This piece of content was originally posted on my Medium blog.

The Jump-start Our Business Startups (JOBS) Act was finalized by the US Securities & Exchange Commission (SEC) on May 16th, 2016 after nearly 4-years of deliberation.This act, in short, allowed the 99% to participate in investment opportunities previously only available to the wealthy. Thus, the true retail investor was born, gaining access to a new, largely undiscovered world of personal finance and investing. Unfortunately, stagnation among equity crowdfunding offerings in the U.S. has left a sour taste in the mouths of capital market participants.

In this piece, we'll:

Dive into some contextual data behind JOBS Act offerings; explore the core traditional Initial Public Offering (IPO) process; and then last, but surely not least - we'll investigate the core concept of the NEO Smart Economy (Blockchain tech) and just how this project might improve the growth efforts of companies across the globe.

Diving Into The JOBS Act

Startups were enabled to raise capital from retail investors under two regulations from the JOBS Act:

Regulation Crowdfunding (Reg CF) - allows an issuer to raise up to $1,070,000 within a 12-month period. Very low cost of compliance, but investor shares are held up for a minimum of 12-months before they are liquid. Regulation A+ (Reg A+) - resurrected a pretty much dead Reg A, increasing the amount of capital raised and created two-tiers to allow companies to go public under: up to $20m (Tier 1) and up to $50m (Tier 2) within a 12-month period. Each tier having their own differences, but filing costs as a public company tend to exceed $1 million (one-time costs) to convert a non-public to a public company and then recurring average costs of $1.5m annually, I believe. Data from PwC here.

I am having a hard time finding legitimate, aggregated data on Regulation A+, but the largest equity crowdfunding Funding Portal, Wefunder, has been keeping track of the data from all companies raising under Reg. CF, stats are below (Data source):

The costs of compliance mentioned above apply to companies raising under Regulation A+, not Reg CF. Companies using a Reg A+ offering to go public now consider it an 'iPO,' the offspring of the traditional IPO process. Reg. CF relies more heavily on 'Funding Portals' to act as the intermediary between retail investors and startups while Reg A+ relies on Broker-Dealers as intermediaries. We'll dive into the basic outline of the traditional IPO process in a section below, not to be confused with the Reg A+ 'iPO' mention above.

Keep in mind, the information (regulations) in this piece of content is specific to the United States economy and not the global economy. The U.S. has over 29.6 million small businesses (Source: SBA) and more than 327.2 million citizens (Source: Consensus Bureau). The U.S. has also been known as the leading economic power ever since the beginning of the Industrial Revolution, spurring an abundance of innovation and the creation of many Blue Oceans (strategy leveraging innovation) among existing, competing businesses of the time.

TL;DR so far: In 2016, the U.S. passed regulations allowing retail investors to participate in startup investing under a new line of regulations that allow companies to raise funds in a similar fashion to projects on Kickstarter or Indiegogo; but backers receive equity or debt notes instead of a product, in hopes that the shares will increase in value as the company grows. In the past nearly 2-years under Reg CF, only 182 companies have raised $50k or more. Compare this to over $3.7 billion raised across the globe in an unregulated Initial Coin Offering (ICO) environment in 2017 alone. I've seen some data suggesting Regulation A+ has garnered over $500m in the same, nearly 2-year period; but have already mentioned the average annual cost of compliance reported from public companies above.

Logically speaking, it sounds like a company needs to be bringing in at least $1 million/year in profits in order to afford the annual costs of compliance to continue operating as a public company - or raise enough money to operate at a significant loss for sometime.

A Look Into The Initial Public Offering (IPO) Process

The image above is taken from Learning Markets, a website dedicated to helping investors learn about and navigate investing in various markets. Notice how right in the beginning it mentions:

"This is usually done through an underwriting process that looks and acts a bit like a pyramid."

Interesting choice of words considering how much that word is thrown around when talking about ICO's. In the IPO process, a company (issuer) sells shares to an investment bank (lead investor on the IPO) for a set price after being approved by the SEC. That investment bank, a lot of the times, then rallies other investment banks, bringing them in on the deal and ultimately forming an 'Underwriting Syndicate.'

The Underwriting Syndicate then shares the initial financial risk for re-selling the issuers shares to the public instead of the Lead Investment Bank taking on 100% of the risk for selling out the IPO. This is done by creation what's called a 'Selling Group,' this is a combination of:

The original, Lead Investment Bank, The other Investment Banks that join the Underwriting Syndicate, and a number of family offices and brokerage firms.

