Part 1: An Interview with Chris Rawlings: Father of the STO

The idea for the Security Token Offering (STO) started in the same place as many other great ideas: In a bar.

On one fateful Tequila Friday, Chris Rawlings and his fellow 500 Startups “batchmates” were about to begin a rolllercoaster ride  that ended in the successful launch of the world’s first equity-backed security token, 22x – direct from the heart of Silicon Valley.

Chris is a serial entrepreneur and the CEO of the logistics and marketing startup JudoLaunch. He’s taken JudoLaunch through 500 Startups,  Chinaccelerator, and a successful VC capital raise.


Richard: I’m here with Chris Rawlings, founder of JudoLaunch, a successful international startup, and also the founder of the world’s first ever security token offering. 


Chris:  Thanks Richard, happy to be here. That’s all true, and I do spend time on JudoLaunch (an e-commerce/SaaS company) but I also helped found the 22x token, which is an STO representing equity in a bundle of early-stage Silicon Valley tech startups.


Richard:  I believe you said you saw a lot of hype in the ICO markets and went, “Alright s***… We need to plug into it.” Is that how it came about?


Chris: I’ll never forget the actual inception of it. It was the first week of startups at batch number 22 at the Silicon Valley tech accelerator 500 Startups (a top-five accelerator like Y-combinator). We have this tradition there called Tequila Friday, so in July of 2017, we’re there standing around, having some drinks, mixing and bull sh**ing…And I end up in a circle with someone who is now my close friend, Jake Koppinger from FreightRoll.

Also, there was Gavin Yeung from CryptoMover, a cryptocurrency ETF, and Kyle DuPont from Ohalo, a blockchain-based data compliance service for banks. So we had two blockchain founders along with me and Jake. We’re talking about crypto, and Jake pulls up a chart on his phone and we’re marveling about how that the money raised for early stage ICO startups had surpassed the money raised by traditional VC. And we’re like, “Surpassed? …Surpassed!?“

This was in July and it had ramped up during the prior three months. We’re seeing the chart, and I’m thinking: “Alright, something’s happening here.” We start joking about how we could take advantage of it and said: “Hey, we should all launch our own tokens!” Jake’s company FreightRoll is similar to a supply chain technology company, and he said “Yeah, I can launch FreightCoin and have every trucker use my currency… And you can launch JudoCoin.”

Gavin came up with the idea to bundle it all, “You know, we should just launch a token for the whole batch.” At first, we laughed, but it quickly got serious, “No, but really: What if we did? What if we did launch a token that was representative of this whole batch? Would it have some utility? Would you be able to use it for everybody’s services? Or would it just represent equity?”

The four of us knocked the idea around and eventually synthesized this concept of the security token: a token representing equity in all of the startups in the batch…Something we could use to offer early-stage tech equity to anyone in the world, to people who would otherwise never be able to invest in the next Uber – because they’re not in the Silicon Valley inner circle.

Normally, the people that get access to deal flow are the ones that know the founders, or they’re meeting up in coffee shops in San Francisco and Palo Alto, or they’re in these tech hubs around the world. Every city has one now, but they’re not accessible to everyone. Another thing was that investing in early-stage startups is completely illiquid. If you want to invest in an early stage company, your funds are going to be tied up for years – up to a decade or more, and that’s just something your average Joe can’t do.

This way a security token would allow anybody to access this equity in a liquid and tradeable way. Now, I’m sure any securities expert reading this have alarms going off in their head. Unfortunately, we didn’t, and we had to learn a bunch of hard lessons about why it’s a difficult problem.

But this was the core concept of 22x Batch: By spreading the risk, the token represents equity in not one startup but thirty, with all of the startups pre-vetted by one of the world’s top tech accelerators, so you had some external validation already built in.

It was a difficult journey, and it almost got blown apart and busted countless times, but we did it. We got serious, created a dedicated Slack channel, started meeting with Fenwick and West (the firm that did Facebook’s IPO), and Kooley. We had conversations with WSGR, and we were talking to many ICO consultancy groups.

