253G2 1 ea145258-253g2_openprops.htm OFFERING CIRCULAR

Filed Pursuant to Rule 253(g)(2)

File No. 024-11018

 

Offering Circular  

 

Open Props Inc.

 

Address:

12816 Inglewood Avenue #637
Hawthorne, California 90250

https://www.props.xyz/

 

Open Props Inc., formerly YouNow, Inc., (“Open Props,” “the Company,” “we,” “us” or “our”), a Delaware corporation, is qualifying the primary distribution of, in total, an additional 80,000,000 of a cryptographic token that exists on the Ethereum blockchain (the “Props Token”) and the secondary distribution by The Props Foundation Public Benefit Corporation (“Props PBC”), a Delaware public benefit corporation and wholly-owned subsidiary of the Company, of, in total, an additional 37,500,000 Props Tokens in the following ways:

 

  The Company is qualifying the primary distribution of up to 80,000,000 additional Props Tokens that will be used to reward users of Props Apps for in-app activities, including contributing content and attention to Props Apps; as one-time discretionary grants to users of Props Apps; to reward owners, operators and developers of Props Apps; and to reward parties that act as an oracle function by communicating certain information between the blockchains underlying the rewards (the “Props Offering”). The Company previously qualified the primary distribution of 135,000,000 Props Tokens.

 

  In addition, we are qualifying the secondary distribution of up to 37,500,000 additional Props Tokens by Props PBC that it will grant to persons developing key apps or otherwise contributing to network development efforts (the “Props PBC Offering”). Props PBC will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act of 1933, as amended (the “Securities Act”). Props PBC previously qualified the secondary distribution of 45,000,000 Props Tokens.

 

For further details regarding the Props Tokens, please see “Description of the Props Tokens Being Offered” beginning on page 81 of this offering circular.

 

   Price to public   Underwriter
discounts and
commissions
   Proceeds to
issuer
   Proceeds to other
persons
 
Per Token  $0.0600(1)  $0.00   $0.0600(1)  $0.00 
Total Maximum to the Company  $35,000,000(2)  $0.00   $35,000,000(2)(4)  $0.00 
Total Maximum to Props PBC  $15,000,000(3)  $0.00   $0.00(3)  $15,000,000(5)

 

(1)

Reflects the average “closing” price per Props Token for the month of June 2021 displayed on July 1, 2021 on coinmarketcap.com, an aggregator of token prices on digital asset exchanges, for Props Tokens trading on seven centralized digital asset exchanges outside the United States and on two decentralized digital asset exchanges. Prior to July 1, 2021, the Company and Props PBC issued Props Tokens qualified hereunder at the prior deemed offering price of $0.1369 per token. For all purposes in this Offering Circular, the price used on or after July 1, 2021 and on or before July 21, 2021 shall be $0.0600 per Props Token, unless changed pursuant to an amendment or supplement to this Offering Circular. Thereafter, the Company and Props PBC will continue to value the Props Tokens in the Props Offering and the Props PBC Offering on the first day of each calendar month at the average “closing” price for the tokens during the previous month displayed on coinmarketcap.com. See “Terms of the Offerings—Pricing.”

   
(2)

The Company is qualifying up to 80,000,000 additional Props Tokens that will be used to reward users of the Props Apps for in-app activities, including contributing content and attention to Props Apps; to reward Props App Developers; and to reward Oracles, at a deemed offering price of $0.0600 per Props Token, which price is subject to further change. See “Terms of the Offerings—Pricing.” The sum of the maximum “aggregate offering price” and “aggregate gross sales”, as those terms are defined in Rule 251(a) of the Securities Act, pursuant to the Props Offering and Props PBC Offering combined may not exceed $50,000,000 in any twelve month period. Assuming the maximum offering price in the Props PBC Offering is reached as described below, the sum of the maximum “aggregate offering price” and “aggregate gross sales” in the Props Offering may not exceed $35,000,000 in any twelve month period. The Company developed the YouNow Livestreaming App and operated it through February 29, 2020 when, pursuant to an asset sale agreement executed February 26, 2020, the ownership and operation of the app passed to a third party acquirer. See “Description of Business—Sale of the YouNow Livestreaming App.” Because each Props App Developer will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act, the issuance of Props Tokens from the Company to each of these persons may be characterized as an underwriting commission.

 

 

 

 

(3)

The Company is qualifying the secondary distribution by Props PBC of up to 37,500,000 additional Props Tokens that it will grant to persons contributing to network development efforts at a deemed offering price of $0.0600 per Props Token, which price is subject to further change. See “Terms of the Offerings—Pricing.” For more details, please see the section of this offering circular captioned “Plan of Distribution.” The sum of the maximum “aggregate offering price” and “aggregate gross sales” pursuant to the Props PBC Offering may not exceed $15,000,000 in any twelve month period. Because Props PBC will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act, the issuance of Props Tokens from the Company to Props PBC may be characterized as an underwriting commission. See “Other Offerings” for additional information. Any of the Props Tokens distributed by Props PBC in connection with this offering will, however, be distributed for no cash consideration.

 

(4) Before deducting expenses estimated to be approximately $2.5 million, including legal fees, accounting fees and printer costs. For more details, please see the section of this offering circular captioned “Plan of Distribution.” This is a “best efforts” offering. There is no minimum number of Props Tokens that must be distributed in this offering.

 

(5) Props PBC is a wholly-owned subsidiary of the Company, and as a result the deemed proceeds from the Props PBC Offering may indirectly benefit the Company.

 

The Props Tokens are speculative and involve substantial risks. You should participate in the Props Network (as defined below) or purchase these securities only if you can afford a complete loss of your investment. See “Risk Factors” beginning on page 11 and “Summary of Risk Factors” beginning on page 9 to read about the more significant risks you should consider before purchasing or receiving our Props Tokens.

 

The offerings have been qualified by the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) and include an amount of Props Tokens that we reasonably expect to be offered and sold within two years from the date of initial qualification, unless subsequently amended. The sum of the maximum “aggregate offering price” and “aggregate gross sales”, as those terms are defined in Rule 251(a) of the Securities Act, pursuant to the Props Offering and Props PBC Offering combined may not exceed $50,000,000 in any twelve month period. The sum of the maximum “aggregate offering price” and “aggregate gross sales” pursuant to the Props PBC Offering may not exceed $15,000,000 in any twelve month period.

 

Props Tokens will be offered to reward users of Props Apps; as one-time discretionary grants to users of Props Apps; to reward Props App Developers; and to reward Oracles. The Props Tokens to be offered to users of a Props App will be offered through that app. Each Props App Developer will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act because each Props App Developer will be receiving Props Tokens from the Company with a view to distributing Props Tokens to users of each such Props App. The Props Tokens to be offered through grant offerings will be distributed at Props PBC’s direction. Props PBC will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act because it will be receiving Props Tokens from the Company with a view to distributing Props Tokens to grant recipients. There is no other underwriter or sales agent for the Props Tokens.

 

There is no minimum number of Props Tokens that we must sell in order to conduct a closing in these offerings. We have made no arrangements to place subscription funds in an escrow, trust or similar account. Props Tokens issued under these offerings will be issued on a continuous basis under Rule 251(d)(3) under the Securities Act. For further details please see the section of this offering circular captioned “Plan of Distribution.

 

The United States Securities and Exchange Commission does not pass upon the merits of or give its approval to any securities offered or the terms of the Offering, nor does it pass upon the accuracy or completeness of any offering circular or other solicitation materials. These securities are offered pursuant to an exemption from registration with the Commission; however, the Commission has not made an independent determination that the securities offered are exempt from registration.

 

Generally, no sale may be made to under Regulation A if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. We deem this limitation to not apply to non-cash consideration, and therefore we deem this limitation to not limit the number of Props Tokens that may be received through the Company’s app rewards program or validator rewards program or through Props PBC’s grant program.

 

For general information on investing, we encourage you to refer to www.investor.gov.

 

The Props Tokens do not trade on a stock exchange, securities exchange or other trading market in the United States. This means that it may be difficult to sell your Props Tokens.

 

We are following the “Offering Circular” disclosure format under Regulation A.

 

The date of this offering circular is August 4, 2021

 

 

 

 

IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR

 

Please carefully read the information in this offering circular and any accompanying offering circular supplements, which we refer to collectively as the “offering circular”. You should rely only on the information contained in this offering circular. We have not authorized anyone to provide you with different information. This offering circular may only be used where it is legal to sell these securities. You should not assume that the information contained in this offering circular is accurate as of any date later than the date hereof or such other dates as are stated herein or as of the respective dates of any documents or other information incorporated herein by reference.

 

This offering circular is part of an offering statement that we filed with the SEC, using a continuous offering process. Periodically, as substantive changes from or additions to the information set forth herein occur, we will provide an offering circular supplement that may add, update or change information contained in this offering circular. Any statement that we make in this offering circular will be modified or superseded by any inconsistent statement made by us in a subsequent offering circular supplement. The offering statement we filed with the SEC includes exhibits that provide more detailed descriptions of the matters discussed in this offering circular. You should read this offering circular and the related exhibits filed with the SEC and any offering circular supplement, together with additional information contained in our annual reports, semi-annual reports and other reports and information statements that we will file periodically with the SEC. See the section entitled “Where You Can Find Additional Information” below for more details.

 

The offering statement, including any amendment thereto, and all supplements and reports that we have filed or will file in the future can be read at the SEC website, www.sec.gov.

 

The Company will be permitted to make a determination that the participants in these offerings are “qualified purchasers” in reliance on the information and representations provided by the holder regarding the holder’s financial situation. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

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TABLE OF CONTENTS

 

  Page
IMPORTANT INFORMATION ABOUT THIS OFFERING CIRCULAR i
OFFERING SUMMARY 1
RISK FACTORS 11
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS 49
USE OF PROCEEDS 51
DILUTION 52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 53
MANAGEMENT 68
EXECUTIVE COMPENSATION 72
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 77
PRINCIPAL STOCKHOLDERS 79
DESCRIPTION OF THE PROPS TOKENS BEING OFFERED 81
DESCRIPTION OF THE PROPS TOKEN’S ROLE IN HELPING TO ALIGN INCENTIVES OF NETWORK PARTICIPANTS 95
DESCRIPTION OF THE PROPS NETWORK 98
OTHER OFFERINGS 107
DESCRIPTION OF BUSINESS 112
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS 125
SELLING TOKENHOLDER 129
PLAN OF DISTRIBUTION 130
LEGAL MATTERS 137
INDEPENDENT AUDITORS 137
WHERE YOU CAN FIND ADDITIONAL INFORMATION 137
GLOSSARY 138
ANNEX A: YOUNOW LIVESTREAMING APP PLAN OF PROPS TOKEN USAGE A-1
ANNEX B: PALTALK, INC. PLAN OF PROPS TOKEN USAGE FOR THE CAMFROG APP B-1
ANNEX C: PALTALK, INC. PLAN OF PROPS TOKEN USAGE FOR THE PALTALK APP C-1
ANNEX D: LISTIA INC. PLAN OF PROPS TOKEN USAGE FOR THE LISTIA APP D-1
ANNEX E: TEGGER DLT INC. PLAN OF PROPS TOKEN USAGE FOR THE TEGGER APP E-1

 

Offering Circular

 

Neither we nor Props PBC has authorized anyone to provide any information or to make any representations other than those contained in this offering circular or in any free writing prospectuses we have prepared. Neither we nor Props PBC takes any responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This offering circular is an offer of only the Props Tokens offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this offering circular is current only as of its date.

 

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OFFERING SUMMARY

 

This offering summary highlights material information regarding our business and these offerings. Because it is a summary, it may not contain all of the information that is important to you. To understand these offerings fully, you should read the entire offering circular carefully, including the “Risk Factors” and “—Summary of Risk Factors” sections, before making a decision to participate in the Props Network or invest in Props Tokens. Unless the context requires otherwise, in this offering circular the terms “we,” “us” and “our” refer to Open Props Inc., the issuer of the Props Tokens and its consolidated subsidiaries, unless the context indicates otherwise.

 

This offering circular uses defined terms. The initial use of each defined term in the offering summary, in the risk factors and in the remainder of this offering circular is rendered in bold. This offering circular also uses certain technical terms. Some of these technical terms are defined in the “Glossary” beginning on page 138.

 

OVERVIEW

 

The Company is the issuer of “Props Tokens,” a cryptographic token that exists on the Ethereum blockchain, and the operator of the “Props Network,” a blockchain-based infrastructure that is designed to include an open, decentralized network of consumer-facing mobile and web-based software applications, or “apps,” (collectively, “Props Apps”) that incorporate the Props Tokens into their operations. We view Props, by which we mean the Props Network, Props Apps, Props Tokens and other elements of our infrastructure, collectively, as a project that incorporates both open-sourced and proprietary technology and apps owned, developed and/or operated by certain persons or entities we refer to as “Props App Developers.” Our Props project is intended to empower users in the digital economy and help app developers align with their engaged users. We expect Props Apps to operate, in some regards, as traditional apps that may be downloaded and accessed by users in a manner similar to any other mass market app, but Props Apps will share a common, special feature: the ability to provide an extra level of premium, built-in functionality to users who hold Props Tokens.

 

There are currently five Props Apps, all of which are designed, or are being designed, to give Props Tokens holders these premium in-app experiences. The first such app was created by the Company and is now owned and operated by a third party. See “Description of Business—Sale of the YouNow Livestreaming App.” It is a livestreaming application, which we refer to as the “YouNow Livestreaming App.” See “Annex A: YouNow Livestreaming App Plan of Props Token Usage” for additional information. In addition, the following third-party app developers have incorporated functionalities for Props Tokens into apps: Paltalk, Inc. has incorporated Props into two apps, the “Camfrog App” and the “Paltalk App” (see “Annex B: Paltalk, Inc. Plan of Props Token Usage for the Camfrog App” and “Annex C: Paltalk, Inc. Plan of Props Token Usage for the Paltalk App” for additional information); Listia Inc. has incorporated Props into the “Listia App” (see “Annex D: Listia Inc. Plan of Props Token Usage for Listia App” for additional information); and Tegger DLT Inc. has incorporated Props into the “Tegger App” (see “Annex E: Tegger DLT Inc. Plan of Props Token Usage for Tegger App” for additional information. Annexes A through E will collectively be referred to herein as “The Props Apps Annexes”. We expect these Props Apps, as well as additional apps that could join the Props Network in the future, and the Props Network in general, will provide the types of functionalities described below, subject to each app’s individual terms and conditions:

  

  Application-Specific Premium Features. Props Tokens may entitle holders to enjoy key features in apps, including, for example, the power to “upvote” or recommend content, a business or a service provider to other users, discounts for the purchase of in-app services, currencies or other in-app virtual goods, additional gameplay features like extra games or content only available to Props Token holders and the ability to vote on various matters relating to the rules of an App, its content, rules or desired features. The existing premium features for Props Tokens within the existing Props Apps are described in “The Props Apps Annexes.

 

  Unit of Value Transfer across Props Apps. Props Token holders may in the future be able to send each other Props Tokens directly, from one user’s wallet to another—thereby allowing Props App users to send each other gifts and share the other benefits of holding Props Tokens in these apps, which may involve “tipping.” See “Description of the Props Tokens Being Offered—Token Transfers.

 

  In-App and Props Network Voting. Props Tokens may in the future allow holders to influence potential changes to the rules of a Props App, its content or desired features by voting. In addition, in the future, Props Token holders may be able to provide votes on key issues affecting the network.

 

We have designed the Props Network so that it incorporates Props Apps into a functioning network and token economy on the Props Network. See “Description of the Props Network—the Props Apps” for an additional description of Props Apps generally. We continue to work to expand the number of Props Apps and the functionalities for Props Tokens across apps, and to enhance the blockchain-based infrastructure of the Props Network and the tools available to users that help make all this possible. In addition to the five Props Apps currently or soon to be operating on the Props Network, other apps will be working toward integrating Props Tokens and joining the Props Network as well.

  

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In part, the Props Network will encourage growth and additional participation by, over time, rewarding activities popular with the user base and encouraging growth. These rewards will be made through a blockchain-based “smart contract” (the “Protocol Rewards Engine”). An algorithm programmed into the Protocol Rewards Engine will allocate rewards among the developers operating Props Apps. The Protocol Rewards Engine’s app rewards will operate to make Props Tokens available as rewards to users of Props Apps and as rewards to Props App Developers. For specific information regarding rewards that can be earned in the Props Apps, see “The Props Apps Annexes.”
These distributions will be made pursuant to the offering statement in which this offering circular is included. See “Plan of Distribution” for additional details.

 

Additionally, the Props Network will also support increases in network participation with an infrastructure to support this rewards program. The Protocol Rewards Engine will also reward “Oracles” – the persons or group of persons that each act as oracles from the Algorand blockchain to the Protocol Rewards Engine on the Ethereum blockchain by communicating the number of Props Apps users earning “Pending Props” in each Props App, and the aggregate Pending Props balances of those users to the Protocol Rewards Engine. Pending Props is our accounting mechanism used to signify who is provisionally entitled to receive Props Tokens. Because the Company is one of several Oracles, the Protocol Rewards Engine will operate to make more Props Tokens available for issuance by the Company, and the Company may then distribute these Props Tokens pursuant to the offering statement in which this offering circular is included. See “Plan of Distribution” for additional details. Rewards of Props Tokens issued to third party Oracles will also be made pursuant to the offering statement in which this offering circular is included. Further, Props PBC will make secondary distributions of Props Tokens pursuant to the offering statement in which this offering circular is included as grants to persons who may contribute significantly to the development of the Props Network. See “Plan of Distribution” for additional details. Props PBC anticipates that recipients in the grant program pursuant to the offering statement in which this offering circular is included may be persons developing key apps or otherwise contributing to Props Network development efforts.

 

Props Tokens are designed to reward user engagement within Props Apps and to encourage growth in app activity. The token allocation mechanics are designed to attract additional independent developers interested in building user-empowering apps to incorporate Props Tokens and join the Props Network, and enable them to use Props Tokens as part of those user-empowering apps. This will, in turn, provide opportunities to reward the creation and maintenance of popular Props Apps and, also, content contribution and other user contributions to Props Apps.

 

Rewards of Props Tokens to users of Props Apps are not made immediately upon completing the in-app activities necessary to earn the rewards. In order to obtain Props Tokens, users must have a digital asset wallet. See “—Token Transfers” for additional information about the process of associating Props Tokens with a public key or wallet address on Ethereum. In addition, rewards are made subject to additional administrative steps and checks that must be completed prior to a Props App user claiming Props Tokens, including know-your-client (“KYC”) and anti-money laundering (“AML”) checks, completion of all requested tax forms and other required documentation, and, potentially, fraud checks. Users are able to receive the rewards only when they have completed all of these necessary steps. Until these steps are completed, one or more Pending Props are recorded for users. Pending Props recorded in connection with performance of activities in the Props Apps may expire if a user does not complete these steps within a certain time. See the section below entitled “Description of the Props Tokens Being Offered–Receiving Props Tokens.”

 

TERMS OF THE OFFERINGS

 

Summary In total, we are qualifying the distribution of up to 117,500,000 additional Props Tokens as follows:
   
Props Offering The Company is qualifying the primary distribution of up to 80,000,000 additional Props Tokens in connection with the Props Offering. These Props Tokens may be issued as rewards to users of either of the Props Apps; as one-time discretionary grants to users of the Props Apps; to reward app developers who integrate their apps into the Props Network; and to reward parties that act as an oracle function by communicating certain information between the blockchains underlying the rewards. The number of Props Tokens qualified hereunder represents the maximum amount of Props Tokens that we reasonably expect to be offered and sold within two years from the initial qualification date. Two years ago, we qualified the primary distribution of up to 135,000,000 Props Tokens in connection with the Props Offering. In the first two years of the Props Offering, we distributed 61,187,903 Props Tokens in connection with the Props Offering.
   
Props PBC Offering We are qualifying the secondary distribution of up to 37,500,000 additional Props Tokens in connection with the Props PBC Offering. These Props Tokens may be distributed by Props PBC as grants pursuant to the offering statement in which this offering circular is included. The number of Props Tokens qualified hereunder represents the maximum number of Props Tokens that we reasonably expect to be offered and sold within two years from the qualification date. Two years ago, we qualified the primary distribution of up to 45,000,000 Props Tokens in connection with the Props PBC Offering. In the first two years of the Props PBC Offering, we distributed 17,100,000 Props Tokens in connection with the Props PBC Offering.

 

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Participant Qualifications

Regulation A generally requires that persons receiving securities either be “accredited investors” within the meaning of Regulation D under the Securities Act or that any other investor’s investment in the securities does not represent more than 10% of the greater of their annual income or net worth (for natural persons), or 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons). We deem this limitation to not apply to non-cash consideration, and therefore we deem this limitation to not limit the number of Props Tokens that may be received through the Props App rewards program or Oracle rewards program or through Props PBC’s grant program.

 

In addition, we have taken the position that the New York BitLicense Regulatory Framework does not apply to the issuance of cryptographic tokens that are securities. As a result, residents of most states may participate in these offerings, including New York residents.

 

The owner and operator of each Props App may require that individuals meet minimum age requirements in order to participate in the offering of rewards to users of that Props App or to receive Props Tokens as one-time discretionary grants to users of that Props App. These restrictions may be described in terms and conditions for each Props App.

 

We have offered and intend to offer Props Tokens in the Props Offering to qualified purchasers in most states of the United States. In the Props Offering, we intend to distribute only up to a maximum of $1 million of Props Tokens in the state of Illinois and $2 million of Props Tokens in the state of Washington. We will not offer Props Tokens through the Props Offering within Arizona, Nebraska or Texas or to any resident of those states. There may be additional states that prohibit or limit us from offering Props Tokens to their residents. In any state that prevents us from, or significantly limits our ability to, offer Props Tokens in that state, we may seek to work with that state’s regulatory bodies so that, at some time in the future, the state would permit us to offer our Props Tokens to its residents. We reserve the right to not offer Props Tokens in additional states. With respect to the Props PBC grant offering, Props PBC only intends to grant tokens in states where the grant is permitted, and we will need to make such determinations on a grant-by-grant basis. Should we grant Props Tokens to residents of Texas as part of the Props PBC grant offering, we will only distribute up to a maximum of $1 million of Props Tokens in the state of Texas.

   
Pricing

The price of the Props Tokens to be distributed in the Props Offering and Props PBC Offering following qualification of the post-effective amendment to the offering statement of which this offering circular is a part will be deemed to be $0.0600 per Props Token, which price is subject to further change, as follows.

 

The Company and Props PBC have valued the Props Tokens in the Props Offering and Props PBC Offering at the average closing price for the tokens during the month of June 2021, as displayed on July 1, 2021 at https://coinmarketcap.com/currencies/props/historical-data/. The closing price is based on the price at which Props Tokens trade on seven centralized digital asset exchanges outside the United States and two decentralized digital asset exchanges. None of these exchanges are regulated and, as such, the information they provide may not be as reliable as information from regulated exchanges. As of July 1, 2021, the Company and Props PBC will value the Props Tokens in the Props Offering and the Props PBC Offering at the end of each calendar month at the average closing price for the tokens during that month. The closing prices can be found at https://coinmarketcap.com/currencies/props/historical-data/. In any future public filings that we make on EDGAR on Forms 1-A or 1-K, we will disclose any changes to the price of the Props Tokens to be distributed pursuant to the offering statement in which this offering circular is included We may use different prices for Props Tokens in private placements. As disclosed in the offering circular, prior to qualification, we sold Props Tokens, and have since sold Props Tokens, in private placements and at various prices per Props Token. In addition, we have issued Props Tokens via the Protocol Reward Engine since the initial qualification of this offering, at a deemed price of $0.1369 per Props Token. Subsequent to the initial qualification of this offering, Props Tokens began trading on both centralized and decentralized digital asset exchanges, and trades for at least one million Props Tokens were executed through or on exchanges.

 

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How to Participate The Company and Props PBC intend to distribute Props Tokens under this offering circular, as described below. Each participant will also be required to complete AML, KYC and other investor verification procedures and, potentially, fraud checks in order to participate.
   
Participation in the Props Offering

The Company is qualifying the primary distribution of up to an additional 80,000,000 Props Tokens, in addition to the 135,000,000 Props Tokens originally qualified, that will be used to reward users of Props Apps for in-app activities, including contributing content and attention to that app; to award as one-time discretionary grants to users of Props Apps; to reward the Props App Developers; and to reward Oracles, for a deemed price of $0.0600 per Props Token, which price is subject to further change. See “Terms of the Offerings—Pricing.”

 

Users of a Props App who wish to receive Props Tokens in the Props Offering must, prior to receipt of Props Tokens, review and accept the terms and conditions for use of that app and complete certain other administrative steps. Each participant in this program seeking to receive rewards or a one-time grant in Props Tokens will be provided with an electronic copy of the offering circular prior to receipt. For more details, please see the section of this offering circular captioned “Plan of Distribution.”

 

Props PBC selects the persons to serve as Oracles and Props App Developers in its sole discretion. For more details, please see the section of this offering circular captioned “Plan of Distribution.”

   
Participation in the Props PBC Offering Props PBC is qualifying the secondary distribution of up to 37,500,000 additional Props Tokens that it will grant to persons developing key apps or otherwise contributing to network development efforts, in addition to the 45,000,000 Props Tokens originally qualified. Each participant in this program seeking to receive a grant in Props Tokens will be provided with an electronic copy of the offering circular prior to receipt. For more details, please see the section of this offering circular captioned “Plan of Distribution.”
   
Term Upon the post-effective amendment to the offering statement of which this offering circular is a part being qualified by the SEC, these offerings will be conducted as a continuous offering (and not on a delayed basis) pursuant to Rule 251(d)(3)(f) of the Regulation A under the Securities Act. See “Plan of Distribution.”
   
Recordation of Ownership Ownership of the Props Tokens distributed through these offerings will be recorded on the Ethereum blockchain at the point when those Props Tokens are delivered.

 

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Trading of Props Tokens The Props Tokens distributed in these offerings will not be restricted securities under federal securities law, and the Company anticipates that, upon issuance, these tokens will be usable without restriction on the Props Network and freely tradeable on a registered exchange or alternative trading system for purposes of federal securities laws. There are currently no national securities exchanges or exchanges that have been approved by the Financial Industry Regulatory Authority (“FINRA”) or registered under Form ATS with the Securities and Exchange Commission (which we refer to in this offering circular as “registered exchanges or alternative trading systems”) to support the trading of Props Tokens on the secondary market in the United States. If such a registered exchange or alternative trading system is approved by FINRA for the trading of Props Tokens by investors subject to the United States federal securities laws and does commence operations, we will notify investors by filing a supplement to this offering circular (if these offerings are still continuing at that time) and a Form 1-U, and posting a notice on https://www.props.xyz/token, and seek to have the Props Tokens listed for trading on such exchange or alternative trading system to the extent its listing requirements or rules can reasonably be complied with by the Company. Holders of Props Tokens that wish to transfer their Props Tokens will be required to make their own determination as to whether such transfer is in compliance with state and foreign securities laws. We have entered into agreements with three digital asset exchanges outside the United States pursuant to which Props Tokens are listed on those exchanges. Such digital asset exchanges have agreed to take steps to prevent U.S. persons from trading Props Tokens on those exchanges. Props Tokens are also listed on four centralized digital asset exchanges and two decentralized digital asset exchanges with which we have not entered into agreement
   
Terms of Props Tokens

The material terms of the Props Tokens are described under “Description of The Props Tokens Being Offered—Terms of the Token Code.” Further, Props Tokens will have certain functionalities inside of Props Apps, including application-specific premium features. See “Description of The Props Tokens Being Offered—Functionality for Users” for additional detail. The benefits Props Tokens afford to users of the Props Apps are described under The Props Apps Annexes

 

Holders of Props Tokens do not receive an interest in the profits or losses of the Company, its affiliates or any Props App Developer. Holders of Props Tokens also do not receive any rights to distributions from the Company, its affiliates, or any Props App Developer, or any legal or contractual right to exercise control over the operations or continued development of Open Props, its affiliates or any Props App Developer. Holders of Props Tokens do not receive a right to any repayment of principal or interest. Holders of Props Tokens do not have voting rights with respect to the Company, its affiliates or any Props App Developer. Also, the description or statement of the properties of the Props Tokens and the Props Network in this offering circular, or elsewhere, does not create any binding obligation on the Company with respect to the Props Tokens or the holders of the Props Tokens following the tokens’ delivery in these offerings. In addition, holders of the Props Tokens do not have any rights to convert their Props Tokens into any other security or, by virtue of their ownership of a Props Token, any rights to acquire any additional Props Tokens. We are also not aware of any liabilities that are owed by or to holders of Props Tokens solely by virtue of owning such Props Tokens.

 

THE PROPS TOKEN’S ROLE IN HELPING TO ALIGN INCENTIVES OF NETWORK PARTICIPANTS

 

Props Tokens play key roles in the incentive structures that are a part of the Props Network infrastructure, including the functions that Props Tokens have for users of Props Apps. See “Description of the Props Token’s Role in Helping to Align Incentives of Network Participants” for additional details. Props Tokens are issued for the performance of these functions.

 

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The following roles are types of distributions being qualified under this offering circular, as described below:

 

  Props Tokens may be issued to users for in-app activities in a Props App. The Company is qualifying with the offering statement in which this offering circular is included the distribution of Props Tokens by the Company to users of Props Apps. The methods for determining the amount of Props Tokens to be issued to users of the Props Apps for in-app activities is described in “The Props Apps Annexes.” Props Tokens may also be issued as discretionary grants to significant users of a Props App in order to “grandfather” their pre-existing social statuses in that Props App into newly-established Props Token status levels. Our officers, directors, employees and their affiliates, and the officers, directors and employees of each Props App Developer, and their affiliates, may be eligible to receive rewards of Props Tokens for their in-app activities in the Props Apps in the same manner as any other user of the Props Apps. See “Description of The Props Token’s Role in Helping to Align Incentives of Network Participants—Incentives for Props App Content—Creators and Other Props App Users” for additional detail.

 

  Props Tokens may be used by Props PBC to make grants to key Props Network participants. The Company is qualifying with the offering statement in which this offering circular is included the distribution by Props PBC of Props Tokens as grants to these key Props Network participants. Props PBC’s methods for determining the amount of Props Tokens to be distributed as grants to key Props Network participants is described under “Description of The Props Token’s Role In Helping To Align Incentives of Network Participants—Grants to Key Network Participants.”

 

  Props Tokens may be issued by the Company to Oracles. The Company is one such Oracle and, in addition to the Company, two other entities currently serve as Oracles. In the future, additional or different parties may serve as Oracles. Because the Company will be one of several Oracles, the Protocol Rewards Engine will operate to make more Props Tokens available for issuance by the Company, and the Company may then distribute these Props Tokens pursuant to the offering statement in which this offering circular is included. Rewards of Props Tokens issued to third party Oracles will also be made pursuant to the offering statement in which this offering circular is included.

 

In addition, Props Tokens will also play key roles in the Props Network in ways that do not require qualification under this offering circular and that may be addressed in future amendments or supplements as described below:

 

  As described above, Props Tokens may entitle holders to access premium features on Props Apps and, also, in the future, to share these experiences by transferring Props Tokens as tips to content creators, friends and other users or otherwise by transferring Props Tokens to any other person as described in “Description of the Props Tokens Being Offered—Token Transfers.”

 

  Props Tokens may be sold by Props App Developers. Any distribution of Props Tokens by the Company in the future will be registered or exempt from registration under the Securities Act. Props App Developers will be required to make their own determination as to whether any sale by such Props App Developer is in compliance with federal, state and foreign securities laws. The Company is not qualifying with this offering circular the distribution by the Company or any Props App Developer of Props Tokens for cash.

 

  Props Tokens may be sold by Props PBC to support Props PBC’s ongoing operations. The Company is not qualifying with this offering circular the distribution by Props PBC of Props Tokens for cash.

 

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THE PROPS NETWORK

 

As more fully described in “Description of the Props Network,” the Company has created open-source software that helps integrate apps into the Props Network, and once an app developer has integrated portions of the open-source software, Props PBC may admit the new app to the Props Network by updating the key Protocol Rewards Engine “smart contract” on the Props Network to recognize that developer’s app as a Props App.

 

When integrated into the Props Network, a Props App’s users may enjoy extra benefits from holding and using Props Tokens, including, in the future, by transferring them within the Props App (or, potentially at some time in the future, across Props Apps within the Props Network) to other Props App users. Integration into the Props Network will also allow the Props App to more easily read information from the Props Network’s blockchain-based infrastructure that may enrich user experience, including Props Token balances on the Ethereum blockchain and, also, potential entitlements to receive Props Tokens upon the completion of steps required in order to receive Props Tokens.

