The Pomp Podcast - Muneeb Ali, Co-Founder of Blockstack: Publicly Filing or a Reg A+ Token Sale

Episode Date: April 11, 2019

Muneeb Ali is a Co-Founder of Blockstack, a new internet for decentralized apps. For the last year, Muneeb and his team have been working to conduct a regulated token offering under the Reg A+ Exemption. This morning, they publicly filed their application, and in this conversation Muneeb and Anthony Pompliano discuss why they are doing this, what the progress has been to date, and what you should expect moving forward. Blockstack is a new internet for decentralized apps where users own their data directly. For developers, it is the easiest way to build decentralized apps that can scale.  For more information visit: https://blockstack.org/pomp ----- If you enjoyed this conversation, share it with your colleagues & friends, rate, review, and subscribe. This podcast is presented by BlockWorks Group. For exclusive content and events that provide insights into the crypto and blockchain space, visit them at: https://www.blockworksgroup.io

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Muneeb Ali is a co-founder of Blockstack, a new internet for decentralized apps. For the last year, Muneeb and his team have been working to conduct a regulated token offering under the Reg A-plus exemption. This morning, they publicly filed their application, and in this conversation, we discuss why they are doing this, what the progress has been to date, and what you should expect moving forward. I really enjoyed this conversation and think their approach has been fascinating. I hope you enjoy it as well.

Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. All right, guys. Bang, bang. I'm here with Muneeb. Big news this morning. Thank you so much for doing this. I really appreciate you taking the time to come on and explain to everyone what you guys have been working on and then what you guys filed this

morning it went awesome to have you in in our office uh for a change i think last time we talked it was it was the other way around uh but yes i think our our team has been catching up on some sleep this was this was a long time coming i imagine that we've been working on this for over a year uh and we spend around nine months uh privately talking to the sec uh privately getting different rounds of comments. And we are finally at a stage where we just publicly filed a 50 million regulated token offering with the SEC. Got it. And so obviously huge news in that you're filing publicly for this regulated token offering. Let's go back to how Blockstack has been financed to date and kind of give people context. And then we can talk about why this is the right path for

you guys and then you know what you kind of had to do to be able to get to this point to file publicly absolutely right so i think um for us our project took a slightly different approach from some of the other crypto platforms what we did was we raised venture capital to explicitly do r&d work right so blockstack is founded by princeton computer scientists including myself i i did a PhD there. And we went to people like Union Square Ventures, we went to Y Combinator, Nabal Ravikant, and these other people, and very explicitly laid out the ambitious plan for the next like five, 10 years, that this is what we're trying to build. We are trying to build the thing that replaces cloud computing, decentralized computing. And here's what it's going to take.

It's going to require a lot of R&D work, and we want to do that work first, get comfortable with the technology, get comfortable with the solid foundations that we are building, and then slowly start building out this decentralized, open-source ecosystem. So the first four years of the project were roughly, we were in R&D phase. Mostly our Union Square Ventures, so Albert Wenger from Union Square, he sits on the board with me. And Uniscore Ventures was the lead investor during the seed round and the series era. And then we entered 2017. And you remember the crypto mania. Wild. Absolutely wild. So the wild west of crypto is happening in 2017.

And we are getting ready to basically launch our Stacks blockchain. We have started building that out. So very quickly, Blockstack is a full stack decentralized computing platform. We take the approach that the blockchain layer, so the stacks blockchain, should be very minimal and there should be very little logic at the blockchain layer. Most of the complexity is outside of the blockchain layer. So we have a very sophisticated storage system called Gaia that gives you the kind of reliability or performance of cloud storage in a fully decentralized way. And then there's like an auth protocol. I wouldn't go into the details, but imagine that we give developers replacement for everything that they're used to in cloud computing so that they can quickly start building applications in desatellized computing.

And so looking at the markets in 2017, we felt that the projects are kind of like taking advantage of all the hype and speculation, and they actually don't have like real technology or they're just riding the wave. So we almost went the other way around. What we did was, and we were also very concerned about regulations and compliance. Like, in addition to enduring excellence, we really believe in compliance almost as a competitive advantage. So we came up with this structure with our securities lawyers where we were setting up Delaware funds and investors in our token offering were becoming limited partners in the fund. And we did that because there was a self-imposed milestone on our project where only 20% of the money comes out for R&D so that we can launch our blockchain. And there was a timer and it was very aggressive. So it was January of this year.