Each member of the 'Selling Group' is responsible for selling a set amount of the IPO shares (risk-sharing) and is compensated for their service and taking on the extra risk for selling out the IPO shares. Normally done through a price-per-share discount, profits come from the discount spread a selling group member receives when selling the IPO shares. AKA selling group member gets a discount on the share price from the underwriting syndicate who also receives profits through this discounted price-per-share method. Are you starting to see why Learning Markets used the word 'pyramid' above?

An example of an investment bank that conducts the IPO process is Goldman, Sachs & Co. - let's dive into an example below:

A company (issuer) seeking to go public through an IPO offering would approach Goldman Sachs for advice conducting an IPO. Let's assume they're accepted, by Goldman and approved by the SEC to begin their raise. Goldman would start reaching out to other investment banks, brokerages and family offices with the investment opportunity and the discount rate they would receive for selling shares. Once the offering is SEC approved, Goldman would begin initiating 'Road Shows,' an in-person event/marketing campaign usually aimed at institutional, accredited and international investors. In other words - not your average consumer. Alongside the 'road show' events would be a heavy advertising campaign to increase awareness of the future opportunity.

The compensation for underwriting services is typically in the form of price-per-share discounts. As the sold shares trickle down the pyramid, so does the decrease in amount earned by each level. Very similar to a pyramid scheme, but involves many large, institutional participants of our global, macro-economy. One can imagine the type of potential collusion involved in the capital markets today given the context above.

The way I see it, the JOBS Act created sort of a conflict between publicly accessible capital markets and the private capital markets which Silicon Valley and Investment Banks have had cornered off nicely for sometime now. What new technology and ICO's essentially did was lowered the amount of barriers involved with participating in a 'public offering.'

So much so that I believe the ability to decentralize intermediaries through blockchain technology will overtake Wall Street and investment banks in a way that forces equality among capital market participants through data transparency and secure functionality, despite Silicon Valley having such solid footing.

This will be done through different, blockchain-specific Dapps (Decentralized applications) that will make learning about investment opportunities easier while also increasing the security of participating in public offerings through information sharing and more efficient systems. Here's where things really start to get interesting! More in the next section.

Educational side note:

I'm working to learn everyday and realize that many readers may not be too familiar with the traditional IPO process, the capital markets and their importance to the macro-economy. I keep textbooks from college to refer back to because I don't know everything, specially the fine details. Here's a link to the slideshow for the Securities Markets and Transactions chapter from the textbook, Fundamentals of Investing (12th ed.) by Gitman, Joehnk and Smart, published by Pearson for additional context.

The Aspirations & Rise of The NEO Smart Economy, Blockchain Network

With innovation comes more efficient systems. The aforementioned IPO process and system is really not set up in a way that allows the average person to fairly participate. The capital markets are currently not inclusive and good deals continue to increasingly go to the private capital markets where they are incubated before arriving to the traditional IPO process. Insert NEO Smart Economy, a new system to facilitate capital raises:

Da Honfei, NEO’s Founder, includes a story in the video where he mentions Vitalik Buterin wanting to build a blockchain for smart contracts whereas he was more interested in building a blockchain for crowdfunding. The story goes deeper into a situation on BitcoinTalk.org where an individual on the forum claimed to have the ability to build the first Asic Miner in 2012 — this was the birth of the NEO Smart Economy.

Hongfei goes on to tell the 2012 story of the BitcoinTalk.org individual from China who claimed to have the ability to build the world’s first Asic miner — he succeeded in building the world’s first Asic miner by raising 16,000 BTC (approx. $178,176,000 today) in a crowdsale on the forums. The price of the Asic Miner shares went from 0.01 BTC per share to 5 BTC each at it’s high. During this time, Bitcoin grew in value 10–20x, Hongfei explains.

People who invested in the project made a lot of money — it seemed too good to be true…it was. Later that year, the same individual who built the world’s first Asic Miner disappeared, along with the value of the shares. All the holders of these Asic Miner shares got screwed. Some people made money, some people lost money.

