YouNow, Inc. (File No. 024-11018)
On July 11, 2019, one day after the qualification of Blockstack’s offering, the SEC qualified the second offering of digital tokens under Regulation A+. YouNow, Inc. sought to offer an aggregate of 178,000,000 “Props Tokens” at a deemed price of $0.1369 per token in (1) a primary distribution of up to 133,000,000 Props Tokens as a reward to users of its applications for in-application activities (such as contributing content and attention to those apps), a one-time discretionary grant to users of its Props Live Video App, or a reward to administrators of its own Props blockchain that it is building and (2) a secondary distribution of up to 45,000,000 Props Tokens by its wholly-owned subsidiary, The Props Foundation Public Benefit Corporation (“Props PBC”), which will grant tokens to developers of key applications and those who otherwise contribute to network development efforts. All Props Tokens will be issued in exchange for non-cash consideration and, therefore, neither YouNow nor Props PBC will receive any cash proceeds from the offering.
The offering circular described Props Tokens as Ethereum-based and “ERC-20” compliant cryptographic tokens, which means that they are digital assets existing on the Ethereum blockchain and that the rules governing Ethereum-based smart contracts that create Props Tokens adhere to widely known “ERC-20” conventions. Holders of Props Token will have the ability to access premium, built-in functionality through YouNow’s network of consumer-facing digital media applications (the “Props Apps”), which may include application-specific key features available only to Props Token holders, the ability to send tokens to other users, voting on potential changes to Props Apps, and elevated status in the Props Apps network. At the time of the offering, only one Props App was ready to be connected to the Props Apps network.
Although only “qualified purchasers” (as described above in the Blockstack summary) may purchase securities under Regulation A, the offering circular noted that YouNow has deemed this limitation not to apply to non-cash consideration and, therefore, no limits will apply to the issuance of Prop Tokens under YouNow’s app rewards or validator rewards programs or Props PBC’s grant program. Recipients of Props Tokens must complete certain administrative steps in order to receive Props Tokens pursuant to the offering, including know-your-customer and anti-money laundering checks and the completion of other required documents.
The offering circular noted that, while Props Tokens are freely tradable on registered exchanges or alternative trading systems, no exchanges or trading systems currently exist to support the trading of Props Tokens on the secondary market. The offering circular also noted that YouNow is treating Props Tokens as securities based on its view that the tokens are “investment contracts” under the SEC’s Framework (as summarized above) and the application of SEC v. W.J. Howey Co. to digital assets. Although the offering relies on Regulation A+ as an exemption from federal registration under the Securities Act, YouNow has limited its offering such that residents of certain states (i.e., Arizona, Nebraska, North Dakota, and Texas) will not be allowed to participate in the offering. In addition, the offering circular noted that YouNow has taken the position that registration as a transfer agent, clearing agency, exchange or alternative trading system, or broker-dealer is not required under the Exchange Act with respect to YouNow, Props PBC, the Ethereum blockchain, the Props blockchain, the validators of such blockchains, the network, and/or the Props Apps. The offering circular further noted that YouNow may in the future determine that Props Tokens no longer constitute securities under federal and state securities laws if the network is sufficiently decentralized such that purchasers of Props Tokens do not reasonably expect YouNow to carry out essential or managerial efforts.