We all thought the Kodak Moment was long lost and forgotten. Eastman Kodak Co. (NYSE: KODK) was the photography industry’s perennial powerhouse for nearly a century. Kodak was once lauded as being one of the world’s most recognizable brands, even closely rivaling long-standing and behemoth brands like Coca-Cola and Nike. During Kodak’s heyday, Kodak commanded a multi-billion dollar valuation and raked in billions in annual revenue. However, towards the turn of the new century, Kodak began feeling the pangs of disruption brought on by the digital era. Kodak soon descended into a mere relic of its illustrious past. Kodak seemingly met its demise when it ultimately filed for Chapter 11 bankruptcy protection in 2012.
However, Kodak’s future began to look much brighter after Jeffrey J. Clarke assumed the helm as Kodak’s CEO in 2014. Since then, Kodak has re-emerged into the limelight from its relative state of reclusion. Kodak now seeks to re-establish itself as a dominant force in the marketplace. Kodak is having a new moment.
Kodak plans to release its KODAKOne image rights management platform, which purports to enable photographers to manage their content ownership rights and license their works via blockchain technology. In addition, the KODAKOne platform creates a new economy using KODAKcoin, Kodak’s crypto token, which lets photographers immediately sell, and receive payments for, their licensed works.
CrowdfundX’s President Dan Marble recently announced CrowdfundX’s partnership with Kodak (NYSE: KODK) and WENN Digital to help market Kodak’s Initial Coin Offering (ICO).
On January 31, 2018, Kodak’s ICO will begin selling KODAKCoin as a security token under Reg D 506(c) to accredited Investors in the U.S., UK, Canada and other select countries.
Creative Compliance: Kodak Maneuvers Through the Securities Laws’ Exemptions
The Kodak ICO announcement certainly shocked the market (and drove Kodak’s share price), but the overall revelations that this news brings to the ICO market may have a greater impact than most may realize. This is because according to Mr. Marble, the Kodak ICO is being run as a private placement. While this may not in and of itself be all that novel, given the size of Kodak and the likelihood of a liquid secondary trading market developing for the Kodak coin, it begs the question – which exemption will cover the resale of these coins? Will secondary sales of Kodak coins be exempt from SEC registration? Perhaps the most intriguing part of this conundrum is that Kodak appears to be taking the position (or at least betting that the SEC will take the position) that the resale of these coins may be exempt pursuant to either Section 4(a)(7) or the so called 4(a)(1½) exemption.
At JPF Securities Law, we have long suspected that ICOs might head this direction, but it is a game changer that a company of Kodak’s stature would blaze this path. Kodak’s chosen ICO method would be lightyears faster than the typical white paper setup currently used. Moreover, the next logical step will be S-1 registered ICOs and ICO deposits at your friendly neighborhood FINRA brokerage.
If you don’t know what the FAST Act Section 4(a)(7) exemption is, or you have never heard of the so called 4(a)(1½) exemption, don’t worry, you are in good company. They are obscure securities law exemptions that cover the resale of restricted securities, which most retail investors never come in contact with. Moreover, 4(a)(1½) is not even really codified. It is essentially an implied exemption that the SEC has tolerated for decades. So for Kodak’s ICO, Kodak is treating KODAKCoin as a security exempt from registration pursuant to Regulation D, as opposed to relying on some obscure Howey analysis.
If Kodak sells $300MM worth of their coins to accredited investors who represent that they have no intent to immediately resell the coins, then Kodak would, in theory, have met its compliance obligations pursuant to the federal securities laws. KODAKCoin owners would then be free to resell their coins to others [assuming they are not part of a scheme to evade the securities laws] in compliance with U.S. securities laws and most likely in reliance on Section 4(a)(7). Any subsequent purchaser would theoretically be able to do the same.
Fixing the Obstacles in Transferring Restricted Securities
In the past, the transfer of restricted securities in a private sale has been notoriously cumbersome and problematic. First, your trades had to go through a transfer agent. Then, you received a paper certificate that could not be deposited until/unless that class of securities was registered with the SEC [or the restriction was removed pursuant to Rule 144]. Subsequent transfers/sales had to be done by mailing the physical certificate around and paying hefty fees to the transfer agent while waiting sometimes weeks for the transfer to be effectuated. As a result, usually only insiders and institutions trade in restricted stock.
Individuals can instantly and directly trade cryptocurrencies, which basically eliminates all of the aforementioned problems, thereby removing these barriers to the quick development of a liquid secondary trading market. Since Kodak coins are being issued by a seasoned issuer and former Fortune 500 company, these securities will probably be listed on crypto exchanges in relatively short order. Even if Kodak coins are not listed, a secondary trading market will, without a doubt, naturally develop online somewhere (probably offshore).
Practical Securities Law Implications of Kodak’s ICO Strategy
Kodak coins would technically be restricted securities but with the ease of transfer of crypto coins. What does that restriction really mean in practical terms? In short, Kodak may have opened Pandora’s box. This development raises a litany of issues. While this blog post can hardly address them all, here are two that we find particularly interesting:
For now, the Kodak coins are “securities” that can’t be deposited and traded on a national stock exchange (NASDAQ, NYSE) with a ticker, but that is probably inconsequential. If Kodak decides to register these coins (via S-1/S-3 or another registration Form), then Kodak could theoretically sell directly to the public, and a custodian (e.g. DTCC) could hold Kodak coins and deposit these securities into street name – Kodak coins would have a ticker symbol and may even trade on a recognized securities exchange. Kodak coins could then be held directly in retail brokerage accounts at FINRA member firms.
There is no gatekeeper such as an SEC registered transfer agent or FINRA registered broker dealer required for the resale of Kodak coins, which makes “policing” these trades almost impossible. It would be impracticable for the SEC to track down each seller (that they have jurisdiction over) to ensure compliance with Section 4(a)(7). While we at JPF Securities Law would love if all Kodak coin sellers called [us] their trusted securities counsel for a legal opinion prior to any resale of their coins, we know that there is little likelihood of this occurring. Kodak and the SEC have got to be thinking the same thing.
In sum, this move by Kodak is an extremely important development for the ICO community. We would hope that a company as large as Kodak would not make a move like this without having good intel that it will be tolerated in Washington DC. Honestly, we have to applaud Kodak for their resolve, because while others were squeezing through the Section 4(a)(7) door, Kodak decided to just kick that door down. Or perhaps unleash a Walking Dead horde of investors to overwhelm said door.
Either way, Kodak’s ICO strategy is exciting. At JPF Securities Law, we hope to see many more Fortune 500 companies follow Kodak’s model for conducting an ICO. Kodak’s model would affect all issuers and potential issuers of securities and the SEC is one step closer to becoming the primary regulator of cryptocurrencies, which brings much needed clarity to the regulatory landscape for ICOs. So, thank you Jeffrey J. Clarke and Eastman Kodak Co., because you have done us all a great service. We hope that the SEC cryptocurrency enforcement team sticks to USDA beef and that sacrificial lamb is not on the menu anytime soon.
Need legal or advisory help with your ICO fundraising? Feel free to reach out to us at JPF Securities Law: firstname.lastname@example.org.
DISCLAIMER: This blog post is made available for educational and entertainment purposes only and does not purport to provide any investment, tax, or legal advice. You should consult your investment, tax, and legal advisor (which can be us) before acting upon any of the information contained in this blog post.