“Photography is more than a medium for factual communication of ideas. It is a creative art.” – Ansel Adams
The past year has witnessed a flurry of remarkable “initial coin offerings,” or ICOs. The pending KODAKCoin digital token sale jointly announced by Kodak and WENN Digital today appears to represent a true watershed moment.
As a threshold matter, Kodak’s story arc is dramatic: a former Dow Jones Industrial Average component, once driven into bankruptcy by technological change, announcing a blockchain-based image rights management platform to regain a place on tech’s bleeding edge. The market reaction to this announcement was equally dramatic, as the price per share of Kodak stock more than doubled in the wake of the announcement.
Scheduled to open on January 31, 2018, the KODAKCoin token sale is distinct from predecessor ICOs in several notable respects and may portend legitimization of the ICO as a bona fide fundraising technique for “traditional” corporate America, at least in select instances.
Unlike most ICO issuers, Kodak is not a startup or private company known (if at all) only to cognoscenti, but an NYSE-listed and SEC-reporting company, and still a household name.
The proposed KODAKCoin token sale also is distinct from many other token sales launched to date in that it is an offering of self-described “security tokens,” which will be sold only to “accredited investors from the U.S., UK, Canada and other select countries.” While numerous token sales have been similarly limited to accredited investors as a prophylactic measure in the event that such sales were found to involve the offering of securities, token issuers generally have not professed to be offering securities, even when the tokens in question have had security-like features (such as profit-sharing rights).
While some observers may be surprised by the public announcement, the token sale is described as being launched under Rule 506(c) of Regulation D of the Securities Act of 1933, as amended, which, subject to compliance with certain restrictions, permits the token seller to engage in general advertising and general solicitation.
As a reporting company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Kodak is unlikely to be concerned about Exchange Act Rule 12(g) reporting thresholds on ownership of securities, which may be a concern to token sellers that are startup companies, as triggering the applicable thresholds requires the filing of periodic reports with the SEC.
Following the SEC’s The DAO 21A Report last summer, many unregulated cryptocurrency exchanges subject to U.S. securities laws have tried to prevent security tokens from trading on their platforms, in an effort to avoid having to register as national securities exchanges or as alternative trading systems.
KODAKCoin’s status as a security likely will preclude the token from being tradable on unregulated cryptocurrency exchanges that are subject to U.S. securities laws—likely affecting the token’s liquidity—and KODAKCoins would be resalable by purchasers only either in a registered securities offering or a transaction exempt from securities registration (such as under the Rule 144 safe harbor for sales by non-affiliates after a holding period is met).
The torrid market sentiment for cryptocurrency and blockchain technology is demonstrated by the ecstatic market reaction to the Kodak/Wenn announcement, despite the press release providing *no* detail about (1) the amount of capital that Kodak is seeking to raise, (2) the rights that tokens would impart to holders, and how those rights might affect common stockholders, or (3) whether the KODAKCoins and the associated blockchain platform will be “functional” in any sense when issued (or in the near term).
It remains to be seen whether the KODAKCoin token sale ultimately will be remembered primarily as a strategic initiative, rather than a marketing initiative (à la “Long Blockchain Corporation”), or if it signals the nascent opening of a legitimate capital raising path for mature companies.
Triple digit share price appreciation is sure to be noticed by other “traditional” companies, causing some to examine their capital raising strategies and explore potential token sales.
Although digital provenance for photographs may be a valid use case in the blockchain context, other organizations may struggle to identify bona fide needs for distributed ledger technology and tokenization, and may lack the technological resources (whether internal or external) to implement any identified strategy. While some companies may be eager to raise funds without necessarily having to incur debt or cede control or economic rights in the manner of a traditional security, many companies, whether well-established or emerging, would be wise to resist the ICO siren call and exercise caution before trying to contrive blockchain use cases, as some critics already posit that the technology represents a solution in search of a problem.
The KODAKCoin token sale will open in less than a month. It will be fascinating to observe the details—and knock-on market effects—as the full picture comes into focus.
This article is written by the authors solely in their personal capacities, and the views expressed are the authors’ own and do not necessarily reflect the views of their employers or any other person. This article does not constitute, and should not be relied upon by anyone, as legal or investment advice.
David M. Adlerstein is counsel in the Corporate Department at Wachtell, Lipton, Rosen & Katz. His practice focuses on mergers and acquisitions, corporate, securities law and regulatory matters, with a focus on financial institutions. Mr. Adlerstein has worked on a broad array of public and private company acquisitions, divestitures, proxy contests, securities offerings and corporate governance matters. He also provides counsel to several nonprofit organizations on a pro bono basis. Mr. Adlerstein is a member of The Economic Club of New York and The Wall Street Blockchain Alliance.
Joshua Ashley Klayman, chairs the Wall Street Blockchain Alliance’s Legal Working Group and frequently speaks and publishes about blockchain technology, smart contracts, cryptocurrency and tokens sales (initial coin offerings), among other topics. Klayman’s clients have included investment banks, other financial institutions and issuers (including token sale issuers); private equity, venture and hedge funds and their portfolio companies; major publicly traded organizations and emerging companies. Klayman regularly represents lenders and borrowers in leveraged finance transactions involving senior, mezzanine and subordinated debt and equity offerings and co-investments, as well as in general lending matters. In her corporate practice, Klayman represents public and private organizations in a broad array of commercial transactions (including mergers and acquisitions, as well as royalty purchase and licensing transactions) and corporate governance matters.
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