Sia launched as a fully functioning decentralized storage platform in 2015 with based on two digital assets. The first is the siacoin token, which is the only way to rent storage on the Sia network. The second is the siafund token, a digital asset that entitles the holder to a portion of the siacoins exchanged each time a file contract is created on the Sia network. Because siafund holders receive siacoins based on the volume of and value of file contracts entered into the Sia network, the siafund holder has an incentive to improve the storage platform and bring on more storage users. We feel this is a better model than many of the token models in use today, where we often see developers prioritizing token price over the core network utility.
There are 10,000 siafunds, and they are indivisible. Nebulous, the company that funded most of the core development for Sia prior to launch, currently holds 8,750 siafunds, and the other 1,250 siafunds are held by members of the Sia community.
We are happy to announce that Nebulous will be selling 750 siafunds to qualified investors in an upcoming Tokenized Security Offering (TSO). As more fully described in our Private Placement Memorandum (found at https://siafunds.tech), the siafunds will be sold in a modified dutch auction, where qualified investors bid for siafunds. The auction will be open for at least 24 hours, and investors are allowed to change or withdraw their bid at any point while the auction is open. When the auction closes, we will determine a winning price based on the bids. The winning price will be the lowest price at which we sell not more than 750 siafunds, rounded to the nearest cent. All winning investors will pay the clearing price for their siafunds, even if their bid was higher than the clearing price. The auction will be closed at a random, unannounced time between the second and fifth day of the auction.
We believe that tokens increase the efficiency of our economy, and also increase the access and participation within our economy. Under the right circumstances and with appropriate legal safeguards in place, we also believe that tokens can be a positive way to raise capital. We also believe that certain token models are broken, creating investor-hostile and user-hostile tokens in an effort to maximize company revenue. We believe that creators of tokens can do better, and that investors should demand a higher standard. We tried to create a token sale that matches what investors deserve.
We believe it is important to give investors time to consider their decision. Our token auction will be open for at least 24 hours, giving investors time to think over their investment. After bidding, investors may change or withdraw their bids at any time until the auction closes.
We believe that accurate price discovery is important to investors, and that all investors should be able to pay the discovered price. Poor price discovery is a problem with many token sales, and is actually also a problem with many IPOs in the traditional market. Often the price will jump or drop by a factor of 4 the day following the initial offering. We believe the Google IPO was a good example of an auction that effectively performed price discovery before any shares were sold. Inspired by this, we have also chosen an auction model that allows for price discovery to happen such that all investors get to participate at the market-determined price.
We are closing our auction at a random time to prevent last-second price manipulation. Without this randomness, bidders could change their bid at the last second to try to gain an advantage. We can eliminate this advantage by hiding the closing time of the auction, such that no bidders know when the auction will close until after it has closed.
We believe that presales and discounts should be fully disclosed. We closed a presale back in October that raised just over $1.07m so that we could finance our token sale (legal bills, token sale website, etc.). We plan to give these investors just under $1.29m in total to use when bidding in our token sale. This amounts to a 20% bonus, and we feel that 20% is appropriate given the extra risk that these investors accepted in paying for their siafunds more than 5 months before everyone else.
We believe it is important to treat the siafund token as a security. Investors will be buying tokens to see returns in the form of additional siacoins, and will be accepting the risk of financial loss. We therefore will be treating the siafund as a security in our auction, and we will be limiting our sale to qualified purchasers, complying with KYC and AML requirements, and otherwise taking steps to comply with all applicable securities regulation — with the understanding of course that the application of traditional securities laws and principles to the blockchain space is difficult and evolving.
We had originally hoped to make the Siafund token sale available to non-accredited investors. U.S. securities law has a relatively new means for doing so called a Reg A+ offering that is more cost-efficient for companies than a traditional initial public offering of securities. However the requirements of Reg A+, and in particular, the requirement for companies with a broad-based community of investors to engage the services of a third party transfer agent, would introduce elements of centralization to the Sia community that are unappealing to us. We did not want to introduce this type of centralization into the Sia platform, and therefore we choose against undertaking a Reg A+ token sale.
So instead of conducting a public offering via Reg A+, we will be selling siafunds in reliance on an exemption from public registration provided by a rule known as Reg D. Siafund holders will still have certain legal and contractual requirements to fulfill when selling siafunds; however they will be able to fulfill these requirements on their own, and will not be required to go through a third party to legally trade the token. The disadvantage of a Reg D offering is that only accredited investors will be allowed to participate. It is our hope that securities regulations are expanded in the future to allow the general public to participate in these types of offerings without requiring centralization.
This is a big step forward for Sia. The distribution of siafunds means that Nebulous will have more resources to power development, and it also means that a wider group of people beyond Nebulous and the existing community will be incentivized to improve the Sia platform. We are excited about our offering, and hope that you are excited as well.