Who'd have thought giving something away could be so complicated?
That's the question crypto innovators have had to come to terms with since the concept of "airdrops" – or the practice of gifting tokens in massive giveaways – has come under the scrutiny of government regulators.
But with the launch of a new product Wednesday, CoinList, an initial coin offering (ICO) facilitator spun out of the renowned startup incubator AngelList, is looking to streamline the process of airdrops in a way that doesn't run afoul with the law.
Aptly named Airdrops, the product runs users through compliance checks and attestations so that a token issuer can give CoinList's users free tokens. On top of that, if the issuer is looking for users that meet certain criteria (be it a profession or location), they can verify that users actually fit those backgrounds.
In this way, CoinList CEO Andy Bromberg believes he has found a way to enable airdropped offerings at a time when many in the industry are looking for a compliant service. Token issuers themselves have had no shortage of issues here, with some, including video-monetization service Stream, even backing off the concept altogether because of the regulatory uncertainty.
Indeed, the SEC hasn't taken a formal stance on how it views crypto tokens delivered through ICO, airdrops or other forms of sales and giveaways, but it's clear regulators are currently investigating that question.
Still, Bromberg is confident in his assembled solutions, and in interview, he hinted at dialogue with regulators that would attest to the viability of the service.
"In our typical compliance first mindset, we sat down and said: Is there a way to pull this off without violating securities laws? And what we came to is the compliant Airdrops product," Bromberg told CoinDesk.
"I can't comment on individual discussions with the SEC. What I can say is we are in frequrent communication with them and — based on our understanding of securities law — we are very comfortable with this."
Not only does the startup believe it has a solution for working under existing securities law, but it's also opening up its existing user base of past investors to new token issuers. Once users have gone through the company's compliance flow, they will be verified to receive airdrops, and CoinList will take a nominal fee from users (less than $1 per airdrop) to accept new tokens.
To date, according to a CoinList spokesperson, it has facilitated more than $400 million worth of token sales through its platform, representing what could be a vast pool of people interested in investing and taking part in future crypto tokens.
Compliance as a service
While that pool of potential investors will likely be attractive for token issuers, Coinlist's product is opt-in – a feature added to reduce spam and mitigate the security threats that have become a common annoyance from crypto enthusiasts involved in such offerings.
Also, CoinList says it's only willing to work with token issuers that are focused on complying with the law. And that's partly because CoinList will be promoting these projects for issuers.
Still, CoinList's Airdrops product seems to be set up whereby all the compliance effort is offloaded from the issuer, which many issuers will like since many are not securities law experts.
CoinList's product allows for airdrops that might fall under Regulation S and Regulation D and will also collaborate with AngelList spin-off Republic, which has a license to sell securities under limited conditions to non-accredited investors using Regulation CF.
The company is also doing a country-by-country analysis to determine what sorts of checks issuers will need to do in order to airdrop to users around the world.
Depending not only on the goals of the issuer and who they want to give to, different levels of know your customer (KYC) and anti-money laundering (AML) requirements will be needed, and whether issuers can to both accredited and unaccredited investors or one or the other.
And all of this has already proven enticing to token issuers. Bromberg told CoinDesk the company is in negotiations with more than one issuer to use its Airdrops product but declined to disclose which ones.
While CoinList has so far been focused on fundraising, Bromberg said that potential issuers will not have to have a token sale on the platform in order to use the new product.
"We're interested in exploring this model where in some cases ... funding might be separate from distribution," Bromberg said.
The right recipients
Still, different companies might have very different goals for an airdrop, and Bromberg gave two examples of use cases he believes could work well.
For example, he said a company with a token it believes regulators will recognize as a utility token, something used primarily to access a certain service, can use CoinList to get it in the hands of people who are likely to be the most interested.
This issuer might target software developers, and in this case, CoinList would enable them to authorize the airdrop to check a users Github API and distribute to developers with a certain commitment frequency.
Getting the tokens in the hands of people who will ultimately use the token as intended "will help that network get to a place where that token is no longer a security," Bromberg said.
Still, there could also be companies that want to issue securities, Bromberg said: "A company could tokenize some of their equity and give that equity, give those tokens, to early users on the product."
As such, CoinList will also offer a wide array of ways to authenticate users as meeting certain objectives, be it a certain audience on Twitter, a certain location in the world or a certain occupation. It can use APIs off other websites to verify these target goals to insure that an airdrop recipient meets them.
Because it is running KYC/AML checks on all of them, it also verifies that each user receives a token allocation only once. "It prevents gaming the system," Bromberg said.
It's an approach designed for an excess of caution, but one that's also ready to adapt.
"Whether or not these things are securities, we are treating them like securities to be as safe as possible," Bromberg said. To that end, some startups have been meeting with the SEC to ask for what's called a no action letter, a document that says regulators believe a given company has not violated securities law.
If something like that comes to pass, CoinList is confident enough that the platform is ready for that, too.
"We'd be open to airdropping without the compliance layer."
Colorful candies image via Shutterstock.
Correction (25th April 8:36 p.m. UTC): An earlier version of this article inaccurately reported the amount of funding that has been facilitated through CoinList. The figure has been updated.