock Tokens fail to meet the terms of any of the three tests of whether there is a “common enterprise.” First, each of the common enterprise tests assume that the potential investment contract being examined has some value. The Common Stock Tokens have absolutely no value whatsoever and never will have any value. As a result, it is not possible to analyze any links among the persons to whom Common Stock Tokens are provided with respect to any profits or losses from the Common Stock Tokens. In addition, it is not possible to analyze any link between Exodus’s profits or losses and the Common Stock Tokens.
Again, the Common Stock Token is only a digital representation of a person or entity’s ownership of Class A common stock with no value of its own. As a result, there can be no common enterprise within the meaning of Howey with respect to the value of the Common Stock Tokens or any profits based on them. Therefore, the Common Stock Tokens do not meet the second prong of the Howey test.
As a result, again, Exodus has determined, at least in part on this basis, that the Common Stock Tokens are not securities.
12 See, e.g., SEC v. SG Ltd., 265 F.3d 42, 50 (1st Cir. 2001) (Ponzi scheme satisfied the horizontal commonality test because investors’ assets were pooled and investors shared in the profit and risk of the enterprise); SEC v. The Infinity Group Co., 212 F.3d 180 (3d Cir. 2000) (instruments meet the common enterprise prong under horizontal commonality because investors will receive pro-rata returns from investment by a trust); Wals v. Fox Hills Development Corporation, 24 F.3d 1016 (7th Cir. 1994) (no horizontal commonality to a time-share purchase and rental agreement because there was no pooling of profits): Deckebach v. La Vida Charters, 867 F.2d 278 (6th Cir. 1989) (yacht charter agreement fails the common enterprise prong because purchasers have no horizontal commonality with other purchasers); Salcer v. Merrill Lynch, 682 F.2d 459 (3d Cir. 1982) (commodities account not a security because there is no pooled group of funds and therefore no horizontal commonality); Curran v. Merrill Lynch, 622 F.2d 216 (6th Cir. 1980) (same); Milnarik v. M-S Commodities, 457 F.2d 274 (7th Cir. 1972) (same).
13 Broad vertical commonality exists where investors’ financial success is dependent on the promoter’s expertise or other efforts. See, e.g., Continental Commodities, 497 F.2d 526, 522-23 (5th Cir. 1974) (investors in discretionary commodities trading accounts were involved in a
“common enterprise” with other investors because “the success of the trading enterprise as a whole and customer investments individually is contingent upon the sagacious investment counseling” of the firm). Narrow Vertical commonality exists where
“fortunes of the investors are interwoven with and dependent upon the efforts and success of those seeking the investment or third parties” such that the success of the investor and the success of the promoter are directly correlated. See, e.g., Brodt v. Bache, 595 F.2d 459, 462 (9th Cir. 1978) (discretionary commodities account did not involve a common enterprise because the brokerage house received commissions on trades entered into on the investor’s behalf regardless of whether they resulted in profits to the investor; thus, the success of the brokerage house was irrelevant to individual investor profits).
Please disclose the process for exchanging or converting Class A common stock into Common Stock Tokens when the tokens become available. Please also disclose any differences in holding Class A common stock versus Common Stock Tokens, including any differences in the rights of ownership such as voting or dividends. How to purchase shares of our Class A common stock in this offering, page 112
The Common Stock Tokens Involve No Reasonable Expectation of Profit
The third prong of the Howey test requires that the investor “is led to expect profits,” and no holder of Common Stock Tokens would be led to expect profits from the Common Stock
Tokens. Any expectation of profit will be related solely to the shares of Class A common stock. The Common Stock Tokens have no value, there is and will be no independent trading market for them, and the price of the Class A common stock is in no way tied to the Common Stock Tokens – which are valued at $0.Read in the reply ↗Rest of the answer
Put another way, if a share of Class A common stock increases by $5, the investor makes the same $5 profit regardless of whether the investor holds Common Stock Tokens, could hold Common Stock
Tokens, or does not hold Common Stock Tokens. As a result, the Common Stock Tokens fail to meet the third prong of the Howey test, and, again, Exodus has determined, at least in part on this basis, that the
Common Stock Tokens are not securities.
Refer to your response to comment 31 of our October 16, 2020 letter. Please disclose here and in the Offering Summary: (i) how you will calculate the value of the Bitcoin, Ether or USDC used to purchase Class A common stock in this offering; (ii) how and when you will communicate this valuation and the number of shares of Class A common stock to the investors; and (iii) whether the investor will be able to withdrawRest of the question
the subscription based upon how you value the digital assets used for payment of the Class A common stock.