 

Separate from the user experience and functionalities within the Props Apps that the Props Network infrastructure enables, we also intend for this infrastructure to play an important role in incentivizing key functions and participation in the network. The Protocol Rewards Engine “smart contract” will over time cause the issuance of 400,000,000 Props Tokens as “daily rewards” and “Oracle rewards”. See “Description of the Props Network—The Protocol Rewards Engine” for additional detail and explanation regarding these allocations.

 

The Props Network is still being developed, and initially, the incentive infrastructure will entail operations undertaken primarily by the Company and Props PBC: the Company is currently the sole developer of open-source software for the Props Network and the Company is one of the Oracles that is responsible for acting as an oracle to the Protocol Rewards Engine. The Props Network’s incentive structure and substantial token allocation for contributing developers is, however, designed to attract additional independent developers interested in building apps incorporating functionality for Props Tokens to join the Props Network. The Props Network’s infrastructure is also being designed to incorporate additional developers into a functioning network and token economy when these additional developers are ready to begin operating Props Apps on the Props Network. See “Description of the Props Network—The Props Apps” for additional detail.

 

We believe that the infrastructure we have developed and are continuing to enhance, together with the network of Props Apps and dedicated user base that has followed and that we anticipate will follow from our distribution of Props Tokens, is helping make the Props Network one of the next generation of digital media platforms. We believe it empowers and will continue to empower content creators, developers and users to better align incentives around the entire digital media value chain: app developers will be incentivized to build apps for a community of users who are, in turn, incentivized to participate by virtue of owning a token that can appreciate in utility and value with the network’s growth. We anticipate that these incentives will simultaneously develop both a large and loyal user base and a large and diverse application ecosystem and economy.

 

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PROPS APPS

  

We have designed the Props Network so that it incorporates Props Apps developed, operated and/or owned by Props App Developers into a functioning network and token economy. See “Description of the Props Network—the Props Apps” for an additional description of Props Apps generally. We continue to work to expand the number of Props Apps and the functionalities for Props Tokens across apps, and to enhance the blockchain-based infrastructure of the Props Network that helps make all this possible. In addition to the Props Apps currently operating on the Props Network, we anticipate that other apps will work toward integrating Props Tokens into their platforms as well.

 

Each Props App has its own rewards system to reward and incent their user community. In the case of the YouNow Livestreaming App, users may earn Props Tokens in exchange for their distribution of live content via the app. The amount of Props Tokens that may be received by a YouNow Livestreaming App user is determined by a formula that factors the amount of activity and engagement they generate, as measured by the amount of “likes” and virtual goods they receive from viewers, and the cumulative watch time they generate. Other Props Apps have various rewards systems that have been set by the relevant Props App Developers. See “The Props Apps Annexes.” The amount of Props Tokens that may be received by a Props App user from each Props App is determined by a formula that factors in, among other things, the amount of activity and engagement the user generates. The distribution of Props Tokens to users of the Props Apps is being qualified under this offering circular. Other apps that become Props Apps may establish their own procedures for determining how users may earn Props Tokens.

 

THE COMPANY

 

Corporate History

 

The Company is a Delaware corporation founded in April 2011 under the name Bnow, Inc. On November 19, 2012, the name was changed to YouNow, Inc. On August 17, 2020, we changed our name to Open Props Inc. Since inception, the Company has been in the live streaming video industry and was the first company to popularize social, live video streaming on mobile devices in the United States.

 

Until the end of February 2020, the Company developed and operated consumer-facing participatory video applications incorporating uses for digital currencies. Since 2017, the Company has leveraged its technology, expertise, user community and other assets to build the infrastructure for an open, decentralized digital network of apps called the Props Network. Given the Company’s substantial past experience in developing and operating a consumer-facing mass market app using digital currency, we believe we are uniquely positioned to help develop this next-generation digital economy. On February 26, 2020 the Company sold its YouNow Livestreaming App to an unaffiliated third party and entered into a service agreement so that the YouNow Livestreaming App remains on the Props Network and is a Props App.

 

Props PBC is a Delaware public benefit corporation formed in September 2018, with a designated public benefit purpose of creating an open, sustainable and equitable media network that fairly rewards all participants in the Props Network for their contributions to the network, by supporting and promoting the growth, research, development, and adoption of the protocol and token underlying the Props Network.

 

Management Team

 

As of July 15, 2021, the Company’s team, consisting of four full-time staff and ten contractors, has been building the Props Network. In so doing, we believe that the Company’s team is further innovating and pioneering a next-generation extensible platform that leverages the combined power of crypto-economics and real-time participation in digital media experiences.

 

Other Offerings

 

We have sold rights to receive Props Tokens in various private offerings in the past, and in March and April 2019, we distributed Props Tokens to certain accredited investors who held these rights, as more fully described under “Other Offerings.” In addition, in June 2019, we distributed Props Tokens to holders of our DPAs, as more fully described under “Other Offerings.” In April 2020, we sold Props Tokens with attached warrants in private placements with multiple investors. In May 2021, certain of those investors exercised their warrants. See “Other Offerings—April 2020 Private Placements.” In the future, we may sell additional rights to receive Props Tokens or Props Tokens.

 

In addition, the Company has issued a total of 100,000,000 Props Tokens to Props PBC, and Props PBC may distribute up to 37,500,000 of these Props Tokens pursuant to the offering statement in which this offering circular is included. Props PBC previously qualified the secondary distribution of 45,000,000 Props Tokens pursuant to the offering statement in which this offering circular is included, and issued 17,100,000 of those Props Tokens. See “Plan of Distribution—Props PBC Offering” for additional details.

 

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SUMMARY OF RISK FACTORS

 

The Props Tokens are speculative and involve substantial risks. You may lose some or all of your Props Tokens. You should carefully review the below, and also the “Risk Factors” section of this offering circular, which contains a detailed discussion of the material risks that you should consider before participating on the Props Network and receiving Props Tokens. These risks include the following:

 

  The Props Tokens currently have limited uses.

 

  There is substantial doubt about our ability to continue as a going concern unless additional sources of capital are secured. Currently, we believe that our cash and cash equivalents will be sufficient to fund our operations into the third quarter of 2022. However, our cash forecasts and capital requirements are subject to change. Our ability to fund ourselves depends principally on our ability to raise funds through the sale of Props Tokens, which financing may not be available on favorable terms or at all, or our ability to develop other sources of revenue.

 

 

The commercial utility of your Props Tokens on the Props Network in the future may be sensitive to the quality of the integration of Props Tokens in specific Props Apps created by third-party developers in the future, which we cannot guarantee will occur and which we may not fully control.

 

  Certain factors such as “gas” fees may affect the desirability of claiming Props Tokens associated with Pending Props.

 

  The value of the Props Tokens may be volatile. There is no guarantee that the Props Tokens will hold value or increase in value, and we do not fully control many factors affecting their value.

 

  The value of your Props Tokens will, in part, depend on the supply relative to demand for Props Tokens in the Props Network. Because we anticipate issuing a significant number of Props Tokens in the future, both through the Protocol Rewards Engine and, potentially, through direct issuances, the value of Props Tokens will likely be diluted and demand for Props Tokens from Props Network users will need to increase in order for Props Tokens to maintain their value.

 

  The value of your Props Tokens may be highly sensitive to decisions made by us to distribute additional Props Tokens.

 

  There currently are no trading markets for the Props Tokens in the United States, and such a trading market may never develop.

 

  The Props Network may not be widely used and may never develop as we intend. As a result, there may be limited users and Props App developers on the Props Network, and the value of the Props Tokens may be negatively impacted.

 

  The success and future growth of the Props Network depend significantly on our successful development of a “two-sided economy” of applications and users, and if we are unable to attract sufficient numbers of applications or users to our network to generate demand for Props Tokens, the Props Network may fail to grow and the value of Props Tokens will be harmed. We may determine that continuing our present efforts to further develop the Props Network is no longer a viable business strategy and take steps including but not limited to ending such efforts by us.

 

  Incentive structures essential to the Props Network are difficult to design and may not function as intended.

 

  The Company’s historical performance does not necessarily reflect future performance or the likelihood of the success of the Props Network.

 

  The Props Network, including the Protocol Rewards Engine, relies on software and programming that is complex, and if it contains undetected errors, the Props Network could be adversely affected.

 

  While we currently have basic functionality for the Props Tokens, we are still developing the rest of the Props Network, including certain components of the open-source software that could facilitate additional apps to join the Props Network. We expect that we will continue to make developments and improvements on the above-described key components to the Props Network into the foreseeable future.

 

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  The Ethereum blockchain on which ownership of Props Tokens is recorded, the Algorand blockchain on which Pending Props are recorded and the Props Tokens themselves may be the target of malicious cyberattacks or may contain exploitable flaws in their underlying code, which may result in security breaches, the loss or theft of Props Tokens, the decline in value of Props Tokens or liability and reputational harm.

 

  The oracle function to the Protocol Rewards Engine is dependent on the efforts of the Company and third parties acting in their capacity as Oracles, and if the Company or these third parties act maliciously or otherwise fail to successfully perform these functions, the operation of the Props Network could be compromised.

 

  Our plans for addressing scalability issues related to the operation of apps dependent on the Ethereum blockchain subject us to a number of technological and regulatory risks that may cause the Props Network to be ineffective or not sufficiently cost-effective to continue operating.

 

  Props App Developers and users of the Props Network may rely on third-party platforms such as the Apple iTunes App Store and the Google Play Store to distribute Props Apps or other applications on the Props Network. If Props App Developers or the users of the Props Network are unable to access or otherwise to maintain the availability of one or more Props Apps on those platforms, including as a result of changes or violations of terms and conditions, access to and utilization of the Props Network and the Props Tokens may suffer.

 

  There are uncertainties related to the regulatory regimes governing blockchain technologies, digital assets, the Props Network and the Props Tokens, and new regulations, interpretations or policies may materially adversely affect the Props Network, including its development, and the value of the Props Tokens.

 

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RISK FACTORS

 

You should carefully consider the risks described below, together with all of the other information contained in this offering circular, before making a decision to receive Props Tokens for your participation in the Props Network. The occurrence of any of the risks described below could have material adverse effects on the value of Props Tokens, the performance of the Props Network, and our company’s business, financial condition, results of operations and prospects. For these reasons, you should carefully read this offering circular and should consult with your own attorney and financial and tax advisors prior to making any decision to participate in the offering. Additional risks and uncertainties that we do not presently know or that we currently deem immaterial may also have similar material adverse effects.

 

Risks Related to the Value of Props Tokens

 

The Props Tokens currently have limited uses.

  

The Props Tokens will have utility in the Props Apps that are operational on the Props Network. There are currently seven Props Apps which are, or soon will be, designed to allow functionality for Props Tokens. Props Tokens entitle holders to functionalities in these Props Apps. See “The Props Apps Annexes” for additional information. Further, Props Tokens may also be transferable and may be used as a means of sending rewards to other users (although it is not currently possible to transfer Props Tokens within a Props App). The utility of the Props Tokens in each of the Props Apps is subject to change as features and functionalities of each of the Props Apps change. Additional uses for the Props Tokens may be added in the future within each Props App. There is, however, no guarantee that the current functionalities for Props Tokens within Props App will be maintained or that these apps will always exist in the future, that additional functionalities for Props Tokens will be added within these Props Apps or that additional apps will join the Props Network with any functionalities for Props Tokens. Even if additional apps are added to the Props Network, it is possible that Props App Developers will allow some additional functions to be performed by other digital assets or by traditional fiat currency, at the discretion of these developers.

 

These limited uses for Props Tokens may negatively affect their value, and any increase in the value of the Props Network may be dependent on the further development of the Props Apps on the Props Network. As a result, users may be less likely to want to receive and use Props Tokens, and Props App Developers may become less effective in attracting users to the Props Network, which could have a material adverse effect on the value of the Props Tokens, the Props Network and our business.

 

The commercial utility of your Props Tokens on the Props Network in the future may be sensitive to the quality of the integration of Props Tokens in specific Props Apps created by Props App Developers, which we cannot guarantee will occur and which we may not fully control.

 

The value of your Props Tokens may be highly sensitive to the way in which the in-app economies for Props Apps are designed and implemented by Props App Developers. While we believe we have designed the Props Network to incentivize app developers to join the Props Network and to include substantial utility for Props Tokens within their apps, because each Props App Developer has discretion over how the Props Tokens and their holders are treated within such developer’s Props App, we cannot guarantee that any app developer seeking to join the Props Network will afford substantial functionalities for Props Tokens in their apps. Even if they design their apps to afford Props Tokens substantial utility, this utility may be similar to existing utility for Props Tokens in Props Apps, and Props App Developers may terminate any use for the Props Tokens that they have in the past provided for Props Tokens. Props App Developers will also have discretion over how they reward their users with Props Tokens, other digital assets or fiat currencies, and the criteria for the allocation of such digital assets or currency. The extent to which these uses and benefits of Props Tokens are built into Props Apps may significantly affect the value of Props Tokens. Neither you nor us will be able to control how Props App Developers incorporate Props Tokens into their Props Apps, and there can be no guarantee that Props App Developers will create any substantial utility for, or benefits to, holding Props Tokens, if at all. In addition, if Props App Developers fail to create in-app economies with large user bases and significant demand for digital assets, this may have a material adverse impact on the value of Props Tokens.

 

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The value of the Props Tokens may be volatile. There is no guarantee that the Props Tokens will hold value or increase in value, and we do not fully control many factors affecting their value.

 

The value of Props Tokens is contingent upon numerous factors, many of which (including legal and regulatory conditions) are beyond our control. Some of these factors are described in these Risk Factors. For example, as described in these Risk Factors under the caption “Risks Related to the Development of the Props Network,” the value of the Props Tokens will depend on the successful continuation and development of the Props Network, including the continued expansion of a network of app developers and users that will support further interest in Props Apps and uses for the Props Tokens, as well as navigating technological and market-based risks, such as popular acceptance of distributed ledger technology. The value of the Props Tokens and other types of digital assets will also substantially depend on whether blockchain and other new technologies related to the Props Tokens turn out to be useful and economically viable. See the section of these Risk Factors under the caption “Risks Related to Blockchain Technology” for additional detail.

 

In addition, if an increasing number of Props Tokens are distributed publicly, the price people are willing to pay for Props Tokens may fall substantially, and if or when a secondary market for the Props Tokens develops, the price may fall further. Because we began distributing Props Tokens to holders of our Simple Agreements for Future Tokens (“SAFTs”) in early March 2019 who confirmed wallet addresses and we have issued additional Props Tokens since then, including as part of the offering qualified under the offering statement of which this offering circular is a part, therefore, there will be Props Token holders who wish to sell Props Tokens, the price of Props Tokens issued to you under this offering circular may be subject to particularly high risks of price volatility or price drops. See “Other Offerings” for additional information regarding the SAFTs and other offerings. The Company does not fully control any of these factors, and therefore may not be able to control the long-term success of the Props Tokens as a feature of the Props Network or the ability of the Props Tokens to maintain their value. The value of Props Tokens may decrease and may also experience significant volatility and unpredictability relative to fiat currency. Moreover, the Company does not plan to maintain any type of bond or trust account designed to protect holders of the Props Tokens, and we do not intend to secure the Props Tokens with any assets.

 

The value of your Props Tokens will, in part, depend on the supply relative to demand for Props Tokens in the Props Network. Because we have issued and anticipate issuing a significant number of Props Tokens in the future, both through the Protocol Rewards Engine and, potentially, through direct issuances, the value of Props Tokens will likely be diluted and demand for Props Tokens from Props Network users will need to increase in order for Props Tokens to maintain their value.

 

In total, the Protocol Rewards Engine released 92,088,879 Props Tokens through July 15, 2021, including 48,599,173 Props Tokens in the first year following its launch. Each year, we expect that the Protocol Rewards Engine will release a decreasing number of Props Tokens (12.5% of the remaining rewards pool per year) until the total number of Props Tokens that will be allocated by the Protocol Rewards Engine, 400,000,000, has been released. See “The Props Apps Annexes” for additional information regarding Props Tokens to be released via the Props Apps. Additional Props Tokens may be issued in connection with one-time grandfathering grants to Props Apps added to the Props Network in the future.

 

In addition, we have reserved: (i) approximately 5.0% of all Props Tokens that we have issued or anticipate to be issued, or 50,000,000 Props Tokens, for discretionary distributions by Props PBC in the form of grants to Props App Developers, developers building Props Network infrastructure, or other strategic partners, or for cash sales to support Props PBC’s operations, of which 17,100,000 have been issued as of July 15, 2021 and 8,700,000 of which remain issuable upon the achievement by the Props Apps of certain milestones, (ii) approximately 22.7% of all Props Tokens that we have issued or anticipate to be issued, or 226,751,564 Props Tokens, for issuance to persons who purchased rights to receive Props Tokens in private placements or pursuant to our DPAs, of which 224,117,663 have been issued as of July 15, 2021 and 2,633,900 are issuable upon the provision by certain of those persons of wallet addresses to us, (iii) approximately 26.8% of all Props Tokens that that we anticipate to be issued, or 268,000,000 Props Tokens, for issuance to the our equity investors and current and future employees, subject to certain vesting requirements, although we may decide to use these Props Tokens for other purposes in the future, including to satisfy an option to purchase 70,000,000 Props Tokens we granted to GSR Markets Limited, of which none have been issued as of July 15, 2021, (iv) approximately 5% of all Props Tokens that we have issued or anticipate to be issued in the future, or 50,000,000 Props Tokens, for issuances by Props PBC to our advisors, of which 43,495,675 have been issued as of July 15, 2021 (including 292,184 that have been issued to a former adviser as liquidated damages in connection with the termination of an adviser relationship), 587,127 that will be issued upon the provision by certain of those advisors of wallet addresses to us and 1,139,583 are issuable subject to certain vesting requirements, and (v) approximately 0.5% of all Props Tokens that we have issued or anticipate to be issued in the future, or 5,000,000 Props Tokens, for issuance to certain centralized digital asset exchanges upon which Props Tokens are listed and certain other service providers, of which 4,829,122.86 have been issued as of July 15, 2021. The total number of Props Tokens released, and the amount in existence at any point in time, will affect the value of your Props Tokens and may dilute that value significantly. If the demand for Props Tokens and uses for Props Tokens do not similarly increase, the value of Props Tokens may decline. In addition, if the total number of Props Tokens is increased in the future, this may also have the effect of diluting the value of your Props Tokens.

 

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The value of your Props Tokens may be highly sensitive to decisions made by us to distribute additional Props Tokens.

 

We anticipate that 400,000,000 Props Tokens will be allocated over time by the Protocol Rewards Engine as daily rewards intended for rewarding popular Props Apps, for users of Props App and for the Oracles. See “Description of the Props Network—The Protocol Rewards Engine.”

 

Initially, because the Company acts as one of the Oracles, the Protocol Rewards Engine, in part, has been rewarding the Company, and may continue to reward the Company, by making more Props Tokens available for issuance pursuant to the offering statement in which this offering circular is included as a result of the Company’s own participation in the Props Network. This means that the Company did not only initially control a substantial portion of all Props Tokens prior to the launch of the Props Network, but will, over time, receive more Props Tokens as a result of such participation. We expect that a substantial majority of these allocated Props Tokens will be issued by the Company to users of Props Apps, but we may distribute a smaller proportion of these allocated Props Tokens in the time period immediately following qualification of this offering circular, as compared to later.

 

In addition, because we expect that 0.03475% of the Props Tokens remaining from the initial 400,000,000 to be allocated by the Protocol Rewards Engine will be allocated each day to Props Apps as described under “Description of the Props Network—The Protocol Rewards Engine” and 0.001829% of the Props Tokens remaining from the initial 400,000,000 to be allocated by the Protocol Rewards Engine will be allocated each day to Oracles, the size of Props Tokens allocations made pursuant to the Protocol Rewards Engine will necessarily decrease over time. As a result, the Company has accumulated and may continue to accumulate significant amounts of Props Tokens and it will then have absolute discretion to distribute such Props Tokens pursuant to this Regulation A offering circular or in other registered or exempt securities offerings. These amounts would be in addition to the approximately 268,000,000 Props Tokens that the Company intends to separately issue to the Company’s equity investors and current and future employees, subject to certain vesting requirements (though we may decide to use these Props Tokens for other purposes in the future, including to satisfy an option to purchase 70,000,000 Props Tokens we granted to GSR Markets Limited), the 226,751,564 Props Tokens issued or issuable by the Company to investors in exempt securities transactions, and the 4,829,123 Props Tokens issued by the Company to exchanges upon which Props Tokens are listed and certain other service providers in exempt securities transactions. See “Other Offerings” for additional information. In addition, Props PBC will have 28,963,031 Props Tokens available for distribution in addition to the 45,236,969 Props Tokens issued or issuable to advisers and 25,800,000 Props Tokens issued or issuable to Props Apps as grants in exempt securities transactions. See “Description of the Props Tokens Being Offered—Token Supply.

 

We will have significant discretion in determining how these Props Tokens will be issued. For example, the Props Tokens that the Company may distribute to users may be issued slowly over a long period of time or, alternatively, more quickly, to the extent that the Company determines that it could help Props Apps or the further development of the Props Network. Further, Props PBC, which is controlled by the Company, currently has discretion to change the total number of Props Tokens that may be issued in the future or to change the Protocol Rewards Engine “smart contract,” to the extent that Props PBC determines that such changes could help the further development of the Props Network. As a result, until the Company issues Props Tokens it has received and will receive, the supply of Props Tokens is substantially within our control—and may change in ways that could adversely affect the value of your Props Tokens and may dilute that value significantly.

 

The level of functionality that Props Tokens will have in Props Apps may depend on the relative holdings of Props Tokens of other users of a Props App.

 

Props Apps may only afford certain functionalities and benefits of holding Props Tokens to users holding a certain number of Props Tokens. These thresholds may depend on a user’s number of Props Tokens relative to the holdings of other users of the Props App. For example, in the YouNow Livestreaming App, the unlocking of virtual goods for purchase functionality for Props Tokens is only available once the user is in the 20th percentile of Props Token holdings for all YouNow Livestreaming App users. As a result, you may not be able to enjoy this functionality unless you have a substantial number of Props Tokens. In addition, your ability to have this functionality may depend, in large part, on the actions of other persons. If these other persons are more active in earning or otherwise collecting Props Tokens, even if you earn or purchase a substantial number of Props Tokens, you may never reach the minimum threshold of Props Token holdings necessary in order to enjoy a particular functionality in a Props App.

 

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Because the Props Tokens have little history, there are significant uncertainties around the evaluation of their utility and their value.

 

The Props Tokens have little performance history. Moreover, the Props Network and the applications that the Props Network is intended to support together constitute an unproven and novel model for the operation of internet applications for consumer-facing mass market applications, and the value of the Props Tokens is likely to depend upon the success of this model. This success may, in turn, be dependent both on demand for an alternative to traditional centralized digital media application infrastructures and the performance of the technology used to create the Props Network and the Props Tokens, which is novel and relatively untested. Further, the current price we have set for the Props Tokens of $0.0600 per token was chosen by us in reference to the average closing price per Props Token for the month of June 2021 displayed on July 1, 2021 on coinmarketcap.com, an aggregator of token prices on digital asset exchanges, for Props Tokens trading on centralized exchanges outside the United States and decentralized exchanges. None of these exchanges are regulated and, as such, the information they provide may not be as reliable as information from regulated exchanges. The previous price we set for the Props Tokens of $0.1369 per token was chosen by us in reference to the undiscounted price paid by investors of our SAFTs and was not set pursuant to any third party valuation. In December 2017, we offered SAFTs to certain investors. See “Other Offerings” for additional information regarding the SAFTs; the undiscounted price paid by investors in this offering was $0.1369. Participation in these offerings and your decision to acquire Props Tokens should, therefore, be evaluated not only on the basis of the value and prospects of the Props Tokens, taking into account an assessment of the prospects of the Company and Props PBC in achieving their respective goals for the Props Network, but should also consider the significant uncertainties associated with these assessments given the lack of similar business models and technological systems against which the Props Tokens, the Props Network and Props Apps may be usefully compared.

 

The deemed offering price of the Props Tokens was not established on an independent basis; the actual value of your Props Tokens may be substantially less than the deemed offering price.

 

The deemed offering price of the Props Token bears no relationship to our book or asset values or to any other established criteria for valuing securities. The current price we have set for the Props Tokens of $0.0600 per token was chosen by us in reference to the average closing price per Props Token for the month of June 2021 displayed on July 1, 2021 on coinmarketcap.com, an aggregator of token prices on digital asset exchanges, for Props Tokens trading on seven centralized exchanges outside the United States and two decentralized exchanges. The previous price we set for the Props Tokens of $0.1369 per token was chosen by us in reference to undiscounted prices paid by investors of our SAFTs. Either price may not be indicative of the proceeds that you could receive upon a commercial sale of the Props Tokens. Further, the deemed offering price may be significantly more than the price at which the Props Tokens (i) trade on the non-U.S. digital asset exchanges where Props Tokens are traded or (ii) would trade if they were actively traded by broker-dealers. Props Tokens have experienced and are likely to continue to experience, significant price volatility on those exchanges due to the volatile nature of the digital asset markets in general and the lack of regulation and potential for abuse of those exchanges. While we explored the possibility of obtaining an independent valuation of the Props Tokens by an independent third party months before Props Tokens had been introduced, this valuation was never obtained, and in any case, because it would have valued the Props Tokens prior to their actual introduction on the Props Network, would have had little bearing on the value of Props Tokens you may receive in this offering.

 

There is no trading market in the United States for the Props Tokens, and a trading market in the United States may never develop.

 

The Props Tokens may only be traded in the United States on a very limited range of venues, including U.S. registered exchanges or regulated alternative trading systems for which a Form ATS has been properly submitted to the SEC. There are currently no national securities exchanges or exchanges that have been approved by the Financial Industry Regulatory Authority (“FINRA”) or registered under Regulation ATS with the SEC to support the trading of Props Tokens on the secondary market. We are aware that several entities are working to develop and launch such an exchange. See “Description of the Props Tokens Being Offered—Secondary Markets.” There is no guarantee that any exchanges capable of and willing to support trading in Props Tokens will become functional.

 

Further, even if any such exchange were to become functional, no such exchange will be required to list the Props Tokens and they may decide not to list the Props Tokens for a number of reasons not under our control, including, but not limited to, a perceived lack of market interest in the Props Tokens, and any other factors relevant to the individual exchanges (for example, if such exchanges are heavily invested in another digital asset). If any such exchange did agree to list the Props Tokens, the market may not offer Props Tokens any significant liquidity for a number of reasons including, for example, a lack of potential buyers. Furthermore, while Props Tokens are traded outside the United States on digital asset exchanges, such trading could adversely affect trading in the United States. As a result, holders in the United States and other jurisdictions in which such exchanges are not available should be prepared to hold their Props Tokens indefinitely, as there is no guarantee that holders will be able to sell or exchange their Props Tokens. In the event that the Props Tokens remain illiquid for a significant period of time or indefinitely, the value of the Props Tokens may be materially adversely affected.

 

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We do not expect there to be any market makers to develop a trading market in the United States in Props Tokens.

 

Most securities that are publicly traded in the United States have one or more broker-dealers acting as “market makers” for the security. A market maker is a firm that stands ready to buy and sell the security on a regular and continuous basis at publicly quoted prices. We have engaged a market maker with respect to digital asset exchanges outside the United States on which Props Tokens have been listed. In the event that a token exchange is created or developed in the United States, we do not believe that the tokens will have any market makers, which could contribute to a lack of liquidity in the Props Tokens, and could have a material adverse effect on holders’ ability to trade the tokens.

 

You and any persons interested in acquiring Props Tokens from you may lack information for monitoring the value of the Props Tokens.

 

The Props Tokens do not have any information rights attached to them, and holders may not be able to obtain all the information they would want regarding the Company or the tokens. As a Tier 2 issuer under Regulation A, we are subject to scaled disclosure and reporting requirements, and we are not required to make the same level of public reporting required of issuers in traditional public offerings. In addition, we are among the first issuers of tokens to have an offering of tokens qualified under Regulation A. Even though the SEC has qualified our Regulation A offering, individual investors, individual States in which we may offer the Props Tokens, or potentially other participants in the Props Network may disagree with the level or type of disclosure, reporting or other information we are providing, or may otherwise object to the means by which we are offering the Props Tokens, or assert that other state laws may apply to this offering. If any of these persons or entities decide to litigate against the Company regarding these or similar issues, it could have a material adverse effect on our operations and on the value of the Props Tokens.

 

Additionally, there is no guarantee that securities or industry analysts will publish research or reports about us or the Props Tokens, and even if they did, we would not have any control over these analysts or their coverage of the Props Tokens. As a result, you and any persons interested in acquiring Props Tokens from you may not be able to receive information regarding the market value of the Props Tokens. As a result of these difficulties, as well as other uncertainties, you may not have accurate or accessible information about us or the value of the Props Tokens.

 

Additionally, this lack of information could negatively affect existing secondary trading markets on which Props Tokens are traded and those on which they may trade in the future, and thereby cause the value of Props Tokens to decline. While Props Tokens are traded on digital asset exchanges outside the United States, there are currently no national securities exchanges or exchanges that have been approved by FINRA or registered under Form ATS with the SEC to support the trading of Props Tokens on a secondary market in the United States.

 

In the future, we may not be subject to ongoing reporting requirements.

 

In the future and, in any event, following the conclusion of our offering of Props Tokens under Regulation A, we may be eligible to file an exit report to suspend or terminate our ongoing reporting obligations. If we become eligible, and if we make this election in the future, we may choose to not file annual reports, semiannual reports, current reports, financial statements and audited financial statements. As a result, holders of the Props Tokens would receive less information about the current status of our company, and the value of our Props Tokens may be adversely affected. We may also cease to file these reports if the Props Tokens are either deemed to no longer be securities under applicable securities laws.

 

In making a decision to participate in these offerings and acquire Props Tokens, you should not rely on information in public media that is published by third parties. You should rely only on statements made in this offering circular.

 

You should carefully evaluate all of the information in this offering circular. We have in the past received, and may continue to receive, media coverage, including coverage that is not directly attributable to statements made by our officers and employees. We cannot confirm the accuracy of this coverage. You should rely only on the information contained in this offering circular in determining whether to participate in these offerings and acquire Props Tokens.

 

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Your investment in the Props Tokens will not provide you with any enforceable rights against the Company, its affiliates or any Props App Developer, including any rights to receive payments, any control rights or any claims on assets.

 

Holders of Props Tokens will not receive a right to any repayment of principal or interest, any interest in the profits or losses of the Company, its affiliates or any Props App Developer, any rights to distributions from the Company, its affiliates or any Props App Developer, or any legal or contractual right to exercise control over the operations or continued development of the Company, its affiliates or any Props App Developer. Holders of Props Tokens may not have any right to vote on any matters relating to the Company, its affiliates or any Props App Developer. Props Token holders may be able to vote on in-app matters within one or more Props Apps in the future and, in the future, we may potentially allow Props Token holders to vote on an advisory basis to help guide Props PBC in making key decisions affecting the Props Network based on their stake of Props Tokens. Further, we are not aware of any binding obligation on the Company, its affiliates or any Props App Developer with respect to the Props Tokens or the holders of the Props Tokens following the Props Tokens’ delivery in this offering. Any profit that you may receive on your holdings of Props Tokens may be based on the commercial utility of the Props Tokens, or on potential capital appreciation associated with the Props Tokens to the extent realizable through trading activity. As a result, information disclosed in this offering circular and elsewhere regarding the Company and its ability to build the Props Network may be relevant to the value of your investment, but the relevance may be limited and indirect.

 

The Props Tokens are not legal tender, are not backed by the government, and accounts and value balances are not subject to Federal Deposit Insurance Corporation or Securities Investor Protection Corporation protections.

 

The Props Tokens are not legal tender and are not backed by any government, and accounts and value balances are not subject to Federal Deposit Insurance Corporation or Securities Investor Protection Corporation protections.

 

There are restrictions upon the ability of a user to claim actual Props Tokens.

 

There are technological and financial restrictions imposed upon the exchange of Pending Props for Props Tokens. Initially, Props Apps create bookkeeping entries known as Pending Props to record a provisional award to users. Such Pending Props can be used to claim actual Props Tokens upon the completion of certain additional steps. Subject to the specific terms of use of each Props App, the user will be required to have accumulated a minimum number of Pending Props prior to claiming actual Props Tokens. In addition, whenever a user receives Props Tokens, the user must pay a “gas” fee with respect to that transaction (regardless of the size of the transaction) on the Ethereum Network, in order to record the receipt of Props Tokens into their wallet. The “gas” fee at any given time is subject to significant fluctuation. Accordingly, even if a user has a sufficient amount of Pending Props or otherwise has the ability to complete the necessary steps and to claim Props Tokens, the transaction-based “gas” fee then in effect may make it costly or undesirable to do so.

