By Mark S. Nelson, J.D.
INX Limited announced that it plans to offer its INX Token via an initial public offering expected to start on August 25, 2020. The Gibraltar-based company said it plans to use the proceeds from the IPO to build its digital and securities trading platforms. Previously, INX had confidentially submitted a draft registration statement to the SEC on Form F-1 in January 2018 and it also had filed a Form D while its registration statement underwent numerous amendments. As of publication, the SEC had not released staff comment letters, if any, on INX’s Form F-1, which became effective on August 20, 2020. INX announced the expected timing of the IPO before its registration statement became effective, although the company has since filed a supplemental prospectus, publicly acknowledged the effectiveness of the registration statement, and confirmed the timing of the offering via press release and a tweet.
Token offering. The IPO of INX’s INX Token will involve 130 million of 200 million tokens that can be created via the company’s smart contract. Holders of INX Tokens are to receive an annual pro rata distribution of 40 percent of the company’s net cash flow form operations, but these distributions can be made only if the company generates positive cumulative adjusted operating cash flow. The company disclosed that as of June 30, 2020, its adjusted operating cash flow was negative in an amount greater than $7 million. Distributions also will require board approval.
The IPO is to be priced at $0.90 per token with a minimum investment of $1,000. Investors would initially pay for their tokens in U.S. dollars, although Bitcoin, Ether and U.S. Dollar Coin (a stablecoin) could be used at a later time if the sale of tokens reaches the minimum offering requirement of $7.5 million. INX, however, said it does not plan to hold Bitcoin or Ether. The offering would end at the earliest of the following: (1) when all tokens have been sold; (2) one year after effectiveness of the registration statement; or (3) within a shorter time period fixed by the company.
Moreover, INX said there will be no mining of new INX Tokens and no mode for creating more INX Tokens than the 200 million permitted by smart contract. Similarly, INX’s smart contract does not allow INX to "burn" INX Tokens.
Business strategy. INX said that it envisions a two-phase development process in which it first builds out its digital trading platform for virtual currencies. INX said it can operate as a money transmitter in seven U.S. states, but that it plans to seek money transmitter licensure in states that require licenses within nine months after reaching the IPO’s minimum offering amount.
Phase two of its strategy involves building a securities trading platform. Here, the company said it may begin its securities trading business as an introducing broker that routes orders to other alternative trading systems (ATSs). However, the longer-term plan is for INX to become a registered broker-dealer and to operate its own ATS. A possible third phase, said the company, would involve creating a platform for the trading of derivatives such as futures, options, and swaps.
The risk factors section of INX’s supplemental prospectus is extensive. The company disclosed that it has no prior operating history, has not received any revenues since its creation in September 2017, and that its independent auditors have expressed concerns about its status as a going concern. INX also said there are other significant risks that could impact its plans, including its ability to make cash distributions and the general volatility of virtual currencies markets.
With respect to needed regulatory approvals, INX said in its supplemental prospectus: "Further, there is currently significant uncertainty regarding the application of federal and state laws and regulations to the trading of security tokens, including regulations governing market intermediaries, and this uncertainty may cause significant delay or may prevent us from developing our INX Securities trading platform and utilizing the INX Token as currently envisioned."
Corporate structure; EGC elections. INX is based in Gibraltar, although it also has an office in Israel where many of its executives are located. INX’s digital and securities trading subsidiaries are Delaware companies, while its solutions unit is located in Gibraltar. INX said it plans to relocate its principal office to the U.S. once its digital trading platform becomes operational.
INX noted that it may elect to use certain exemptions available to foreign private issuers and emerging growth companies (EGCs). With respect to its EGC status, INX asserted that it is an EGC and that it had elected not to take advantage of the delay in adopting new accounting standards. However, INX said it would take advantage of other exemptions for EGCs, including the exemption regarding the attestation to the effectiveness of its internal controls over financial reporting.