Holders of the Common Stock Tokens Do Not Rely on the Managerial or Entrepreneurial Efforts of Others
Finally, holders of Common Stock Tokens do not meet the fourth prong of the Howey test, which requires that any expectation of profits is “solely [or primarily] from the efforts of a promoter or a third party.”14 Neither Exodus nor anyone else can create any value for the Common Stock Tokens, because they have no value independent of the Class
A common stock at all.Read in the reply ↗Rest of the answer
Put differently, holders of Class A common stock do not rely on Exodus or anyone else to generate any profit based on the Common Stock Tokens. Those holders who will, at some point, have Common Stock Tokens will not enjoy any higher value for their Class A common stock because Exodus has created the Common Stock Tokens than those who do not. . Again, nothing Exodus or anyone else will do will change the value of the Common Stock Tokens, and no investor can reasonably rely on Exodus or anyone else for any profit. Therefore, the Common Stock Tokens do not satisfy the fourth prong of the Howey test , and Exodus has determined, as least in part on this basis, that the Common
Stock Tokens are not securities.
II. The Common Stock Tokens Are Not Investment Contracts under the SEC’s Framework for the Analysis of Digital Assets
On April 3, 2019, the Staff published a “Framework for ‘Investment Contract’ Analysis of Digital Assets” (the “Staff Framework”).15 The Staff Framework lists a number of non-exclusive factors that the Staff believes are useful in analyzing whether a digital asset is a security under the Howey test. The
Staff Framework addresses each of the elements of the Howey test and provides guidance on their application to digital assets.
The Staff Framework assumes that the digital assets in question either currently have a value or are going to have a value once released by the entity that created them. Specifically, the Staff notes that “The first prong of the Howey test is typically satisfied in an offer and sale of a digital asset because the digital asset is purchased or otherwise acquired in exchange for value, whether in the form of real (or fiat) currency, another digital asset, or other type of consideration.”
Again, the Common Stock Tokens are neither purchased nor acquired from Exodus in exchange for any form of value, and they generate no value for holders at all. Common Stock Tokens have no value whatsoever. They are merely digital representations made available for holders of Class A common stock to use to represent their ownership if they wish to do so. As a result, the Staff Framework does not provide any additional insight into the analysis of the Common
Stock Tokens, and again, Exodus comes to the determination that the Common Stock Tokens are not securities.
14 Howey, 328 U.S. at 299; SEC v. Glenn Turner, 474 F.2d 476, 482 (9th Cir. 1973) (the test is whether the “efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise”); Miller v. Central Chinchilla Group, 494 F.2d 414, (8th Cir. 1974) (“the word “solely” should not be read as a strict or literal limitation on the definition of an investment contract”).
15 Framework for “Investment Contract”
Analysis of Digital Assets, SEC Strategic Hub for Innovation and Financial Technology (April 3, 2019), available at https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
III. Conclusion
While Exodus appreciates the Staff’s concern regarding the nature of the Common Stock Token, Exodus believes that it has, over the past four comment response letters and accompanying offering circulars, provided sufficient information, analysis and evidence to show that a digital image that has no value, has no rights associated with it, has no effect on the price of the actual security being offered and is not independently traded cannot, under any of the different federal securities laws frameworks, be construed as a security. Exodus respectfully believes that it has therefore provided a sufficient and fulsome response on this topic.
Cover Page
2. Refer to your response to comment 2. Please clarify here and in your offering summary section, if true, that if the offering is terminated or if a subscription is rejected for any reason, the company will return the amount and form of payment that was made on the original date of payment.
The Company acknowledges the Staff’s comment and has accordingly updated the disclosure on the cover page, and pages 11 and 113 of the Amended Offering Circular.
Capitalization, page 59
3. It appears that you reflect the gross proceeds in your pro forma as adjusted additional paid-in capital, total stockholder's equity and total capitalization. Please revise your table to present only the net proceeds of your offering.
The Company acknowledges the Staff’s comment. The Company has revised the capitalization table on page 59 of the Amended Offering Circular.
Plan of Distribution
Common Stock Tokens, page 111
4. Please disclose the process for exchanging or converting Class A common stock into Common Stock Tokens when the tokens become available. Please also disclose any differences in holding Class A common stock versus Common Stock Tokens, including any differences in the rights of ownership such as voting or dividends.