 

The terms and conditions of each Props App may limit functionality of the Props Tokens for certain users and users may lose functionality of the Props depending on the decisions of third parties, over which we and users have no control.

 

As described in “The Props Apps Annexes,” Props Tokens have certain functionalities within the Props Apps and may have additional functionalities in the future. These functionalities may include, for example, elevated in-app social status or access to premium in-app virtual goods, and the allocation of a larger daily stipend of in-app rewards. See “The Props Apps Annexes” for details regarding the functionality of Props Tokens in these Props Apps.

 

These functionalities may, however, be denied to Props Token holders pursuant to the terms and conditions of use of the applicable Props App. For example, the terms and conditions of the YouNow Livestreaming App provide for the right to suspend, limit or terminate access, at any time with or without notice and with or without cause, including if the user is determined to pose a threat to the app service or its users. In addition, the provisional accounting entries Props Apps make when users have completed in-app activities necessary to earn rewards (which we refer to as Pending Props) may be canceled upon the violation of a Props App’s terms and conditions, for example, and the user would never be able to claim them. See “Description of the Props Tokens Being Offered—Pending Props.” Also, if you are unable to use the Props Tokens within available Props Apps, you may not be able to derive significant value from holding Props Tokens and you may, in addition, be unable to sell them in secondary markets. See “Description of the Props Tokens Being Offered—Secondary Markets” for additional details. There are currently no national securities exchanges or exchanges that have been approved by FINRA or registered under Form ATS with the SEC to support the trading of Props Tokens on a secondary market in the United States.

 

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The functionality and operation of Props Tokens in each Props App and the ability for the Company or each Props App Developer to enforce the functionality and operation of each Props App is subject to the ability to enforce the applicable terms and conditions of each such Props App. Because some Props Network users will likely be persons under the age of 18 and therefore may be able to repudiate or disaffirm contracts under applicable local law, the Company and other third party Props App Developers, may not be able to enforce such Props App terms and conditions against users under the legal age of consent. See “Risk Factors—Some of the Props Network users will likely be under the age of 18, and those users may be able to repudiate or disaffirm the terms of use and other agreements that we enter into with such users.

 

The tax treatment of the Props Tokens is uncertain, and there may be adverse tax consequences for you, Validators and other holders upon receiving Props Tokens in connection with this offering.

 

The tax characterization of the Props Tokens is uncertain, and you must seek your own independent legal and tax advice with respect to U.S. and non-U.S. tax treatment, as applicable, of the acquisition of Props Tokens. Your receipt of Props Tokens may result in adverse tax consequences to you, including withholding taxes, income taxes and tax reporting requirements. We intend to treat the issuance of Props Tokens to a U.S. holder or non-U.S. holder, for U.S. federal income tax purposes, as compensation for services. Accordingly, a U.S. holder will generally be required to include in gross income the fair market value of the tokens it receives from us, and Props Tokens we issue to a non-U.S. holder may be subject to a 30% withholding tax if the services such holder performs for us are considered to have been performed in the United States and certain other conditions are met. We cannot and do not make any representations or assurances as to individual tax consequences, including the consequences of using Props Tokens as transaction currency.

 

If the Props Tokens are characterized as a “virtual currency” for U.S. federal income tax purposes, then, under a notice issued by the U.S. Internal Revenue Service in 2014 (the “Notice”), the general rules applicable to property transactions would apply. See “Certain United States Federal Income Tax Considerations,” herein. The Notice indicates that, in certain cases, persons acquiring Props Tokens may be subject to adverse tax consequences upon their receipt of Props Tokens. For example, certain recipients that are not acting in the capacity of an employee and that receive Props Tokens should report the fair market value of such tokens as self-employment income and may be subject to self-employment tax. In addition, a person that receives Props Tokens as compensation, an incentive or a reward will generally be subject to adverse tax consequences and reporting requirements. Furthermore, Revenue Ruling 2019-24 indicates that the receipt of virtual currency by a holder of a Props Token pursuant to an “air drop” following a “hard fork” generally will result in adverse tax consequences to the holder of a Props Token. Finally, you may be required to report gain or loss if you use a token (including a Props Token) as a transaction currency.

 

The prices of digital assets like the Props Tokens are extremely volatile, and the value of Props Tokens may be materially adversely affected as a result.

 

The prices of digital assets such as Bitcoin and Ether have historically been subject to dramatic fluctuations and are highly volatile, and the market price of the Props Tokens may also be highly volatile. Several factors may influence the market price of the Props Tokens, including, but not limited to:

 

  the ability of the Props Tokens to trade on a secondary market in the United States, if at all;

 

  the availability of a token exchange or other trading platform for digital assets in the United States;

 

  the supply of Props Tokens;

 

  demand for Props Tokens, which can be influenced by the growth of applications on the Props Network, utility of Props Tokens within those applications, new types of digital assets and growth of businesses making use of the Props Network and Props Tokens;

 

  general acceptance of digital assets by retail merchants and commercial businesses, for example, as payment for goods and services, general adoption of online digital asset exchanges and digital wallets that hold digital assets, the perception that the use and holding of digital assets as safe and secure, and the regulatory restrictions on their use;

 

  purchasers’ expectations with respect to the rate of inflation;

 

  changes in the software, software requirements or hardware requirements underlying the Props Tokens;

 

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  changes in the rights, obligations, incentives or rewards for the various holders of the Props Tokens;

 

  interest rates;

 

  general pricing trends in the prices of digital assets;

 

  digital asset exchange rates, including the rates at which digital assets may be sold for different fiat currencies;

 

  the withdrawal and deposit policies of digital asset exchanges, which may limit the ability to receive fiat currency in exchange for digital assets or use fiat currency to pay for digital assets;

 

 

interruptions in service from or failures of a major digital asset exchange on which digital assets are traded;

     
  investment and trading activities of large purchasers, including private and registered funds, that may directly or indirectly invest in digital assets;

 

  coordinated algorithmic behavior, including trading, by a large pool of small token holders;

 

  monetary policies of governments, trade restrictions, currency devaluations and revaluations;

 

  developments or disputes concerning our intellectual property rights or our technology, or third-party proprietary rights;

 

  regulatory measures, if any, that affect the use of digital assets and crypto tokens such as the Props Tokens;

 

  global or regional political, economic or financial events and situations; and

 

  expectations among participants that the value of digital assets will soon change.

 

In addition, decreases in the price of even a single other digital asset, whether located on or off of the Props Network, may cause volatility in the entire digital asset industry and may affect the value of other digital assets, including the Props Tokens. For example, a security breach or any other incident or set of circumstances that affects purchaser or user confidence in Ether or another well-known digital asset such as Bitcoin may affect the industry as a whole and may also cause the price of the Props Tokens and other digital assets to fluctuate significantly.

 

You may never receive Props Tokens in connection with performing in-app activities unless you are able to complete certain steps within 120 days of receipt of Pending Props and “claim” your Pending Props.

 

You are not guaranteed to receive Props Tokens for performing in-app activities in any Props App, including those described under “The Props Apps Annexes,” or in connection with one-time discretionary grants by the Company or a Props App Developer. Prior to receiving any Props Tokens, you must complete certain minimum steps—including completion of KYC and AML procedures and completion of all tax forms requested by the applicable Props App Developer, as well as “claim” your Pending Props. See “Description of the Props Tokens Being Offered—Receiving Props Tokens” for a general description of the required steps in Props Apps. In any Props App, we anticipate that the KYC and AML procedures and documentation requirements required of users earning Props Tokens in amounts below a certain threshold set in our discretion will be more basic, in order to minimize unnecessary administrative burdens on users. For example, to the extent applicable law permits, a Props App Developer may not require tax forms for users receiving small numbers of Props Tokens. Once a user has reached a maximum threshold of total Props Tokens earned and recorded as Pending Props, however, a Props App Developer may require that the user complete additional KYC/AML procedures and documentation in order to receive Props Tokens.

 

Upon completing in-app activities or upon offer of a one-time discretionary grant, there will be indication, in your Props App account, that Pending Props have been recorded and a corresponding number of Props Tokens are available to be claimed. Generally, if a user that has Pending Props in connection with in-app activities or in connection with one-time discretionary grants offer fails to complete the above-described required steps within 120 days of receiving them, the Props App user may never obtain the Props Tokens. If that happens, the Props App may cancel any such Pending Props. See “The Props Apps Annexes” for additional information. As a result, you should not view the performance of in-app activities or offering of a one-time grant as a guarantee that you will receive Props Tokens. None of the current Props App Developers anticipates exercising this discretion to revoke Pending Props associated with activities performed in Props Apps except in cases of users apparently abandoning them, although they are not precluded from doing so in other circumstances. If one of the current Props App Developers were to determine to exercise its discretion to revoke Pending Props, we anticipate that it would intend to communicate with any user with such Pending Props prior to revoking the Pending Props.

 

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Further, before you receive Props Tokens, Props Apps may also need to complete certain additional steps, including checking for fraud or violation of the Terms of Service, and administrative procedures related to settlement that can delay the issuance or Props Tokens after you have performed in-app activities. Further, issuance of the Props Tokens and final settlement will only be made once the transfer of Props Tokens from a wallet controlled by the Props App to the user’s wallet is confirmed by validators on the Ethereum blockchain. Prior to settlement, Props App users, Props App Developers, Oracles and grantees have no right to receive Props Tokens, and if the Company or Props PBC, as applicable, were to dissolve or liquidate, or if the Props App Developer were to cease to reward users of their respective apps, or if the Company were to cease to reward Oracles, or if Props PBC were to cease making grants with Props Tokens, then users, Oracles and grantees would have no right to receive Props Tokens, and they may never receive these Props Tokens.

 

Risks Related to the Further Development of the Props Network

 

The Props Network may not be widely used and may never develop as we intend. As a result, there may be limited users and Props App Developers on the Props Network, and the value of the Props Tokens may be negatively impacted.

 

It is possible that the Props Network and Props Tokens will not be used by a large number of application developers or that there will be limited public interest in the Props Network or the Props Tokens. In addition, technological, legal, regulatory or commercial developments could render the Props Network obsolete or impermissible. Any such lack of use or interest in the Props Network could negatively impact the Props Network and the value of the Props Tokens.

 

The success and future growth of the Props Network depend significantly on our successful development of a “two-sided economy” of applications and users, and if we are unable to attract sufficient numbers of applications or users to the Props Network to generate demand for Props Tokens, the Props Network may fail to grow and the value of Props Tokens will be harmed. We may determine that continuing our present efforts to further develop the Props Network is no longer a viable business strategy and take steps including but not limited to ending such efforts by us.

 

The ultimate success of the Props Network may depend upon our ability to attract additional application developers to create additional apps to be joined to the Props Network, which will, in turn, depend in large part on the success of our efforts to develop an ecosystem of application developers and users. We seek to attract application developers and users by engaging in traditional marketing efforts and incentivizing participation in the Props Network with Props Tokens. See “Description of the Props Token’s Role in Helping to Align Incentives of Network Participants” for additional details. If our current efforts at attracting and retaining application developers are not effective or become less effective, if we are unable to continue to use any of these methods or marketing channels or if the cost of using these methods were to significantly increase, we may not be able to attract and retain new application developers and users in a cost-effective manner or convert application developers into active application developers on the Props Network. Further, developing apps with functionality for Ethereum-based tokens may not be attractive to some app developers because of costs (including, but not limited to, “gas” fees) and regulatory issues. See “Our plans for addressing scalability issues related to the operation of apps dependent on the Ethereum blockchain subject us to a number of technological and regulatory risks that may cause the Props Network to be ineffective or not sufficiently cost-effective to continue operating.” and “We may need to address additional regulatory issues in connection with our plans for the development of the Props Network.” As a result, the growth of the Props Network could be adversely affected, which may impair the value of the Props Tokens. In addition, we may determine that continuing our present efforts to further develop the Props Network is no longer a viable business strategy and take steps including but not limited to ending such efforts by us.

 

Incentive structures essential to the Props Network are difficult to design and may not function as intended.

 

Props Tokens may be distributed in ways intended to incentivize actions essential to the Props Network, including Props App creation, participation in the Props Network online community, the creation of digital media content to be shared on the Props Network, development of premium experiences for Props Token holders across the network and other app-specific activities within Props Apps. As discussed above in “Description of the Props Token’s Role in Helping to Align Incentives of Network Participants,” Props App creation and operation may be incentivized in the future by rewarding high-quality Props App Developers with Props Tokens. Props App Developers may use Props Tokens to incentivize the creation of digital media content and other app-specific activities.

 

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The success of the Props Network, therefore, will depend on users and developers being incentivized to participate in the Props Network in exchange for Props Tokens. In addition, we incentivize the operation of Oracles with Props Tokens. Further, we rely on validators of the Ethereum blockchain to record ownership and transfer of Props Tokens to the Ethereum blockchain, which is where ownership of Props Tokens is recorded. See “Description of the Props Network—The Algorand Blockchain—The Oracles” for additional details. Incentive structures like these may not operate as intended, however, and we cannot guarantee that these mechanisms, as designed, will effectively incentivize the behaviors that they are intended to promote and which are necessary for the operation and further development of the Props Network. If these incentive structures fail or are not as effective as intended, the Props Network and the value of the Props Tokens may be adversely affected.

 

Because, upon qualification of this post-qualification amendment, there will be few Props App Developers, the Props Network may be adversely impacted by changes in the business and financial condition of Props App Developers, which may negatively impact the value of the Props Tokens.

 

There are six Props App Developers with a total of seven apps that are designed to give Props Tokens functionality or are presently adding such functionality. There can be no guarantee that additional application developers will create Props Apps or join the Props Network. As a result of the limited number of Props App Developers, the Props Network may be adversely impacted by changes in the business and financial condition of, or demand for its services by, these developers. We expect that, even to the extent that developers have contractual obligations to us with respect to their development activities, these developers will be able to terminate these obligations at any time, such that any developer may decide at any time to cease development of their application on the Props Network, due to bankruptcy, commercial considerations or for any other reason. If a number of such developers are unable or unwilling to use the network for development of their applications for any reason, the growth of the network could be impeded, leading to a lack of adoption of the Props Network. This could adversely affect the value of your Props Tokens.

 

The Company’s historical performance does not necessarily reflect future performance or the likelihood of the success of the Props Network.

 

The Company’s past experience building the Props Network and, previously, providing consumers with live stream video chat service does not guarantee that it or Props PBC will be able to successfully develop the Props Network. The historical performance of the Props Apps and our previous business does not necessarily indicate that the Props Network’s future performance or further development will be successful—or the value of Props Tokens with increase or maintain in value. Further we cannot guarantee that users of the Props Apps will continue to use them, and a decline may occur in users of the Props Apps, or in the activity of such users, in the future.

 

It is impossible to predict whether the Props Network will have a substantial user base or grow its current user base in a way that will support a “two-sided economy” that includes a population of Props App Developers, and we cannot guarantee that the Props Network will maintain its current user base or grow, nor is it possible to predict whether any major security incidents will occur on the Props Network. The growth and stability of the Props Network is affected by a large number of complex and interrelated factors. Past growth and performance of the Props Network are not indicative of the growth and performance of the Props Network in the future.

 

The Props Network, including the Protocol Rewards Engine, relies on software and programming that is complex, and, if it contains undetected errors, the Props Network could be adversely affected.

 

The Props Network, including significant components like the Protocol Rewards Engine “smart contract” and the Ethereum “smart contract” that creates Props Tokens (the “Token Code”), and our internal systems rely on software and computer programming that is highly complex. In addition, the Props Network and internal systems depend on the ability of this software to store, retrieve, process and manage immense amounts of data and digital media content. While we will take reasonable steps to avoid such issues, including undergoing routine audits, some errors or other bugs or defects may only be discovered after the code has been released for external or internal use. For example, undetected errors in the “smart contracts” we deploy to the Ethereum blockchain may be manipulated so as to allow bad actors to issue themselves Props Tokens or otherwise maliciously affect the Props Network. Errors or other bugs or defects within the software on which we rely may result in a negative experience for Props App Developers and users, delay introductions of new features or enhancements, result in errors or compromise our ability to protect user data or our intellectual property. Any errors, bugs or defects discovered in the software on which we rely could therefore result in harm to our reputation, loss of developers or users, loss of revenue or liability for damages, any of which could adversely affect the Props Network and the value of your Props Tokens.

 

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We will need to continue to develop certain components of the open-source software that will help additional apps to join the Props Network and attract additional developers to the Props Network in order for the Props Network to grow as we anticipate it will.

 

We are planning to further develop components of the Props Network, including the open-source software, and to add Props Apps to the Props Network. Consequently, many details about the structure of Props Apps and the Props Network—including, for example, how Props Token holders may be able to vote and on what issues, or other details of our development strategy, and business model—are not known, are uncertain, are subject to regulatory uncertainty or are subject to change, with or without notice to Props Token holders. See “Our plans for addressing scalability issues related to the operation of apps dependent on the Ethereum blockchain subjects us to a number of technological and regulatory risks that may cause the Props Network to be ineffective or not sufficiently cost—effective to continue operating.” and “We may need to address additional regulatory issues in connection with our plans for the development of the Props Network.” There is, as well, no guarantee that the Props Tokens or Props Network will develop as planned, and you should not rely on descriptions of our planned, future development for the Props Network or Props Tokens as a promise or guarantee.

 

The systems and devices of the Props Network may be the target of malicious cyberattacks, which may result in security breaches and the loss or theft of tokens. If these attacks occur or security is compromised, this could expose us to liability and reputational harm and could seriously curtail the utilization of the Props Tokens and cause a decline in the market price of the Props Tokens.

 

The Props Network may be the target of malicious attacks seeking to identify and exploit weaknesses in the software, the Props Network, Props Apps or the Props Tokens, which may result in the loss or theft of tokens. These attacks may include the following:

 

  Man-in-the-middle, phone hijacking, smurfing, spoofing and other denial of service attacks refer to situations where communications between computers on the Props Network are intercepted or interrupted.

 

  Social engineering attacks, including phishing emails, where attackers use impersonation to gain access to funds or private information (such as private keys).

 

Such attacks may materially and adversely affect the Props Network in the ways described above, and any such attacks, or the perception that any has occurred, also may materially and adversely affect the Props Network by reducing trust in the integrity of the Props Network, creating bad publicity, and ultimately decreasing demand for the applications on the Props Network.

 

In February 2019, the Company was contacted by a reporter regarding a potential data breach into the YouNow Livestreaming App’s user data, which allegedly occurred in 2017 and involved the exposure of user records for 40,000,000 users. The information provided by the reporter included a small sample of the data from the alleged breach, and included basic personal information (names), partial email information, and public IP addresses. The Company considers the impact of the disclosed information on the YouNow Livestreaming App’s users to be minimal, as the disclosure of names, partial email information, and public IP addresses of the users in these circumstances is unlikely to cause substantial damage. Following the report, the Company launched an internal review into the matter, and has not found any conclusive evidence of a data breach into its systems. We believe, however, that it is likely that it occurred. Regardless, the Company proactively took action to secure its systems by revoking all existing passwords and access keys into any service and system which has access to user data, and introducing Single Sign On (SSO) and 2 Factor Authentication (2FA) across the company.

 

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The Company disclosed information on the alleged breach to the Information Commissioner’s Office (ICO) of the United Kingdom. The ICO has closed the investigation with no further regulatory action required. We also reported it to Agencia Espanola Proteccion Datos (AEPD), under GDPR regulations, which has also closed the investigation with no further regulatory action required. Various European data protection authorities have announced the protection of data relating to users who are minors to be a focus area in the coming years, which may mean that this data breach may result in a regulatory investigation into the YouNow Livestreaming App’s data practices, which may cause enforcement action to be taken in due course. In addition, other jurisdictions may require the filing of reports or other information related to the alleged breach. As of the date of this offering circular, we have made no additional filings or reports, which may also mean that this data breach may result in a regulatory investigation into the YouNow Livestreaming App’s data practices that could cause enforcement action to be taken in due course.

 

This breach is alleged to have occurred with respect to YouNow Livestreaming App accounts, which are separate from the blockchain infrastructure of the Props Network, including the Props Network’s Token Code and Protocol Rewards Engine. See “As a holder of Props Tokens, you will be responsible for securing and maintaining your private keys and otherwise following cybersecurity best practices. Failure to do so may result in the loss of all your tokens” for more information about the necessity of keeping private keys safe. It would be possible for a malicious actor to use account information with respect to a Props App to, for example, maliciously interfere with user experience of that Props App by changing account settings or other information associated with the account, including wallet addresses associated with the account so that, for example, the user’s app experience would not reflect the total Props Tokens they hold. However, this user’s Props Tokens could not be stolen with only the information obtained in the alleged 2017 breach. As a result, the Company does not believe that this potential breach poses any significant risks to Props Token holders.

 

The operation of the Props Tokens and the Props Network depends on ongoing Props Token transaction validation efforts, which are conducted, in large part, by third parties that we do not control on the Ethereum blockchain.

 

The Props Network depends upon the actions of third party blockchain validators on the Ethereum blockchain, who operate computers that construct the Ethereum blockchain in exchange for rewards. See “Description of the Props Tokens Being Offered—Token Transfers” for additional information. In addition, the recording of Props App usage data, the performance of certain oracle functions for our Protocol Reward Engine “smart contract,” and the recording of Pending Props all depend, in part, on third party validators administering the Algorand blockchain and on Oracles who communicate Pending Props information to the Protocol Rewards Engine.

 

There is no guarantee, however, that a sufficient number of validators will continue to mine the Ethereum blockchain or perform validator functions on the Algorand blockchain; validators are not contractually or legally obligated to continue validation operations and may cease transaction validation if they determine that their operations are no longer profitable, if they are prevented from doing so by government or regulatory agencies or for any other reason. Further, if Oracles do not reach the agreement required in order for the Protocol Rewards Engine to make daily rewards allocations, the Protocol Rewards Engine would not make daily rewards allocations for that day, potentially resulting in interruptions to the operations of the Props Network. Also, if validators maintaining the Ethereum blockchain cease to continue constructing the Ethereum blockchain, if validators of the Algorand blockchain cease constructing the Algorand blockchain or otherwise fail to perform validator functions, or if Oracles cease to communicate Pending Props information to the Protocol Rewards Engine, then you may lose your Props Tokens, the Props Network may be unable to function and the value of your tokens may decline.

 

Misconduct and errors by our employees and third-party service providers, or by users and developers on the Props Network, could harm our network and reputation.

 

We are exposed to many types of operational risk, including the risk of misconduct and errors by our employees, former employees, third-party service providers, third party Oracles or by developers or users on the Props Network. Participants on the Props Network such as Props App Developers and third party Oracles, who we do not control, could be in a position to handle large amounts of sensitive and potentially proprietary data, whose exposure could result in significant liability. It is not always possible to identify and deter misconduct or errors by employees or third-party service providers, and we cannot control application developers or users on the Props Network; the precautions we take to detect and prevent this activity, such as encryption of user data, may not be effective in controlling unknown or unmanaged risks or losses. For example, it is possible that a developer could create an application that allows the developer to see unencrypted data. Any of these occurrences could result in our diminished ability to operate our business and develop the Props Network, potential liability to our company, inability to attract future application developers and users, reputational damage to the Props Network, regulatory intervention and financial harm, which could negatively impact the Props Network, the growth of the Props Network and the value of Props Tokens.

 

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Negative publicity could adversely affect the adoption of the Props Network and the value of the Props Tokens.

 

Negative publicity about us, the Props Network or about the digital asset industry in general, including the quality, security and reliability of the Props Network or the Props Tokens, and the quality, security and reliability of similar technologies employed by other digital assets, could adversely affect our reputation, the popularity of the Props Network and the confidence in, and the use of, the Props Network, which could harm the growth of the Props Network and the value of your Props Tokens. This may be true even if such publicity is inaccurate. For example, negative publicity could relate to the utility of digital assets in general, the accuracy and effectiveness of the protocol used in allocating the Props Tokens on the Props Network, changes to the Props Network, our ability to effectively manage and resolve complaints from users and Props App Developers, privacy, data protection and security practices, litigation, regulatory activity, the actions of other third parties on the Props Network, including with respect to user actions in any Props App or future-created Props Apps, and the experience of users with the Props Network or services and other digital assets.

 

Harm to our reputation could also arise from many other sources, including employee misconduct, misconduct by our partners, including Props App Developers, misconduct by users on the Props Network or third party Oracles, outsourced service providers or other counterparties, failure by us or our partners to meet minimum standards of service and quality, inadequate protection of user data, security incidents, data breaches and compliance failures and claims, or the perception that any of these has occurred. Misinformation about Props Tokens, the Props Network or our team members can spread on social media websites like Twitter or Facebook or on public forums. Accounts owned by our employees might be hacked to potentially spread misinformation. While we plan to take necessary precautionary steps and attempt to address cases of misinformation, there is no guarantee that we will be successful in these efforts. Misinformation or negative publicity can negatively impact the price of the Props Tokens.

 

Any violation of our policies or the Company’s terms and conditions of use, including misuse of any Props Apps on the Props Network, by our customers could also damage our reputation and potentially subject us to liability.

 

Consumers could misuse a Props App by, among other things, transmitting sexually-explicit or violent content, reproducing and distributing copyrighted material without permission, transmitting inaccurate or fraudulent information or otherwise engaging in illegal activity. Similarly, Props App Developers or their users may also engage in illegal activity. Any such use of the Props Network could damage our reputation and could subject us to claims for damages, copyright or trademark infringement, defamation, negligence or fraud. Moreover, users or other network participants may use the Props Network to promote their products and services in violation of federal, state and foreign laws.

 

We cannot predict whether the use of the Props Network by users or Props App Developers could expose us to liability under applicable laws or subject us to other regulatory action. Even if any claims asserted against us or regulatory actions do not result in liability, we may incur substantial costs in investigating and defending against such claims or actions, or our reputation may be damaged. If we are found liable or to have violated applicable law in connection with these activities, we could be required to pay fines or penalties, redesign components of the Props Network or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.

  

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The Company or, in the future, another participant in the Props Network could create another digital asset which could negatively affect the value of the tokens.

 

A Props App Developer could create additional tokens or other digital assets similar to the Props Tokens. These other assets may share certain characteristics with the Props Tokens, and they may compete directly or indirectly with the Props Tokens. Any such additional tokens or other digital assets could negatively affect the Props Network and the economy in Props Tokens by diluting interest in Props Tokens or otherwise affecting the incentive structures built around Props Tokens, including in ways we cannot predict. These tokens or other digital assets could also potentially replace some or all of the usage of the Props Tokens in these or other Props Apps. The occurrence of any of these events could negatively affect the value of the Props Tokens.

 

The technology underlying the Props Network may not function properly.

 

While the essential components of the Props Networkincluding the Token Code, the Props Tokens and the current Props Appswill be operational at the time of qualification of this offering circular, the Props Network remains in development and key elements of the technology are new to our system, including the Algorand blockchain, as discussed in “Description of the Props Network—The Algorand Blockchain.” In March 2019, we began distributing Props Tokens to our SAFT holders, and, as a result, Props Tokens have been in use since then. However, we may still experience problems with their functionality in a Props App. We could also experience other problems, and elements of the Props Network may not function properly when introduced to live users on the Props Network. These features will be important to the growth of the Props Network. There can be no guarantee that the technology required for the operation of the Props Network will function as anticipated or function at all. This technology may malfunction because of internal problems or as a result of cyberattacks or external security breaches or we might not be able to successfully develop the technology. Further, there may be no alternatives available if this technology does not work as anticipated. As a result, failure of this technology to work as intended may adversely affect the operation and growth of the Props Network and may have a material adverse impact on the value of your Props Tokens.

 

The Props Network has been and will be, as applicable, developed by key technology employees, and the Props Network’s continued operation and further development depend on the continued availability of those key employees.

 

Key technology supporting the Props Network, including our “smart contracts” and other components of our intellectual property, has been and will be developed primarily by a small number of key technology employees of the Company. For example, we are aware of only three employees of the Company who possess the necessary technological skillset to develop the backend infrastructure for the Props Network. In the future, some of these employees may leave the Company or may be transitioned into roles at Props PBC, where they may be dedicated to Props Network-wide development efforts. The loss of the services of any of those key employees could have a material adverse effect on the ability of the Company or Props PBC, as applicable, to develop, operate or maintain the Props Network. If the Company were to lose the services of any these key employees, it could be very difficult or expensive to replace them, and the loss of any of them could have a material adverse effect on our operations and financial conditions. Further, because the skillset required to successfully develop the technology for blockchain-related businesses is rare, the loss of key employees could result in us being unable to fill these roles.

 

We may face litigation or liability in connection with our forward sales of Props Tokens to purchasers of simple agreements for future tokens (SAFTs), which could have a material adverse effect on our company’s operations and financial condition.

 

We issued SAFTs to investors in November 2017. The Company believes that, under the SAFTs, the research and development services it was obliged to provide were limited to the creation of the Company’s token platform and the creation and delivery of a functional token. The completion of these research and development services principally required the creation of the Token Code (an ERC-20 “smart contract”); building the distribution mechanism for Props Tokens, including a mechanism for effecting any vesting under SAFTs; developing the Rize app, including basic “wallet” functionality in the Rize app and merging it into the YouNow Livestreaming App; and building Props-specific exclusive features in the YouNow Livestreaming App. In March 2018, we offered to these investors a rescission of their SAFT purchases or, alternatively, amendments that would extend the deadline for delivery under the agreements to March 4, 2019, in exchange for increasing the number of Props Tokens the purchasers would be entitled to receive under their agreements by 10%. The vast majority of the purchasers chose to amend and affirm their SAFTs. As a result, we were obliged to begin to distribute functional Props Tokens to SAFT holders by March 4, 2019, or be obliged to return these purchasers’ investments in the SAFTs in an amount approximately equal to $20.6 million.

 

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The Company completed its services by March 4, 2019 in connection with the initial delivery of the Props Tokens to SAFT purchasers, and as a result, the Company believes that as of March 4, 2019 it had performed all of its research and development obligations owed to SAFT holders under the SAFTs. See “Other Offerings” for additional information. SAFT purchasers could, however, argue that the Company needed to enable additional functionality prior to delivering the Props Tokens to the SAFT holders, such as a fully functioning Protocol Rewards Engine. While the Company believes it properly delivered the Props Tokens and, in any case, could not be deemed to have failed to perform under a SAFT as a result of the application of law according to the terms of the SAFT, it is possible that our SAFT investors could subject us to private litigation relating to our obligations under the SAFT or argue that we are obliged to return their investments. Any of these proceedings could have a material adverse effect on our business, the Props Network and the value of the Props Tokens.

 

The Props Network and the Props Tokens may face the risk that one or more of its competitors, or other third parties, may obtain patents or other protections covering technology critical to the operation of the Props Network and the Props Tokens.

 

We believe that a number of other organizations are or may be working to develop decentralized application systems for digital media platforms or other novel technologies that may be competitive with our own technology. Some or all of these organizations, including organizations that may have technology similar to the Company or Props PBC, may have substantially greater technological expertise, experience with blockchain technologies and/or financial resources than we have, and many of them may be attempting to patent technologies that may be competitive with or similar to the technology we have developed, or attempting to reverse engineer our technology, which may be possible as a substantial portion of the software underlying the Props Network is open source software that is generally available to the public and described in our publicly available whitepaper. We do not have access to detailed information about the technologies these organizations may be attempting to patent. The Props Network may ultimately compete with these alternative networks, which could negatively impact the Props Tokens and the Props Network, and may prevent the further development of Props Network. Further, occasionally, the Company may be targeted with patent infringement lawsuits. These cases may be brought by non-practicing entities that sustain themselves by suing other companies. Currently, the Company is not aware of any patent infringement suits against it or contemplated to be brought against it.

 

If one or more other persons, companies or organizations obtains a valid patent covering technology critical to the Props Network or the Props Tokens, our company and any other entities that required rights to the relevant technology in order to enable the Props Network and the Props Tokens to operate as intended might be unwilling to license the technology or unable to license the technology on commercially reasonable terms, and it could become impossible for the Props Network and Props Tokens to operate, which could have a material adverse effect on our business, the Props Network and the value of the Props Tokens.

 

The open source portions of the software and underlying technology of the Props Network and Props Tokens could be used by third-parties to develop competing blockchain-based business models and tokens.

 

Given that a substantial portion of the software necessary for the Props Network to operate, including the majority of the software comprising the PropsKit, and Sidechain Node are released under the terms of various open source software licenses and given that such software is generally available to the public at www.github.com or linked from https://www.props.xyz/token or other publicly available websites, a person or company could establish software, technology and networks, built using our publicly-available software. It is possible that those products would be substantially similar to and competitive with our software, technology and network. If this were to occur, it is possible that the value of the Props Network and Props Tokens could decline.

