Navigating Web3 safely and successfully by Dave Rodman (Rodman Law Group)

hey everybody how's it going hey guys morning uh good morning yes good morning my name is uh Dave Rodman I'm the managing partner at the robin Law Group um this has been like off uh doing a little bit of a fireside chat today well Ben lakeoff founder of charged particles uh founder of bankless Ventures yeah it's been like a founder of charge particles been around in the space for a while uh recently launching banklas Ventures which is the early stage web3 fund part of the bank list media so this this uh this talk was uh titled navigating web 3 safely and successfully and the idea was I would talk about the safely Ben would talk about the successfully we ended up having less time than we uh planned so I think we're going to focus more on the safely which is the legal side um but uh please come to Ben's talk on what is it Friday yeah Friday Friday to hear more about raising and just being a successful founder yeah so let's uh let's start off it's kind of difficult to see but um of the people out here how many people are founders a couple um how many are are first-time Founders in the web3 space and then um how many people are working on a startup actively and thinking about fundraising course head startup okay cool um so I think where we probably want to start is like mistakes that Founders make jumping into the market right away so Dave your counsel for a number of startups in the space Mentor at a number of accelerators like early stage startups let's start off with a broad one of like what's the most common mistake or misconception you see by Founders jumping into the web three space and starting to operate yeah uh so I think the number one uh misconception is that you can move fast and Break Stuff the same way that you could in other traditional web 2 software development companies Facebook Uber um yes they faced some regulation along the way and they paint some fines but the thing about web 3 is that it is inherently Financial I mean it whether you want it to be or not it has a financial component to it which means from like day one you're operating in one of the most stringent regulated Industries in this country and the federal government has some real opinions on um who can do these things how these things are done and what you cannot do and the mentality of moving fast and breaking stuff we'll deal with it later just doesn't work the statute of limitations on a lot of these violations are like 14 years long we're all working on an immutable Ledger like there are things that you can do right away that seem tiny that can absolutely [ __ ] you up many years later um I think I mean I'm wearing a tornado cash shirt I wear them at all my my talks now is a great example I mean we formally do not believe in what has happened to tornado cash but Founders in jail right now uh because fincen and money laundering uh you know not that I think that's what was happening as its main purpose those are very scary laws that you do not want to violate and you can end up in Guantanamo Bay like that under the Patriot Act so that's that's I think a long way of answering the question you just asked me yeah no and I so for context uh Dave's one of my best friend also my lawyer also lawyer for many of the companies I invest in are involved with but oh you know what yeah none of this is legal advice this is all or financial advice from Ben this is all educational and you should definitely talk to a lawyer yeah so that that but that's a perfect example he's he's scared the [ __ ] out of me with all of this stuff um so I think you should have like a healthy bit of fear but and maybe we'd dive into that it's not so much that you shouldn't shouldn't uh operate in the space you just have to know like what sort of levels of risk you're taking by the actions that you're doing and kind of the jurisdictions that you're playing in and what their prerogative is but um you know so a lot of those things that you were talking about is scary what's happened with tornado cash devs is certainly scary so some Founders I hear are like you know well we'll be a dow we'll operate as a nons we'll just not have a legal entity and and and do it like that um talk to me about that approach and kind of what you would talk to somebody that has that approach to going about this yeah so I mean there's there's one Anon and that's Satoshi uh he had no team that we know of uh individual actor at a time when no one knew what this stuff was because it didn't exist that's like it was and it was probably Hal Finney who died let's just be honest uh so the there's never going to be another time where someone can be truly a non because you need to have a team you could have you could personally have the best opsec in the world and cover Your Tracks 100 but you probably gotta raise capital probably gotta employ somebody like there's there are now like gaps in the armor and you cannot rely on anonymity or pseudonymity to protect you like the government is looking for these projects they are looking to get you and if you think I'm being I think I'm being uh like overly cautious here Gary Gensler is actively coming to get you if you're in this space coming after stable coins yeah I mean Jesus Christ he in his in his article the other day he talked about oh well if you create a foundation offshore we don't care I mean like that's what everybody does that's like our go-to thing like he can't just say that and be accurate like he's he's actually not speaking truth about the law but you can see his mentality he's the number one regulator of this stuff in this country he is after you okay so being an on probably very difficult to do in practice but what about just setting up a dow um and launching it from a dow from a decentralized autonomous organization sure so like that's sort of another common one we get when people come to the firm and ask us uh you know I want to do this thing it's kind of sketchy from a regulatory standpoint I'm just going to Dow it and I'll be fine no you're not going to be fine um first of all an entity list Dao raises all sorts of insane issues with everything from 100 personal liability for all actions of said Dao to um really really weird uh tax uh issues now so let's just say that everybody in this audience we all form a dow together and half of us are non or pseudo-anon and half of us are disclosed and I'm a partner at a law firm in Denver and I'm a member if this Dow does something and there is a damage a plaintiff's attorney consume me Dave Rodman personally for the entire damage and it's on me to try to recover from all of the unknown people who I might not even know the real their real names they might be in Asia they might be in the Ukraine uh they could be down the street and I would never know that um so you know any of the exposed members of that are 100 liable and that's just civil liability um then you have examples like I was talking about these risks for years and then the ukidao uh suit happened I mean like that was terrible but it was validation of all the things that I've been saying so then the immediate next thing is the client says all right well we'll just throw an LLC around it call it good no you can't do that if you throw an LLC around it and you have more than 500 people in it and you have more than 10 million dollars of assets you have the same reporting requirements as Facebook