The Surprising Reason Why Blockstack May File for an IPO

Blockchain startup Blockstack is currently evaluating how to issue new tokens for general miners. 

“The issuance of new tokens is the main issue here,” Blockstack CEO Muneeb Ali told CoinDesk. “Because within the U.S. we’re treating STX [tokens] as securities, if new tokens are being minted by the protocol and they’re being released in the ecosystem, we need a legal framework for them.”

That framework could include an initial public offering (IPO), he said.

In September, Blockstack became the first blockchain startup in the U.S. to raise money through a token offering approved by the Securities and Exchange Commission (SEC). Planning to activate the process of “mining” on the Blockstack blockchain early next year, Ali explained there are a few different ways new tokens could be issued to miners in a similarly legally-compliant and regulated way. 

First, the company could issue stacks (STX) tokens to miners under a Regulation S offering. Under Regulation S, Blockstack would be free to mint new STX on the blockchain and issue STX to active miners on the platform without needing to receive approval from the SEC.

Granted, this also means mining on Blockstack would be restricted to non-U.S. persons and most likely locked for a period of a year and a day. 

“That’s one way of starting mining [on Blockstack], which won’t be ideal in the sense that we don’t want to exclude U.S. people from it,” Ali said. 

According to the blockchain attorney that represented Blockstack for its 2019 token offering, Robert H. Rosenblum of law firm Wilson Sonsini Goodrich & Rosati, there is the possibility of offering newly issued tokens to miners in the U.S. under an alternative category called Regulation D. 

However, all miners under Regulation D must be accredited investors. What’s more, these investors would not be able to receive STX through mining for at least a year and a day. 

To avoid such complications and open up miner participation to all interested persons in the U.S., Blockstack could host a second Regulation A token offering. While this would open up miner participation to both accredited and non-accredited investors in the U.S., Blockstack would be restricted to an issuance cap.

“The big problem with a Reg A offering is that you can’t sell more than $50 million worth of assets in any 12-month period,” said Rosenblum.  

Once the process of mining launches on the Blockstack blockchain next year, the issuance of new STX tokens could exceed the $50 million limit, which is why Ali told CoinDesk he is considering a fourth option. 

That is, taking the company public. 

The fourth alternative is to file a Form S-1 with the SEC. 

This would be equivalent to conducting an IPO for the company (as several other cryptocurrency startups have attempted in the last two months.)

Blockstack stated as much in its offering circular filed to the SEC in July:

While registering STX as publicly-traded shares in the U.S. does open up participation for general mining to U.S. persons, Ali said going through with an IPO requires “a lot more work” than the other options.

For starters, even with the SEC’s approval to conduct an IPO, Blockstack would likely need to receive additional state-by-state approval to issue newly mined STX tokens. 

While this is not a requirement of traditional securities, cryptocurrencies according to Rosenblum fall into “a strange category” of securities law requiring the approval of state securities regulators as well as federal. 

“It will be expensive but no one knows for sure how much it’s going to cost to deal with various states,” Rosenblum said. “No one knows for sure if every state is even going to give their approval. It’s possible that if you did a registered offering for Form S-1, you would be approved to sell in some but not every state.”

Even so, Rosenblum views the approval of an S-1 for a blockchain startup as simply a matter of time given the continuous growth of the industry. Whether Blockstack will be the first U.S.-based blockchain startup to go public is an unanswered question. (Note: The INX crypto exchange filed to go public in August but its IPO has yet to be declared effective. The U.S. IPO for Chinese bitcoin miner maker Canaan was deemed effective by the SEC on Wednesday.)

“I would say we are far from deciding on any option right now,” said Ali. 

Outside of Regulations S, D, A and taking the company public, blockchain attorney Matthew E. Kohen said there is a possibility in the long-term of U.S. regulators deeming Blockstack’s STX token as no longer a security. 

“At which point, a lot of these ongoing requirements Blockstack has to deal with disappear,” said Kohen. 

Blockstack states as much in its initial offering circular by disclosing that the company itself could determine that STX “are no longer securities for purposes of federal securities laws.” 

“We anticipate [this] to occur sometime in 2020 or the first quarter of 2021, within a year following the introduction of mining to the Blockstack network,” the offering circular states.

How Blockstack would go about making this determination and which U.S. regulators would bless such a decision is presently unclear, Kohen said.

At the same time, issuance of tokens through mining is a murky subject matter altogether, according to Rosenblum, who sees “a massive gulf” between what the SEC has said and what they’ve actually done in terms of enforcement.

“It’s difficult to understand and reconcile that the SEC views most or virtually all tokens – other than bitcoin, ether, possibly EOS and a few others – as securities with their absolute reluctance and failure to take any action on all sorts of cryptocurrency issuers that do pay miners [in the U.S.] currently but have not registered those tokens,” Rosenblum said. “Where is the SEC in all of this? What are they doing?”

Still, in light of what the SEC has previously done and stated especially on cryptocurrencies such as bitcoin and ethereum, the possibility remains for STX to one day be categorized as a commodity asset rather than a security. 

Even so, Ali explained that Blockstack will only activate mining under a clear legal framework in order to avoid regulatory uncertainty.

“What we solved for with the Reg A was how to do an offering where the general public can participate. Turning mining on has related issues but it’s not the same problem. It’s a different problem,” Ali said. “The end framework [for mining] might end up looking different.”

Update (Nov. 21, 16:02 UTC): The U.S. IPO for Chinese bitcoin miner maker Canaan opened Wednesday as this story was being prepared for publication. The headline has been updated.

Blockstack CEO Muneeb Ali image via CoinDesk archives