 

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If we fail to promote and maintain our brands in a cost-effective manner among both users and application developers, we may lose Props Network users and the value of your Props Tokens may be adversely affected.

 

We believe that developing and maintaining awareness of our brands in a cost-effective manner is critical to attracting and retaining application developers and users to the Props Network. This also applies to top-tier employee talent. Successful promotion of our brands will depend largely on the effectiveness of our marketing efforts, efforts to encourage adoption and further development of the network by application developers and other ecosystem partners and the experience of application developers and users on the Props Network. Our efforts to build our brands have involved significant expense, and it is likely that our future marketing efforts will require us to incur significant additional expense. These brand promotion activities may not result in increased revenue and, even if they do, any increases may not offset the expenses incurred. If we fail to successfully promote and maintain our brand or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brands, we may lose our existing application developers and users to our competitors or be unable to attract new application developers and users, which may adversely affect the value of your Props Tokens.

 

If Props PBC is unable to continue with its grant program for any reason, including as a result of regulatory issues, we may be forced to change our plans for supporting the further development of the Props Network, which could adversely affect the Props Network or the value of your Props Tokens.

 

Props PBC may distribute Props Tokens on a discretionary basis in the form of grants or expense reimbursements to developers building either applications on the Props Network or Network infrastructure, strategic content partners and other entities directly supporting the growth of the Props Network. The distribution of Props Tokens in the form of grants or expense reimbursements to developers, strategic content partners and other entities supporting the growth of the Props Network is being qualified under this offering circular. We view Props PBC’s operation of this program as a significant benefit to the Props Network, given that Props PBC has a stated public benefit purpose of creating an open, sustainable and equitable media network that fairly rewards all participants in the Props Network for their contributions to the network, by supporting and promoting the growth, research, further development and adoption of the protocol and token underlying the Props Network.

 

Because it will be receiving Props Tokens from the Company with a view to distributing Props Tokens to grant recipients, Props PBC will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act. A statutory underwriter is subject to the prospectus delivery and liability provisions of the Securities Act and may be deemed to be conducting broker-dealer like activities that could in certain circumstances subject Props PBC to additional regulatory obligations. If the distribution of Props Tokens by Props PBC in its grant program becomes unduly expensive or if Props PBC is otherwise unable to continue its distributions as a result of regulatory or other reasons, we may need to restructure our plans for supporting the growth of the Props Network, including, for example, by having the Company issue grants. Any such occurrence could adversely affect the further development of the Props Network and the value of your Props Tokens.

 

We may need to increase the total number of Props Tokens issuable by the Token Code in order for the Props Network to operate in the future.

 

Because the initial terms of our Token Code provide for the issuance of a fixed number of 1,000,000,000 Props Tokens, the amount of Props Tokens available to serve as incentives for the undertaking of key functions to be performed by Props Network participants will decrease over time. See “Description of the Props Tokens Being Offered—Token Supply” and “Description of the Props Token’s Role in Helping to Align Incentives of Network Participants.” It is possible that these key functions will only continue to be adequately incentivized as the number of Props Tokens allocated or issued decreases on the condition that the value or of Props Tokens rises in the future. There is, however, no guarantee that the value of Props Tokens will increase in the future. See “Risk Factors—The value of the Props Tokens may be volatile. There is no guarantee that the Props Tokens will hold value or increase in value, and we do not fully control many factors affecting their value.” As of the date of this offering circular, Props PBC will have the power, as the owner of the account with the ability to effect changes to “smart contracts” like the Token Code and the Protocol Rewards Engine (the “Controller”), to increase the total number of Props Tokens that may be issued, to the extent that Props PBC determines that such an increase could help the further development of the Props Network. See “Description of the Props Network—The Token Code” for additional details. If Props PBC fails to take such action, the Props Network may be unable to continue to operate in the desired manner.

 

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Risks Related to Blockchain Technology

 

The Ethereum blockchain on which ownership of Props Tokens is recorded, the Algorand blockchain on which entries of Pending Props are recorded and the Props Tokens themselves may be the target of malicious cyberattacks or may contain exploitable flaws in their underlying code, which may result in security breaches, the loss or theft of Props Tokens, the decline in value of Props Tokens, or liability and reputational harm.

 

The Props Tokens and the economy in Props Tokens, including Pending Props, rely on the Ethereum blockchain and the Algorand blockchain to operate. As a result, Props Tokens, Pending Props and the Props Network are subject to a number of reliability and security risks attendant to blockchain and distributed ledger technology, including malicious attacks seeking to identify and exploit weaknesses in the software. Some of these known risks include:

 

  “51% attacks,” which occur when an attacker controls a majority of computing power or digital assets necessary to validate transactions on a blockchain, giving the attacker a majority of the validation power on the network. Oracles on the Ethereum blockchain who successfully obtain this validation powereither individually or as part of a “mining pool” or group of validatorsmay block other users’ transactions or make it appear as though they still have tokens that have been spent, which is known as a “double-spend attack.” A 51% attack may also allow an attacker to use its monopoly over new blocks to “censor” other user transactions by actively preventing them from being written to the blockchain. Any such attack on the Ethereum blockchain could result in the loss of Props Tokens.

 

  A “finney attack” occurs when an attacker mines a block but does not announce it to the network. In this case, a miner can double-spend tokens by sending them to another user in a legitimate transaction and then create a valid new block with a double-spend of those same tokens; for the attack to be successful, this block must be released so that it is added to the blockchain before the target user’s legitimate transaction. Once the block the attacker mines is accepted, the legitimate transaction will not be accepted and the honest user will not receive the tokens, thereby being out of a payment. Typically, developers and users who accept “quick transactions” (transactions that are accepted before the counterparty can confirm that the transaction has been written to the correct version of the blockchain) when accepting payment on the network are vulnerable to this type of attack. These attacks can be avoided by requiring that several additional network operations to written to the blockchain after any transaction before considering that transaction complete; bit developers may be incentivized not to do so to allow for quicker processing of network operations on their application.

 

Such attacks may materially and adversely affect the Ethereum blockchain or the Algorand blockchain, which may in turn materially and adversely affect the creation, transfer or storage of the Props Tokens, Pending Props and the Props Network. As a result of these and other risks of malicious attacks, there can be no assurances that the creation, transfer or storage of Props Tokens, Pending Props or the Props Network itself will be uninterrupted or fully secure. Any such interruption or security failure may result in impermissible transfers of Props Tokens or Pending Props, a complete loss of users’ Props Tokens or Pending Props or an unwillingness of users to access, adopt and utilize the Props Network, Props Tokens and/or Pending Props as a result of reduced trust in the integrity of the Props Network from bad publicity.

 

The oracle function to the Protocol Rewards Engine is dependent on the efforts of the Company and third parties acting in their capacity as the Props Network’s Oracles, and if the Company or these third parties fail to successfully perform these functions, the operation of the Props Network could be compromised.

 

The Company is an Oracle. In addition, as of the date of this offering circular, two other persons or entities serve as Oracles. See “Description of The Props Network—The Oracles” for additional details regarding selection of Oracles. The selected entities, collectively, will have responsibility for communicating from the Algorand blockchain to the Protocol Rewards Engine, on a daily basis, the number of users who earned Pending Props in each Props App and the aggregate Pending Props balances of each of those users, so that the Protocol Rewards Engine can make daily app rewards. See “Description of the Props Network—The Protocol Rewards Engine” for additional details regarding these rewards. As a result, key functions of the Props Network will depend on the Company, including receiving accurate accounts of usage data from Props Apps developers and providing the Protocol Rewards Engine with the daily updates necessary so that it may provide its daily allocation of Props Tokens.

 

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As a result, if these entities suffer from cyberattacks or other security incidents (whether from hacking, which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, the inadvertent transmission of computer viruses or other malware, other forms of malicious attacks, malfeasance or negligent acts of its personnel, or via other means, including phishing attacks and other forms of social engineering), or their efforts are otherwise compromised the functioning of the Props Network may be jeopardized. In addition, if the Oracles for any reason fail to continue to communicate to the Protocol Rewards Engine the Pending Props information noted in the previous paragraph, or otherwise cease operations, this may cause a material adverse effect to the Props Network and the value of your Props Tokens.

 

Our plans for addressing scalability issues related to the operation of apps dependent on the Ethereum blockchain subject us to a number of technological and regulatory risks that may cause the Props Network to be ineffective or not sufficiently cost-effective to continue operating.

 

As noted above, scalability is a challenge for platforms working with large blockchains like the Ethereum blockchain. The Company believes that it has addressed some of these problems by recording a bookkeeping entry with the number of Props Tokens a user may be entitled to claim in the future, which we refer to as Pending Props, to the Algorand blockchain immediately upon a user’s earning of Props—which may only be converted into Props Tokens once the user has completed the steps described in “Description of the Props Tokens Being Offered—Receiving Props Tokens.” This information improves user experience of Props Apps by allowing users to enjoy the benefits of holding Props Tokens while an app is still performing fraud checks or similar operations that must be completed prior to issuance of Props Tokens on the Ethereum Blockchain.

 

These solutions may not be successful and may only temporarily help us address scalability issues in a limited way. For example, the Company may cease this practice of covering certain transaction fees in the future and may not undertake to cover the costs of transactions on the Ethereum blockchain for Props App Developers, which may make developing apps for the Props Network less attractive for third party developers. In addition, our solution may subject us to regulatory risks as additional app developers seek to join the Props Network, including, for example, with respect to the potential requirement to register as a transfer agent or find a registered transfer agent to act as a validator. See “Description of the Business—Government Regulation” for additional detail. In general, if scalability issues are not resolved, this could make it uneconomical or unattractive for users to use Props Apps, including, for example, because users may not be able to efficiently tip or otherwise transfer small numbers of Props Tokens.

 

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The technology underlying digital asset and blockchain technology is subject to a number of known and unknown technological challenges and risks that may prevent wide adoption and use of the Props Network and the Props Tokens.

 

The blockchain technology used in connection with digital assets like Props Tokens, which is sometimes referred to as “distributed ledger technology,” is a relatively new, untested and evolving technology. It represents a novel combination of several concepts, including a publicly available database or ledger that represents the total ownership of the digital asset at any one time, novel methods of authenticating transactions using cryptography across distributed network nodes that permit decentralization by eliminating the need for a central clearing house while guaranteeing that transactions are irreversible and consistent, differing methods of incentivizing this authentication by the use of blocks of new tokens issued as rewards for the validator of each new block or transaction fees paid by participants in a transaction to validators and hard limits on the aggregate amount of currency that may be issued. As a result of the new and untested nature of digital asset and blockchain technology, the Props Network and the Props Tokens are vulnerable to risks and challenges, both foreseen and unforeseen. Examples of these risks and challenges include:

 

  Scalability is a challenge for platforms working with large blockchains like the Ethereum blockchain, because addition of records to a blockchain requires the network to achieve consensus through a transaction validation mechanism, which often involves redundant and extensive computation, processing of transactions is slower than that achieved by a central clearing-house, and delays and bottlenecks in the clearance of transactions may result as the digital asset expands to a greater number of users. See “Risk Factors—Our plans for addressing scalability issues related to the operation of apps dependent on the Ethereum blockchain subject us to a number of technological and regulatory risks that may cause the Props Network to be ineffective or not sufficiently cost-effective to continue operating.” for additional details regarding how we are working to address these risks.

 

  To the extent incentive payments are used to incentivize the validation of a transaction or record to a block on the Ethereum blockchain, these fees may spike during times of high transaction volume. Because the Props Tokens are being treated as securities, these incentive payments could also potentially raise regulatory issues related to whether the recipient of the fees is required to register as a broker-dealer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We believe that these rewards do not warrant an Ethereum validator registering as a broker-dealer, as discussed in the section of this offering circular captioned “Description of Business—Government Regulation”; however, there is no guarantee that regulatory agencies will agree with our position.

 

  Generally blocks cannot be removed from the blockchain, but, during the validation process for large blockchains like Ethereum, competing blockchains may arise with respect to the last few blocks on the blockchain. As a result, a block is often not considered to be irreversibly on the blockchain until several additional blocks have been added to it, and occasionally blocks with a handful of confirmations can be dropped and modified. Applications or other persons that account for Ethereum tokens that do not wait a sufficient period before treating the blockchain as permanently written may lose assets and funds in exchange for blockchain payments that are never completed.

 

  Although blockchains are generally considered reliable, they are subject to certain attacks as described above under “Risk Factors—Risks Related to Blockchain Technology—The Ethereum blockchain on which ownership of Props Tokens is recorded, the Algorand blockchain on which Pending Props entries are recorded and the Props Tokens themselves may be the target of malicious cyberattacks or may contain exploitable flaws in their underlying code, which may result in security breaches, the loss or theft of Props Tokens, the decline in value of Props Tokens, or liability and reputational harm.

 

  The Ethereum blockchain’s validators may either increase or decrease the incentive payments required to complete transactions on the Ethereum blockchain, which could materially and adversely affect the creation, transfer or storage of the Props Tokens. Changes to the Ethereum blockchain could reduce the number of validators on the Ethereum blockchain, which could possibly leave the Ethereum blockchain increasingly vulnerable to a 51% attack.

 

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  Because the Ethereum blockchain and the Algorand blockchain are public blockchains, malicious users may freely view, access and interact with key components of the Props Network. For example, our Protocol Rewards Engine is a “smart contract” written to the Ethereum blockchain, and malicious users will be able to freely access this code in ways that could allow them to steal or otherwise affect Props Tokens.

 

  The Ethereum blockchain, which currently relies on a “proof-of-work” consensus protocol system whereby blocks are awarded based on the solving of computationally difficult problems, has resulted in Ethereum validators using increasing amounts of energy that may be unsustainable as the system continues to grow, and which may draw unfavorable regulatory attention. Further, when or if the Ethereum blockchain switches to either a hybrid “proof-of-work and proof-of-stake” or “proof-of-stake” consensus protocol system, an Ethereum-wide change to its consensus protocol may present additional risks. For example, transactions in Props Tokens may not be processed as presently contemplated in the period of time during or after the switch in consensus protocols, which may materially and adversely affect the creation, transfer or storage of the Props Tokens.

 

Although there may be solutions that have been proposed and implemented to these and other challenges facing various digital assets, the effectiveness of these solutions has not been proven. Further, other challenges may arise in the future that we cannot predict. For example, advances in cryptography and/or technical advances, such as the development of quantum computing, could present risks to the Props Tokens and the Props Network by undermining or vitiating the cryptographic consensus mechanism that underpins the Ethereum blockchain protocol. Similarly, legislatures and regulatory agencies could prohibit the use of current and/or future cryptographic protocols which could limit the utility of the Props Tokens, resulting in a significant loss of value or the termination of the tokens and the Props Network. Accordingly, the further development and future viability of digital assets in general or specific digital assets, such as the Props Tokens, is uncertain, and unknown challenges may prevent their wider adoption.

 

The technology underlying digital asset and blockchain technology is subject to a number of industry-wide challenges and risks relating to consumer acceptance of blockchain technology. The slowing or stopping of the development or acceptance of blockchain networks and blockchain assets would have an adverse material effect on the successful adoption of the tokens.

 

The growth of the blockchain industry in general, as well as the blockchain networks on which the Props Tokens rely, is subject to a high degree of uncertainty regarding consumer adoption and long-term development. The factors affecting the further development of the digital asset industry, as well as blockchain networks, include, without limitation:

 

  worldwide growth in the adoption and use of digital assets and other blockchain technologies;

 

  government and quasi-government regulation of digital assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;

 

  the maintenance and development of the open-source software protocol of blockchain networks;

 

  changes in consumer demographics and public tastes and preferences;

 

  the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using government-backed currencies or existing networks;

 

  the extent to which current interest in digital assets represents a speculative “bubble”;

 

  general economic conditions in the United States and the world;

 

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  development of central bank digital currencies;

 

  the regulatory environment relating to digital assets and blockchains; and

 

  a decline in the popularity or acceptance of digital assets.

 

The digital assets industries as a whole have been characterized by rapid changes and innovations and are constantly evolving. Although they have experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks and blockchain assets may deter or delay the acceptance and adoption of the Props Tokens.

 

The Ethereum blockchain network on which ownership and transfer of Props Tokens will be recorded utilizes code that is subject to change at any time. These changes may have unintended consequences for the Props Network and the Props Tokens.

 

The Props Tokens are built as an ERC-20 token recorded on the Ethereum blockchain. See “Description of the Props Tokens Being Offered—Terms of the Token Code” for additional information regarding what it means to be an ERC-20 token. In addition to the aforementioned risks regarding development and acceptance of blockchain networks or the price of blockchain assets that may negatively affect the Ethereum network, other changes such as upgrades to Ethereum’s blockchain, a hard fork in the Ethereum blockchain, or a change in how transactions are confirmed on the Ethereum blockchain may have unintended, adverse effects on all blockchains utilizing the ERC-20 standard, including the Props Network. For example, the proposed change in Ethereum’s consensus mechanism from a proof-of-work to modified proof-of-stake format could affect the issuance or transfer of Props Tokens. These changes may occur at any time and may cause delays in development or may completely foreclose our ability to maintain the Props Network. Any such changes to the Ethereum network could result in a disruption to the Company and the Props Network—which could negatively affect the value of your Props Tokens.

 

Forks may be implemented on the Ethereum blockchain in a manner that may affect the value of your Props Tokens, and may ultimately result in duplicate records of Props Tokens which we have not issued and may not support.

 

As described under “Description of The Props Tokens Being Offered—Third Party Token Modifications and Changes to Functionality,” third party groups or individuals involved in the Props Network may at any time propose upgrades or changes to the open-source software underlying the Props Tokens that can result in prolonged “forks” in the Ethereum. While we do not believe that these changes present significant risks to the Props Network or Props Token holders, there is, however, a possibility that these changes could result in disruptions to the Props Network or disagreements in the Props Network community of developers and users regarding which fork of a blockchain should be recognized as legitimate for the Props Network. A particular Props App could, for example, determine to treat the competing record of Props Tokens as the legitimate record of Props Tokens. We believe we could exert control and substantially resolve any disagreements by causing Props PBC to terminate the competing record of Props Tokens. Further, with respect to these competing tokens not endorsed by the Company, the Company would publicly disclaim its status as issuer of such an altered token and discontinue any plans to upgrade that token code or discontinue development for apps working in that competing environment. See “Description of The Props Tokens Being Offered—Third Party Token Modifications and Changes to Functionality” for additional detail.

 

In the future, we could assign essential components of the Props Network, including the Protocol Rewards Engine, to Props PBC, which ultimately could negatively affect the Props Network and the value of the Props Tokens, and may ultimately result in us disclaiming our status as the issuer of the Props Tokens.

 

In the future, we could take a less active role in guiding the further development and administration of the Props Network. This could occur as a result of the assignment of the ownership of the Protocol Rewards Engine or other parts of the Props Network infrastructure to Props PBC or taking other actions that we would deem necessary to assign the operation and maintenance of the Props Network infrastructure to Props PBC. See “Description of Business—Assignment, Decentralization” for additional details. Depending on the actions we take and how completely the essential managerial and entrepreneurial efforts that Props Token holders would be relying upon would become those of Props PBC and not the Company’s, we believe that this could result in Props PBC becoming the issuer of the Props Tokens. While we believe that this determination could only be made in consultation with counsel and, if appropriate, the SEC or its staff and we would work to ensure Props Token holders are provided with notice, any such assignment could negatively affect the Props Network and the value of the Props Tokens. At the time of any such assignment, Props PBC may not, for example, be able to provide the same level of financial or technical support to the Props Network and any such assignment could disrupt the operation of the Props Network. Moreover, any public notice of an upcoming change to the Props Network could affect the value of Props Tokens, even before that change is effected.

 

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Further decentralization of the Props Network could occur in the future, which ultimately could negatively affect the Props Network and the value of the Props Tokens, and may ultimately result in us disclaiming our status as the issuer of the Props Tokens.

 

In the future, we could take a less active role in guiding the further development and administration of the Props Network. For example, we anticipate that, in the future when there is a healthy ecosystem of Props App developers, content-creators and users on the Props Network, we could entrust the Controller the account with the ability to effect changes to the Props Network “smart contracts” to a decentralized autonomous organization (“DAO”), which would then enable Props Token holders to vote on changes to these “smart contracts.” It would be necessary both to gain substantial community support for these efforts and, also, to create additional technological capabilities in order to successfully effect such decentralization. Further, while the law for this is evolving, we believe that, subject to the view of the SEC, it is possible that at some point in the future the Props Network could become so decentralized that Props Tokens would no longer be securities issued by the Company. See “Description of Business—Assignment, Decentralization” for additional details. You will not have any rights in determining whether or not this has occurred. We believe that the determination that the Props Network is so decentralized that the Company is no longer the issuer of the Props Tokens likely will turn on whether purchasers or participants reasonably expect the Company to carry out essential managerial or entrepreneurial efforts. A mix of facts and circumstances may inform whether the efforts of the Company are no longer a key factor for determining the success of the Props Network and the Company may no longer have an informational advantage over others, so that disclosures by the Company may be less meaningful. We don’t believe, for example, that this will necessarily occur if we simply entrust Controller responsibilities to a DAO, and we believe that this determination could only be made in consultation with counsel and the SEC.

 

As a holder of Props Tokens, you will be responsible for securing and maintaining your private keys and otherwise following cybersecurity best practices. Failure to do so may result in the loss of all your Props Tokens.

 

Props Token balances are associated in your wallet with your token public key, which is in turn associated with your token private key. You are responsible for knowing your private key and keeping it a secret. Because a private key, or a combination of private keys, is necessary to control and use Props Tokens stored in your digital wallet or vault, the loss of one or more of your private keys associated with your digital wallet or vault storing the tokens will result in the loss of your Props Tokens.

 

You are responsible for educating yourself on best practices for securely keeping private keys and protecting your personal information and on cybersecurity best practices. While we take steps to prevent or mitigate the impact of cyber-attacks in the Props Network open-source software, there can be no guarantee that we will be successful in preventing all cyber-attacks on this software. Holders of digital assets can be targeted by hackers in many ways, most of which are out of our control. Holders’ private keys also can be stolen. Any third party that gains access to one or more of your private keys, including by gaining access to login credentials of a hosted wallet service you use, may be able to misappropriate your Props Tokens. We will use reasonable efforts to make resources regarding best practices for keeping private keys secure available to users, but we have no control over this type of attack and cannot directly stop hackers from stealing private keys of users. We accept no liability and will not reimburse you for any theft of private keys or any malfunction of any wallet software. As a result, any loss of your Props Tokens due to theft or unauthorized use of your private key may be final and result in the complete loss of your Props Tokens.

 

Props Token transactions may be irreversible, and, accordingly, losses due to fraudulent or accidental transactions or technology failures in your wallet software may not be recoverable.

 

Transactions in Props Tokens may be irreversible, and, accordingly, you may irreversibly lose all of your Props Tokens in a variety of circumstances, including in connection with fraudulent or accidental transactions, technology failures in wallet software or cyber-security breaches. Losses due to fraudulent or accidental transactions may not be recoverable.

 

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Risks Related to our Business

 

We have a limited history working with blockchain technology, which makes it hard to evaluate our ability to develop the Props Network.

 

The Company was formed in 2011 to develop and operate consumer-facing mass market entertainment apps. From 2014 through 2020, we operated these apps with an “in-app” digital currency. As we develop the Props Network, we leverage our technology, expertise, user community and other related experience to build the infrastructure for an open, decentralized network of apps reliant on blockchain technology. Our company’s limited operating history in this sector may make it difficult to evaluate its current business and future prospects. We have encountered, and will continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly developing and changing industries, including challenges in forecasting accurately, determining appropriate allocation of its limited resources, gaining market acceptance, managing a complex regulatory landscape and developing new products. Our current operating model may require changes in order for us to scale our operations efficiently. You should consider our business and prospects in light of the risks and difficulties we face as an early-stage company in the blockchain industry focused on developing products in the field of digital media network infrastructure. The further development of the Props Network and, in turn, the value of the Props Tokens will depend on the success of our business.

 

The Company has incurred net losses in the past and we expect to continue to incur net losses in the future.

 

The Company seeks to grow its business and the Props Network by attracting users, application developers and partners and further enhancing and developing the Props Network. These efforts may prove more expensive than currently anticipated, and we expect to continue to incur additional net losses in the future. Further, we may not succeed in financing our operations through the sale of Props Tokens. There can be no assurance that the Company will be successful in securing such financing, on favorable terms or at all. While the Props Network remains reliant on the efforts of the Company and Props PBC, if we are unable to continue operations or are otherwise constrained as a result of incurring net losses or failing to raise finance, this would have a material adverse impact on the Props Network, Props Apps and the value of Props Tokens.

 

Based on our rate of cash outflows, there is substantial doubt about our ability to continue as a going concern unless additional sources of capital are secured.

 

As a result of our sale of assets relating to and including the YouNow Livestreaming App, we raised cash. Following that sale, we have been able (through the April 2020 Private Placements) to raise additional financing based on our transition to a “pure play” token and network propagation business. We currently believe that our cash and cash equivalents will be sufficient to fund our operations into the third quarter of 2022.

 

Nevertheless, there is substantial doubt about our ability to continue as a going concern. As a consequence of the sale of the YouNow Livestreaming App, we no longer generate revenues from the sale of digital goods, and we have in the past relied on the sale of digital goods, as well as proceeds from the sale of Props Tokens and other securities, to fund our operations. Moreover, our cash forecasts and capital requirements are subject to change as a result of a variety of risks and uncertainties. Unless we raise additional funds or we begin to achieve self-sustainability or profitability, there can be no assurance that we will be able to maintain our business beyond the third quarter of 2022.

 

If we are unable to generate cash from operations and/or financing activities, this could have a material adverse impact on the Props Network, Props Apps and the value of Props Tokens.

 

If we are unable to generate sufficient cash from the sale of Props Tokens or from other sources of investment finance, we may be unable to fund our operations which could have a material adverse effect on the Props Network and on the value of the Props Tokens.

 

We currently believe that our cash and cash equivalents will be sufficient to fund our operations into the third quarter of 2022. However, our cash forecasts and capital requirements are subject to change as a result of a variety of risks and uncertainties, including increases in operating costs. In addition, the costs of fully developing the Props Network may be greater than we originally anticipated. We believe, for example, that we will need to have sufficient cash on hand to fund our operations and continue the development of the Props Network, including through growing the network’s user base and attracting additional app developers. However, these expenses could be higher than anticipated, and we may in all events be unable to recruit app developers. Our ability to fund our development efforts may, ultimately, depend on our ability to raise funds through the sale of Props Tokens, and such financing may not be available on favorable terms or at all, or our ability to develop other sources of revenue. Our inability to generate cash from the sale of Props Tokens or from other sources of investment finance could have a material adverse effect on the Props Network and on the value of Props Tokens.

 

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The reductions in spending, including, in particular, reductions in staffing levels, resulting from the February 2020 sale of the YouNow Livestreaming App may have a material adverse effect on the Props Network and the value of the Props Tokens.

 

Our sale of the YouNow Livestreaming App allowed us to make reductions in spending and operating expenses, including reductions in staff. These reductions in spending, including, in particular, reductions in staffing levels, may harm our operations and our ability to promote the further development of the Props Network. Further, if we are unable to generate sufficient cash from operations or financing sources, we may be forced to make even further reductions in spending, liquidate assets where possible and/or curtail, suspend or cease planned programs or operations generally or possibly seek bankruptcy protection, which would have a material adverse effect on our business, the Props Network and the value of the Props Tokens.

 

Props Apps Developers and users of the Props Network rely on third-party platforms such as the Apple iTunes App Store and the Google Play Store to distribute Props Apps. If Props App Developers or the users of the Props Network are unable to access or otherwise to maintain Props App availability on the platforms, including as a result of changes or violations of terms and conditions, access to and utilization of the Props Network and the Props Tokens may suffer.

 

We expect that a significant portion of Props Apps users will access Props Apps on the Apple iTunes App Store and the Google Play Store. As a result, Props Apps and the business of Props App Developers may be subject to the standard policies and terms of service of these third party platforms, which govern the promotion, distribution and operation generally of applications on the platform. These platforms may have terms that limit the operation of apps that incorporate digital assets like Props Tokens and Ether. In addition, each platform provider has broad discretion to change and interpret its terms of service and other policies with respect to the Props Apps, and those changes may be unfavorable. For example, it is possible that the Apple iTunes App Store or Google Play Store may determine that our business, including the potential transfer of Props Tokens within a Props App, violates their respective terms of service. We have, however, taken the position that our business, including the potential transfer of Props Tokens within a Props App, does not violate their respective terms of service, and accordingly, this does not provide a basis for them unilaterally to remove the apps from their respective stores. A platform provider may also change its fee structure, add fees associated with access to and use of its platform, change how the personal information of its users is made available to application developers on the platform or restrict how users can share information with other users on its platform or across platforms. Platform providers may also make changes to their platforms that make access to Props Apps more difficult. For example, Props Apps may receive unfavorable treatment compared to the promotion and placement of competing applications, such as the order in which they appear within the platforms. Such changes could result in decreased downloads of the Props Apps and decreased traffic to the Props Network.

 

Any of these changes or if a Props App violates, or a platform provider believes that such Props App has violated, its terms of service, including by determination that the operation of Props Apps with Props Tokens as we have contemplated violates their terms of service, may result in the removal of Props Apps from these platforms or other adverse consequences—which may have the effect of decreasing the visibility or availability of Props Apps, limiting distribution capabilities, preventing access to the Props Apps, increasing the costs to operate on these platforms or otherwise result in the exclusion or limitation of the Props Apps from or within a platform provider’s platform, which could negatively impact the Props Network, Props Apps and the value of Props Tokens. In addition, if there is any change or deterioration in the relationship between the Company, Props PBC or the Props Apps, on the one hand, and a platform provider, on the other hand, that platform provider could limit or discontinue the Company’s or the Props App’s access to its platform.

 

In the event that the Company or a Props App is limited or restricted from accessing any platform, including the Apple iTunes App Store or the Google Play Store, the Company or such Props App may decide to provide certain services, including issuances and transfers of Props Tokens, through alternative venues that may be more difficult to access and which may in turn discourage users from using Props Apps. Any limit of, or discontinuation to, Props Tokens’ or the Props App’s access to any platform could have a material adverse impact on access to and utilization of the Props Network, our business, our ability to attract additional app developers to create Props Apps and the value of Props Tokens.

 

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The Props Network, the Company and Props PBC may be at increased risks of cyberattack or other security incidents—which may result in the loss of Props Tokens and adversely affect the Props Network and the value of Props Tokens.

 

The nature of our business may lead to an increased risk of fraud, cyberattack or other security incidents. Malicious actors may target the Props Network, including the Token Code and Protocol Rewards Engine, the Company or Props PBC, Props Apps and Props App developers, in order to potentially gain possession of Props Tokens. As a result, the Props Network, the Company and Props PBC may be subject to cyberattacks, security risks and risks of security breaches. A successful attack or breach of security could result in a loss of private data or unauthorized use or transfer of digital assets, including the loss of Props Tokens. Further, any successful attack or breach could adversely affect the further development and commercialization of the Props Network, which could have a material adverse effect on the value of Props Tokens. For example, an attack on the Company or Props PBC may jeopardize the operation of the Props Network, which could affect the Props Network’s ability to operate. Attacks on the Token Code or Protocol Rewards Engine could also affect the Props Network’s ability to operate and cause the loss or theft of Props Tokens.

 

In February 2019, the Company was contacted by a reporter regarding a potential data breach into the YouNow Livestreaming App’s user data, which allegedly occurred in 2017 and involved the exposure of user records for 40,000,000 users. The information provided by the reporter included a small sample of the data from the alleged breach, and included basic personal information (names), partial email information, and public IP addresses. The Company considers the impact of the disclosed information on the YouNow Livestreaming App’s users to be minimal, as the disclosure of names, partial email information, and public IP addresses of the users in these circumstances is unlikely to cause substantial damage. Following the report, the Company launched an internal review into the matter, and did not find any conclusive evidence of a data breach into its systems. We believe, however, that it is likely that it occurred. Regardless, the Company has proactively taken action to secure its systems by revoking all existing passwords and access keys into any service and system which has access to user data, and introducing Single Sign On (SSO) and 2 Factor Authentication (2FA) across the company.

 

The Company has disclosed information on the alleged breach to the Information Commissioner’s Office (ICO) of the United Kingdom. The ICO has closed the investigation with no further regulatory action required. We also reported it to Agencia Espanola Proteccion Datos (AEPD), under GDPR regulations, which has also closed the investigation with no further regulatory action required. Various European data protection authorities have announced the protection of data relating to users who are minors to be a focus area in the coming years, which may mean that this data breach may result in a regulatory investigation into the Company’s data practices, which may cause enforcement action to be taken in due course. In addition, other jurisdictions may require the filing of reports or other information related to the alleged breach. As of the date of this offering circular, we have made no additional filings or reports, which may also mean that this data breach may result in a regulatory investigation into the Company’s data practices that could cause enforcement action to be taken in due course.