as apple as Microsoft you get the report to the SEC and are you going to do that no are you able to do that no uh so you have these caps of participants and that that's just like if that Dow was meant to do like build widgets that Dao like most Dows are Venture based or have a venture component that limit of participants goes down to 99. how many Dows are limited to 99 people like actual dials like Constitution doubts how many members are of that Dao it's it just doesn't work so basically the answer to these clients is hey I hate to say this as an American but you can't do this in America you have to go offshore you have to use these certain special uh vehicles and unfortunately they're not cheap but they do the job of protecting you from a hundred percent general liability and from some very weird tax consequences yeah and I think maybe we'll go into the structures a bit but I I think something that comes up now for a lot of you probably is this sounds expensive I just have this idea that I don't even know will work out so like what's a way to have this like minimal viable test of will I go to jail if I do this and like what's the The Entity legal entity structure that I need to do to provide like the minimal of the amount of security and privacy for me as a Founder what what do you talk how should a Founder think through this so there's a tendency for like any specific service provider to say that they are the most important service provider so I recognize that but honestly talk to a lawyer who knows web3 before you start a company before you enter an accelerator spend a couple of bucks have a consult with them ask them lay out their project and like say do you see any problems with this they're probably going to say yes they might not but they're probably going to say yes and then ask them well how can we minimize them and they may say there is no way to minimize them or they might say hey here's how we'll do it XYZ you'll have some degree of risk but this is the most safe way to do it and that conversation depending on if you're in New York San Francisco it's going to cost you about a thousand dollars if you were to come talk to me it cost you about 600 bucks uh it'll be the most the best spent money that you have ever ever spent in your entire career as a Founder because you will avoid so many pitfalls that will cost you more money to try to fix to have like a little bit of a legal road map at the beginning it's I I'm trying to make it not sound self-serving because I don't want it to I'm sad that this is the state of the industry that we're in but you have to do it yeah and I I'd add to that so agree you know a couple thousand bucks it saves you a lot of headache later but there are other options but just keep in mind that a legal representative does it by a legal way but like you could also talk to an advisor talk to other Founders in the space ask what they have been doing in terms of structuring and then you kind of have a little bit more of a like um directed conversation with your lawyer and limit your legal fees but in terms of like the broad is this illegal I'm going to go to jail probably direct those at the lawyer but in terms of structuring best practices and things like that um you can go advisory route you can talk to friends other Founders in the space uh incubators accelerators those are all good methods to kind of get a lay of the land if you're completely clueless on the process but always prioritize your your lawyers uh Insight over your advisor's Insight your investors Insight your lawyer has a duty to you your lawyer has a malpractice insurance your lawyer has to be acting your best interest there's other things they might align maybe but they may not align perfectly and you're going to be the one shouldering that risk but like just to give credit where credits do I mean like this is a perfect example of somebody who took my advice good legal advice and has done it successfully like repeatedly so it's doable and you know belly aches on costs every once in a while and he's my best friend but uh you know it it's been worth its weight in gold we're up here talking to you yeah definitely and I do belly it's part of it I guess um let's let's uh and and again the caveat other this is not legal advice but um giving Founders like some best practices you hear all these different structures it should be Marshall Islands it should be Panamanian Cayman Foundation Co like um give us kind of the lay of the land of like best practices for companies Opera organizations operating in web 3 perhaps launching a token some things to keep in mind again not legal advice but just kind of General General uh input never launch a token from a US company ever do not do it um do not issue a token warrant from a U.S company I know that's kind of the sort of like rage right now do not do it because the way that you need to do it is you need to have a structure offshore ideally a Cayman Foundation company that owns a came an Exempted company that owns a BVI business company the BVI company issues the token Foundation company has no owners uh that's kind of the model for token issuance it also works really really well to corporatize a Dao that'll be your token issuance vehicle it's becoming standardized like we were one of the first firms to adopt it we're a small firm I'm very proud of that fact but it works but other big firms that want to keep their fees on Shore they'll be like oh we got to draft you token warrant for that entity offshore so what you're doing you're saying hey I'm an American company and I'm selling securities for an offshore vehicle that's illegal that's you're violating promoter laws don't do it there are ways around that um I think the one thing that you took away one of the one thing took away from this this conversation do not issue a token on Shore do not use a token warrant from the offshore vehicle if you issue a token warrant from the offshore vehicle you choose to do that nothing wrong with that um as long as you're following regassis means no U.S investors and we can go into that but um those two things don't issue a token from the United States don't issue a token warrant with the United States company yeah so as the token Warren thing I mean I do a lot of investing see this a lot so people are still making this what should they do instead it should be a token side letter like what's the best practices there it's the absolute best process is to have enough money to start the if you're gonna have a token is to have enough money to start that token structure which is expensive from the get-go and do all the token raises from there from a staff from a TPA talking purchase agreement I understand that that is prohibitive that you know that entity structure I described costs about 12 Grand uh C Corp in Delaware or Wyoming costs about 100 bucks I understand that so if you can't go straight offshore for your token well you got to do something in the middle a safe and a side letter is kind of a good idea um but as soon as you have enough money for Runway to to move to the offshore like basically the message is do as little bit of that running raising onshore through the U.S entity that probably has a safe note attached to it probably has a side letter get the minimum amount of money for the door to get your Runway and get your offshore Vehicles structured and then any future Equity raises that you want to do do on you the U.