It has passed. So we had to work on the core technology, take our blockchain network live. and if we do the funds would then purchase the tokens in the genesis block otherwise the funds liquidate and up to 80 of the capital goes back to the investors so on paper we raised 50 million dollars that looks great but the team was working like crazy on the core technology because we had roughly like a one year window to figure all of that out and launch our our main network which we did in Q4. And there was an independent advisory board that Matt decided that we delivered on this technology and we can unlock more capital. But this is kind of like just the

half of the story. Because this half of the story deals with the VC funds, people who are accredited investors who can participate in these offerings more easily even in a regulated environment like the US. So the first 50 million you guys raised came from what we'll call professional investors that are accredited and they do this for a living. And those funds had certain milestones that basically unlocked the access to the money. But you had the $50 million, right? We had them in a way, if we met the milestones. Absolutely. So if you do your job, you're going to get this money. Now, there was another tranche of money outside of the first 50. Explain that. Yes. So when we were looking at the structure, we tried very hard at that time

to figure out how can our core community, the developers we're building on the platform, the enthusiasts who hang out in our Slack channel all the time, how can they also participate in purchasing the Stacks tokens? We brainstormed a lot, but couldn't figure that out back in fall of 2017. What we did do was we basically gave everyone vouchers. Think of that as a waiting ticket to a restaurant that, hey, if you come back with it, we will give you the same price. non-binding right like we have to play play nice with our community to honor it and if you come

back with this we will give you the same price that all these sophisticated funds were getting and since then we've been working on that legal framework okay right and so when you sold 50 million dollars worth of these vouchers right if i'm a non-accredited investor i want to invest i can't go into the first tranche of 50 with the professional investors, I then have this second opportunity, right? So it's called Fundraise 2, basically. In Fundraise 2, I say to you, I want to give you $25,000. You told me, don't give me the money yet, but I will give you a voucher that says that you are allocated $25,000 in the round and you locked in the price at which i was going to invest right so basically um i now have a iou right to some degree where when i in

the future give you my 25 000 you'll give me um those tokens at the price that we predetermined right yes and just just some clarifications here uh for so it's non-binding like we we have to honor the vouchers which we which we plan to through through this uh filing with the sec and we were also just like i talked about you know there were self-imposed uh investor protection mechanisms like this 80 percent money that can go back to the investors we also were imposing protections for these potential retail investors so we told them that you will not be able to put in more than three thousand dollars each so it's nine thousand people and it roughly translates to a 24 million potential offering okay uh so what would happen uh if the uh the

sec fully qualifies this 50 million offering is that the voucher holders would get to go first up to 24 million and then there will be some allocation for just the retail investors not just in the u.s but anywhere anywhere anywhere in the world got it okay and so uh you you had a plan right to some degree or at least you had an idea of what you wanted to do here. And I would say that you were forward-looking enough as a team to not conduct the traditional ICO and give non-accredited investors tokens. You use this voucher model. Walk us through the last like nine, 10 months, right? Because you've obviously been talking to regulators. You've been going through private comments. Explain the process you've gone through and what that's been

like absolutely so first of all it's been quite a ride right i've been uh i'm a computer scientist by training but i had to learn a lot about securities regulations and it ended up being fun anyway uh so first of all uh you're familiar with the sec guidelines that came out last week right uh i think my team deserves the credit for this but they effectively predicted that this is what the SEC is most likely going to end up doing a year ago. Got it. So you, your team and the securities lawyers, you guys had to look out in the future and try to, you know, really guess where the puck was going. Exactly. Right. And based on what the guidance was that was last week from the SEC, you guys guessed fairly accurately. Yes. I can actually walk you through the paths that were

in front of us. Right. So rewind the clock, go back to, let's say, January of 2018. Right. We're sitting there this is what we need to do what are the paths available the paths effectively are try to comply with the securities regulations with the sec at that time almost anyone you would talk to would say not going to happen the sec is not going to let any project through and plus it makes no sense if a crypto project if a blockchain tries to comply with securities regulations you're going to end up into all sorts of like weird corner cases and will not get through plan b or path b try to change the law right try to put pressure on the congress try to lobby and try to change the the regulation so that you have a new path in a way right option three somehow try to