Richard, you and I were talking before about how there’s a lot of sketchy business in this industry. The fact is there’s a blurry line between legitimate and criminal enterprises. We came in contact with it all, and it just set us down this wild, crazy path.

Richard: That’s awesome. What kind of challenges did you face, and were there any stages where you almost gave up?

Chris: We got some early momentum, and Jake, Gavin, and I didn’t try to lead the process. We opened the idea up and made it a community effort. I was living in a San Francisco co-op at the time and injected some of their ideas into the project. So it was like a “do-ocracy.”

The most influential people in the 22x project were the ones that did the most work. Everyone else thought that this was a weird and interesting thing that was emerging, but Jake and I took it completely seriously.

We had consultants, experts, and ICO consultancy groups, and we talked to other people who had ICO’d.  At one point I even ended up partying in Brock Pierce’s flat in Santa Monica with him and a bunch of his network. It took us down this crazy road, but we eventually realized that we had to get a deep understanding of securities law. We found out there were a number of ways to do this. We initially consulted with multiple law firms to see if the legal framework was going to be an actual legal securities offering.

From our perspective with US companies, we had a lot of different routes we could go down: a Reg D offering with a Reg S portion, with the Reg D part keeping it legally as a private fund. We could register as a 3(c)(1) fund, which is what most VC funds are, with a limit of 99 U.S. citizen equity holders, and then internationally it’s country by country, depending on the country’s rules for making investments in international securities offerings. In many ways it was almost limitless internationally because some countries had very loose laws, other ones, you know, were very liberal. So it allowed us to do a lot internationally. Then there was the route of doing a traditional public offering.

That would have cost us about a million and a half and required a ton of specialized paperwork, financial reporting, etc. That was the far end of the spectrum. Then there were middle options. There was an act in the U.S. called the Jobs Act that was part of these new options, so there’s now a Reg A offering and Reg A+. Reg A+ is what a lot of people in the industry call IPO light. It’s not as strict of a standard compared to a public offering, but you are able to have either an unlimited (or essentially unlimited) number of holders of your security, and you can raise up to fifty million dollars.

For a while, we considered a Reg A+ offering in the U.S. but ended up going Reg D, because you only have to fill out a form with the SEC and launch it. With a Reg A+ you have to get direct approval from the SEC to do it, it can take months, and we just didn’t have that much time. We had a three-month period where all the companies were getting together, so we had to make it happen quick. We ended up with a Reg D/Reg F offering structure just like a boring, old, regular, private fund with nothing sexy about it at all.

The only sexy part about it was that it was tokenized. We had a Delaware LLC  management entity, and a Cayman entity that held the companies’ equity… So the subscription agreement for the companies was from the companies’ equity to the Cayman entity, and that’s how we batched & tokenized thirty startups from the 500 Startups accelerator.

Each token represents a small piece of equity in the Cayman Islands vehicle. the Delaware LLC is used as the management company; it performs the limited amount of fund management and fund administration that’s required. The idea is to have a very small amount of this. Many of the normal responsibilities of the fund administrator are automated through tokenization.

For example, pay-outs happen when a company exits. So say one company in this batch IPOs, what happens when the Cayman entity now holds the public stock of that company? It has a period of time where it’s required to liquidate and distribute the proceeds. This happens automatically through the token network to all holders, and each token holder gets paid proportionally to however and whatever they initially paid.

So if they paid in their local fiat, they get their payouts of this exit from the basket in fiat. If they paid in Ether, then they get their payouts in Ether – or they can choose to get paid in a different way. But essentially, someone can hold their 22x token until the very last company exited or died. And that would be fine because someone could value the companies in the token in and of themselves, doing their own research and placing their own assigned net asset value to the basket, and then comparing that with how the market is assigning their net asset value.

The Chris Rawlings, 22x Series

Part 2 Will Be Published Shortly