S side and any future token sales that you want to do do from the from the offshore side and like investor gives you a thousand bucks and they want token and Equity give them a safe in the U.S give them a Saft in the offshore yes there are that that initial way that I described kind of links the two with the safe and the onshore and the the side letter to the sort of seed everything to get offshore do you want to do that as for as short a time as possible it is the one of the most sketchy parts of this and there's a there's a case uh the telegram case which you know you should all read it it's it should be required reading for Founders in this space and yeah it's full of technical jargon but like there's a reason why you should do it this way and it's all based on the very little case law that we have on this nascent industry yeah and I'll I'll just add I'll plug my talk on Friday if you are fundraising that's a whole nother conversation I'm doing a whole talk on it on Friday like taking your your company from idea to actually raising funds this is also super important kind of beyond the scope of this conversation but like thinking through those things as well as all the legal ramifications um do we want to do questions we've got five minutes well one other thing I would add is that like everybody's afraid of the SEC the cftc fincen the plaintiffs bar is only marginally less scary for those of you don't know what that is that is the Legion of plaintiff side attorneys that bring class actions against companies for violating laws it's a private right of recovery it's not a criminal thing but NBA top shots baseball cards on the Internet or basketball cards on the internet uh plaintiff's Bar says its Securities that's not the it's not the SCC saying that that's a plaintiff's attorney saying that and they don't really care about winning they care about extracting a gigantic settlement and that great gigantic settlement could just destroy your entire treasury uh Force you out of business um they're not looking to set precedent the way the SEC would they're not looking to put you in jail they're looking to extract max pain in the form of dollars from you and your company and they are motivated and they are resourceful and they are in every industry in the United States no matter what you are doing building cars medical devices dbd marijuana crypto and so uh one of the things that I tell people who come to the firm is yes The Regulators are the most scary thing you need to pay attention to them but you also have to realize that the plaintiff bar is also coming for you in the standard of proof they have to prove is way less than what a actual governmental agency has to prove so so all this sounds terrifying but just make sure you dot your eyes and cross your t's still build cool things still innovate still focus on building something that customers want to use but you know have it a healthy dose of caution on some of these things do you want to do a couple questions we have a few minutes maybe if anybody has a question just raise your hand and there's a micrunner over there thanks um just for my own education with regards to the Howie test do you feel that even if you like you think that the SEC is not gonna um how should I say this not gonna put so much stock and even if your company fulfills you know doesn't what is it called like fails all the legs of the Howie test um they're still gonna try to come after you and and you know run you out of business or something like that I mean again we can't possibly give a wide brush on this but like Gary Gensler has said that he has said other than Bitcoin you have a team that is that is working on a project and that token is going to increase in value because of their work I'm coming to get you like that was just published like last week he straight up said that yeah and we've got one more minute it's a popular last question I'd say Howie test is just one thing too the plaintiffs is is also very very terrifying so even if you don't how we test isn't an issue and you have like this plaintiff thing Max Payne my question is are you guys also helping to manage like pre-token issuance appraisals for tax purposes uh we don't do valuation at the firm but we do have uh two tax attorneys who spend all their time focusing on the tax consequences of this stuff which is a whole another conversation and is also mind-boggling unfair are they publishing anything anywhere to read their we don't have time to publish we are too busy we have too many clients and we are working like one-armed paper hangers cool so I think that was it for questions so I mean my takeaway Dave scares the crap out of people that's kind of what he does as a lawyer I'm also a huge Bull in this space yeah he's actually also wearing a a shirt about tornado cash so clearly a proponent for decentralization and what we're doing here but like I said before just maybe don't move fast and break things still focus on creating a product that users love and care about but um you know Dr Eisen cross your t's up up front maybe spend a couple a couple dollars on illegal fees get an advisor that knows what they're talking about hire a lawyer it doesn't have to be Dave Dave's a a Founder so he can understand the founder mindset especially like me pinching pennies and stuff like that you know he knows as a Founder doesn't have to be Dave but get get a lawyer on your team early early on to help you out with this stuff I guess that's my takeaway yeah I mean that's my takeaways it doesn't have to be us but um talk to a Savvy web three lawyer if you have the chance talk to a Savvy weapley lawyer who built their firm from nothing um because they'll have the same understandings of running a business and founding a company that you do so thanks everybody cheers guys thanks [Applause]