How ICGo Saved Grandma From Getting Fleeced and Ushered in the Era of Secure Venture Investing for…
Another Report from the near future, by ConsenSys Web3Studio
This story is fiction…for now.
Emma Whitnel was furious and ashamed. Her grandmother lost everything to a shady blockchain investment scheme (an ICO that had a fancy whitepaper with plenty of vague, inspiring language but a team with zero intention of doing anything but taking peoples’ money). And it happened while Emma was working for a major crypto investment fund.
Emma struggled with guilt after listening to Grandma say, “But honey, you were doing so well with the blockchain, and I just wanted to be part of that. Your grandfather spent his whole life being too conservative.”
Grandma was right. She should be allowed to be part of things. Why did the largest upside potential of innovative new ventures have to fall solely to rich “accredited investors?”
Emma had the answer to that. It was because accredited investors could afford to research early-stage deals, and they could afford to lose 100% of their investment. But even so, Grandma had room in her budget to risk something, just not everything.
Crowdfunding’s Promise and Problems
Emma remembered that in May of 2016, the SEC had finally provided the rules for the 2012 JOBS Act and Title III Crowdfunding. On the surface, Title III seemed to do exactly what Emma was thinking. It let startups sell shares to non-accredited investors, any US citizen worth less than one million dollars or making less than two-or-three hundred thousand a year.
But in 2018, Title III wasn’t being used very much. Maybe one-hundred million raised, which could mean as few as 100 startups all-up. The reason was in the fine print of the regulation:
- Startups couldn’t raise more than $1 million dollars from crowdfunding, and in order to offer shares, a startup had to engage costly legal services and auditing firms to validate their books — which would eat up a lot of that paltry $1 million;
- There were strict rules about how much someone could invest in crowdfunding opportunities in a given year, and there was no easy way to know whether someone had already exceeded their limit when they invested in something new;
- Crowdfunding could only be managed through broker-dealers or accredited funding portals, a new type of SEC-regulated financial intermediary. And these took on the risk of non-compliance if Grandma went over her annual limit or something went wrong…so they took hefty fees of 3–6%, further increasing the cost and friction of raising funds this way;
- While it was possible to have more than 500 investors in a crowdfunding sale, it was tricky and costly to do so, which meant that to raise a million dollars, each investor had to be in for an average of $2,000. That was pretty close to the maximum amount a person with a net worth of $107,000 could invest in an entire year. And yet, a couple-thousand wasn’t exactly penny cash for Grandma to invest in a single risky startup.
Wouldn’t it be awesome, Emma thought, if equity crowdfunding were so friction-less and safe that Grandma could invest in startups as easily and often as buying a lottery ticket?
So Emma created ICGo
Using her experience and connections in blockchain finance and her background in securities law — with a little help from her friends at OpenLaw — Emma created a special kind of funding portal. ICGo now offers Title III crowdfunding and brings startups and investors together, like any other accredited funding portal. But it uses Web3 technology and practices to vastly reduce the frictions and costs.
Here’s how it works
Startups use the ICGo site to list their offering, but included in the portal is an automated system that takes the effort of financial and legal compliance off the back of the resource-strapped startup. At first, ICGo just ate the cost of engaging accounting and legal services, but now it has turned that into a low-friction marketplace where firms and qualified individuals bid to review deals and earn tokens for validating each others’ work. ICGo also uses AI technology to further ensure that irregularities are spotted quickly. Signals from the AI are sent to the ICGo validation marketplace for verification, and that is fed back into the AI as training data. ICGo gets smarter every day, and the SEC has begun to notice. Recently they issued a positive statement about easing Title III restrictions based on ICGo’s data, which shows that investor risk is much reduced from initial estimates.
On the investor side — Grandma uses the ICGo app on her mobile phone to review the market of validated deals and make one-click investments. She can purchase as little as $10 worth of a given company’s equity.
At first Grandma could only invest about 1/2 of the total amount allowable by Title III rules for her stated net worth. But the level increased as she connected ICGo to additional sources of financial and identity validation — her bank, for starters, but things got really easy when Grandma got a self-sovereign identity vault in 2022 and connected it to the IRS. As Emma puts it:
ICGo is like having TSA pre-check for venture investing.
ICGo doesn’t just rely on this, though. “Bad Grandma” could be sneaky and find ways of overstating her income, over-buying by using separate funding portals, or she could just make mistakes in her taxes. Those mistakes could cost ICGo dearly if an audit found they were selling Grandma more securities than Title III allowed.
ICGo Leads Standards
Emma realized as early as 2019 that to make ICGo work financially and safely, she needed to work with the SEC. Together with a team of industry and regulatory experts, she helped establish two key standards in 2021:
- The creation of a blockchain-based investor registry, sanctioned by the SEC. It tracks the issuance of securities to all non-accredited investors engaging in crowdfunding. Funding portals today must integrate with the registry in order to operate legally. This reduces the chance of Grandma using multiple, separate portals to invest more than her annual maximum. (The blockchain registry only returns a true/false flag to a portal when Grandma tries to invest. If false, the registry is essentially saying she has maxed-out and can’t buy any more Title III securities. This acts as a black box, providing accountability but preventing information about the internal activities of the different Portals leaking to the public or to each other.)
- ERC 2021 is now the official crypto-token standard on Ethereum for Title III securities. The magic of 2021 is that a token complying with this ERC is incapable of completing a sale unless all of the digitally-enforceable SEC rules for Title III are met. For example, an ERC 2021 transaction will fail automatically unless the Title III registry returns “True,” indicating that Grandma has not exceeded her maximum investment limit — no matter how many portals she may have used. (If she uses a portal that isn’t integrated with the registry, she — and that portal — are breaking the law.)
Turning Standards Leadership into Great Tools
Ensuring that a Title III sale is legal is just the tip of the iceberg. Ongoing reporting and monitoring requirements for both the ventures, the investors and the portals mean that ICGo’s primary business is providing better and better tools to ensure that everyone is in compliance while exerting the lowest possible effort.
“They have streamlined a process and made it work in a really compelling way,” said Aaron Wright, CEO of OpenLaw. ICGo uses OpenLaw to digitally handle the legal documents and smart contracts involved in listing, buying, selling and reporting on the platform.
That focus is starting to pay off for everyone. The SEC is likely to adopt new rules in 2023 that significantly increase the amount ventures can raise while reducing — and in some cases eliminating altogether — the need to use expensive lawyers and accounting firms. And by 2025, there is a chance that ICGo’s platform will be allowed to include both non-US investments and non-US investors.
Just as Uber’s driver ratings reduced the need for expensive taxi-driver-style licensing while increasing overall driver quality control, ICGo’s behind-the-scenes analytics are proving to be far more powerful at reducing fraud and non-compliance than the most expensive accounting audit.
Making venture investing easy, global and inexpensive enough to allow one-click $10 trades was anything but easy. It took patience and a willingness to work with government on creative approaches to old problems. This was Emma’s great contribution. Grandma would be proud.
But Wait — There’s a Twist
What I didn’t tell you about Grandma at the beginning of this story is that she was, in fact, an accredited investor when she got fleeced by the unscrupulous token-scheme. She had a net-worth over one million dollars. So it isn’t surprising that once ICGo got traction, everyone started using it, especially angels trying to keep track of their investments. Even ventures that don’t opt for Title III funding use the platform to manage compliance and cap tables.
Even though she could invest far more, Grandma uses ICGo’s “self-control” feature to prevent over-investing by letting her set a limit. And she only invests in companies on the ICGo marketplace in order to avoid shady deals.
Today, Emma and Grandma are doing well, thank you very much. 🙂