get a no action letter from the sec that the sec says this does not comply with the with the regulations as they stand but we have determined that we are not going to take an action against your product and path four which a lot of crypto projects would talk about is that just leave the u.s or block the u.s right we looked at these options and we were like first of all blocking the the u.s markets like certain large projects like eos or polka dot has done we feel that that's not the right way forward. U.S. is still a leader in technology. Silicon Valley is here.

It is still a very large public market, and you should be able to crack the public markets open in the U.S. It's an important thing to have a truly decentralized global network. Secondly, I think this is where it gets a little bit more tricky for projects who have already raised some funding from U.S. investors. because if you're in that boat and we were we already have u.s investors if you're now trying to block u.s and literally physically move out of the u.s what happens to those investors are you

going to return their money are they going to sue you uh would it be fair to them that they took so much risk and helped you build the initial uh protocol and the network in the r&d stages and then you're saying, oh, sorry, you are now kind of like locked out of this investment that you made, right? So those are some of the issues with that approach. No action letter in our conversations with securities lawyers was pretty much like, this is off the table, never going to happen for such a large thing where you get a no action letter from the SEC.

And well, here's another path as well. Another path is just do it and then take the SEC to court, right? which some projects are effectively doing that it's a it's for me personally that's a pretty scary option right like i i don't want to be in a situation where i'm publicly taking one of the biggest regulators not just the u.s but the world to court and the future of what we are really trying to do building this decentralized internet a decentralized computing platform relies in that on that court case right so that's that's too much risk in in in my view so the option that we effectively going for basically said and here here was the insight the key insight was that

the technology can adapt faster to regulations than regulations can adapt to the technology all right so this is really important because i i haven't heard anyone say this yet and i think that it is uh not only clever but but on the surface appears to be correct right which is as you understand the rules you can build your technology to fit those rules faster than regulators can change the rules to fit your technology precisely right why is nobody else doing that i think they can i think they were just discouraged by how daunting it felt like i've been in sec meetings right like there there's a room full it's one of the most serious things you can do and and and and those guys are like they deserve credit right like in

the sense that yes that they have been very careful and cautious but for a reason right they if you if you look at the comments that the chairman clinton have made he looks at the public ipo markets and basically says that these regulations are the foundation for protecting these markets and look at how good these markets do. So their number one job is to let people innovate, but at the same time, protect the general public. And I think they've been very careful and very, very thoughtful in their approach so far. But it just seemed like a very taunting task. I think, this is my theory, maybe it's wrong, is that people just didn't dig deep enough they didn't go deep enough into their regulations okay what would happen let's say we

are trying to comply what would happen there are there are things like that sound crazy in the beginning that is a blockchain ats no it's not or are you if you're running a minor node like how what kind of restrictions or licenses would apply to you right at the surface you would completely be like, this is insane. I'm not doing it. But if you start making progress, and our approach was that we opened up a dialogue with the SEC, and we started looking into what are the things that they care more about, or what are the different divisions even inside the SEC who seem to care a lot about certain issues. And we would compose the memos with our securities lawyers we got help from the coin center and in trying to basically educate them so we i think

we assume that they have good intentions by default yep and there is just different language on both sides so we were actively trying to learn their language while actively trying to simplify our language for them right so that was the bridging the gap part and i think it it and we We kept getting sometimes like through comments from someone in D.C. who would mention that the SEC actually wants to do this. They just want, you know, completely off the record, they've heard something somewhere that they are just looking for a high quality project to come to them. Because whatever project that they approve would end up setting a precedence for the rest of the industry. The people who think that here's not only a framework for doing a regulated token offering, but more importantly, if you look at the recent kind of like SEC comments, there was a lot of attention on when the SEC kind of said that Ethereum is not a security, right? Or at least the way Ethereum is today, it's not a security.