As previously discussed in our response to comment 1, the Common Stock Tokens are only a digital representation of an investor’s ownership of the Company’s Class A common stock. The Class A common stock is not exchanged or converted into Common Stock Tokens. All record ownership and transfers must be, and will be, tracked and made through the transfer agent’s records independent of the Common Stock Tokens. The Company’s decision to provide Common Stock Tokens to investors will have no legal effect or consequence on the underlying ownership of Class A common stock or the economic, governance or other rights associated with the Class A common stock. Common Stock Tokens contain no voting, governance, economic or other rights, and cannot be traded independently of the Class A common stock.
How to purchase shares of our Class A common stock in this offering, page 112
5. Refer to your response to comment 31 of our October 16, 2020 letter. Please disclose here and in the Offering Summary: (i) how you will calculate the value of the Bitcoin, Ether or USDC used to purchase Class A common stock in this offering; (ii) how and when you will communicate this valuation and the number of shares of Class A common stock to the investors;
and (iii) whether the investor will be able to withdraw the subscription based upon how you value the digital assets used for payment of the Class A common stock.
The Company acknowledges the Staff’s comment and has updated the disclosure in the Amended Offering Circular as follows:
•
On pages 11, 42 and 113, the Company has clarified the method used to calculate the value of Bitcoin, Ether or USDC used to purchase Class A common stock in the offering and the time at which point such calculation is made. The Company has also added a risk factor on page 42 describing the process by which the Company calculates the exchange rate.
On pages 11, 42 and 113, the Company has clarified that investors will have an opportunity to review the valuation of Bitcoin, Ether or USDC to be used to purchase shares of Class A common stock prior to tendering their subscription.
On page 113, the Company has further provided an example of the confirmation that investors will receive before they tender subscriptions for shares of Class A common stock.
The Company notes that, because each investor will have an opportunity to review and approve the Company’s U.S. dollar valuation of the investor’s crypto assets before the investor tenders a subscription for Class A common stock, investors will not be able to withdraw their subscriptions once tendered based upon how the Company has valued the crypto assets used for payment.
Please disclose the arbitration and waiver of jury trial provisions in section 14 of the subscription agreement, revise the subscription agreement to specify whether or not these provisions apply to actions arising under the Securities Act or Exchange Act, and add a risk factor describing the attendant risks
The Company respectfully notes that Section 14.11 of the form subscription agreement, filed with the Offering Circular as Exhibit 4.1 thereto, specifies that the arbitration provisions of the subscription agreement shall not apply to actions or claims arising under the U.S. federal securities laws. The Company is filing an amended Exhibit 4.1 with the Amended Offering Circular to clarify, for the avoidance of doubt, that actions or claims arising under the Securities
Act or the Exchange Act shall not be subject to arbitration.
The Company has further revised the disclosure on page 41 of theRead in the reply ↗Rest of the answer
Amended Offering Circular to disclose the arbitration and waiver of jury trial provisions in the subscription agreement and has provided a risk factor on page 45 describing the risks associated with such provisions.
We note your response to comment 8. Please describe what actions the Transfer Agent takes if it discovers an inconsistency in its daily reconciliation process between its book entry records and the blockchain, and describe the process by which a holder of Class A common stock can request that the Transfer Agent review the holder's transactions as well as the Transfer Agent's ability to correct discrepancies betweenRest of the question
its records and the blockchain.
The Company acknowledges the Staff’s comment and has updated the disclosure on page 114 of the Amended Offering Circular. Read in the reply ↗
Please provide your analysis regarding whether having an ancillary recordkeeping mechanism on a blockchain for security tokens that is independent from the records maintained by the transfer agent presents any legal or other risks to investors, market participants or the national clearance and settlement system and whether it is inconsistent with the Exchange Act, including Exchange Act Section 17A(a)(2)(A)(ii),Rest of the question
which directs the Commission to facilitate the establishment of linked or coordinated facilities for clearance and settlement of securities transactions.
The Company acknowledges the Staff’s comment. The Company respectfully provides the following response:
As previously discussed in our response to Comment 1, the Common Stock Tokens are not securities of any kind; they are digital representations of the Class A common stock, but the ownership of the Class A common stock is exclusively governed by the records of the Transfer Agent. The Common Stock Tokens have no bearing on the legal ownership of the Class A common stock, and are irrelevant to the clearance and settlement of sales of the Class A common stock.Read in the reply ↗Rest of the answer
Instead, the Class A common stock is cleared and settled in precisely the same manner as other securities that are not traded on a securities exchange and are not DTC-eligible.
