Introducing ZEN, the first SEC-Compliant ICO How one blockchain startup is using SEC compliance to its advantage.
When ZEN co-founder, CEO, and former Zynga lead systems engineer Frank Erik Banks approached Silicon Valley VCs in late 2016 with a new teen-targeted social video app, he had a promising minimum viable product and over 8,000 highly-engaged users, but no one would bite.
"VCs thought that the social media space was done, so they weren't interested," says co-founder Matthew Knight. "Finding funding was hard."
Also working against them was an ingrained Silicon Valley culture that dismisses black founders' ideas, even when they come from brilliant people. Knight describes 20-year tech veteran Banks as an incredible innovator and big-picture thinker, the kind of person who commits 1000% to his long-term vision, while Banks says Knight is a natural-born entrepreneur who dives deep for crucial user insights.
Their funding impasse was made even more painful by teen music video app Musical.ly's success. Seemingly no one had heard of it, but Musical.ly had 90 million users when Banks and Knight were pitching ZEN, and it later sold for $1 billion in late 2017. Musical.ly was doing it; why couldn't they?
They found an answer in 2017: ICOs, or initial coin offerings. The traditional IPO model embodies much-reviled centralization by concentrating power and money among an elite few. In contrast, ICOs offer distributed crowdfunding with blockchain, the tech Bitcoin introduced to the world. A blockchain-based startup creates a team, roadmap, and white paper, then asks the world for funding by buying tokens.
The more Banks read, the more he realized blockchain technology solved their core funding and product issues. In his words, it "closed the loop." He and Knight had been looking for ways to truly empower ZEN users: business-savvy young content creators making fandom videos about anime, gaming, and more. These teens were powerful community influencers, but were often exploited—and they knew it. Vine, a once-popular short-form video app, excluded top influencers from its business and died soon after their exodus.
Banks and Knight wanted to subvert this status quo. Rather than a centralized YouTube- or Instagram-like platform that limits users' audience and earning potential, they envisioned a decentralized, blockchain-based one that makes content creators financial stakeholders. ZEN creators could share videos, earn cryptocurrency tokens called ZENCoins, buy digital marketplace goods, and connect authentically with their fellow fandom communities. Economic network effects also meant ZENCoins would gain value as more creators joined the ecosystem.
Most importantly, blockchain's innate security would protect users who bought ads, monetized shoutouts, or sold their channels. Today, these activities occur regularly in a fraud-filled social media shadow market, and accounts are often stolen. Blockchain could provide decentralization, revenue sharing, and secure transactions, all in one. It closed the loop.
But ICOs aren't all sunshine. Although blockchain and token-based crowdfunding solved many problems, the largely-unregulated space is rife with fraud. In 2017 and early 2018, ICO news was as dominated by stories of fake white papers, exit scams, and China's ICO ban as it was by 50,000% investment returns. Investor behavior didn't help. Bloomberg reported that 2017's top 30 ICOs didn't have products at launch. In the crypto-gold rush, people were more excited by ideas than reality.
This was actually fantastic news for ZEN, whose app had quickly grown to over 40,000 users, receiving high praise and millions of video plays. They even landed Musical.ly's former lead developer, George Ciobanu—an incredible hire, given Musical.ly's monumental growth to 200 million users on his watch. Ciobanu both knows how young content creators think and how to drive app growth to the hundreds of millions. ZEN's killer team put them ahead of the curve, and, in a vaporware-filled market, their promising app was the real deal.
However, for public investors, lack of ICO regulation, low trust, and high barrier to entry are still issues. This led ZEN down a different path than the norm: they launched the world's very first SEC-compliant pre-ICO, and their ICO will follow suit. Compliance has been hotly debated; many ICOs claim their tokens are "utility tokens," not securities, while others simply block sales to US investors. But ZEN saw SEC-compliance as non-negotiable for establishing confidence, involving US investors, and future-proofing their business. "If the SEC turned around one day and said "All [tokens] are considered securities,' we'd already be following the rules," said Knight.
There were other benefits, too, like offering a totally new hybrid investment with convertible promissory notes. These would later convert into preferred equity or discounted future ZENCoins. ZEN accomplished this with a Title III Equity Crowdfunding Campaign, or Reg CF. Much like Kickstarter, where crowdfunders pay for future goods, in equity crowdfunding investors pay for a company stake.
New investors also find this is an easier on-ramp. Some feel Bitcoin and Ethereum wallets are intimidating, while others are generally cautious about cryptocurrency. But convertible notes and equity are more familiar, everyday concepts, and ZEN's model gives investors choices.
ZEN is the only pre-ICO uniquely combining SEC compliance, equity crowdfunding, and a hybrid investment model—not surprising given the weeks of extra paperwork. Banks and Knight believe this may change as more ICOs catch wind of the benefits. But, for now, ZEN is future-proofed, forward-thinking, and fast-tracking to funding success.