 

This breach is alleged to have occurred with respect to YouNow Livestreaming App accounts, which are separate from the blockchain infrastructure of the Props Network, including the Props Network’s Token Code and Protocol Rewards Engine. See “As a holder of Props Tokens, you will be responsible for securing and maintaining your private keys and otherwise following cybersecurity best practices. Failure to do so may result in the loss of all your tokens” for more information about the necessity of keeping private keys safe. It would be possible for a malicious actor to use account information with respect to a Props App to, for example, maliciously interfere with user experience of that Props App by changing account settings or other information associated with the account, including wallet addresses associated with the account so that, for example, the user’s app experience would not reflect the total Props Tokens they hold. However, this user’s Props Tokens could not be stolen with only the information obtained in the alleged 2017 breach. As a result, the Company does not believe that this potential breach poses any significant risks to Props Token holders.

 

Any of these types of attacks or any other security incidents, or the perception that any have occurred, may, however, also damage our reputation. Any breach of data security that exposes or compromises the security of any of the computers used by our employees or technology utilized by the Props Network could adversely impact the reliability of the network or introduce computer code to our software repositories that was not written by our engineers. These events may cause a material adverse effect to the Props Network and the value of your Props Tokens.

 

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We operate in intensely competitive industries and any failure to attract new app developers or users to the Props Network could diminish or suspend our development and possibly cease our operations.

 

The consumer application industry is highly competitive and has few barriers to entry, and we expect to face significant competition in the future, including but not limited to social media apps such as Facebook, Instagram and Snapchat, video apps such as YouTube and digital media streaming applications such as Twitch and Houseparty. Many of these current and potential competitors offer similar services and have longer operating histories, significantly greater capital, financial, technical, marketing and other resources and, with respect to our consumer applications, larger user or subscriber bases than we do. These factors may allow our competitors to more quickly respond to new or emerging technologies and changes in client or consumer preferences. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing strategies that may allow them to build larger user bases consisting of greater numbers of clients or paying users. Our competitors may provide services or develop applications that are equal or superior to our services or applications or that achieve greater market or industry acceptance, including for example, similar blockchain or digital asset-based platforms. It is possible that a new product or service developed or offered by one of our competitors or other new market entrants could gain rapid scale at the expense of existing brands through harnessing a new technology or distribution channel, creating a new approach to servicing clients or connecting people, particularly within the mobile application space. A competitor could also seek to attract Props App Developers to switch away from the Props Network.

 

With respect to consumer applications, consumers have a propensity to try new products to connect with new businesses. As a result, new entrants and business models are likely to continue to emerge in our industry. These activities could attract users and subscribers away from our products and services and reduce our market share. If we are unable to efficiently and effectively attract new users or clients as a result of intense competition or a saturated market, we may not be able to continue the operation of the Props Network.

 

We may not be able to successfully realize our plans for adding additional Props Apps to the Props Network, and even when additional Props Apps are added to the Props Network, it is possible that any functionalities for Props Tokens in the additional Props Apps would be unattractive to users which could adversely affect the Company’s business or the Props Network.

 

In the future, additional Props Apps may be added to the Props Network. The addition of additional Props Apps in the future is a significant component of our plans for the further development of the Props Network. Props App Developers may, however, ultimately determine not to develop their apps for functionality for Props Tokens or cease to operate their apps as Props Apps for a number of reasons. For example, if Props App Developers joining the Props Network in the future perform functions substantially similar to those performed by the current Props App Developers, these future developers likely will be deemed to be statutory underwriters under Section 2(a)(11) of the Securities Act. We recognize, however, that future Props App Developers may integrate their apps into the Props Network in distinct ways, including in ways that do not involve the distribution of rewards in the same manner as the current Props App Developers, and, for these developers, we will need to evaluate the developer’s status as a statutory underwriter on a case-by-case basis. In the future, for example, it is possible that some Props App Developers will have such small roles in the Props Network that they could, depending on factual circumstances, not be deemed to be statutory underwriters. In addition, there may be other regulatory issues related to the operation of Props Apps by third parties that could similarly affect an app developer’s willingness to develop apps for functionality for Props Tokens. Further, we may not be able to find any additional developers willing to develop Props Apps. If we are not able to achieve our planned further development for the Props Network, this could have an adverse effect on the Company’s business, the Props Network and our ability to support the Props Network.

 

Even if Props App Developers do develop Props Apps and functionality for Props Tokens, any functionality these developers create for Props Tokens may be unattractive to users. Any such occurrence could decrease the popularity and use of the Props Network, which could have an adverse effect on the Company, the Props Network and our ability to support the Props Network.

 

There is uncertainty about the further spread of the COVID-19 virus and the impact it may have on the Company’s business and operations.

 

In December 2019, a novel coronavirus disease (“COVID-19”) was reported, which by March 2020, had been characterized by the World Health Organization as a pandemic. This pandemic and resulting shelter-in-place, quarantine and similar governmental orders put in place around the world have caused widespread disruption in global economies, productivity, and financial markets.

 

The full extent to which the COVID-19 pandemic and the various responses to it may affect our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including: the duration and scope of the pandemic, including any potential future waves of the pandemic; governmental, business and individual actions that have been and continue to be taken in response to the pandemic; the availability and cost to us to access the capital markets; the effect on the apps, and users of the apps, operating in our Props Network; changes in the rates of use of such apps, and by extension in demand for Props Tokens; and disruptions to or restrictions on our employees’ ability or desire to work and travel. Although all or virtually all of our business operations can be performed remotely, many of our employees are juggling additional work-related and personal challenges, including adjusting communications and work practices to collaborate remotely, managing the technical and other challenges of working from home on a daily basis, looking after children as a result of school and camp closures, and caring for themselves, family members or other dependents who are or may become ill. If we seek to access the capital markets, there can be no assurance that financing will be available on attractive terms, if at all. The effects of and responses to the COVID-19 pandemic are constantly evolving, and its effects on the Company’s business may vary as a result. We will continue to actively monitor the issues raised by the COVID-19 pandemic and may take further actions that alter our business operations, including as may be required by federal, state, local or foreign authorities or that we determine are in the best interests of our employees, partners and the holders of Props Tokens. If we are not able to respond to and manage the ongoing impacts of COVID-19 effectively, our business and operations could be harmed.

 

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We may be subject to litigation or arbitration proceedings and may face liabilities and damage to our reputation as a result of litigation arising out of sales of rights to Props Tokens under SAFTs, DPAs or other prior agreements to issue Props Tokens.

 

In the past, the Company sold rights to receive Props Tokens by entering into SAFTs and entered into other agreements for the issuance of Props Tokens. Further, a former subsidiary of the Company, YouNow Services, entered into DPAs, which could have been satisfied by YouNow Services’ distribution of Props Tokens to the debtholders or payment in cash. In some cases, the description of the Props Network provided to purchasers in these agreements may have differed from the currently contemplated Props Network. For example, the Company has, in the past, described a role for a nonprofit foundation based in the Seychelles, and that foundation is no longer in existence. See “Description of Business.” Further, we continue to develop the Props Network, and as a result, additional differences between past plans for the Props Network and current plans for the Props Network may arise in the future, including changes in token distribution schedules and amounts and uses of tokens and rewards structures. As a result, it is possible that these differences or other changes to the implementation plan between past descriptions and the currently-contemplated structure for the Props Network may subject us to the risk of third-party litigation with purchasers of our SAFT, DPA and other agreements for the issuance of Props Tokens. If any lawsuits were brought against us and resulted in a finding of legal liability, such lawsuits could materially adversely affect our business, the Props Network and the value of Props Tokens.

 

We may face litigation or liability for certain issuances or agreements to issue Props Tokens in possible violation of federal and state securities laws.

 

In the past, the Company entered into agreements with certain of our advisors for the issuance of Props Tokens. These agreements were entered into with these advisers in order to induce them to provide professional services to the Company, and the form of written agreement governing the majority of these relationships is included as an exhibit to this offering circular. We may not have received representations necessary from these advisers for us to establish all necessary facts in order for us to rely on an exemption from the registration requirements of the Securities Act, as well as those of various state securities laws. The Company, however, believes it had a reasonable basis as to as the accredited investor status of all but four advisers who are United States persons. See “Other Offerings” for additional information.

 

The Company did not distribute Props Tokens to four of the advisers who are U.S. persons because the Company believes that it did not have a reasonable basis as to these advisers’ accredited investor status. For these advisers, the Company paid them in cash, rather than Props Tokens.

 

If any prior offering did not qualify for an exemption, it is possible we could be subject to private litigation or enforcement actions by the SEC or state regulators. Any of these proceedings could have a material adverse effect on our business, the Props Network, and the value of the Props Tokens. The forms of written agreements governing the majority of these relationships are included as an exhibit to this offering circular.

 

In addition, approximately 6 of these advisers were engaged in late 2017 in order to, among other things, help us introduce our tokens to a wide community of content creators and token enthusiasts, including but not necessarily limited to communications via YouTube posts or other public communications. As a result, it is possible that these advisers could be deemed to have performed broker-dealer like activity in connection with the offering of our SAFTs in late 2017. Any finding that these advisers were performing broker-dealer activities without registration or otherwise in violation of law could subject us to private litigation or enforcement actions by the SEC or state regulators. Any of these proceedings could have a material adverse effect on our business, the Props Network and the value of the Props Tokens.

 

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In addition, we may face litigation or liability in connection with the offer of Props Tokens pursuant to our DPAs possibly violating federal and state securities laws. YouNow Services entered into DPAs with investors pursuant to which YouNow Services raised an aggregate of approximately $690,834, net of already-issued refunds, as of June 3, 2019. The total amount raised, prior to already-issued refunds, was $1,070,000. The offering of the DPAs was made pursuant to an exemption from the requirements of Section 5 of the Securities Act provided by Title III of the Jumpstart our Business Startups Act (“Regulation CF”). We have taken the position that an offering of Props Tokens pursuant to the DPAs was also exempt under Regulation CF in connection with the offering of the DPAs, and that we may deliver freely tradeable Props Tokens pursuant to the DPAs. This offering was, however, subject to a number of ambiguities and uncertainties. For example, while the DPAs are each dated June 2018 pursuant to each agreement’s countersignature by YouNow Services, this appears to have been an administrative error; the DPA offering was launched in December 2017 and met its funding goal in December 2017—but there was a delay in appending YouNow Service’s electronic signature to the DPAs. Further, the Form C that was filed in connection with the Regulation CF offering of DPAs did not explicitly address the Props Tokens issuable pursuant to the DPAs as a type of security being offered and instead only referenced “Debt Securities” as the type of securities being offered. If investors, the SEC or state regulators were to disagree with our position, it is possible we could be subject to private litigation or enforcement actions by the SEC or state regulators. Any of these proceedings could have a material adverse effect on our business, the Props Network, and the value of the Props Tokens.

 

Some of the Props Network users will likely be under the age of 18, and those users may be able to repudiate or disaffirm the terms of use and other agreements that we enter into with such users.

 

In certain jurisdictions, persons under the age of 18 have the ability to repudiate or disaffirm contracts entered into by those individuals, and some of the Props Network users and the users of Props Apps are likely to be under the age of eighteen. As a result, we may have difficulty enforcing our terms of service and other agreements that we enter into with such individuals that are under the age of 18 in connection with the operation of our business, the Props App, the Props Network and the distribution of Props Tokens.

 

A violation of privacy or data protection laws by us or by application developers and users of the Props Network, including applications engaged in the buying and selling of shareable data, could have a material adverse effect on us and the value of the Props Tokens.

 

We and certain of our advisors and other Props Network participants are subject to applicable privacy and data protection laws and regulations, and it is possible that some of our users or Props App Developers will attract buyers and sellers of shareable data. The laws and regulations relating to privacy and data protection are evolving, may impose inconsistent or conflicting standards among jurisdictions, can be subject to significant change and may result in ever-increasing regulatory and public scrutiny and escalating levels of enforcement and sanctions. We cannot control the conduct of users of the network, or other participants on the Props Network who may engage in businesses that make them subject to and in violation of privacy and data protection laws, and as a result there can be no guarantee that users of the network will not engage in misconduct. We also expect that there will continue to be new proposed laws and regulations relating to privacy and data protection in various jurisdictions, and we cannot determine the impact such future laws, regulations and standards may have on our business. Future restrictions on the collection, use, sharing or disclosure of data, or associated requirements, could require us to incur additional costs or modify our platform, possibly in a material manner, which we may be unable to achieve in a commercially reasonable manner or at all, and which could limit our ability to develop new features.

 

Any violations of laws and regulations relating to the safeguarding of private information could subject our company or any users to fines, penalties or other regulatory actions, as well as to civil actions by affected parties. Penalties and fines relating to privacy and data protection violations can be significant. The EU General Data Protection Regulation, for example, provides for penalties of up to the greater of €20 million or 4% of an organization’s global annual turnover and various European data protection authorities have announced the protection of data relating to users who are minors to be a focus area in the coming years, including the English, Irish, French and Dutch regulators. Any violations or alleged violations could adversely affect our ability to develop and successfully commercialize the Props Network, which could have a material adverse effect on our operations and financial conditions, and could also negatively impact the Props Tokens and the Props Network, both on a short-term and long-term basis.

 

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We and Props App Developers may be sued by third parties for alleged infringement of their proprietary rights, which could harm our or these Props App Developers’ business, the Props Network, our ability to support the Props Network and the value of the Props Tokens.

 

Our success, and the success of the Props Network, depends on not infringing on the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. From time to time, third parties may claim that we or the Props Network are infringing on their intellectual property rights, and we may be found to be infringing on these rights. In the future, others may claim that our technology infringes or violates their intellectual property rights. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Any claims or litigation could cause us or Props App Developers to incur significant expenses and, if successfully asserted, could require that we and/or Props App Developers pay substantial damages or ongoing royalty payments or require that we comply with other unfavorable terms. We may also be obligated to indemnify parties or pay substantial settlement costs, including royalty payments, in connection with any claim of this type or litigation and to obtain licenses, modify applications or refund fees, which could be costly. Even if we were to prevail in this type of dispute, any litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

 

On March 15, 2018, we received a cease and desist letter with respect to the Company’s Props trademark. We responded on March 28, 2018 and have not heard anything further. We can provide no assurances on the outcome of this matter. If the other party were to prevail, we may be required to stop using the Props trademark, which could have a material negative impact on the Props Tokens, the Props Network, and our operations.

 

The popularity of digital assets may decrease in the future, which could have a material impact on the digital asset industry and our operations and financial conditions.

 

In recent years, digital assets have become more widely accepted among the public, investors, and developers, but acceptance of cryptocurrency has also faced increasingly complex legal and regulatory challenges and, to date, have not benefited from widespread adoption by governments, central banks or established financial institutions. Any significant decrease in the acceptance or popularity of digital asset offerings may have a material impact on our operations and financial conditions as digital assets constitute our material assets. The recent prices of digital assets have been extremely volatile and they are subject to substantial price fluctuations which could result in significant losses. Such losses could have a material adverse effect on our ability to develop the Props Network, and therefore on the value of your Props Tokens.

 

Our operations involve several risks and hazards, including potential dangers to our employees and to third parties that are inherent in certain aspects of our business. If we do not adequately insure against these risks, unanticipated losses could materially and adversely affect our financial condition and operating results.

 

Our business includes the storage of large amounts of digital assets that, if widely adopted, may be of significant value. It is possible that certain of our employees, executives, co-founders, office spaces, or key employees could be attacked or become the victims of extortion, which may result in physical injury or kidnappings. We could also encounter unexpected costs for reasons beyond our control in connection with the handling of these situations for our employees or executives. Any of these types of accidents or other incidents could involve significant potential claims of employees, executives and/or third parties who are injured or who may have wrongful death or similar claims against us.

 

We believe we maintain appropriate levels of insurance against risks and potential liabilities that limits our likely exposure to unanticipated losses. However, our insurance coverage may not be adequate to cover claims or liabilities, and we could be forced to bear significant costs from one or more accidents or incidents. Substantial claims in excess of our related insurance coverage could cause our actual results to differ materially and adversely from those anticipated. Due to future claims or liabilities, or to market conditions, our insurance premiums could increase, and as a result we might decide that it is necessary or appropriate to reduce our insurance coverage.

 

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The further development and operation of the Props Network and Props Tokens may require that we protect our technology and intellectual property rights.

 

The ability to develop and operate the Props Network and Props Tokens may depend on technology and intellectual property rights that our company may hold or license from unaffiliated third parties, including Amazon Web Services. If for any reason our company were to fail to comply with its obligations under the applicable license agreement or to adequately protect its owned intellectual property, or were unable to provide or were to fail to obtain rights to the technology and intellectual property that the Props Network and Props Tokens require, we would be unable to operate, which would have a material adverse effect on our operations and financial conditions.

 

We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.

 

We intend to continue to make investments to support the growth of the Props Network, and we believe we will require additional funds to respond to business challenges, including the need to develop new services or products, improve our operating infrastructure or acquire complementary businesses and technologies. Accordingly, we may need to engage in equity, debt or other types of financings to secure additional funds. Any financing we secure in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions, or make the necessary capital investments to grow the Props Network. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support the Props Network and business growth and to respond to business challenges could be impaired and our business may be harmed.

 

Our use of Form 1-A and our reliance on Regulation A for these offerings may make it more difficult to raise capital as and when we need it, as compared to if we were conducting a traditional initial public offering on Form S-1.

 

Because of the exemptions from various reporting requirements provided to us under Regulation A and because we are only permitted to raise up to $75 million in any 12-month period under Regulation A (although we may raise capital in other ways), the Props Tokens may be less attractive to purchasers and it may be difficult for us to raise additional capital as and when we need it. If we are unable to raise additional capital as and when we need it, the growth of the network and our financial condition and results of operations may be adversely affected, which may have a material adverse effect on the value your Props Tokens.

 

Grantees in the Props PBC grant offering and users of Props Apps may be required to submit claims arising under the grant agreement or terms of use to arbitration, which could result in less favorable outcomes to the plaintiff(s) in any action under either agreement.

 

Grantees in the Props PBC grant offering will be bound by a grant agreement. Grantees agree that disputes arising under or relating to the grant agreement will be resolved by binding arbitration. However, no claims under the federal securities laws shall be subject to the mandatory arbitration provision, and these provisions do not impact the rights of grantees to bring claims under the federal securities laws or the rules and regulations thereunder. Additionally, despite a grantee agreeing to the provisions in the grant agreement, investors will not be deemed to have waived the Company’s compliance with federal securities laws and the rules and regulations thereunder. Persons receiving Props Tokens from grantees via secondary transactions will not be bound by the grant agreement and the corresponding arbitration provision referenced above.

 

Similarly, users of each Props App will be bound by terms of use of that Props App. Participants therein may agree that disputes arising in connection with the terms or the use of the service will be resolved by binding arbitration. However, we do not believe that claims under the federal securities laws would be subject to a mandatory arbitration provision, or that these provisions would impact the rights of participants to bring claims under the federal securities laws or the rules and regulations thereunder. Additionally, despite a potential participant agreeing to the provisions in the terms of use, participants will not be deemed to have waived the Company’s compliance with federal securities laws and the rules and regulations thereunder.

 

As a result, if an adversarial proceeding not involving the federal securities laws is brought against the Company under the grant agreement, it may be heard only by an arbitrator or arbitrators, which would be conducted according to different procedures and may result in different outcomes than a trial by jury or a trial by judge would have had, including results that could be less favorable to the plaintiff(s) in such an action.

 

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We note that, despite the AT&T Mobility v. Concepcion, 563 U.S. 321 (2011) case in which the U.S. Supreme Court affirmed the enforceability of AT&T’s arbitration agreement’s class action waiver, the enforceability of mandatory arbitration has recently been under review by various state and federal courts, and courts have limited these provisions’ reach in various circumstances (see, e.g., Richard E. Scotti v. Tough Mudder, Inc., N.Y. Slip Op No. 29098, 2019 WL 1511148 (N.Y. Sup. Ct., March 29, 2019)). We anticipate, given the history of courts’ close scrutiny of individual-facing arbitration provisions, that future courts will continue to review and consider the enforceability of such provisions and, as courts continue to evolve their thinking on this issue, it is possible that certain state or federal courts may further limit the enforceability of such provisions.

 

The arbitration provision in the grant agreement shall not apply to claims arising under the U.S. federal securities laws.

 

You may be liable for any inaccurate information you provide in your token grant agreement if you receive Props Tokens as part of that grant agreement.

 

Recipients of Props Tokens through the Props PBC Offering are required to execute a token grant agreement, in which they agree to be liable for any and all damages and expenses (including investigation and defense costs in connection with third party claims) based on any inaccuracy in the information provided by the recipient in connection with the agreement. Recipients may be liable for the full amount of any such damages, which may include, among other items, rescission costs or governmental fines and penalties levied against the Company for violations of applicable securities laws, anti-money laundering laws and sanctions administered by the Office of Foreign Assets Control, as determined by a court of competent jurisdiction or by the applicable government agency.

 

Recipients of Props Tokens through the Props Offering are required to indemnify the Company with respect to certain claims related to recipients’ use of the Props Network and any content submitted by recipients to the Props Network. Claims under US federal and state securities laws are explicitly excluded from this indemnification, however. For more details on the liability and indemnification described above, see the section of this offering circular captioned “Plan of Distribution—Indemnity and Liability.”

 

Risks Related to Regulation

 

There are uncertainties related to the regulatory regimes governing blockchain technologies, digital assets, the Props Network and the Props Tokens, and new regulations, interpretations or policies may materially adversely affect the Props Network, the further development of the Props Network, and the value of the Props Tokens.

 

Regulation of assets like the Props Tokens and related technologies and actors (such as blockchains and digital asset exchanges) involves uncertainty as to how existing law will apply; is likely to rapidly evolve as government agencies take greater interest and develop new approaches to regulation of these assets and technologies; and varies significantly among international, federal, state and local jurisdictions.

 

The Props Network and the Props Tokens are novel technologies and relatively untested, and the application of U.S. federal and state securities laws to aspects of the Props Network and the Props Tokens is unclear in certain respects. Because of the differences between the Props Tokens and traditional securities, there is a risk that issues that might easily be resolved by existing law if traditional securities were involved may not be easily resolved for the Props Tokens. In addition, because of the novel risks posed by the Props Tokens, it is possible that securities regulators may interpret laws in a manner that adversely affects the Props Network, including our development plans for the Props Network, and the value of the Props Tokens.

 

Various legislative and executive bodies in the United States and in other countries may, in the future, adopt laws, regulations or guidance or take other actions that could severely or materially impact the permissibility or viability of the Props Network, including our plans for the further development of the Props Network, the Props Tokens, tokens generally and, in each case, the technology behind them or the means of transacting in or transferring them, as well as the Company’s accounting policies with respect to the tokens on its balance sheet and transactions related to the tokens in its financial statements. It is difficult to predict how or whether regulatory agencies may apply existing or new regulation with respect to this technology and its applications, including the Props Network and the Props Tokens. In addition, self-regulatory bodies may be established that set guidelines regarding digital assets, including tokens like the Props Tokens, and platforms like the Props Network, which could have similar effects to new policies adopted by government bodies.

 

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Any future regulatory actions applicable to us, the Props Network, the Props Tokens and our related activities could severely impact us, the Props Network, including further development of the Props Network, and the value of the Props Tokens. We may need to restructure operations, the Props Network or our plans for further development of the Props Network significantly or take other adverse actions to comply with any new regulation or guidance. These efforts could be costly and could involve fundamentally changing core portions of our business, operations and network, or require the Company to restate its financial statements. They could, in turn negatively affect the value of the Props Tokens. On the other hand, failure to restructure for compliance adequately or quickly enough could result in regulatory action (such as investigations by the government or a self-regulatory organization or government or private litigation or administrative actions) that requires us to spend significant time and effort, which would pull our attention away from the core of our business and potentially deplete our resources. It could also result in negative publicity. Regulatory change could even potentially result in the Props Tokens or certain operations or planned operations of the Company, Props PBC or other Props Network participants, including Props App Developers or Oracles, being viewed as impermissible, which could result in a need for dramatic alterations or the termination of these operations or planned operations. Regulatory action could also affect the rights of holders of the Props Tokens, for example by severely limiting the ability of holders to transfer or sell their Props Tokens. Even the relaxation of regulation, permanently or temporarily, could leave us at a competitive disadvantage compared to new market entrants, which would not have to shoulder the legal and accounting costs associated with our early move into the market.

 

Digital asset networks, blockchain technologies and coin and token offerings also face an uncertain regulatory landscape in many foreign jurisdictions, including (among others) the European Union, China and Russia. Various foreign jurisdictions may, in the future, adopt laws, regulations or directives that affect the Props Network, including plans for the further development of the Props Network, or the Props Tokens. These laws, regulations or directives may conflict with those of the United States or may directly and negatively impact our business. The effect of any future regulatory change is impossible to predict, but any change could be substantial and materially adverse to the adoption and value of the Props Tokens.

 

Because a substantial number of Props Network users will likely be persons under the age of 18, certain activities of Props Apps may need to be modified or marketing strategies altered, to comply with new and possibly inconsistent regulations, which could be costly or delay the release of Props Apps. For example, the United Kingdom’s Office of Fair Trading issued new principles in January 2014 relating to in-app purchases in free-to-play games that are directed towards children 16 and under, which principles became effective in April 2014. In addition, in response to a request made by the European Commission, Google has announced that it will no longer label free-to-play games as free in European Union countries. The Federal Trade Commission has also indicated that it intends to review issues related to in-app purchases, particularly with respect to games that are marketed primarily to minors; the Federal Trade Commission reached a settlement agreement with Apple on this subject. If the Federal Trade Commission issues rules significantly restricting or even prohibiting in-app purchases, it could significantly impact our business strategy by limiting the products Props Apps Developers are able to offer to users, by limiting the size of the potential market for Props Apps, or by requiring costly additional differentiation between products for different territories to address varying regulations. Furthermore, the growth and further development of free-to-play gaming and the sale of virtual goods may prompt calls for more stringent consumer protection laws that may impose additional burdens on us and on Props App Developers. We anticipate that scrutiny and regulation of our industry will increase and that we and Props App Developers will be required to devote legal and other resources to addressing such regulation.

 

New or changing laws and regulations or interpretations of existing laws and regulations, in the United States or other jurisdictions, may materially and adversely impact the Props Tokens, including with respect to their value, their liquidity, the ability of Props Token holders have to access marketplaces or exchanges on which to trade the Props Tokens and the structure, rights and transferability of the Props Tokens.

 

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Because Props Tokens currently are treated as securities under applicable United States federal and state laws, the work of Oracles on the Ethereum blockchain and the Algorand blockchain, Oracles, and Props App Developers will need to comply with securities laws. If compliance with these laws makes the cost of these mechanisms prohibitive, we or these entities may be required to limit or even abandon them, which would adversely affect the Props Network and the value of Props Tokens.

 

The Company treats the Props Tokens as securities in the United States based on a view that the tokens are “investment contracts” under the recent guidance provided by the SEC “Framework for ‘Investment Contract’ Analysis of Digital Assets,” and the application of the test under SEC v. W. J. Howey Co. (the “Howey Test”) to digital assets. As a result, our use of the Ethereum blockchain and Algorand blockchain, which involves rewards of tokens to Oracles and Props App developers in connection with transactions, may potentially subject Oracles or developers to federal or state broker-dealer laws. See “Description of Business—Government Regulation—Registration of Ethereum validators, Algorand validators, Oracles and Props App Developers as Broker-Dealers.In addition, certain activities conducted with respect to the Props Tokens could be viewed as triggering a requirement that the Company, Props PBC, validators on the Ethereum blockchain or the Algorand blockchain, Oracles, or the Ethereum blockchain or Algorand blockchain to register as a transfer agent or clearing agency. See “Description of Business—Government Regulation—Registration as Transfer Agents” and “Description of Business—Government Regulation—Registration as Clearing Agencies.

 

We do not believe that these types of registration are required, but it is possible that the SEC or another regulator would disagree with that position. If so, we, other participants in the Props Network, the Ethereum blockchain and/or the Algorand blockchain could be required to register as broker-dealers, transfer agents or clearing agencies, and to comply with law applicable to broker-dealers, transfer agents or clearing agencies, which could lead to significant costs to us or other participants in the Props Network, including validators on the Ethereum blockchain or Algorand blockchain, Oracles and Props App Developers, and could force us or these parties to change or cease our operation or support of the Props Network or Props Apps. It could also lead to considerable uncertainty as to how we or other Props Network participants, including validators of the Ethereum blockchain or Algorand blockchain, Oracles and Props App Developers, would comply with regulation, which would likely result in a need for a relatively long registration process and could ultimately prove prohibitive to the Props Network business model. Any of these developments could adversely affect the Props Network, its further development and the value of the Props Tokens.

 

We do not intend to register the Props Network or any Props App as exchanges or ATSs.

 

We have taken the position that the Props Network and the Props Apps should not be viewed as exchanges or ATSs, primarily because each proposed transaction involving Props Tokens on the network will be individually determined and implemented. For more information, see Description of Business—Government Regulation— Registration of the Props Network or any Props App as an Exchange or ATS. It is possible that the SEC or another regulator would disagree with our position. If so, we could be forced to register the Props Network as an exchange or ATS and comply with applicable law, which could lead to significant costs to us and could force us to change or cease our operations. Any of these developments could decrease the value of the Props Tokens sold in this offering.

 

The limitations of and regulatory uncertainty under Regulation A promulgated pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, may negatively affect our ability to develop the Props Network, which could negatively affect the value of the Props Tokens.

 

The Company anticipates treating the Props Tokens as securities based on a view that the tokens are “investment contracts” under the recent guidance provided by the SEC “Framework for ‘Investment Contract’ Analysis of Digital Assets,” and the application of the Howey Test to digital assets. As a result, our current plans to issue Props Tokens are subject to our ability to register or find a suitable exemption from registration for the issuance of Props Tokens in all applicable jurisdictions. Our current offerings rely on an exemption from registration under the federal securities laws of the United States provided by Regulation A, which also provides for preemption of state registration requirements, but also currently limits our issuances to $75 million in tokens each year. We anticipate that this amount will be sufficient to exempt the token issuances we contemplate under this Offering Circular, but there is no guarantee that this Regulation A will remain sufficient for our activities.

 

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Additionally, given the relative lack of regulatory precedent regarding Regulation A and token offerings under Regulation A, there is a significant amount of regulatory uncertainty in regards to how the SEC or the individual state securities regulators will regulate both the offer and sale of the Props Tokens, as well as any ongoing compliance to which we may be subject under Regulation A. For example, some state regulators may take the position that preemption from state securities laws made available for offerings under Regulation A has no impact on state requirements for issuers to register as issuer-dealers or other types of intermediaries under state laws, or that other state laws may apply to this offering. As a result, these states could bring enforcement actions and impose additional costs, fines, and registration requirements.

 

This regulatory uncertainty or unfavorable resolution to this uncertainty may have material adverse effects on the value of the Props Tokens and the Props Network. It could make the operations or planned operations of the Company, Props PBC or other Props Network participants more costly, inefficient or prohibited. Further, it is possible that this regulatory uncertainty or any other uncertainty regarding securities offered pursuant to Regulation A could reduce the availability or attractiveness of Props Tokens to Props Network participants, which could adversely affect the ability of the Props Network to grow and develop, and the value of the Props Tokens.

 

We may need to address additional regulatory issues in connection with our plans for the further development of the Props Network.

 

There may be additional regulatory uncertainty with respect to certain of our planned operations and plans for the further development of the Props Network. For example, it is possible that the addition of third party apps to the Props Network could cause additional regulatory issues for the Props App Developers that develop such apps or other participants or components of the Props Network. In addition, regulations in jurisdictions outside the United States in which Props Tokens are available are subject to changing regulation and regulatory burdens, which may increase in one or more jurisdictions in which Props Tokens are held or traded. See “By participating in the Props Network as a Props App Developer and allowing the Company to reward users of your app with Props Tokens, you could be subject to regulatory risks” and “Description of the Business—Government Regulation” for additional details. If we or other Props Network participants are confronted with additional regulatory issues, costs or burdens, this could adversely affect our ability to develop and grow the Props Network, as well as the value of the Props Tokens.

 

By participating in the Props Network as a Props App Developer and facilitating the Company’s rewards to users of the Props App Developer’s Props App with Props Tokens, a Props App Developer could be subject to regulatory risks and burdens.