Contrary to the suggestion in comment 8, the Common Stock Tokens are not an “ancillary recordkeeping mechanism.” They are a visual representation of Class A common stock ownership; they have no legal, recordkeeping or similar functions.
Nor are the Common Stock Tokens “independent from the records maintained by the Transfer Agent.” The Common Stock Tokens are maintained by the Transfer Agent, and the Transfer Agent allocates those tokens to the wallets of holders of Class A common stock precisely and solely based on the records maintained by the Transfer Agent. The “ownership” of the Common Stock Tokens is entirely dependent upon, and in no way independent of, the records maintained by the
Transfer Agent.
As a result, we are not aware of any “legal or other risks to investors, market participants or the national clearance and settlement system” resulting from the use of the Common Stock Tokens as digital representations of the ownership of the Class A common stock. As previously discussed, the Common Stock Tokens are irrelevant to the clearance and settlement process for sales of the Class A common stock.
Similarly, we are not aware of any reason why the use of the Common Stock Tokens is or should be “inconsistent with the Exchange Act, including Exchange Act Section 17A(a)(2)(A)(ii), which directs the Commission to facilitate the establishment of linked or coordinated facilities for clearance and settlement of securities transactions.” Again, the Common Stock Tokens are not relevant to the clearance and settlement process for the purchase and sale of the Class A common stock. As previously discussed, the Common Stock Tokens are irrelevant to the clearance and settlement process for sales of the Class A common stock.
As an example of the foregoing, if the Transfer Agent’s records show that Mary has sold 100 shares of Class A common stock and Sarah has purchased those shares, the transfer agent will mark in its books and records that
Mary has 100 fewer shares and that Sarah has 100 more shares. The sale of the Class A common stock will be cleared and settled in the same manner as the sale of any other shares that are maintained by a transfer agent and that are not sold on an exchange or DTC-eligible. The existence (or non-existence) of the Common Stock Tokens are irrelevant to this process.
If, at the time of Mary’s sale of the Class A common stock to Sarah, the Common Stock Tokens are in existence, and if both Mary and Sarah have chosen to use the Common Stock Tokens and have digital wallets, then the Transfer Agent will move 100
Common Stock Tokens out of Mary’s digital wallet, and into Sarah’s digital wallet. Significantly, if the transfer agent were to not move the Common Stock Tokens out of Mary’s digital wallet and into Sarah’s, or if the transfer agent were to move the
Common Stock Tokens incorrectly, or if Mary and/or Sarah never opted to possess Common Stock Tokens and a digital wallet, or if the Common Stock Tokens are never created and utilized, it would make absolutely no difference to the clearance and settlement process, and it would make no difference to the legal ownership of the Class A common stock (which is governed solely by the books of the transfer agent).
Please describe what happens to the Common Stock Tokens in a situation where the Token holder sells Class A common stock without transferring the Token. For example, clarify whether the seller retains the Token or the buyer is issued a new Token. Please also discuss the role of the transfer agent, if any, in this situation. We will consider qualifying your offering statement at your request.Rest of the question
If a participant in your offering is required to clear its compensation arrangements with FINRA, please have FINRA advise us that it has no objections to the compensation arrangements prior to qualification.
The Company acknowledges the Staff’s comment and has updated the disclosure on page 116 of the Amended Offering Circular. Read in the reply ↗
Please disclose here that if a seller transfers or sells Class A common stock and the seller possesses but does not transfer to the buyer the number of Common Stock Tokens that corresponds to the amount of Class A common stock sold, the Transfer Agent will remove the relevant amount of Common Stock Tokens from the seller’s digital wallet and burn them, so that they no longer exist.Rest of the question
We note your disclosure in this regard in the last paragraph on page 120.
The Company acknowledges the Staff’s comment and has revised the language on page 1 of the Amended Offering Circular. Read in the reply ↗
Please clarify here whether Class A common stock holders will be able to opt-out of receiving the Tokens and, if so, describe the process for holders to so opt-out.
The Company acknowledges the Staff’s comment and has revised the language on page 114 of the Amended Offering Circular. Read in the reply ↗
Also in this review: company letter, 2021-04-06, company letter, 2021-04-06, company letter, 2021-04-08