Proof of Use? Civil Believes This ICO Model Lets It Sell Anyone Tokens Legally
Civil, the blockchain startup looking to disrupt media, will be offering its crypto token to investors of all kinds – both accredited and unaccredited – next week.
As a spoke of ConsenSys, the ethereum startup incubator and business all its own, that decision runs counter to most of the common wisdom about token sales these days.
The much maligned initial coin offering (ICO) has come under intense fire recently for everything from sinking ethereum’s price to scuttling whatever hard won credibility the industry managed to gain before mania built up around tokens.
The original idea, funding a new decentralized platform by pre-selling crypto tokens to anyone who wanted to buy them, is being looked at more skeptically in many circles, especially as the U.S. Securities and Exchange Commission (SEC) and other regulators debate what rules (and make some rulings) need to be put in place to protect investors.
Because of that, this year, founders, especially U.S.-based founders, have stuck to only raising money from people defined by securities regulators as accredited investors, that is, people wealthy enough to take on some serious risk.
That’s why Civil’s choice to open their token sale to anyone and everyone could seem like a good way to get them in trouble.
“There’s a lot of things that keep me up at night but when you work in a space as uncertain as this, there’s a lot of uncertainty that goes beyond just regulatory uncertainty,” Matthew Iles, the CEO of Civil, told CoinDesk.
This statement could have something to do with the fact Civil thinks it’s got the right framework – the consumer token framework created by the ConsenSys-initiated Brooklyn Project – for running open token sales.
The framework was announced on September 7 and has already been used by the hotly-anticipated decentralized world map project, FOAM.
It’s very explicitly not a how-to so much as recommendations and discussion points. Based on its guidelines, Civil is, for example, demanding participation in the network before token holders can sell their coins.
Speaking to this idea, Iles told CoinDesk:
“We’re going to be providing ways, easy ways, for people in the first days of the network launch to essentially learn how to vote with their token, use our dapp and become trained. And in that process of training, they will prove use and unlock those tokens.”
Use not speculation
The first way Civil is gearing its token sale towards an actual use beyond speculation is by explaining within the registration that the sale is for “reach” users.
Participants will have to complete a quiz that demonstrates their knowledge of how crypto tokens and blockchain works as part of the onboarding process through Token Foundry.
Plus, buyers won’t be able to sell their tokens from a wallet until that wallet has shown some level of use, which Civil calls “proof-of-use.” In this way, the holder then demonstrates some level of understanding of the protocol. Small-scale purchasers will have to use 25 percent of their tokens on the platform and large purchasers will have to use 50 percent in order to unlock their tokens to sell or giveaway.
And it shouldn’t be tough for token holders to participate since the Civil protocol will be ready soon after the sale. This is different from many token entrepreneurs who raise money on token sales without a protocol built, seeing the money as a way to pay for the development.
But for Civil, according to Iles, the real focus is on creating a new business model for journalism.
And that means not just inviting everyone who cares about journalism to participate in the project but also having a platform for them to participate on from day one.
“I think what drives us most is I’m trying to create the right kind of community to power this thing and for us that meant necessarily finding a way for us to allow average people to participate.”
After raising $5 million in venture funding from ConsenSys Ventures last year, the token sale aims to hit a hard cap of $24 million, selling 34 million of its 100 million tokens to the public. The sale will run from September 18 to October 2 (or till the hard cap is reached), with the Civil protocol going live shortly after.
The soft cap – the amount the company needs to hit to even go through with the ICO – is $8 million.
The new framework will debut under harsh market conditions.
With the crypto markets down, and more specifically ETH (the native currency of ethereum, where the Civil token is being housed) down dramatically, it’s unclear whether buyers are still eager to snatch up crypto tokens.
Although, because of the token’s immediate utility, Civil might still prove attractive.
Once users have the tokens, there are a number of things they can do with them.
For one, they could start a newsroom. Users need to stake 1,000 tokens to start one. Newsrooms that are created on the protocol all have to adhere to Civil’s constitution for ethical journalism, and must be listed on its token-curated registry.
Already, a bunch of newsrooms have already been announced, with everything from local journalism to cultural reporting.
In perhaps the biggest news for the startup so far, it is partnering with the AP to license content.
After a newsroom is started, token holders can challenge any newsroom’s adherence to the constitution at any time, but they’ll have to stake a lot of tokens, which they might not get back should they be proven wrong, to do so. Other token holders will be able to vote their tokens in these challenges.
And soon, users should be able to tip writers or pay for other services from newsrooms in civil tokens.
Underneath the hood, the Civil protocol will also help with archiving and establishing the origin of any given piece of content, since it’ll be posted to the ethereum blockchain. This mechanism is touted as being a solution for the messy licensing environment of the internet.
That said, any experiment needs a pretty large sample size to understand whether the hypothesis works, which is why Civil needs to sell to the wider public. As of this writing, TokenFoundry shows 1,510 interested parties listed on the Civil sale.
Useful and compliant
While the Civil white paper was released last summer, Iles told CoinDesk, the company waited to raise money until it had something – the protocol – to show for it.
According to Iles, the last year of building felt like a “dead sprint.”
At the same time, another ConsenSys-affiliated project, the Brooklyn Project, was studying securities law and trying to find an argument, an approach that it believed could justify a sale of crypto tokens to regular people.
Pat Berarducci of Consensys Legal, who was one of the attorneys that helped craft the guidelines, told CoinDesk:
“Traditionally security laws typically don’t apply to sales of a kind of consumptive goods for consumptive purposes.”
Yet, it’s one thing to use precedence to predict that, but it’s another thing to convince regulators that the logic applies.
It’s unclear whether regulators will agree with the approach. And this means that Civil (and others that use the framework) is taking quite the risk, since entrepreneurs will not know if regulators are going to let the idea fly until they sell some tokens and either wait to see if regulators do anything or if courts side with entrepreneurs when regulators pounce.
Still, Iles said, “Hopefully through approaches like ours and others we can start to demonstrate that not only is this stuff compliant, but, more importantly, useful and valuable to people.”
And if nothing else, the oft repeated lawyerly line that everything comes down to “facts and circumstances” will have something to point back to in the Brooklyn Project framework.
Berarducci said, “It’s been about an eight-month process of trying to develop a framework that allows, I think projects – as well as lawyers and perhaps regulators and policymakers – to kind of think through the important issues and important topics when it comes to a token project.”
Telling CoinDesk he sees a path to compliance even if some of the loudest voices in the industry don’t, Berarducci concluded:
“There’s still a lot to learn. There’s still lots of experiments left.”
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