 

The Company intends to reward users of Props Apps developed by third parties by issuing Props Tokens to such users, through these Props Apps. Because the developers of these Props Apps will be receiving Props Tokens from the Company so that they may be distributed to users, each such Props App Developer could be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act. A statutory underwriter is subject to the prospectus delivery and liability provisions of the Securities Act, and Regulation M, and may be deemed to be conducting broker-dealer like activities that could in certain circumstances subject the developer to regulatory obligations. See “Description of Business-Government Regulation” for additional information.

 

We take the position, however, that third party Props App Developers are not “engaged in the business” of effecting securities transactions and, in any case, are not effecting such transactions on behalf of others. Moreover, we do not believe that the Props App Developers receive transaction-based compensation. For these and other reasons, we take the position that these developers are not “brokers.” We also take the position that Props App Developers are not “dealers” because, among other reasons, any securities trading activities conducted by Props App Developers are sufficiently minor measured against their other activities such that they are not “engaged in the business” of buying and selling securities for their own account. It is possible that the SEC or another regulator would disagree with our position. If so, Props App Developers could be forced to register as broker-dealers and comply with applicable law, which would disrupt their business significantly, perhaps making it prohibitive to operate and participate on the Props Network, and would likely lead to a decrease or complete loss in the value of the Props Tokens.

 

We may experience negative reactions to treating the Props Tokens as securities under United States federal and state laws.

 

It is possible that individuals involved in the digital asset and blockchain communities will disagree with the position that the Props Tokens should be treated as securities at this time. As a result, there may be negative reactions and consequences in the community from which we seek support. For example, people who disagree with the designation of the Props Tokens as securities in their current state may opt to use platforms and networks other than the Props Network. These developments could have a negative effect on the Props Network, including plans for the Props Network’s further development, and the value of the Props Tokens.

 

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Although we believe it is possible that we will eventually be able to treat the Props Tokens as non-securities under United States federal and state law, we do not have an estimate of when that will be, if ever.

 

It is possible that the Props Tokens will reasonably no longer be treated as securities under United States federal and state law at some point in the future, particularly if and when the Props Network has evolved sufficiently, consistent with then-existing guidance. However, it is difficult to predict when this may occur, and there is little guidance as to when federal or state regulators would agree with this type of position with respect to the Props Tokens and a network like ours. There is currently little guidance as to when regulators will view assets like the Props Tokens as assets that are not securities, and without additional guidance, there is considerable uncertainty as to when the Props Tokens may be no longer treated as securities. Potential acquirers of the Props Tokens should assume the Props Tokens will be treated as securities when making their decision to participate in this offering.

 

If the Props Tokens are reasonably treated as non-securities under United States federal and state laws in the future, we will no longer qualify them through this offering circular, and persons acquiring Props Tokens may not receive the benefit of protections under United States federal and state securities laws.

 

As noted above, at some point in the future we may come to the conclusion that we can reasonably treat the Props Tokens as non-securities for purposes of United States federal and state securities laws. If so, we would no longer seek to qualify the tokens under this offering circular. If this were to occur, you would thereafter no longer receive the benefit of the disclosures and protections provided based on our Regulation A filing. In addition, you and other users of the Props Network may no longer receive the benefit of the protections provided by other provisions under United States federal and state securities laws.

 

If the Props Tokens are reasonably treated as non-securities under United States federal and state law in the future, we or other Props Network participants may become subject to alternative forms of regulation, which could require changes to material aspects of our business, the Props Network or the business of other Props Network participants.

 

It is possible that, if the Props Tokens are no longer subject to regulation under United States federal and state securities laws, they will be covered by other regulatory regimes, including potentially the laws governing commodities and money services businesses. If so, we or other Props Network participants may need to modify operations or planned operations or the operation or planned operations of the Props Network to comply with those regulations. This could be costly and may involve changing aspects of the Props Network and the business in ways that adversely affect them and, in turn, the value of the Props Tokens.

 

It is unclear when and if federal or state regulators will allow registration of a token exchange or Alternative Trading System (“ATS”) to facilitate trading of Props Tokens in the United States.

 

Holders of the Props Tokens may need to rely on potential sales in the secondary market for liquidity. There are currently no national securities exchanges or exchanges that have been approved by FINRA or registered under Form ATS with the SEC to support the trading of Props Tokens on a secondary market in the United States. Since January 2021, we have entered into agreements with three centralized digital asset exchanges outside the United States to list Props Tokens for trading. Those agreements provide that trading on such exchanges is for persons who are not U.S. Persons (as defined under Regulation S under the Securities Act), and such exchanges have made commitments to us that Props Tokens will not be available for trading by U.S. Persons. In addition, four other centralized digital asset exchanges with which we have not entered into any agreements have chosen to list Props Tokens for trading, and as such we have no ability to restrict who may or may not participate in the trading of Props Tokens on those exchanges. Props Tokens are also listed for trading on two decentralized digital asset exchanges with which we have not entered into any agreements, and as such we have no ability to restrict who may or may not participate in the trading of Props Tokens on those exchanges.

 

There is no guarantee that any potential exchanges or ATSs will become functional or be approved for trading at any point in the future or that, when and if they are operational, they will be successful. In addition, in the event that secondary trading of the Props Tokens is facilitated by third party exchanges, because they will be relatively new, they may be more susceptible to fraud or manipulation. Further, there is no guarantee that any token exchange or ATS would allow trading of the Props Tokens. In fact, we may be required to pay significant and even prohibitive fees to list the Props Tokens, which we could decide not to pay. Any of these developments would negatively affect liquidity and pricing of the Props Tokens in the secondary market.

 

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We are not licensed to conduct a virtual currency business in New York and do not intend to become licensed in any other state that may require licensing in the future. We have taken the position that the New York’s BitLicense Regulatory Framework does not apply to our offer of Props Tokens. It is possible, however, that the New York State Department of Financial Services could disagree with our position.

 

We are not licensed to conduct a virtual currency business in New York or any other state. We have, however, taken the position that the State of New York’s BitLicense Regulatory Framework does not apply to the offer and sale of securities like the Props Tokens—including issuances pursuant to SAFTs or DPAs personally issued to persons located in New York and offerings pursuant to the offering statement in which this offering circular is included. We are also taking the position that the securities offered pursuant to the offering statement in which this offering circular is included are “covered securities” as that term is used in Section 18 of the Securities Act, and as a result, the BitLicense Regulatory Framework is preempted under federal law with respect to Props Tokens offered under this offering circular. In addition, we believe it is reasonable to conclude that application of the BitLicense Regulatory Framework to the Props Tokens is preempted under New York state law. In 2011, the New York state legislature created the New York Department of Financial Services (“NYDFS”) by transferring the functions of the New York State Banking Department and the New York State Insurance Department into a new, consolidated department. The statute authorizing the NYDFS (the “Financial Services Law”) provides the NYDFS and its superintendent with limited authority to regulate certain banking, insurance, and related financial products and services in the state of New York. The Financial Services Law defines “financial product or service” to specifically exclude from the NYDFS’s authority financial products or services that are “(i) regulated under the exclusive jurisdiction of a federal agency or authority, (ii) regulated for the purpose of consumer or investor protection by any other state agency, state department or state public authority, or (iii) where rules or regulations promulgated by the superintendent on such financial product or service would be preempted by federal law.”

 

It is possible that the New York State Department of Financial Services could disagree with our position. If we were deemed to be conducting an unlicensed virtual currency business in New York, we could be subject to significant additional regulation and/or regulatory consequences. This could lead to significant changes with respect to the operation or planned operation of the Props Network, how the Props Tokens are structured, how they are purchased and sold and other issues, and would greatly increase costs in creating and facilitating transactions in the Props Tokens. It could lead to the termination of the Props Tokens or decreases in the value of the Props Tokens. In addition, a regulator could take action adverse to us, other Props Network participants, the Props Network or the Props Tokens. Any of these outcomes would negatively affect us, the Props Network, including its further development, and the value of the Props Tokens and/or could cause us to cease operations.

 

Currently, New York is the only state that requires a license to operate a virtual currency business, but it is possible that other states may require licenses in the future. If additional states begin to regulate virtual currency businesses as New York has, or impose other regulatory restrictions, and take the position that we or other Props Network participants are operating regulated virtual currency businesses, it could have a material adverse effect on our ability to operate in those states, or for holders of the tokens to engage in any activities related to the tokens in those states, which could affect the value of the Props Tokens. This could also lead to the potential legal consequences described above with regard to New York.

 

We are not registered as a money transmitter or money services business, and our business may be adversely affected if we are required to do so.

 

We believe that we are not money transmitters or money services businesses. If we were deemed to be money transmitters and/or money services businesses, we would be subject to significant additional regulation and costs. This could lead to significant changes with respect to operations of the Props Network, suspensions in the operation of the Props Network or certain of its components, including Props Apps, changes in how the Props Tokens are structured, changes in how they are issued and other regulatory or business consequences, and would greatly increase our costs in creating and facilitating transactions in the Props Tokens. It could also lead to the termination of the Props Tokens or a decrease in their value. In addition, a regulator could take action against us if it views the Props Tokens and/or the Props Network as a violation of existing law. Any of these outcomes would negatively affect the value of the Props Tokens and/or could cause the Company to cease operations. For further details, see the section below captioned “Description of Business—Government Regulation—Money Transmitter and Money Services Business Considerations.”

 

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We could become a “reporting company” with significant additional reporting obligations under the Exchange Act because we are not using a transfer agent for transactions in the tokens.

 

Under Regulation A, we will have limited ongoing reporting obligations to the public relative to the obligations of companies that are “reporting companies” for purposes of the Exchange Act. We believe we qualify for this more limited reporting regime for several reasons. We are aware, however, that the exemption that allows this lighter reporting is in part dependent on the use of a transfer agent with respect to a company’s securities. We do not intend to engage a transfer agent with respect to the Props Tokens, because, among other reasons, the types of activities a transfer agent would normally engage in generally are performed automatically on the blockchain. For further details, see the section below captioned “Description of Business—Government Regulation—Reporting Company Considerations.” It is possible that a regulator would disagree with this position and, as a result, require that we file the full set of reports required of a reporting company. If so, we would need to spend considerable additional time and effort to provide the required reports. This could have a material adverse effect on our operations, and would require significant attention from management, which in turn could negatively affect our business, the Props Network, including its further development, and the value of the Props Tokens.

 

There may be deficiencies with our internal controls and financial and accounting reporting personnel that require improvements, and if such deficiencies exist and we are unable to adequately address them, we may be suffer material misstatements in our financial statements and fail to meet our reporting obligations.

 

As a “Tier 2” issuer under Regulation A, we will not need to provide a report on the effectiveness of our internal controls over financial reporting, and we will be exempt from the requirements that an auditor attest to the accuracy of our reports, at least for as long as we remain a Tier 2 issuer. In addition, our Independent Auditor has not assessed the effectiveness of our internal control over financial reporting and will not as a result of these offerings be required to assess the effectiveness of our internal control over financial reporting. As a result of the foregoing, for the foreseeable future, there will not be any attestation from us or our Independent Auditor concerning our internal control over financial reporting. Because of these limitations, there is a risk that we may not prevent or detect material misstatements on a timely basis based on our internal controls.

 

We have limited sufficient and competent accounting and financial reporting personnel and other resources to address complex technical accounting issues and judgments and to prepare and review the consolidated financial statements and related disclosures in accordance with SEC reporting requirements. For example, as a result of our staffing, our processing of financial information may suffer from a lack of segregation of duties, such that journal entries and account reconciliations may not be reviewed by someone other than the preparer, and such that closing of accounting periods may not occur on a timely basis. We use outside professional advisors to supplement our in-house accounting and financial reporting capabilities. Nevertheless, there can be no assurance that our internal and external resources will together be sufficient for us to avoid additional expense in the preparation of audited financial statements, errors in our accounting or financial reporting or significant deficiencies or material weaknesses in our accounting, internal controls or financial reporting. Any such additional expenses, errors, weakness or deficiencies could adversely affect our financial condition or results of operations, or the accuracy of our reporting of our financial condition or results of operations.

 

Generally, if we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets and harm our results of operations. While we do not expect this to happen, there can be no assurance that a material misstatement in our financial statements may not occur.

 

Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, technology, data protection and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, increased cost of operations or otherwise harm our business.

 

We are subject to a variety of additional laws and regulations in the United States and abroad that involve matters central to our business, including user privacy, blockchain technology, data protection, intellectual property and marketing to persons under the age of 16, among others. Foreign data protection, privacy and other laws and regulations can be more restrictive or impose different requirements than those in the United States. These U.S. federal and state and foreign laws and regulations are constantly evolving and can be subject to significant change. In addition, the application and interpretation of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate.

 

We have adopted policies and procedures designed to comply with these laws in the United States. The growth of our business and its expansion outside of the United States may increase the potential of violating applicable laws, however, and we could be subject to additional laws and regulations outside the United States that we do not currently know about. The risk of our company being found in violation of these or other laws and regulations (both the United States and abroad) is further increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and these laws and regulations may be open to a variety of interpretations. Any action brought against us for potential violation of these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including civil and criminal penalties, damages and fines, we could be required to refund payments received by us, and we could be required to curtail or cease our operations. Any of these consequences could seriously harm our business and its financial results. Finally, these existing and proposed laws and regulations can be costly to comply with and can delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices.

 

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Our company is subject to the risk of possibly becoming an investment company under the Investment Company Act.

 

The Investment Company Act regulates certain companies that invest in, hold or trade securities. In general, a company with more than 40% of the value of its non-cash assets held in investment securities is an “investment company.” Because a portion of our assets consists of the Props Tokens, and at times the value of those assets may surpass 40% of the value of our non-cash assets, we and our affiliates run the risk of inadvertently becoming investment companies, which would require registration under the Investment Company Act. Registered investment companies are subject to extensive, restrictive and potentially adverse regulations relating to, among other things, operating methods, leverage, management, capital structure, dividends and transactions with affiliates. Registered investment companies are not permitted to operate their business in the manner in which we operate our businesses, nor are registered investment companies permitted to have many of the relationships that we have with our affiliated companies.

 

We believe we do not meet the definition of an investment company despite our holdings in Props Tokens, because we believe it is reasonable to treat the Props Tokens that we hold as non-securities for purposes of the Investment Company Act in our own hands. This is due to the fact that any returns we might receive based on the Props Tokens would be based on our own efforts and not the efforts of others. As a result, the Props Tokens would not be “investment contracts” and not securities in our hands.

 

It is possible that a regulator could disagree with this position. If so, and if we were to inadvertently meet the definition of an investment company as a result, we might need to significantly alter our business, including by changing our strategy for distributing the tokens and other operations in a way that negatively affects the value of the Props Tokens sold in this offering. Becoming an investment company could also result in negative regulatory consequences such as becoming subject to monetary penalties or injunctive relief (or both) in an action brought by the SEC, being unable to enforce contracts with third parties, and having third parties obtain rescission of any contracts entered into by either the Company or Props PBC during the period that we were an unregistered investment company. As a result, if it were established that we were an investment company, it would have a material adverse effect on our business and financial operations and our ability to continue as a going concern.

 

A regulator could determine that transactions on the network violate Regulation M.

 

Regulation M generally prohibits issuers from buying and selling their securities at the same time, in order to prevent potential price manipulation that could result from those activities. Because in the future we may decide to sell Props Tokens at the same time that the Company may receive Props Tokens in connection with the purchase by users of other digital goods in a webstore (outside of the app), for example, we may be viewed as receiving Props Tokens at the same time that we are selling them under Regulation A. We have taken the position that obtaining Props Tokens from the Protocol Rewards Engine does not constitute a “purchase” of securities by us for purposes of Regulation M. As a result, we do not believe that activities on the Props Network are in violation of Regulation M. It is possible that a regulator would disagree with this position. If so, we might be required to restructure these transactions, which could lead to significant costs to us and could force us to change or cease operations of the Props Network. This could result in a loss or decrease in value of the Props Tokens.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This offering circular contains forward-looking statements that are based on management’s beliefs and assumptions and on information currently available to management. Some of the statements in the sections of this offering circular captioned “Offering Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” and elsewhere in this offering circular contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “is designed to,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.

 

These statements involve risks, uncertainties, assumptions and other factors that may cause actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this offering circular, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this offering circular include, but are not limited to, statements about:

 

  the anticipated development and growth of the Props Network;

 

  our expectations regarding demand for the applications that are intended to use the Props Network;

 

  our expectations regarding whether a secondary trading market may develop for the Props Tokens in the form of an exchange or alternative trading system or internal bulletin board;

 

  our expectations regarding regulatory developments and their effect on the Props Network;

 

  the ability of applications on the Props Network to develop a user base and a successful business model;

 

  our expectations regarding the evolution  of and changes to the Ethereum network;

 

  our future financial performance, including our expectations regarding our operating and research and development expenses;

 

  the impact of competition in our industry and innovation by our competitors;

 

  the anticipated trends, growth rates and challenges in our business and in the digital asset market;

 

  developing and designing the Props Network;

 

  maintaining and expanding our base of network users and application developers;

 

  maintaining our relationships with application developers;

 

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  our liquidity and working capital requirements;
     
  our ability to obtain additional working capital and raise additional financing;

 

  our anticipated growth and growth strategies and our ability to effectively manage that growth and effect these strategies;

 

  our ability to expand;

 

  the reliability of the third-party infrastructure and the blockchains on which the Props Network depends;

 

  our ability to hire and retain necessary qualified employees to expand our operations;

 

  our ability to adequately protect our intellectual property;

 

  the effect on our business of litigation to which we are or may become a party;

 

  our ability to stay abreast of and comply with new or modified laws and regulations that currently apply or become applicable to our business both in the U.S. and internationally;

 

  our ability to maintain an effective system of internal controls necessary to accurately report our financial results and prevent fraud;

 

  our use of the net proceeds from this offering; and

 

  the estimates and estimate methodologies used in preparing our consolidated financial statements.

 

In addition, there is uncertainty about the COVID-19 virus and the impact it may have on the Company’s business and operations.

 

In addition, you should refer to the sections of this offering circular captioned “Risk Factors” and “Offering Summary – Summary of Risk Factors” for discussions of other important factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this offering circular will prove to be accurate. Furthermore, if the forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

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USE OF PROCEEDS

 

We will not receive any cash proceeds from the Props Offering or from the Props PBC Offering.

 

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DILUTION

 

The following table summarizes the differences between the total consideration and the weighted-average price per token paid by existing tokenholders who have acquired Props Tokens prior to the date of this offering circular, participants participating in this offering at the current price, or deemed price, to the public of $0.0.600 per Props Token and participants who previously participated in this offering at the price, or deemed price, to the public of $0.1369 per Props Token, before deducting estimated offering expenses:

 

    Tokens
Purchased
    Total
Consideration
    Weighted-Average
Price Per Token
 
Existing tokenholders on or before June 30, 2021     352,699,172 (1)   $ 37,074,261 (2)   $ 0.1051 (3)
Tokens offered in this offering on or after July 1, 2021     117,500,000 (4)   $ 7,050,000 (5)   $ 0.0600 (6) 

 

  (1) Includes (i) 186,492,414 Props Tokens that were distributed pursuant to SAFTs (as amended) that we entered into under Regulation D, (ii) 1,980,785 Props Tokens that remain issuable pursuant to outstanding SAFTs, (iii) 16,311,869 Props Tokens that were issued to certain of our advisors pursuant to the agreements we entered into with them in connection with their service to the Company (including 292,184 Props Tokens that the Company issued to a former adviser as liquidated damages in connection with the termination of an adviser relationship), (iv) 587,127 Props Tokens that remain issuable pursuant to these agreements pending confirmation of wallet addresses, (v) 27,154,342 Props Tokens that were issued pursuant to a token option agreement, at an exercise price of $0.00125 per token, entered into with an adviser,  (vi) 6,032,394 Props Tokens that were distributed pursuant to DPAs, (vii) 653,115 Props Tokens that remain issuable pursuant to these agreements pending confirmation of wallet addresses, (viii) 26,857,143 Props Tokens that were sold as part of the April 2020 Private Placements, (ix) 4,735,713 Props Tokens which those April 2020 investors purchased upon the exercise of warrants issued in connection with the April 2020 Private Placements, (x) 4,829,123 Props Token that were issued to certain centralized digital asset exchanges upon which Props Tokens are listed and certain other service providers, (xi) 59,965,147 Props Tokens issued pursuant to the Props Offering on or before June 30, 2021 and (xii) 17,100,000 Props Tokens issued pursuant to the PBC Offering on or before June 30, 2021. See “Other Offerings” for additional information.

 

  (2)

Total consideration includes (i) $20,610,636 pursuant to the SAFTs entered into under Regulation D, (ii) $693,384 pursuant to the DPAs, (iii) $2,347,415 pursuant to agreements with certain of our advisors, (iii) $1,880,000 pursuant to the April 2020 Private Placements, (iv) $331,500 pursuant to the warrants issued in connection with the April 2020 Private Placements, (v) $661,107 in connection with agreements with certain centralized digital asset exchanges upon which Props Tokens are listed and certain other service providers, (vi) $8,209,229 consisting of deemed non-cash consideration ($0.1369 per Props Token) pursuant to the Props Offering on or before June 30, 2021 and $2,340,990 consisting of deemed non-cash consideration ($0.1369 per Props Token) pursuant to the PBC Offering on or before June 30, 2021. See “Other Offerings” for additional information.

 

  (3) The undiscounted price per Props Token offered in our SAFT offering was $0.1369. Certain of the SAFT purchasers, however, received discounts from this price in connection with their election for early investment or vesting schedules on their Props Tokens, once distributed. Upon election of these terms, subscribers were given discounts from the undiscounted price. As a result, the weighted average sale price of all of the Props Tokens issued and issuable pursuant to the SAFTs was $0.1094 per Props Token. Advisors did not pay cash in connection with entry into agreements for the issuance of Props Tokens, and prices for their agreements are calculated based on a price of $0.1369 per Props Token for all Props Tokens issued pursuant to these agreements, the effective undiscounted per Props Token price paid by purchases of our SAFTs. For all Props Tokens issuable pursuant to the token option agreement, this amount is calculated based on a price of $0.00125. The effective price of Props Tokens issued pursuant to our DPAs was $0.1369.

 

  (4) Includes (i) 80,000,000 additional Props Tokens for distribution in the Props Offering on or after July 1, 2021, of which, (a) between July 1, 2021 and July 15, 2021, 29,464 were issued to certain of our advisors pursuant to the agreements we entered into with them in connection with their service to the Company, (b) as of July 15, 2021, 1,154,167 were issuable subject to certain vesting requirements, and (c) 1,666,175 were issued pursuant to the Props Offering and (ii) 37,500,000 additional Props Tokens for distribution in the Props PBC Offering on or after July 1, 2021.

 

  (5)

Includes deemed non-cash consideration of $0.0600 per Props Token from the Props Offering and Props PBC Offering, which price is subject to further change. See “Terms of the Offerings—Pricing.”

     
  (6) This price is subject to further change. See “Terms of the Offerings—Pricing.”

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

 

You should read the following discussion and analysis together with the consolidated financial statements and the related notes to those statements included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. As a result, our actual results may differ materially from those anticipated in these forward-looking statements. See “Special Notes Regarding Forward-Looking Statements.”

 

Overview

 

Until August 17, 2020, Open Props Inc. was known as YouNow, Inc. On August 17, 2020, the Company’s name was changed to Open Props Inc. See Note 1 in the Notes to the Consolidated Financial Statements.

 

The Company is the issuer of Props Tokens, a cryptographic token that exists on the Ethereum blockchain, and the operator of the Props Network, a blockchain-based infrastructure that is designed to include an open, decentralized network of consumer-facing mobile and web-based apps (collectively, “Props Apps”) that incorporate the Props Tokens into their operations. We view Props, by which we mean the Props Network, Props Apps, Props Tokens and other elements of our infrastructure, collectively, as a project that is intended to empower users in the digital economy and help app developers align with their engaged users. We expect Props Apps to operate, in some regards, as traditional apps that may be downloaded and accessed by users in a manner similar to any other mass market app, but Props Apps will share a common, special feature: the ability to provide an extra level of premium, built-in functionality to users who hold Props Apps. The mobile application originally developed by the Company, the YouNow Livestreaming App, provides a platform on which any user can broadcast to a live audience, watch video content and engage with content creators (broadcasters) and other users. In February 2020, the Company sold the YouNow Livestreaming App, and is now focused exclusively on growing and developing the Props Token economy and the Props Network.

 

Recent Events

 

On February 26, 2020, the Company entered into an agreement with YouNow Media, LLC (the “Acquirer”) for the sale of certain assets related to and including the Company’s YouNow Livestreaming App, related intellectual property and assets and a designated amount of working capital. The consideration included cash proceeds of $250,000. The purchase price was subject to certain post-closing adjustments in connection with, among other things, true-ups of certain receivable and payable amounts that were not exactly determinable at the time of closing. The Acquirer also succeeded to a secured loan arrangement that the Company had put in place in respect of certain ongoing YouNow Livestreaming App-related receivables, the Company’s obligations (in the amount of $533,114) and pledges of assets under that secured loan arrangement were terminated. The Acquirer is not affiliated with the Company. As a result of the sale, the Company recognized a loss on the sale of the assets of $1,117,290 which was included in the results of operations for the year ended December 31, 2020.

 

In April, 2020, the Company offered Props Tokens for sale to certain investors (the “April 2020 Private Placements”) at a price of $0.07 per token in reliance of the exemption offered by Regulation D (“Regulation D”) under the Securities Act of 1933, as amended (the “Securities Act”). The Company raised $1,342,500 in cash and an additional fraction of that amount in the form of other consideration. Each investor received Props Tokens as well as a warrant to purchase an additional number of Props Tokens, equal to up to 30% of the number of Props Tokens initially purchased at an exercise price of $0.07 per Props Token. The Props Tokens sold in the April 2020 Private Placements are not transferrable for one year and the warrants are non-transferable and expire in one year. A total of 26,857,143 Props Tokens were sold in the April 2020 Private Placements, not inclusive of any Props Tokens that might be issued in connection with the exercise of any of the associated warrants.

 

Going Concern

 

Our consolidated financial statements have been prepared assuming that the Company will continue as a going concern. However, there is substantial doubt regarding our ability to do so. As a result of our sale of assets relating to and including the Company’s YouNow Livestreaming App, we raised cash, and following the sale we have been able to raise additional financing based on our transition to a “pure play” token and network propagation business. However, as a consequence of the sale, we will no longer generate revenues from the sale of digital goods, and we have in the past relied on the sale of digital goods, as well as proceeds from the sale of Props Tokens and other securities, to fund our operations. There can be no assurance that we will be able to generate cash from operations and financing activities sufficient to maintain our business over the next year, and thereafter until we achieve self-sustainability and profitability.

 

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Results of Operations

 

Revenue

 

Through 2019, the Company derived revenue principally from the sale of in-app digital goods purchased by users to support content creators. In the YouNow Livestreaming App, we sold an in-app currency called “Bars” that was used to make purchases within the YouNow Livestreaming App, but could not be transferred out of the app. In our Rize app, which was merged into the YouNow Livestreaming App in October 2018, we sold “Coins,” which served the same purpose. In addition to the in-app currency, we also sold subscriptions to certain content within the YouNow Livestreaming App. The majority of our revenue was derived from the operation of the YouNow Livestreaming App, with a very small percentage of revenue derived from the operation of the Rize app.

 

Open Props recognized revenue upon the sale of digital goods as management believes that the digital goods were materially consumed within two days following their initial purchase. Revenues were recorded gross of platform fees, applicable taxes and foreign exchange fees. Platform fees differ by platform: Apple and Google platform fees are 30% of gross revenue while PayPal and Braintree platform fees are less than 4% of gross revenue. The revenue we earned from the sale of digital goods was split between Open Props and popular content creators based on arrangements between the Company and each content creator.

 

The Company has also, in the past, derived revenue from the sale of advertising services. Open Props sold advertising to companies that promote their brand through in app branding, which were displayed in the YouNow Livestreaming App. These advertisements were only sold within the YouNow Livestreaming App. Open Props has discontinued the sale of advertising and advertisements are not presently sold within the YouNow Livestreaming App. The revenue was recorded gross and was recognized in the period in which the advertising services occurred.

 

Cost of Revenue

 

Cost of revenue consisted principally of revenue sharing with our content creators, platform fees and expenses related to matters related to hosting and bandwidth. The percent of this revenue we shared with content creators was generally 60% of net revenue spent on the “Bars” or other digital goods sent to the content creator. Net revenue in this instance can be defined as gross revenue net of platform fees, taxes and foreign exchange fees charged by the platform providers (i.e., Apple, Google, Braintree & PayPal). Certain higher value content creators (which we may have identified based on higher revenue generated, new registered users (which we may have identified based on web and app traffic metrics), concurrent viewers or other important metrics) may have received a higher percentage of this revenue pursuant to contracts we had with the content creator. The allocation to content providers is accounted for in cost of revenue on a monthly basis based on a computation of the Bars that were purchased and used in connection with the content the user created.

 

In addition to revenue share with our content creators, we paid hosting and bandwidth costs, and we paid music license fees on a quarterly basis to music publishers based on U.S. generated revenue. These fees total less than 0.5% of total expenses in all periods presented.

 

Research and Development Expenses

 

Research and development expenses represent costs incurred by us for the development of the Props Network and include: employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; external research and development expenses incurred under arrangements with third parties, such as consultants; advisor token grants entered into with unaffiliated individuals and companies who provide advisory services in exchange for Props Tokens; license fees; and other expenses, which include administrative functions. For historical periods prior to the sale of the YouNow Livestreaming App, which occurred in February 2020, research and development expenses also included research and development expenses attributable to the YouNow Livestreaming App.

 

Research and development activities accounted for a significant portion of our operating expenses. Our current business strategy includes growing the Props Network and creating an increasingly decentralized economy of consumer apps, where Open Props will play an increasingly smaller role over time in making key decisions affecting the Props Network.

 

Other Income (Expense)

 

Other income (expense) consists principally of gains and losses from the sale of digital assets, mostly related to Ether and Bitcoin cryptocurrency as well as proceeds generated from the private placements of SAFTs and sale of DPAs, token offering expenses and grants to the developers of Props Apps. The gains and losses were determined based on the sale price minus the cost basis of the digital asset. The cost basis is determined at the market price of the digital asset at the time that the digital asset was initially received, less impairment charges. For purposes of determining realized gains and losses, the cost of digital assets sold is based on specific identification—where, each digital asset sold is traced back to the Open Props wallet address where it was held when first acquired, allowing the Company to determine an original cost basis for the digital asset. Because of volatility in the price of digital assets, the Company’s realized gain on the sale of digital assets is subject to significant variability, which may also lead to significant variability in other income.

 

The Company has generated proceeds from private placement of SAFTs. For accounting purposes, Open Props recognizes proceeds from these arrangements as other income (token development income). See the section titled “—Critical Accounting Policies and Significant Judgements and Estimates—Other Income” below for details.

 

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Year ended December 31, 2020 Compared to Year ended December 31, 2019

 

The following table sets forth selected consolidated statements of operations data for each of the periods indicated:

 

   December 31,
2020
   December 31,
2019
   $
Change
   %
Change
 
Revenue  $1,811,036   $9,845,347   $(8,034,311)   -81.6%
Operating expenses                    
Cost of revenue   1,275,928    6,786,653    (5,510,725)   -81.2%
Research and development   3,515,249    4,955,637    (1,440,388)   -29.1%
Sales and marketing   527,303    2,244,108    (1,716,805)   -76.5%
General and administrative   1,768,518    4,961,927    (3,193,409)   -64.4%
Other income (expense)   506,654    20,783,049    (20,276,395)   -97.6%
Taxes   23,555    21,867    1,688    7.7%
Net income (loss)  $(4,792,863)  $11,658,204   $(16,451,067)   -141.1%

 

Revenue

 

Revenue decreased by $8.0 million for the financial year ended December 31, 2020, due to a decrease in digital goods revenue. The digital goods revenue decreased due to the sale of certain assets related to and including the YouNow Livestreaming App in February 2020, which resulted in no additional revenue from the sale of digital goods subsequent to February 2020.

 

Cost of Revenue

 

Cost of revenue decreased by $5.5 million for the financial year ended December 31, 2020, due to the sale of certain assets related to and including the YouNow Livestreaming App in February 2020. The cost of revenue was associated with digital revenue from the YouNow Livestreaming App.

 

Research and Development Expenses

 

Research and development expenses decreased by $1.4 million for the financial year ended December 31, 2020, due to lower salary and benefit costs related to a reduction in headcount subsequent to the sale of certain assets related to and including YouNow Livestreaming App.

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist of marketing, public relations, and content management. Sales and marketing expenses decreased by $1.7 million for the financial year ended December 31, 2020, due to a decrease of $1.0 million in marketing expenses and partner marketing and event marketing as well as lower salary and benefit costs of $0.6 million.