Hongfei thought, “How do we build a blockchain that can be used to do crowdfunding in a safe way for that not to happen again? At the time, the project was called AntShares.” I believe this is when Da Hongfei truly ingested the Red Pill...[The Matrix reference]

NEO Smart Economy Is Born

First off, it's important to note that NEO is it's own blockchain like Bitcoin, Ethereum, or Litecoin. The difference is in the type, or flavor of blockchain that NEO is. NEO is the first blockchain (to my knowledge) to bring about a dual-token system. When a transaction is sent over the BTC/ETH/LTC chains, they charge their native coin as 'gas' for sending the transaction. Below is a solid explanation of how the two tokens interact with the NEO Smart Economy - don't mind the ANS-ANC abbreviations as this was before the re-brand ended and they are synonymous to NEO-GAS:

The dual-token system is what makes NEO different from really any other existing blockchain network. Holding 1 NEO actually generates GAS at a rate of 0.00000008 NEO/GAS held per block. Block time is 15-20 seconds apart, about 2,000,000 blocks pass a year. Holding 1 NEO earns the holder approx. 0.16 GAS/year right now, the schedule looking forward:

Next year will be 0.14 GAS/NEO per year,

year after will be 0.12 GAS/NEO per year,

then 0.10, 0.08, 0.06, 0.04, 0.02 GAS/NEO per year until 100m GAS is produced, ending in approximately 2038.

After 2-years of developing AntShares, the team sat down to discuss a new name and brand that further solidified the intent of the project— NEO Smart Economy. Hongfei mentions having only slept 2-hours before this Silicon Valley DevCon 2018 speech because he was coming up with the definition of a Smart Economy, pictured above straight from San Francisco DevCon Presentation.

Hongfei goes on explaining his new definition:

“A smart economy is a digitized economy. Everything should and will be digitized. The currency, the money. The assets— it can be physical assets. It can be intangible assets. And your identity. Identity is not limited to person. It can be an organization's identity, it can be an item’s identity, an IOT’s identity.

So in a Smart Economy, everything is digitized. And a smart economy is also a programmable economy. So digitized is not enough.

If digitized economy is smart economy, then AliPay, WeChat will be the biggest winner. They have already digitized everything, but we need programmable economy.

We need transparency, we need subjective smart contracts to control, to manage those digitized assets, currencies, identities. And even more, Smart Economy is about trustless economy. With blockchain technology, people around the world do not need to know each other or trust each other yet. They don’t need any middlemen or a bank to do business in a very safe way.

So my definition of a Smart Economy is it is digitized, it is programmable, it is trustless.”

The NEO Smart Economy will be a digital, global economy where one can participate from the comfort of their desktop computer. One that is inclusive and conducive to the participation of your average retail investor. By the way, my thoughts are that the consumer is now the retail investor - they are synonymous in 2018.

An example to help you understand decentralized banking vs. what we know today:

Today, when you deposit your cash at the bank, it goes into their system and credits your account the amount you deposited. The US Dollar bills aren't actually in your account. We don't technically have control over the funds once they enter the bank's system without relying on an extension of the bank, accessing funds through ATM's, bank branches and paying with payment apps to actually access your funds. Right? At the same time, if even half the people in the US go to their bank to withdraw all of their USD, the banks would collapse because there aren't as many USD in circulation. Link to help you understand the double spending problem.

Now, let's take a look at one variation of our 'bank account' within the NEO Smart Economy. Below is an image I took of NEO's City of Zion desktop wallet:

The best way to bring capital into the NEO Smart Economy is through a multi-step approach where we must purchase BTC or another cryptocurrency through our bank account somewhere like Coinbase, sending it to an exchange that sells NEO, and then picking NEO up in exchange for the crypto purchased with fiat.We still rely heavily on intermediaries at this point, but to me we are literally using intermediaries to dis-intermediate them - the beginning of 'decentralizing' the traditional economy. The act of dis-intermediating the traditional economy: putting fiat from a bank or financial institution into a decentralized blockchain network.

The cool part about holding NEO in your NEO wallet is that you always maintain control of your tokens in your wallet. If for whatever reason this specific NEO wallet client goes down, there are multiple others that your same wallet address/private key is compatible with. We end up relying on a core, growing group of passionate developers as opposed to the corporation behind various banks like Wells Fargo, J.P. Morgan, Bank of America, or any other large organization run with the same for-profit business model as banks.

Even if the developers never actually built a wallet client after having had one, our NEO coins and tokens would still be safe from someone stealing them because we possess the private key to that public address. If you need help understanding the security behind blockchains, this article from BlockGeeks will quickly catch you up.

The Kicker: What happens when we click the 'Participate in Token Sale' button?

