In the beginning, there was common stock—thanks for your money, here’s your certificate.
Fast forward to the age of tech startups and gushers of digital coin offerings and things get a little more complex, ushering in investments such as SAFES and ICOs. Now those terms sound almost quaint as the crowdfunding and fintech worlds dream up new twists on traditional and digital securities.
Recently we stumbled upon this beauty: the DUSTO, or Debt Until Security Token Offering.
A term used by crowdfunding portal TruCrowd, DUSTO is a future equity agreement akin to a convertible note or a SAFE (er, that would be Simple Agreement for Future Equity). But in the case of a DUSTO, the debt converts into a token rather than a share of stock.
Having trouble keeping track? (We don’t blame you!) Here’s a handy cheat sheet of funding terms that crowd investors are likely to encounter.
First, the basics.
Security – A security is any investment contract where the buyer anticipates a financial gain due to the efforts of a third party—i.e. you invest your money with a business, they make a profit, you get some of it returned to you. It’s a pretty broad definition that covers a wide range of investment types. (See also the Howey Test).
Issuer – A business raising money by “issuing” securities
Equity – An ownership share in a business. It may or may not come with voting right and other privileges.
Membership Units – Similar to shares of stock, but for an LLC or membership organization rather than a C Corp. Unit holders are typically entitled to a share of the LLC’s profits.
Debt – A loan that pays some sort of interest (i.e. a fixed rate or a percentage of sales) but does not confer any ownership rights.
Convertible Note – A promissory note that (usually) bears interest and can convert into equity shares under specified conditions, usually a future date or funding event.
Now, for the advanced stuff!
ICO (Initial Coin Offering) – Like an IPO (Initial Public Offering), but companies issue digital tokens or cryptocurrencies instead of stock. Early ICOs operated on the presumption that they were not securities, and therefore not subject to traditional securities regulations, sparking a frenzy. The SEC begs to differ (see also STO).
SAFE (Simple Agreement for Future Equity) – A non-interest bearing agreement for future equity in a startup, meaning that it can convert to equity in the future under specified conditions. SAFEs originated in Silicon Valley as a way to put off the valuation (and thus the price per share) of a startup until a later date, typically when a major funding round occurs that helps determine the company’s value. But beware: conversion is not guaranteed; if a triggering event does not occur, investors may be left with nothing. (For more about SAFEs, see this SEC investor bulletin).
Crowd Safe – An equity crowdfunding specific version of a SAFE used by crowdfunding portal Republic. Upon conversion (if and when that happens), investors receive special shares with limited rights that do not show up on a company’s cap table.
SWIFT (Simple Weighted Incentive For Time) – Crowdfunding platform SeedInvest uses the term to describe offerings that add an incentive or “time-based discounts” for early investors. An early investor might pay $8 for a $10 share of stock, as one simple example.
STO (Securities Token Offering) – A token offering conducted under a valid securities exemption, such as Regulation Crowdfunding, Regulation A or Regulation D. The term STO seeks to distinguish token offerings that comply with securities regs from the Wild West of ICOs. “Whereas ICOs are the sale of coins, purported utilities or even currencies, STOs are the sale of securities,” writes StartEngine’s Howard Marks.
DUSTO (Debt Until Security Token Offering) – Like SAFEs and Crowd Safes, this is a form of future security that puts off the valuation of a company until a later funding event, which in turn triggers the valuing of the security tokens. As with SAFES, if there’s no trigger event, you’re likely left with a big goose egg.
Side by Side, or concurrent offering – When a company conducts a Regulation Crowdfunding offering alongside a Reg D private placement. That allows businesses to tap mainstream investors under Reg CF (up to $1.07M) while also soliciting larger, unlimited sums from high net worth or professional investors.