 

General and Administrative Expenses

 

General and administrative expenses consist of salaries and personnel-related costs, including non-cash stock-based compensation, for our personnel in executive, legal, finance and accounting, human resources and other administrative functions, non-litigation legal costs, as well as fees paid for accounting and tax services, consulting fees and facility costs not otherwise included in research and development expenses. General and administrative expenses decreased by $3.2 million for the financial year ended December 31, 2020, principally due to lower rent expense of $0.9 million and lower salary and benefit costs of $1.4 million.

 

Other Income (Expense)

 

Other income (expense) decreased by $20.3 million for the financial year ended December 31, 2020. Included in other income, net was the $1.1 million loss on the sale of certain assets related to and including the YouNow Livestreaming App for the year ended December 31, 2020. Excluding the loss on the sale of YouNow Livestreaming App assets, other income, net decreased by $19.2 million, principally due to distributions of Props Tokens to SAFT purchasers, DPA purchasers and advisors of $1.3 million for the year ended December 31, 2020 compared to $19.7 million for the year ended December 31, 2019.

 

Taxes

 

Taxes were comparable to the prior year despite the decrease in income in 2020 compared to 2019 since net operating loss carryforwards from previous periods were used to offset taxable income in 2019.

 

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Trend Information

 

Revenue Trends

 

Digital goods revenue related to the sale of Bars ceased in February 2020 due to the sale of the YouNow Livestreaming App. We also do not expect to receive rental income in the future. In the future, we may receive additional proceeds through the sales of Props Tokens by providing services to apps on the Props Network, or through other means. In April 2020, the Company closed private placements with respect to the sale of Props Tokens to multiple investors. See “Other Offerings—April 2020 Private Placements.”

 

Expense Trends

 

We expect operating expenses in the future to remain low, compared to past historical periods, principally due to the significant decrease in personnel costs associated with the sale of the YouNow Livestreaming App (including research and development and sales and marketing related personnel costs), as well as lower overhead cost and the elimination of office rent starting in July 2020. Costs of revenue were associated with revenue from the YouNow Livestreaming App, which was sold, and thus should be eliminated.

 

Liquidity and Capital Resources

 

Sources of Funds

 

Historically, Open Props has funded operations through revenue generated through the YouNow Livestreaming App and from debt financing and sales of securities. See “Other Offerings—April 2020 Private Placements.” The Company’s cash and cash equivalents on hand as of December 31, 2020 were $1.1 million. The Company’s cash and cash equivalents on hand as of December 31, 2019 were $2.1 million.

 

In the future, we plan to fund our operations and capital funding needs through the sales of Props Tokens. The sale of Props Tokens may result in dilution of the existing supply of Props Tokens. We may also continue to fund our operations and capital funding needs through equity financing. The sale of additional equity would result in dilution to our equity holders. If we are not able to secure adequate additional funding we may be forced to make additional reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs. To the extent that we raise additional capital through collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish certain rights to the Props Network and related software, future revenue streams, research programs or grant licenses on terms that may not be favorable to us. Any of these actions could harm our business, results of operations and future prospects.

 

The following table summarizes our cash flows for the periods indicated:

 

    December 31,
2020
    December 31,
2019
    $
Change
    %
Change
 
Net cash provided by (used in):                        
Operating Activities   $ (890,735 )   $ (5,497,261 )   $ 4,606,526       -83.8 %
Investing Activities     217,267       30,452       186,815       613.5 %
Financing Activities     (326,171 )     396,645       (722,816 )     -182.2 %
(Decrease) increase in cash   $ (999,639 )   $ (5,070,164 )   $ 4,070,525       -80.3 %

 

Net Cash Used In Operating Activities

 

The use of cash in all periods resulted principally from our net losses adjusted for non-cash charges and changes in components of working capital.

 

Net cash used in operating activities for the financial year ended December 31, 2020 was $890,735. This principally consisted of the Company’s net loss of $4.8 million partially offset by a $4.3 million increase in the Company’s token obligations.

 

Net cash used in operating activities for the financial year ended December 31, 2019 was $5,497,261. This principally consisted of $11.7 million in net income, $1.7 million in prepaid expenses and other assets, $0.8 million in proceeds from the liquidation of Bitcoin, $0.3 million in accounts receivable and $1.3 million in non-cash items, including depreciation, amortization, stock compensation expenses and token development obligations. These proceeds were offset by a $0.6 million decrease in accounts payable and accrued expenses, $0.4 million decrease in restricted receivables and a $20.2 million expense of non-cash items related to the distribution of a portion of the Company’s token obligations and a net loss on the liquidation of Bitcoin.

 

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Net Cash Provided by Investing Activities

 

Our investing activities have consisted principally of property and equipment purchases for computer-related equipment, capitalization of software development costs and investments in digital assets. Capitalized software development costs are related to new applications or improvements to our existing software that expands the functionality of our network.

 

Net cash provided by investing activities for the financial year ended December 31, 2020 was $217,267 which principally consisted of proceeds on the sale of the YouNow Livestreaming App.

 

Net cash provided by investing activities for the financial year ended December 31, 2019 was $30,452. This principally consisted of the sale of furniture and fixtures totaling $33,810.

 

Net Cash Provided By (Used In) Financing Activities

 

Substantially all of the net cash provided by financing activities in all periods presented was the result of proceeds received under a line of credit, proceeds from SBA loans, and sales of our Series A and Series B preferred stock.

 

Net cash used in financing activities for the financial year ended December 31, 2020 was $326,171. This principally consisted of the repayment of a line of credit in the amount of approximately $0.4 million offset by proceeds from our PPP loan of $0.1 million.

 

Net cash provided by financing activities for the financial year ended December 31, 2019 was $396,645. This principally consisted of proceeds from a line of credit in the amount of approximately $0.4 million offset by $0.04 million for the repayment of notes payable related to the sale of DPAs.

 

Capital Commitments

 

We currently have no commitments to make capital expenditures.

 

Assets, Liabilities and Stockholders’ Equity (Deficit)

 

Current Assets

 

As of December 31, 2020, our total current assets were $1,357,874, compared to $2,614,089 as of December 31, 2019. This change was principally due to a $1.0 million decrease in cash resulting from net losses and payments of operating expenses, and a $0.3 million decrease in prepaid expenses due to the sale and disposition of certain assets related to and including the sale of the YouNow Livestreaming App in February 2020.

 

Restricted Receivables

 

As of December 31, 2019, our restricted receivables were $430,721, compared to $0 as of December 31, 2020. The decrease was due to the repayment of our loan agreement which no longer required receivables to secure the borrowings.

 

Property and Equipment

 

As of December 31, 2020, our net property and equipment was nil compared to $50,350 as of December 31, 2019. This change was principally due to the sale and disposition of certain assets related to and including the YouNow Livestreaming App in February 2020.

 

Intangible Assets

 

As of December 31, 2020, our net intangible assets were $539,140, compared to $1,461,616 as of December 31, 2019. This change was principally due to sale of certain assets related to and including the YouNow Livestreaming App in February 2020.

 

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The following table provides additional information regarding our developed technology and digital asset holdings.

 

    1/1/2019                 12/31/2019     1/1/2020                 12/31/2020  
Intangible Assets   Beginning
Balance
    Additions     Reductions     Ending
Balance
    Beginning
Balance
    Additions     Reductions     Ending
Balance
 
Algo   $ -     $       -     $ -     $ -     $ -     $ 768,194     $ (246,444 )   $ 521,750  
Bitcoin     384,191       -       (374,270 )     9,921       9,921       -       (4,727 )     5,194  

Ethereum

    15,788       -       -       15,788       15,788       -       (3,592 )     12,196  
Total   $ 399,979     $ -     $ (374,270 )   $ 25,709     $ 25,709     $ 768,194     $ (254,763 )   $ 539,140  

 

The market prices of digital assets, including Algo, Ethereum and Bitcoin, experienced significant volatility during 2020 and 2019. At December 31, 2020, the market price of Ethereum was $737.37, Bitcoin was $29,001.72 and Algo was $0.32. At December 31, 2019, the market price of Ethereum was $129.61 and Bitcoin was $7,193.60. This represents an increase of approximately 469% and approximately 303%, respectively, from their prices as of December 31, 2019. The price fluctuations of digital assets may have a significant effect on the value of the Company’s digital asset reserves.

 

Current Liabilities

 

As of December 31, 2020, our total current liabilities were $5,750,761 compared to $3,806,811 as of December 31, 2019. This increase was principally due to an increase in token development obligations related to the distribution of the Props Tokens. The increase in token obligations was partially offset by a reduction of $1,204,434 in accounts payable and accrued expenses and a decrease of $430,721 from the repayment in a line of credit related to a secured loan agreement.

 

Stockholders’ Equity (Deficit)

 

As of December 31, 2020 our stockholders’ deficit was $3,853,747 compared to stockholders’ equity of $749,965, as of December 31, 2019. This change was principally due to an increase to our deficit from the net loss during the year ended December 31, 2020.

 

Off-Balance Sheet Arrangements

 

We did not have any off-balance sheet arrangements during any of the periods presented.

 

Critical Accounting Policies and Significant Judgements and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgements and estimates.

 

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Income Recognition

 

Token Development Income

 

The Company accounts for its token development agreements as research and development arrangements under Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 730-20, Research and Development Arrangements. The Company has concluded that, under the SAFTs, the research and development services it was obliged to provide were limited to the creation of the YouNow Livestreaming App’s platform and the creation and delivery of a functional token. The completion of these research and development services principally required the creation of the Token Code (an ERC-20 “smart contract”); building the distribution mechanism for Props Tokens, including a mechanism for effecting any vesting under SAFTs; developing the Rize app, including basic “wallet” functionality in the Rize app and merging it into the YouNow Livestreaming App; and building Props-specific exclusive features in the YouNow Livestreaming App.

 

Pursuant to ASC 730-20, the Company recorded a liability for amounts received from SAFT purchasers that were refundable pursuant to the terms of the SAFTs. Pursuant to the terms of the SAFTs, a SAFT expires and terminates upon the earlier to occur of certain events, including the issuance of Props Tokens upon an application launch, the payment or setting aside for payment of amounts payable to the SAFT purchaser upon the dissolution of the Company, or the reaching of a termination date, as specified by amendments to the SAFTs dated March 4, 2018, set as twelve months after the amendment’s effective date. See “Token and Warrant Sales” for additional information. If a SAFT terminated pursuant to the expiration of this deadline, the SAFT purchaser’s purchase amount was refundable. As a result, this liability was recorded as token development obligations on the Company’s consolidated balance sheets as of December 31, 2020 and 2019. At all times prior to the issuance of the Props Tokens pursuant to the SAFTs, the Company has recorded a liability equal to its repayment obligations

 

The Company has concluded that, upon delivery of the Props Tokens to the SAFT purchaser in accordance with the SAFT, it has completed its services and has performed all of its research and development obligations owed to SAFT holders under the SAFTs. The Company completed these services by March 4, 2019 in connection with the initial delivery of the Props Tokens to SAFT purchasers, and as a result, the Company has concluded that as of March 4, 2019 it had performed all of its research and development obligations owed to SAFT holders under the SAFTs. See “Token and Warrant Sales” for additional information. While the Company will continue to develop the functionality of the platform, it does not consider other activities associated with the Props Network to be part of the Company’s research and development services under the SAFTs, and upon delivery of the Props Tokens to the SAFT purchasers, it will have no remaining obligations under the SAFTs, including with respect to the further development of the network, the enhancement of the Props Tokens issued, or with respect to any refunds. Upon issuance and delivery of Props Tokens to SAFT purchasers, the Company offsets the token development obligation liability and recognizes token development income within other income (expense) in the Company’s consolidated statements of operations. Further, upon the Company fulfilling its contractual obligations under the SAFT by delivery of the Props Tokens to the purchaser’s electronic wallet, the Company has no intention of refunding the SAFT purchase amount under any circumstances. As a result, the Company has concluded there are no surrounding conditions under which they would repay any of the SAFT purchase amounts.

 

The Company recognized token development income of $1,275,506 in 2020 compared to $19,151,035 in 2019. Total research and development expenses incurred under the token development arrangements are included in research and development in the Company’s consolidated statements of operations for the years ended December 31, 2020 and 2019. In the future, changes in the Company’s circumstances or changes in applicable accounting standards may permit or require us to change our accounting policies, and we will fully disclose any such change in our accounting policies.

 

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Digital Goods Income

 

Effective January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers related to the Company’s sale of digital goods. Under ASC 606, the Company should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods and services. In accordance with ASC 606, the core principles are:

 

1) identify the contract with customer;

 

2) identify the performance obligations in the contract;

 

3) determine the transaction price;

 

4) allocate the transaction price; and

 

5) recognize revenue when or as the entity satisfies a performance obligation.

 

The adoption of ASC 606 did not have a material impact on the Company’s consolidated financial statements and disclosures. Payments from digital goods purchasers are non-refundable and relate to non-cancellable contracts that specify the Company’s obligations. The satisfaction of the performance obligation occurs at the time of sale of digital goods since Management estimates the digital goods are consumed within two days after the initial purchase.

 

In accordance with Accounting Standards Update (“ASU”) 2016-08, Principal versus Agent Considerations (Topic 606) (Reporting Revenue Gross versus Net), the Company evaluates its agreements with mobile platforms to determine whether the Company is acting as the principal or as an agent in the sales of digital goods to determine if revenue should be reported gross or net. The key indicators that the Company used for such determination includes:

 

1) the terms and conditions of the Company’s contract with the mobile platforms;

 

2) the party responsible for determining the type, category, and quantity of methods to generate revenue;

 

3) whether the Company is paid a fixed percentage of the arrangement for each transaction;

 

4) the party which sets the pricing with the end-user and has the credit risk; and

 

5) the party responsible for the fulfillment of the digital goods.

 

Based on the evaluation of the key indicators, the Company has determined that it is acting as the principal to the digital goods purchaser.

 

For revenue earned through mobile platforms, the transaction price is equal to the gross amount the Company charges to each digital goods purchaser. The related mobile platform and payment processing fees are recorded as cost of revenue in the period incurred.

 

Effective January 1, 2019, the Company adopted ASU 2016-08 and has applied the changes retrospectively. The retrospective change did not have an impact on the carrying amounts of assets and liabilities and no offsetting adjustments were necessary to opening retained earnings. Prior to the adoption of ASU 2016-08, revenues from the sale of digital goods were reported net of mobile platform and payment processing fees.

 

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Props Tokens

 

During the year ended December 31, 2019, Open Props began to issue and deliver Props Tokens under the terms of the SAFTs and the DPAs as described under “Token and Warrant Sales.” Open Props has accounted for all Props Tokens held by the Company and its subsidiaries as internally-generated intangible assets on the balance sheet with zero carrying value. Issuance of Props Tokens to any vendor, employee, user, broadcaster, etc. will be expensed at the time that service is rendered or tokens are issued depending on the nature of the transaction. The use of Props Tokens to pay vendors, employees, users, broadcasters, etc. is a non-monetary transaction under ASC 845, Nonmonetary Transactions, and has been accounted for at the undiscounted price per token $0.1369 for transactions occurring in 2019 and 2020. Because the Props Tokens currency have no carrying value in our financial statements, use of these tokens will result in a gain equal to the fair value of the Props Tokens distributed.

 

Since January, 2021, we have entered into agreements with three centralized digital asset exchanges outside the United States to list Props Tokens for trading. Those agreements provide that trading on such exchanges is for persons who are not U.S. Persons (as defined under Regulation S under the Securities Act), and such exchanges have made commitments to us that Props Tokens will not be available for trading by U.S. Persons. In addition, four other centralized digital asset exchanges with which we have not entered into any agreements have chosen to list Props Tokens for trading, and as such they have not made commitments to us that Props Tokens will not be available for trading by U.S. Persons. Props Tokens are also listed for trading on two decentralized digital asset exchanges with which we have not entered into any agreements, and as such they have not made commitments to us that Props Tokens will not be available for trading by U.S. Persons.

 

Value of Digital Assets

 

Open Props has determined that digital assets should be classified as intangible assets with indefinite useful lives, and as such, they are recorded at their respective fair values as of the acquisition date. Open Props does not amortize intangible assets with indefinite useful lives. Indefinite-lived intangible assets must be reviewed at least annually for possible impairment, or more frequently if an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of the intangible assets is below their carrying values. Because there are active markets which generate quoted prices for the types of digital assets that Open Props holds, we recognize impairment caused by decreases in fair value based upon quoted prices for identical instruments in such markets.

 

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Sale of the YouNow Livestreaming App

 

On February 26, 2020, we entered into an agreement for the sale of certain of our assets relating to and including the YouNow Livestreaming App. The sale was made to YouNow Media, LLC (the “Acquirer”), an unaffiliated entity, on an arm’s-length basis. As of the same date, we and the Acquirer closed the sale and the Acquirer entered into a separate agreement with us to continue to reward YouNow Livestreaming App users with the issuance of Props Tokens and to continue to operate the YouNow Livestreaming App as part of the Props Network. Thereafter, as of March 1, 2020, the Acquirer became the operator of the YouNow Livestreaming App (the “YouNow Livestreaming App Operator”) and hired all of our employees whose functions principally involved operation of the YouNow Livestreaming App (but not our senior executives). We refer to the foregoing events collectively as the “Transaction”.

 

We believe that the Transaction may increase the Company’s appeal to investors as a “pure play” token and network propagation business, and thereby facilitate the raising of additional investment, which is critical to our continued operations. Moreover, the Transaction has provided the Company with additional working capital. The Company has long been projecting its need for additional cash and cash equivalents to fund ongoing operations. See, e.g., the Company’s amended Offering Statement on Form 1-A/A filed September 27, 2019, in the Risk Factors section at page 33 (projecting cash availability through May 31, 2020), as affirmed in the Company’s amended Offering Statement on Form 1-A/A filed February 10, 2020, and in the Company’s Form 1-SA filed September 28, 2020. In the near term, the Transaction has also reduced the Company’s ongoing monthly operating losses and its cash burn rate, which were higher when the Company’s operations included the App alongside the operations associated with Props Token issuance and the Props Network.

 

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The consummation of the Transaction followed sustained efforts by the Company to identify new investors and potential strategic partners and counterparties; to secure new investments; to enter into strategic transactions; and to take other steps, all with a view to maximizing the Company’s value, including through the continued operation and growth of the Props Network and the continued issuance of Props Tokens, in order to maximize the value of the Props Tokens held by the Company and others.

 

For additional information concerning the Transaction, see “Description of Business—Sale of the YouNow Livestreaming App.”

 

Unaudited Pro Forma Condensed Combined Financial Information

 

The following unaudited pro forma condensed combined financial statements have been provided to show the hypothetical effects of the Transaction on the Company’s financial condition and operating results. The unaudited pro forma condensed combined financial statements are based on the Company’s historical consolidated financial statements, adjusted to give effect to the Transaction. The unaudited pro forma condensed combined balance sheet as of December 31, 2019 gives effect to the Transaction as if it had occurred on December 31, 2019. The unaudited pro forma condensed combined statements of operations and comprehensive loss for the year ended December 31, 2019 give effect to the Transaction as if it had occurred on January 1, 2019.

 

These unaudited pro forma condensed combined financial statements are provided for informational purposes only. They do not necessarily reflect what our financial condition or results of operations would have been had the Transaction occurred on the dates indicated. Also, they may not be useful in predicting our future financial condition and results of operations. Our actual financial condition and results of operations in the future may differ significantly from the pro forma amounts reflected herein, due to a variety of factors.

 

References to the “Asset Purchase Agreement” in the following discussion refer to the Asset Purchase Agreement by and between YouNow Media, LLC and Open Props Inc., dated as of February 26, 2020, which can be found as Exhibit 6.12 to the offering statement in which this is included.

 

The nature of the Transaction was a sale of the YouNow Livestreaming App and assets used by the YouNow Livestreaming App, and the assumption of associated liabilities, for cash. The assets received by the Acquirer included contracts that related primarily to, or that were used or held for use primarily in connection with, the operation of the YouNow Livestreaming App, as described in Paragraph 1.1(a) of the Asset Purchase Agreement; licenses and permits that related primarily to, or that were used or held for use primarily in connection with, the operation of the YouNow Livestreaming App, as described in Paragraph 1.1(b) of the Asset Purchase Agreement; specific intellectual property assets, as described in Paragraph 1.1(c) of the Asset Purchase Agreement; specific software and hardware used or held for use primarily in connection with, the operation of the YouNow Livestreaming App, as described in Paragraph 1.1(d) of the Asset Purchase Agreement; all information, records, documents, and files of the Company that related in a material way to, or that were used or held for use primarily in connection with, the operation of the YouNow Livestreaming App, as described in Paragraph 1.1(e) of the Asset Purchase Agreement; all rights of the Company under warranties, indemnities and similar rights against third parties to the extent related to any assets acquired by the Acquirer; all prepaid expenses of the Company incurred in connection with the Company’s use or acquisition of any assets acquired by the Acquirer, to the extent that the benefit of such prepaid expenses had not yet been realize as of the date of the closing of the Transaction; as described in Paragraph 1.1(g) of the Asset Purchase Agreement; all source code, as such term is defined Article 11 of the Asset Purchase Agreement; all social media accounts, as such term is defined Article 11 of the Asset Purchase Agreement; any other assets set forth in Paragraph 1.1 (j) of the Asset Purchase Agreement; and accounts receivable, as set forth in Paragraph 1.1(k) of the Asset Purchase Agreement. In addition, the Acquirer assumed certain liabilities of the Company, including any and all liabilities of the Company arising after the closing in connection with any assets acquired by the Acquirer; any and all liabilities of the Company arising after the closing of the Transaction in connection with the operation of the YouNow Livestreaming App; any and all liabilities of the Company arising after the closing of the Transaction in connection with employees who were hired by the Acquirer; fifty percent (50%) of any and all sales, use or other transfer taxes and all filing and recording fees applicable to assets transferred from the Company to the Acquirer in connection with the Transaction; liabilities in connection with a financing arrangement, as set forth in Paragraph 1.3(e) of the Agreement; and certain other liabilities, as set forth in Paragraph 1.3 (f) of the Agreement. Cash and a potential purchase price adjustment were the only assets received by the Company in connection with the Transaction. All employees whose functions and responsibilities related primarily to, or were primarily in connection with, the YouNow Livestreaming App ceased to be employees of the Company, and each of them simultaneously became an employee of the Acquirer, after the completion of the transfer of the YouNow Livestreaming App, on substantially the same terms and conditions (subject to certain salary adjustments), and with the same benefits. The Company and the Acquirer took steps, under Paragraph 6.3(e) of the Asset Purchase Agreement, to ensure that, with respect to each of the Company’s employees who became an employee of the Acquirer, salary and benefits would continue without interruption. The Transaction has been accounted for by recognizing the assets and liabilities conveyed in the Transaction at their book values. The Company has not performed valuation studies to estimate the fair values of the identifiable assets acquired and liabilities assumed.

 

The assumptions and estimates underlying the unaudited adjustments to the pro forma condensed combined financial statements are described in the accompanying notes, which should be read together with the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined financial statements should be read together with our historical consolidated financial statements included elsewhere in this offering circular. 

 

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Unaudited Pro Forma Condensed Combined Balance Sheet

As of December 31, 2019

 

   Open Props Inc.
 Historical
   Pro Forma
Adjustments
   Notes to
Pro Forma
Adjustments
  Pro Forma
After
Disposition
 
       Unaudited      Unaudited 
ASSETS               
Current assets:               
Cash  $2,111,756   $250,000   (a)  $2,361,756 
Accounts receivable, net   202,584       (b)   202,584 
Prepaid expenses and other assets   299,749    (235,023)  (c)   64,726 
Total current assets:   2,614,089    14,977       2,629,066 
Non-current assets:                  
Restricted receivables   430,721           430,721 
Property and equipment, net   50,350    (22,853)  (d)   27,497 
Intangible assets   1,461,616    (1,435,907)  (e)   25,709 
Total non-current assets:   1,942,687    (1,458,760)      483,927 
Total assets  $4,556,776   $(1,443,783)     $3,112,993 
LIABILITIES AND STOCKHOLDERS’ EQUITY                  
Current liabilities:                  
Accounts payable and accrued expenses  $1,393,120   $(854,311)  (f)  $538,809 
Line of credit   430,721           430,721 
Notes payable   112,669           112,669 
Token development obligations   1,870,301           1,870,301 
Deferred rent payable               
Total current liabilities:   3,806,811    (854,311)      2,952,500 
Commitments and contingencies                  
Stockholders’ equity:                  
Common stock, $0.001 par value - 139,189,499 shares authorized; 94,095,230 issued; 92,854,286 outstanding  $92,854   $      $92,854 
Additional paid in capital   35,628,138           35,628,138 
Accumulated other comprehensive income   8,390           8,390 
Deficit   (31,075,407)   (589,471)  (g)   (31,664,879)
Treasury stock   (3,904,010)          (3,904,010)
Total stockholders’ equity  $749,965   $(589,471)     $160,493 
Total liabilities and stockholders’ equity  $4,556,776   $(1,443,783)     $3,112,993 

  

The accompanying notes are an integral part of these Unaudited Pro Forma Condensed Combined Financial Statements.

 

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Unaudited Pro Forma Condensed Combined Statement of Operations and Comprehensive Loss

For the Year Ended December 31, 2019

 

   Open Props Inc.
Historical
   Pro Forma
Adjustments
   Notes to
Pro Forma
Adjustments
  Pro Forma
After
Disposition
 
   Unaudited   Unaudited      Unaudited 
Revenue:               
Digital goods   $9,720,557   $(9,720,557)   (h)   $ 
Advertising and other    124,790           124,790 
Total revenue    9,845,347    (9,720,557)      124,790 
Operating expenses:                   
Cost of revenue    6,786,653    (6,786,653)   (i)     
Research and development    4,975,077    (2,402,908)   (j)    2,571,169 
Sales and marketing    2,244,108    (2,244,108)   (k)     
General and administrative    4,961,927    (3,310,216)   (l)    1,651,711 
Total operating expenses    18,967,765    (14,743,885)      4,223,880 
Loss from operations    (9,122,418)   5,023,328       (4,099,090)
Other income:                   
Gain from the sale of SAFTs    19,151,035           19,151,035 
Gain from the sale of DPAs    586,893           586,893 
Gain from the distribution of tokens    1,194,710           1,194,710 
Rental income    112,000           112,000 
Gain on liquidation of digital currencies    441,863           441,863 
Total other income    21,486,501           21,486,501 
Other expenses:                   
Token offering expenses    (684,012)          (684,012)
Total other expenses    (684,012)          (684,012)
Gain before provision for income taxes    11,680,071    5,023,328       16,703,399 
Provision for income taxes    21,867           21,867 
Net income   $11,658,204   $5,023,328      $16,681,531 
Other comprehensive income                
Foreign currency translation adjustments                
Comprehensive income   $11,658,204   $5,023,328      $16,681,531 

 

The accompanying notes are an integral part of these Unaudited Pro Forma Condensed Combined Financial Statements.

 

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Notes to Unaudited Pro Forma Condensed Combined Financial Information

 

Note 1 — Basis of presentation

 

Our historical consolidated financial statements have been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the disposition of the YouNow Livestreaming App and related assets, (2) factually supportable and (3) with respect to the pro forma condensed combined statements of operations and comprehensive loss, expected to have a continuing impact following the disposition. The disposition was accounted for in accordance with ASC Topic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets. The unaudited pro forma condensed combined financial information does not reflect the realization of any future cost savings or other efficiencies that may be expected, intended or planned for as a result of the disposition.

  

These unaudited pro forma condensed combined financial statements are provided for informational purposes only. They do not necessarily reflect what the Company’s financial condition or results of operations would have been had the disposition occurred on the dates indicated. Also, they may not be useful in predicting the future financial condition and results of operations of the Company. The actual financial condition and results of operations of the Company in the future may differ significantly from the pro forma amounts reflected herein, due to a variety of factors.

 

Note 2 — Pro forma adjustments

 

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change. The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:

 

  (a)   Reflects net cash received by the Company in the Transaction.  See Paragraph 3.2 of the Asset Purchase Agreement.

 

  (b) While all accounts receivable were derived from the YouNow Livestreaming App, the Acquirer did not assume the economic benefits of these receivables in the Transaction, as it also assumed related financing liabilities associated with the receivables under a factoring arrangement incurred by the Company subsequent to the pro-forma balance sheet date.  As noted in Paragraph 3.3 of the Asset Purchase Agreement, the values of such accounts receivable, when and as determined, were subject to a purchase price adjustment, so that all income with respect to such accounts receivable, as of the Closing Date, would be paid by the Acquirer to the Company.  

 

  (c) Reflects elimination of prepaid expenses and other assets directly attributable to the YouNow Livestreaming App excluding those prepaid expenses directly attributable to the Props Network.  Pursuant to Paragraph 1.1(g) of the Asset Purchase Agreement, to the extent that the benefit of certain prepaid expenses had not yet been realized as of the Closing Date, the Acquirer was required to reimburse the Company for such prepaid expenses.

 

  (d) Reflects elimination of fixed assets (mostly computers) that were transferred to the Acquirer for use by employees whose job responsibilities primarily related to the YouNow Livestreaming App, as set forth in Paragraph 1.1(d) of the Asset Purchase Agreement.

 

  (e) Reflects elimination of intangible assets directly attributable to the YouNow Livestreaming App, including developed technology and intellectual property, which were transferred to the Acquirer under the Asset Purchase Agreement.

 

  (f) Reflects elimination of accounts payable directly attributable to the YouNow Livestreaming App that were assumed by the Acquirer pursuant to Paragraph 1.3 of the Asset Purchase Agreement. Remaining accounts payable include, substantially, legal and accounting fees and other expenses related to the Company’s Regulation A offering and other financing activities.

 

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  (g) Reflects the pro forma loss on the sale of the net assets conveyed in the Transaction. The pro forma loss was determined by calculating the difference between the net cash proceeds of $250,000 and the carrying value of the assets and liabilities conveyed in the Transaction, as shown in the Company’s unaudited consolidated balance sheet as of December 31, 2019.

 

  (h) Reflects elimination of all of the Company’s revenue, as all revenue was derived from the YouNow Livestreaming App.

 

  (i) Reflects elimination of all of the Company’s cost of revenue, as all revenue was derived from the YouNow Livestreaming App.

 

  (j) Reflects elimination of research and development expenses directly attributable to the YouNow Livestreaming App, including employee-related expenses such as salaries, benefits, travel and stock option expenses, with respect to employees who job responsibilities related primarily to the YouNow Livestreaming App, and who became employed by the Acquirer after the Transaction.

 

  (k) Reflects elimination of all sales and marketing expenses, as all such expenses were directly attributable to the YouNow Livestreaming App.

 

  (l) Reflects elimination of salaries and overhead attributable to the YouNow Livestreaming App.

 

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MANAGEMENT

 

Executive Officers, Directors, Significant Employees

 

Our executive officers, directors, and significant employees including their ages and positions, are as set forth below:

 

Name   Age   Position
Executive Officers and Directors        
Adi Sideman   51   Founder, President and Chief Executive Officer, Director, Open Props Inc. and Props PBC
Nick Grossman   42   Director, Open Props Inc.
Shaival Shah   45   Director, Open Props Inc.
Significant Employees        
Peter Watts   32   Chief Technology Officer, Open Props Inc. and Props PBC
Jonathan Achai   43   Chief Engineer, Open Props Inc.
Peter Roth   45   General Counsel, Open Props Inc.

 

Executive Officers and Directors

 

Adi Sideman is the Founder, President and Chief Executive Officer of the Company, and a member of its board of directors. Mr. Sideman has also been the President and Secretary and a member of the board of directors of Props PBC since September 2018. Mr. Sideman is an entrepreneur in participatory media, with more than 20 years of experience creating applications and companies in the user-generated video space. Prior to the Company, Adi produced the first-ever animated ads on AOL and created more than 30 online games for major studio franchises. In 1999, he founded the interactive media technology firm Oddcast, which continues to develop interactive media applications such as “Elf Yourself”. In 2005, Adi co-founded KSolo, the first online karaoke service (acquired by Fox Interactive/MySpace) and, in 2006, Adi co-founded audio ad network TargetSpot, a joint venture with CBS (acquired by Radionomy). He attended graduate school at the Interactive Telecommunications Program at NYU’s Tisch School of the Arts and received his undergraduate degree from NYU Film School.

 

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Nick Grossman has been a member of the board of directors of the Company since 2020. Mr. Grossman has been a partner at Union Square Ventures since 2014. Prior to that, Mr. Grossman led an incubator for startups at the intersection of cities and data at OpenPlans, with a focus on cultivating open source communities, building open data platforms and supporting open standards efforts. Mr. Grossman has a Bachelor’s degree in Urban Studies from Stanford University, and has held academic affiliations at the MIT Media Lab and Harvard Law School.