Some of you may not know this, but when an Initial Coin Offering (ICO) is successful in making a lot of noise - the likelihood that a duplicated phishing site pops up increases exponentially. Why? Because it's easy to copy the code from a website and launch the same domain name, except with a .org instead of a .com, for instance.

I've personally seen many, many ICO websites get duplicated and have even had a client's crowdsale website duplicated multiple times over the span of a raise. The phishing sites have even implemented Google Ad campaigns to advertise the phishing site - the NEO City of Zion blockchain desktop wallet helps prevents falling for phishing scams, but won't entirely solve that issue.

Conducting ICO's through this method (NEO desktop wallet) allows for verification to be done through the desktop wallet as opposed to the account creation method on an ICO's website. The difference? Take a look below at the basic image displaying what I explained about phishing sites popping up to steal funds in the form of ICO tokens and/or ICO funds raised:

Currently and ever since ICO's became a thing, there have been no mature/trusted crowdfunding platforms for projects to raise funds on like Kickstarter, Indiegogo or GoFundMe. Remember the ASIC Miner story above? Instead, marketing strategy for ICO's has actually been quite opposite of traditional donation/reward/equity crowdfunding raises: drive traffic directly to your website where backers will sign-up and contribute to the project. Or less complex, simply posting the Bitcoin or Ethereum address that the raise is accepting contributions at, like in the case of the ASIC Miner story. Can you see how this can create information silos where potential backers can get scammed?

ICO's have also conducted their AML/KYC verification in the back-end of their website - this also leaves their users vulnerable to signing-in to a phishing site, giving away the password to their real ICO account or worse, their identity. Despite the potential issues with phishing sites and scammers, this process, in all, has been more beneficial for projects, companies and organizations raising capital because they're retaining website traffic (hopefully) and, with the addition of NEO's ICO infrastructure, won't need to worry as much about their overall potential capital raised getting diminished by scammers.

NEO's THEKEY Project For ID Verification

Now, the NEO wallet verification screen images I included above refer to whether or not the ICO allows for automatic refunds or not if the ICO is over-subscribed, not necessarily ID verification, currently. While the IDV feature is not currently present, I believe this screen is where the NEO blockchain may allow ICO's to conduct KYC/AML verification - this would likely be through the integration of an identity-based project like Ethereum's Civic. NEO blockchain's version of Civic is called THEKEY.

No uploading documents to various 3rd party websites every time an ICO opportunity arises. If THEKEY were to plug-in to the NEO desktop wallet, the user would only have to upload ID docs one time and they're done. All while having 100% control over their coins/tokens. I have a feeling NEO will soon outline a formal ICO process or best practices for both the project creator and investor to further ensure the safety of the NEO community when participating in these raises.

Maybe I'm being hopeful, maybe this section gets Da Hongfei to think about details he may not have leading to the creation of a best practices process, I don't know. Though, I would like to see a step in a best practices process that involves verifying ICO projects on the official NEO.org website or something along those lines so we can verify the project is real. Maybe it's a community-sourced due diligence platform created by the NEO community for the community, I'm not sure at this point. Would love to connect with NEO's leadership team to learn more about plans moving forward. Specially when it comes to governmental cooperation - the United States Securities and Exchange Commission could definitely use a public blockchain conducive to regulatory compliance like the NEO Smart Economy to reign in the regulated ICO.

After writing this piece, I am eager to learn how Da Hongfei and the team plan on making sure a 2012 ASIC Miner story never happens again with NEO Smart Economy. Feel free to comment below with questions or insights you might have or give this article a share with your network to help others discover these new technologies. Keep an eye out for my next article on the projects currently being built on the NEO blockchain and how they will help NEO grow to mainstream adoption through 2018.

Feel free to follow along on Medium or connect with me on LinkedIn where you can also catch new stories.

Edit (2/23/2018): Correction on my speculation on using THEKEY project to verify ICO's. In fact, Bridge Protocol is a Nep-5 token project on the NEO blockchain that is aiming to create a 3-tier identity system that will allow Westerners to finally participate in KYC/AML ICO's. Great summary article on Bridge from NEO Guide which I will refer to in the next article.

Disclaimer: this piece of content is not intended to be financial advice and I do not have the required certifications to give financial advice. I do hold a couple NEO coins and highly recommend you do your own research before putting a dime into the market. Cryptocurrencies are highly volatile/risky and can cause you to lose a lot of, if not all of your money, whether or not you 'know what you're doing' or have experience investing. The market is plagued with scams of all sorts so tread carefully.

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