What they did not say is how Ethereum was launched. They made no comment about that. They made no comment about what happened, what's the process of launching in a compliant way to going through enough decentralization that you reach a stage that you're no longer a security. Whereas we are tackling those problems head on, right? That this is a way to do a compliant launch. And here is a path to decentralization where we believe that when these things happen, this would no longer be considered a security. And so as you're moving towards the public filing, it took nine months of private comments, meetings, et cetera? Yeah, nine months, two official rounds of comments.

So this would be our third filing. So for those that don't know, explain what a filing is and kind of when you say comments, what does that mean? Like walk us through the actual mechanism in which you receive feedback and then you edit, et cetera. Yep. So I hate this analogy, but think of what we're doing. It's called the Regulation A+. It has a 50 million cap on the actual capital that can be raised. And some people call it, quote unquote, mini IPO. I hate that analogy, but for a broader audience, I think that's one framework they can keep in mind. And what the public filing means is, like, imagine when, you know, some company is ready to do an IPO, they have to go through this full process of getting audited, getting ready to do quarterly financial reporting, right? Like, basically internally prepping up that once you open up your books, once you disclose, like, so much information about what you're doing, you're internally ready to do that, right? And people are going to ask a lot of questions. And in a way, that's what we did. It's effectively, imagine running a crypto project slash company that is internally operating as if we are going to go public. And we made some key hires. We were able to hire the BlackRock CFO Canada, who came in and he was also the controller for BlackRock Americas, managing on $4 trillion in assets.

And he was a really, really good resource for building up our internal muscle for getting ready for financial reporting, for getting through these auditing. Where, again, you can imagine the conversations with auditors where we are trying to tell them about our crypto holdings or how we are going to verify that we still own certain amounts and so on. So it was definitely, definitely not easy. You're kind of like innovating and hitting challenges in all of the different areas. there is one point that i kind of want to stress uh and that is like if you take a step back i know we we jumped into the news because it's a it's a big one our stance is that the stacks token is a utility token right it's clearly a utility because people can use it to register digital assets or smart contracts like today right if you want to register a username you can go the token

gets burned and you register a digital asset. And the network is live. We launched the blockchain in Q4. And then we went and we got legal opinions from different jurisdictions around the world, like the more important ones, around half a dozen, including UK, France, Germany, Singapore, Hong Kong, and so on. In all of these jurisdictions, imagine all of them, it is very clear that this is not a security. It's a utility token and that's how it will be treated in these jurisdictions. In the US, due to an abundance of caution, we are treating the token as if it's a security, and we are going ahead and complying with all securities regulations anyway. And our stance is, and this is a 500 page or so document that is now fully disclosed, and our stance even

in the public filing is that we are complying with all the securities regulations, but we also believe that these regulations may no longer apply to us in the coming years, especially as the ecosystem decentralizes more. So I'm the CEO of Blockstack PBC. That's the company that builds the core protocols and the developer tools and focuses on any of these regulatory filings. But at some point, there will be enough independent parties in this ecosystem. There are already more than 70 independent teams building applications on the platform. So these are independent parties that are now participating in the network and we are actively working towards for example instead of us hiring all the core developers ourselves we can partner with

universities or research centers and help them hire core developers and there's precedence there like bitcoin does that there are some core developers who have are affiliated with universities as those things happen and block sack pbc has less and less control on the network we might reach a stage where we might no longer need to do these uh these financial reporting and and and the token even by the sec is not considered a security and then we actually want to reach that stage for sure what would you say was um kind of your takeaways through all of the hard work that you guys did um maybe one positive and then one part that was like frustrating right i think the positive thing for me and then what i would keep reminding myself was that

like take a step back look at you know how technology was developed over the last one or two decades all the users of the of these platforms like facebook instagram whatsapp they've never had a financial stake in the success of those networks. And in some cases, they are the ones who create all the content. Like imagine Twitter, imagine Medium, right? And there's this constant struggle and a battle between a large company and its user base, right? Because the relation is not a healthy one, right?

The user's data is getting monetized in negative ways, and you have this very tense relationship with the company, and you help the company, and there was no financial upside for you, right? In the crypto model, and that's why people get really attracted to these models, the early user base, the early users of the network who need these tokens to participate actually have a clear path to financial upside as well. Right. That's interesting. But looking at the bad actors in our space, looking at like how people would go on and selling effectively vaporware, like I was extremely concerned about protecting these retail investors as well. So the positive thing about this framework is that there is less information asymmetry between the insiders of the project, meaning Blockstack, PPC or other affiliates, and the public markets. Like this disclosure literally has everything, all the information, all the financials, all the material things that any investor should take a look at. But looking at the stage of the project, it's still early days. right it is still like as if the users who are using the network or who are thinking of participating you are still within the first 1 million users of facebook or or something like

that right so you have the option of the financial upside if you really believe in the technology if you really want to use it you're enthusiastic about it but you also have protections that were only available to public markets at a very very late stage the first time someone can buy Facebook stock is when they IPO'd. So that's the positive thing. I think it's a very unique combination and it drives me. The negative thing was obviously that the process could be slow at times and you have to sit there and explain things that you might consider basic and also this sense of doubt. Imagine that if a lot of people in the industry are telling you that this is never going to happen even though no matter how confident you are in your own analysis at some point you start

having those moments of doubt like what if this was the call that we made where we just got stuck in in in you know some file cabinet in the sec and basically we were never able to come out of it we had backup plans in mind but the amount of capital invested the amount of work we have done it would would have been very unfortunate if we were not able to figure out a path forward. Absolutely. What happens next, right? So, you know, I think everyone is pretty excited and impressed with how you got here, right? In terms of the thoughtfulness, the hard work, the ability to handle the doubt, right? And kind of, you know, maneuver through this. You've made the public filing. What plays out next or what are you looking forward to? Yeah. So with the public filing,

There are many things about the project that we couldn't really talk about because we were going in the quiet period. So you would start noticing like a lot more announcements coming from us. And we are technically in a phase where obviously the Stacks token cannot be purchased at this point. It does not trade on any exchanges either. And we are waiting for final qualification from the SEC. And that's like our approval. that that's like the approval that you can now uh start selling yep right and there are usually timelines it's something like uh there has to be at least 21 days between the public flip

and your first uh payment that you accept or you you affect what ends up happening is that you end up working with the sec to figure out the right date where you want to go live yep basically the sec is going to say thumbs up on this uh let's put together a plan that you can go execute but you will be approved to go execute and and well we are confident that we will be just looking at the comments and those comments are also public so anyone can look at what the sec is concerned about and make their own judgment that are we really about to get through or are there still significant comments that that still need to be resolved right like technically it's possible that the sec comes back with some some other comment that would like what about x and then we have to respond to that

But it's a process. It's a very well-established process with a lot of history. But at least now, the one upside for our team is that we can finally talk more openly, even though, again, as you can imagine, there are so many restrictions on what I can and cannot say. But let's just say that it was worse a day ago. Look, I am fascinated by the progress you guys have made. I think that it's very obvious you guys have worked hard at this. And it all kind of culminated this morning by being able to follow this publicly. And it's fingers crossed that you're going to be able to get that approval and be kind of on your way. But I appreciate you coming on and talking about it because I think people have a lot of questions. They're excited. But the more that they can understand, hopefully, you know you are one of many that eventually gets to do this and and kind of sets this new precedent to uh to allow the industry to kind of continue pushing forward absolutely and and thanks for for

coming here on such a short notice i know i couldn't like i couldn't even tell you what what this is and and you were very gracious for those at home uh muni basically sent me a very cryptic message and said uh you have to cop this is essentially what he said and uh on it on his Word alone came and I'm glad that I did. So it's awesome that you're able to do this. And where can people find out more about Blockstack or some of the work? So for Blockstack, the technology, the website is blockstack.org. And specifically for anything related to this upcoming offering,

we created a separate web property called stackstoken.com. And any offering material would get posted there. and on twitter uh it's at block stack and for me it's my first name at muneeb m-u-n-e-e-b uh thanks thanks thanks so much for coming and i'm a big fan of your podcast i'm glad we have we got to do another one nobody knows but you are the first second time appearance yeah interesting absolutely i'm honored man so uh no man look congratulations and we'll have to do this again once you get the final approval. Awesome. Thank you. Hey, everyone. Pop here. If you like this episode of Off The Chain and want to help us take crypto to the top of the Apple, Spotify,

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