 

Shaival Shah has been a member of the Company’s board of directors since 2011 and has 18 years of operating, VC/PE investing and deal experience across early to growth-stage technology startups, with a particular expertise in developing and commercializing online products, business and product strategy, monetization, corporate development, business development and growth. Mr. Shah particularly focuses on utilizing technology, product design and native business models to disrupt existing, incumbent industries by understanding industry structures, money flow and product inefficiencies/gaps. Mr. Shah has served these roles at start-ups and growth-stage companies where he’s built and managed teams of various sizes.

 

Significant Employees

 

Peter Watts is the Chief Technology Officer for both the Company and Props PBC, running all blockchain integrations and how they relate to the platform’s ecosystem. Since joining in October 2014, Mr. Watts has led many platform initiatives, such as the development of the Company’s web application and spearheading the Company’s growth team. From October 2011 until September 2014, Mr. Watts worked at Swarm.fm, a music discovery company and early partner on the Spotify App Platform that he co-founded. Mr. Watts is a self-taught software engineer who previously built applications for bands and music venues.

 

Jonathan Achai joined the Company at its inception in 2011 and is currently its Chief Engineer. Mr. Achai has lead engineering efforts at the Company involved in product engineering and infrastructure development, and is currently leading engineering on the Company’s platform and blockchain team. Before the Company, Mr. Achai developed frontend and backend products at Oddcast, developing numerous user generated content applications, and has over 20 years of experience. He has been a computer science engineer since childhood and received a B.A. from Hunter College in computer science.

 

Peter Roth is the General Counsel of the Company. Mr. Roth joined the Company in 2021. Prior to joining the Company, Mr. Roth practiced law at a number of law firms in New York, where he worked with numerous startups and venture capital funds. He also served as head of legal at an artificial intelligence-based computer vision company. Mr. Roth received a B.A. from New York University in Journalism and a J.D. from the University of Pennsylvania Law School.

 

Board Composition and Risk Oversight

 

The board of directors of the Company is currently composed of three members. The certificate of incorporation and bylaws to be in effect upon the completion of these offerings provide that the number of directors shall be at fixed from time to time by resolution of the board of directors. There are no family relationships among any of the directors or executive officers.

 

During 2020, the board of directors met six times.

 

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Voting Agreement

 

The holders of a majority of the issued and outstanding shares of Common Stock shall be entitled to elect up to three (3) directors to the Company’s board of directors. Certain of our stockholders holding, in aggregate, a majority of our Common Stock have agreed to elect, replace and dismiss members of the Company board of directors in accordance with the terms of that certain Voting Agreement, dated as of April 3, 2019, as amended by a First Amendment to that Voting Agreement on August 19, 2020 (as amended, the “Voting Agreement”), by and between the Company, Shatki Group, Zeev Children Trust, Zeev Ventures II, L.P., USV Investor 2012 Fund, LP, Union Square Ventures 2012 Fund, LP, USV 2012, LP, Venrock Associates VI, L.P., Venrock Partners VI, L.P., Comcast Ventures and Adi Sideman (collectively, the “Voting Agreement Stockholders”). Pursuant to the terms of the Voting Agreement, as amended, on all matters relating to the election and removal of directors, the Voting Agreement Stockholders have agreed to vote all shares beneficially owned by them so as to elect members of the Company’s board of directors as follows: (i) one individual designated by Venrock Associates VI, L.P., initially Shaival Shah, and (ii) up to two individuals designated by a majority of the stockholders, initially Adi Sideman and Nick Grossman. Further, the Voting Agreement Stockholders have agreed that any vote taken to remove any director elected pursuant to the foregoing requirements, or to fill any vacancy created by the resignation, removal or death of such a director, will also be subject to these designation rights, and at the request of the party with a designation right over a certain director, the Voting Agreement Stockholders have agreed to vote to remove that director.

 

In addition, pursuant to the Voting Agreement, the Company has agreed not to take certain actions without the written consent or vote of Adi Sideman and the majority of the shares of Common Stock held by Venrock Associates VI, L.P., Venrock Partners VI, L.P., Comcast Ventures, Shatki Group, Zeev Ventures II, L.P., Zeev Children Trust, Union Square Ventures 2004, L.P., Union Square Ventures 2012 Fund, LP, USV Investor 2012 Fund LP, USV 2012, LP, Oren Dobronsky, Founder Collective Management Co., LLC, Founder Collective Entrepreneurs’ Fund, LLC, Richard Sarnoff, Donald R. Katz, Thrive Capital Partners, Talmadge O’Neill, Senja Holdings LLC, Silicone Alley Venture Partners LLC, Upstage Ventures, Gary Ginsberg, Ruvi Shaibal, Radioone, LLC, Valley Investment Ventures, LLC, Landan Family Trust, Samuel Zysman, Eran Shir, John Albanese, Gekko Holdings, LLC, Gyanni Family Trust, DRRN Ltd., Tal Barnoach, Eric and Susan Luhrs Living Trust, Adil Haque, Chen Amit, SG VC LLC, Dovi Frances, Grabiner LLP, Zohar Gilion LTD, Christopher Dixon, Primera Capital, Brett Rochkind, Jacqueline Reses, Collab + LINE LLC, Rahul Meta, Scott Mead, KTW Schindler Investments S.A., Broadway Video Ventures LLC, S-Curve Holdings LLC, Ali Rowghani, Milestone Venture Partners III LP, Milestone Venture Partners III New York LP, and Milestone Venture Partners IV LP. The actions subject to this consent right include: (i) altering or changing the rights, powers or privileges of Common Stock by way of amending the certificate of incorporation or bylaws or otherwise, (ii) increasing or decreasing the authorized number of shares of Common Stock, (iii) authorizing or creating (by reclassification or otherwise) any new class or series of shares having rights, preferences or privileges senior to or on parity with the Common Stock; (iv) redeeming or repurchasing any shares of capital stock (other than pursuant to Company’s right to repurchase shares at the original cost, including as may result from equity incentive agreements with service providers giving the Company the right to repurchase shares upon the termination of services); (v) effecting any Deemed Liquidation Event (as defined in the certificate of incorporation), merger, other corporate reorganization, sale of control or any transaction in which all or substantially all of the assets of the Company are sold; (vi) amending or waiving any provision of the Company’s Restated Certificate or Bylaws; (vii) declaring or paying any dividend or otherwise making certain distributions to holders of any series of capital stock; (viii) increasing or decreasing the authorized number of directors of the Company constituting the board of directors; or (ix) liquidating, dissolving or winding-up the business and affairs of the Company, or consent, agree or commit to any of the foregoing without conditioning such consent, agreement or commitment upon obtaining the above-described required approvals.

 

The Voting Agreement includes a provision under which parties to the agreement agreed to waive their right to a trial by jury with respect to disputes arising under the agreement. However, the Company does not believe that claims under the federal securities laws shall be subject to the waiver of the right to a jury trial, and the Company believes that these provisions do not impact the rights of the parties to the agreement to bring claims under the federal securities laws or the rules and regulations thereunder. Additionally, despite a potential investor agreeing to the provisions in the agreement, investors will not be deemed to have waived the Company’s compliance with federal securities laws and the rules and regulations thereunder. The Voting Agreement does not define or limits the rights of Props Token holders.

 

Forum Selection

 

The bylaws of the Company provide that the Court of Chancery of the State of Delaware shall be the exclusive forum for certain litigation matters, including any derivative action. The choice of forum provision as set forth in the bylaws of the Company does not apply to any actions arising under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended. The Company does not believe that its bylaws define or limit the rights of Props Token holders.

 

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Limitation of Liability and Indemnification

 

The certificate of incorporation and bylaws of the Company provide the indemnification of our directors and officers to the fullest extent permitted under the Delaware General Corporation Law. In addition, the certificate of incorporation provides that our directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director and that if the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of our directors shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

 

As permitted by the Delaware General Corporation Law, we have entered into separate indemnification agreements with each of the directors of the Company that require us, among other things, to indemnify them against certain liabilities which may arise by reason of their status as directors, officers or certain other employees. We wish to maintain insurance policies under which our directors and officers are insured, within the limits and subject to the limitations of those policies, against certain expenses in connection with the defense of, and certain liabilities that might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been directors or officers. However, we have found that the premiums offered in the market for such insurance policies are especially high for companies in the cryptographic token business. We are continuing to weigh the costs and benefits to us of maintaining such insurance. The coverage provided by these policies may apply whether or not we would have the power to indemnify such person against such liability under the provisions of the Delaware General Corporation Law.

 

Subject to certain limitations, the bylaws of Props PBC limit the liability of the Company, Inc., its sole shareholder, for monetary damages and provide that we will indemnify and pay or reimburse reasonable expenses in advance of final disposition of a proceeding to its sole member.

 

The bylaws of Props PBC provide that to the fullest extent permitted by applicable law the Company will not be liable to Props PBC. The Company shall not be liable with respect to all expenses and liabilities (including judgments, fines, penalties, interest, amounts paid in settlement with the approval of Props PBC and attorney’s fees and disbursements) arising from the performance of any of its obligations or duties in connection with its service to Props PBC or the bylaws of Props PBC, including in connection with any civil, criminal, administrative, investigative or other action, suit or proceeding to which the Company, or any of its directors or officers, may hereafter be made party by reason of being or having been our sole member.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. We believe that these provisions and agreements are necessary to attract and retain qualified persons as our officers and directors. At present, there is no pending litigation or proceeding involving our directors or officers for whom indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

 

Non-Employee Director Compensation

 

To date, none of our non-employee directors has received any cash, equity or token compensation for serving on our board of directors, with the exception of Mr. Shah, who received options to purchase 51,054 shares of the Company’s common stock with an exercise price of $0.10 in 2011, and options to purchase 25,000 shares of the Company’s common stock with an exercise price of $0.25 in 2018. One-quarter (1/4) of the shares subject to each option grant vest on the first anniversary of the grant’s respective commencement date, with the remaining balance of the shares vesting 1/36th monthly thereafter. In addition, Mr. Shah received options to purchase 619,894 shares of the Company’s common stock with an exercise price of $0.05 in 2019. The shares vest monthly over a three-year period.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table summarizes the compensation of the three highest paid persons who were our executive officers during the years ended December 31, 2020 and 2019:

 

Name and Principal Position  Year   Salary   Bonus   Option
Awards
   All Other
Compensation
   Total 
                         
Adi Sideman(1)   2020   $200,000   $        —   $60,028   $            —   $260,028 
Chief Executive Officer   2019   $178,500   $   $365,372   $   $543,872 
                               
Yonatan Sela (2)   2020   $146,667   $   $0   $   $146,667 
Chief Business Officer   2019   $220,000   $   $357,227   $   $577,227 
                               
Peter Watts   2020   $168,000   $   $55,676   $   $223,676 
Chief Technology Officer   2019   $168,000   $   $175,645   $   $375,395 
                               
Jake Branzburg(1)(3)   2020   $38,333   $   $0   $   $38,333 
Senior Vice President   2019   $195,500   $   $71,784   $   $267,284 

 

(1) In 2019, Mr. Sideman was one of the three highest paid persons among our executive officers, based on total compensation. In 2019, Mr. Branzburg was one of the three highest paid persons among our executive officers, based on total compensation.

 

(2) Mr. Sela left the Company on August 31, 2020.

 

(3) Mr. Branzburg left the Company as of February 29, 2020 to join the third party acquirer of our app operations, Open Props Media, LLC.

 

2011 Stock Option and Grant Plan

 

Our 2011 Stock Option and Grant Plan, or our 2011 Plan, was adopted by our board of directors and approved by our stockholders in May 2011. Our 2011 Plan allows us to provide awards of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, nonqualified stock options, restricted stock, and unrestricted stock (each, an “award” and the recipient of such award, a “grantee”) to eligible officers, key employees, directors, and contract consultants of ours and any parent or subsidiary of ours.

 

As of December 31, 2020, there were options to purchase 8,025,363 shares of our common stock outstanding under our 2011 Plan.

 

Reserved Shares. In April 2019, we increased the number of shares of common stock reserved for grant under the 2011 Plan by an additional 40,420,081 common shares, pursuant to which 41,600,000 shares of common stock were available for grant immediately after such change, and 50,869,975 shares of common stock were reserved for issuance (such figure representing the total pool plus outstanding options issued). This increase was made in connection with the recapitalization described under “Certain Relationships and Related Party Transactions—Preferred Stock Conversion Agreement.” The total number of shares reserved for grant under the 2011 Plan is subject to adjustment as provided in our 2011 Plan. Shares may be either authorized but unissued shares and/or shares that were once issued and subsequently reacquired by us. Our board of directors shall be empowered to take any appropriate action required to make shares available for awards granted under our 2011 Plan. Any shares subject to awards, in respect of which the right of a grantee to purchase the same will, for any reason, terminate, expire or otherwise cease to exist, will again be available for grant under our 2011 Plan.

 

Plan Administration. Our 2011 Plan is administered by our board of directors or one or more committee appointed by our board of directors. The administrator may from time to time adopt such rules and regulations for carrying out our 2011 Plan as it may deem best. With respect to participation by an officer or a director of ours or any other person whose transactions in shares are subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), at any time that any class of our equity securities is registered pursuant to Section 12 of the Exchange Act, our 2011 Plan shall be administered in compliance with the requirements, if any, of Rule 16(b)-3 of the Exchange Act, such that any transaction pursuant to our 2011 Plan will be exempt from Section 16(b) of the Exchange Act.

 

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The interpretation and construction by the administrator of any provision of our 2011 Plan or of any award thereunder is final and conclusive. Subject to the general terms and conditions of the 2011 Plan, the administrator has full authority in its discretion, from time to time and at any time, to determine (i) the grantees, (ii) the number of shares to be covered by each award, (iii) whether to designate options as incentive stock options or nonqualified stock options, (iv) the time or times at which the same shall be granted and shall expire, (v) the fair market value of the shares of our capital stock or other property, (vi) the schedule and conditions on which awards may be exercised and on which shares will be paid for, (vii) the exercise price of the shares covered by each award granted hereunder and the method of payment of such price, (viii) the method for satisfaction of any tax withholding obligation arising in connection with the award, including the withholding or delivery of shares subject to award, (ix) the timing, terms and conditions of a grantee’s ability to exercise the award or the vesting schedule of any award acquired upon the exercise thereof, (vi) any other matter which is necessary or desirable for, or incidental to, the administration of our 2011 Plan. In addition, the administrator has the power shall have the power to: (i) approve one or more forms of award agreement; (ii) amend, modify, extend, cancel or renew any award or waive any restrictions or conditions applicable to any award or any shares acquired upon the exercise thereof; (iii) accelerate, continue, extend or defer the exercisability of any award or the vesting of any award, including with respect to the period following a grantee’s termination of service with us; (iv) prescribe, amend or rescind rules, guidelines and policies relating to our 2011 Plan, or to adopt supplements to, or alternative versions of, our 2011 Plan, including, without limitation, as the administrator deems necessary or desirable to comply with the laws of, or to accommodate the tax policy or custom of, foreign jurisdictions whose citizens may be granted awards; (v) correct any defect, supply any omission or reconcile any inconsistency in our 2011 Plan or any award agreement and to make all other determinations and take such other actions with respect to our 2011 Plan or award as the administrator may deem advisable to the extent not inconsistent with the provisions of our 2011 Plan or applicable law; and (vi) impose a “blackout” period during which a grantee’s right to exercise options and/or sell, purchase, or otherwise acquire or transfer shares will be limited.

 

Stock Options. Our 2011 Plan permits the grant of incentive stock option and nonqualified stock options. Any person who is not an employee on the effective date of the grant of a stock option may not be granted an incentive stock option. Subject to the provisions of our 2011 Plan, the administrator determines the terms and conditions of stock options granted under our 2011 Plan. Each award of stock options will be evidenced by an option agreement specifying the terms and conditions of such stock option, including the number of shares covered by such option, the dates such option may be exercised, the exercise price, the schedule on which such shares may be paid for, and such other terms and conditions as the administrator at its discretion may prescribe, consistent with our 2011 Plan. The exercise price of a stock option may not be less than 100% of the fair market value of a share and the term of a stock option generally may not be more than 10 years, except that an incentive stock option may not be granted to an individual who, at the time the stock option is granted, owns stock possessing more than 10% of the total combined voting power of all our classes of stock, its parent or its subsidiaries, unless the exercise price per share is not less than 110% of the fair market value of a share on the date of grant of such incentive stock option and the term of such incentive stock option is no more than 5 years. The administrator will determine the methods of payment of the exercise price of an option, which may be in cash or cashier’s or certified check, or such other method of payment determined by the administrator. After the termination of a grantee’s service, the grantee may exercise grantee’s stock option for the period of time stated grantee’s stock option agreement, which is generally 30 days, except in the case of a termination by reason of death or disability, in which case such period is generally 6 months, and in the case of a termination for cause, in which case the applicable stock option will immediately terminate.

 

Restricted Stock. Our 2011 Plan permits the grant of restricted stock. Subject to the provisions of our 2011 Plan, the administrator determines the terms and conditions of restricted stock granted under our 2011 Plan. Each award of restricted stock will be evidenced by a restricted stock agreement specifying the terms and conditions of the restricted stock, including any applicable purchase price and the restricted and conditions applicable to such restricted stock. Such restrictions and conditions may be based on continuing employment (or other service relationship), achievement of pre-established performance goals and objectives and/or such other criteria as the administrator may determine. The restricted stock award agreement may require or permit the immediate payment, waiver, deferral or investment of dividends paid on the restricted stock.

 

Unrestricted Stock. Our 2011 Plan permits the grant of unrestricted stock. Subject to the provisions of our 2011 Plan, the administrator determines the terms and conditions of unrestricted stock granted under our 2011 Plan. Each award of unrestricted stock will be evidenced by a restricted stock agreement specifying the terms and conditions of the restricted stock. An eligible person may, with consent of the administrator, elect to receive a portion of any cash compensation otherwise due to such grantee in the form of shares of unrestricted stock either currently or on a deferred basis.

 

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Non-transferability of Awards. No stock option shall be assignable or transferable by the grantee to whom granted otherwise than by will or the laws of descent and distribution, and a stock option and/or awards may be exercised during the lifetime of the grantee only by such grantee or by such grantee’s guardian or legal representative. The terms of such option and/or awards shall be binding upon the beneficiaries, executors, administration, heirs and successors of such grantee. Restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as provided in our 2011 Plan or in the restricted stock award agreement. Additionally, the right to receive shares of unrestricted stock on a deferred basis may not be sold, assigned, transferred, pledged or otherwise encumbered, other than by will or the laws of descent and distribution.

 

Transferability Limitations with Respect to Shares; Right of First Refusal. Shares issued pursuant to awards generally are not transferable to any third party without the prior approval of the administrator. Should the administrator approve such transfer, it shall be subject to a right of first refusal as set forth in our 2011 Plan. Shares issued pursuant to awards may also be subject to one or more repurchase options, or such other conditions and restrictions as may be determined by the administrator in its discretion at the time the award is granted.

 

Voting Rights. Concurrently with the exercise of any stock option and vesting of any restricted stock or unrestricted stock award, and as a condition precedent to such exercise and/or the issuance of any shares in respect thereof, the grantee will be required to sign and deliver to us an irrevocable power of attorney and voting proxy in such form as may be prescribed by the administrator.

 

Stockholders’ Agreement. We may require the holder of restricted stock and unrestricted stock to be bound by any stockholders’ agreement in effect from time to time among the holders of the same class of stock.

 

Share Adjustments. In the event that our outstanding shares are increased, decreased or changed into, or exchanged for a different number or kind of securities, without receipt of consideration by us, through reorganization, merger, recapitalization, reclassification, stock split, reverse stock split, stock dividend, stock consolidation or otherwise, (i) appropriate and proportionate adjustments shall be made to the number and kind of securities and exercise price for the securities subject to the award which may thereafter be granted under our 2011 Plan, (ii) appropriate and proportionate adjustments shall be made to the number and kind of and exercise price for the securities subject to the then outstanding award, and (iii) appropriate amendments to the option agreements shall be executed by us and each grantee if the administrator determines that such amendments are necessary or desirable to reflect such adjustments. If determined by the administrator to be appropriate, in such an event that involves the substitution of securities of a corporation other than ours, the administrator shall make arrangements for the assumptions by such other corporation of any awards then or thereafter outstanding under our 2011 Plan. Notwithstanding the foregoing, such adjustment in outstanding awards, shall be made without change in the total exercise price applicable to the unexercised portion of the awards but with an appropriate adjustment to the number of securities, kind of securities and exercise price for each of the securities subject to the awards. The determination by the administrator as to what adjustments, amendments or arrangements shall be made pursuant to our 2011 Plan, and the extent thereof, will be final and conclusive. No fractional shares shall be issued under our 2011 Plan on account of any such adjustment or arrangement.

 

Change of Control. Our 2011 Plan provides that in the event of a Change in Control (as defined in our 2011 Plan), each outstanding award shall be treated as the administrator determines, including, without limitation, that each stock option be assumed or an equivalent option substituted by the successor corporation or a parent or subsidiary of the successor corporation. The administrator will not be required to treat all awards similarly in the transaction. In the event that an award is not assumed or substituted for following the Change in Control, the award shall terminate as of the date of the closing of the Change in Control and the administrator shall notify the grantee in writing or electronically of such termination.

 

Amendment; Termination. The administrator may at any time discontinue granting awards under our 2011 Plan or otherwise suspend, amend or terminate our 2011 Plan and may, with the consent of a grantee, make such modification of the terms and conditions of such stock options as it deems advisable. Such an amendment or modification to our 2011 Plan will be deemed adopted as of the date of the action of the administrator effecting such amendment or modification and will be effective immediately, unless otherwise provided therein, subject to approval thereof (i) within twelve (12) months before or after the effective date by our stockholders holding not less than a majority vote of our voting power voting in person or by proxy at a duly held stockholders meeting when required to maintain or satisfy the requirements of Code Sections 421 and 422 with respect to incentive stock options, (ii) by any appropriate governmental agency if required, or (iii) by a securities exchange or automated quotation system if required. No awards may be granted during any suspension or after termination of our 2011 Plan.

 

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Repricing Offering for Stock Options under 2011 Plan

 

On April 3, 2019, we offered to our employees the opportunity to effectively reprice all outstanding options to purchase shares of our common stock previously granted under the 2011 Plan to an exercise price of $0.05. In connection with this offer, all options tendered to us before a deadline set as twenty one days after the offer date were subject to this right. All shares of common stock that may have vested under tendered options were forfeited in connection with this effective repricing, as all shares of Common Stock were deemed unvested as of the date of grant of the new grant. Further, the exercise price of tendered options was not the only term or conditions of the tendered options that changed; upon tendering an option and the issuance of a new grant, each option holder received a new notice of option grant and stock option agreement governing the terms of the repriced option grant. These new grants constitute entirely new grants to purchase shares of the Company’s Common Stock. Furthermore, these new grants set forth different terms, including, without limitation, a new vesting schedule (beginning as of the date of the new grant), new exercise periods post termination and a new expiration date.

 

Employment Arrangements with our Named Executive Officers

 

Each of our named executive officers is employed “at will.”

 

Adi Sideman, Chief Executive Officer

 

Mr. Sideman’s current annual base salary is $200,000, which is paid by the Company.

 

Yonatan Sela, Chief Business Officer

 

Mr. Sela left his employment with the Company as of August 31, 2020. His annual base salary was $220,000, which was paid by the Company.

 

Eran Kalmanson, Chief Technology Officer

 

Mr. Kalmanson left his employment with the Company as of March 5, 2020. His annual base salary was $199,750, which was paid by the Company.

 

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Outstanding Equity Awards at Fiscal Year End

 

Other than as set forth below, there were no outstanding unexercised options, unvested stock, and/or equity incentive plan awards issued by the Company to its named executive officers as of December 31, 2020.

 

Name  Type of
securities
underlying
unexercised
options
  Number of
securities
underlying
unexercised
options (#)
exercisable
   Number of
securities
underlying
unexercised
options (#)
unexercisable
   Option
exercise
price ($)
   Option
expiration
date
Yonatan Sela  Common Stock   108,800(1)      $0.05   1/13/2025
(left Open Props as of August 31, 2020)  Common Stock   58,000(1)      $0.05   8/31/2025
   Common Stock   75,000(1)      $0.05   8/03/2026
   Common Stock   117,500(2)   2,500   $0.05   12/31/2026
   Common Stock   54,687(2)   20,313   $0.05   1/09/2028
   Common Stock   158,552(2)   86,948   $0.05   4/30/2028
   Common Stock   6,161,587(4)      $0.05   4/17/2029
                      
Eran Kalmanson  Common Stock   54,000(1)      $0.05   9/05/2022
(left Open Props as of March 5, 2020)  Common Stock   56,000(1)      $0.05   9/05/2022
   Common Stock   60,000(1)      $0.05   9/05/2022
   Common Stock   20,000(1)      $0.05   9/05/2022
   Common Stock   128,104(1)      $0.05   9/05/2022
   Common Stock   118,750(2)      $0.05   9/05/2022
   Common Stock   39,062(2)      $0.05   9/05/2022
   Common Stock   72,645(2)      $0.05   9/05/2022
   Common Stock   2,885,379(3)      $0.05   9/05/2022
                      
Alejandro Moreno-Paz  Common Stock   15,000(1)      $0.05   7/31/2022
(left Open Props as of January 31, 2020)  Common Stock   15,000(1)      $0.05   7/31/2022
   Common Stock   13,125(1)      $0.05   7/31/2022
   Common Stock   37,500(1)      $0.05   7/31/2022
   Common Stock   15,104(2)      $0.05   7/31/2022
   Common Stock   20,000(2)      $0.05   7/31/2022
   Common Stock   4,375(2)      $0.05   7/31/2022
   Common Stock   987,088(3)      $0.05   7/31/2022
                      
Jake Branzburg  Common Stock   94,614(1)   51,886   $0.05   4/30/2028
(left Open Props as of February 29, 2020)  Common Stock   133,740(1)   30,864   $0.05   10/04/2027
   Common Stock   2,469,037(3)   1,395,544   $0.05   4/17/2029

 

(1) Twenty-five percent of the shares subject to the option are scheduled to vest on the one year anniversary of the vesting commencement date and 1/36 of the shares subject to the option are scheduled to vest each month thereafter on the same day of the month as the vesting commencement date, subject to the named executive officer’s continued service through each such date.
   
(2) 1/48 of the shares subject to the option are scheduled to vest each month on the same day of the month as the vesting commencement date, subject to the named executive officer’s continued service through each such date.
   
(3) 1/36 of the shares subject to the option are scheduled to vest each month on the same day of the month as the vesting commencement date, subject to the named executive officer’s continued service through each such date.
   
(4) 1/12 of the shares subject to the option are scheduled to vest each month on the same day of the month as the vesting commencement date, subject to the named executive officer’s continued service through each such date.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Each of Props PBC, a wholly owned subsidiary of the Company, and the Company are offering Props Tokens qualified in this offering circular. The following is a summary of transactions since January 1, 2017 to which either the Company or Props PBC has been a party in which (a) the amount involved exceeded the lesser of (i) $120,000 and (ii) 1% of the average total assets at year end for the last two fiscal years and (b) any of our executive officers, directors, promoters or beneficial holders of more than 10% of any class of our voting securities, or any immediate family member of the above persons, other than compensation arrangements which are described under the sections of this offering circular captioned “Management—Non-Employee Director Compensation” and “Executive Compensation.”

 

Debt Payable by Assets Agreements

 

In June 2018, YouNow Services entered into DPAs under the exemption provided by Regulation CF. See “Other Offerings” for additional details regarding the terms of the DPAs. At the time of the DPA offering, the Company owned 80% of the equity of YouNow Services and Crowd Include LLC owned 20% of the equity of YouNow Services. In December 2018, the Company purchased the 20% equity interest held by Crowd Include LLC in exchange for consideration of $100, pursuant to the terms of that certain Operating Agreement of YouNow Services, dated December 4, 2017. the Company may in the future determine to dissolve YouNow Services. Upon such dissolution, the Company will issue $10,000 worth of Props Tokens, valued at the then-current valuation, to Crowd Include LLC, the former minority equityholder in YouNow Services.

 

The Company caused YouNow Services to assign its repayment obligations under the DPAs to the Company in June 2019, and the Company has distributed Props Tokens to satisfy repayment obligations under the DPAs as described under “Other Offerings.”

 

In December 2017, the Company entered into an agreement with YouNow Services pursuant to which the Company agreed to sell to YouNow Services the number of Props Tokens necessary to satisfy YouNow Service’s obligations to deliver Props Tokens under the DPAs. In return, the Company was entitled to receive from YouNow Services the net proceeds from YouNow Services’ sale of the DPAs. Because the DPAs were assigned to the Company, the Company and YouNow Services intend to terminate this agreement.

 

Preferred Stock Conversion Agreement

 

On April 5, 2019, we amended and restated our certificate of incorporation. As amended and restated, our certificate of incorporation provides that the total number of shares of all classes of stock which the Company shall have authority to issue is 139,189,499 shares, all of which shall be designated as Common Stock, par value $0.001 per share. Previously, our certificate of incorporation had provided for certain classes of preferred shares, which were converted, contemporaneously with the filing of our current certificate of incorporation with Secretary of State of the State of Delaware, pursuant to a Preferred Stock Conversion Agreement by and among the Company, the holders of shares of Series A Preferred Stock, the holders of shares of Series A-1 Preferred Stock, the holders of shares of Series A-2 Preferred Stock, the holders of shares of Series B Preferred Stock, and the holders of shares of Series B-1 Preferred Stock (the “Conversion Agreement”). Pursuant to the terms of the Conversion Agreement, (i) the shares of Series A Preferred Stock were converted into shares of Common Stock on a 1:1 basis, (ii) the shares of Series A-1 Preferred Stock were converted into shares of Common Stock on a 1:1.7722 basis, (iii) the shares of Series A-2 Preferred Stock were converted into shares of Common Stock on a 1:1.9038 basis, (iv) the shares of Series B Preferred Stock were converted into shares of Common Stock on a 1:3.5172 basis, and (v) the shares of Series B-1 Preferred Stock were converted into shares of Common Stock on a 1:8.9191 basis. As a result, shares of Preferred Stock of the Company issued and outstanding immediately prior to the effective date of our current certificate of incorporation and the Conversion Agreement ceased to exist and were terminated, and all rights, powers, preferences and privileges of the Preferred Stock were terminated in their entirety.

 

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We entered into a Second Amended and Restated Investor Rights Agreement in connection with our entry into the Conversion Agreement. The Second Amended and Restated Investor Rights Agreement includes a provision under which parties to the agreement agreed to waive their right to a trial by jury with respect to disputes arising under the agreement. However, the Company does not believe that claims under the federal securities laws shall be subject to the waiver of the right to a jury trial, and the Company believes that these provisions do not impact the rights of parties to the agreement to bring claims under the federal securities laws or the rules and regulations thereunder. Additionally, despite agreeing to the provisions in the agreement, parties to the agreement will not be deemed to have waived the Company’s compliance with federal securities laws and the rules and regulations thereunder. The Second Amended and Restated Investor Agreement does not define or limits the rights of Props Token holders.

 

Other Transactions

 

We have entered into separate indemnification agreements with each of our directors. For a description of these agreements, see the section of this offering circular captioned “Management—Limitation of Liability and Indemnification.”

 

Token and Warrant Sales

 

From April 21 through April 27, 2020, the Company closed the April 2020 Private Placements with respect to the sale of Props Tokens with multiple investors, including new institutional investors, two entities that are stockholders of the Company and are associated with one of the Company’s directors (who is a managing director of Union Square Ventures) and the executive officer of one of the Props Apps. In the private placements, the Company raised approximately $1,342,500 in cash and an additional fraction of that amount in the form of other consideration. The two entities associated with Union Square Ventures purchased 3,571,428.5714 Props Tokens. See “Other Offerings—April 2020 Private Placements.”

 

The April 2020 Private Placements were conducted as transactions exempt from registration under Rule 506(b) of Regulation D under the Securities Act of 1933. The Props Tokens sold in the April 2020 Private Placements are transferable only in accordance with United States federal and state securities laws. In addition to receiving Props Tokens, each investor received warrants to purchase an additional number of Props Tokens, equal to up to 30% of the number of Props Tokens initially purchased, at an exercise price of $0.07 per Props Token. Certain investors exercised their warrants, including the two entities associate with Union Square Ventures, which purchased 1,071,428 Props Tokens upon exercise of their warrants. The Props Tokens issued to the investors upon exercise of the warrants are non-transferable until May 2022, and will then be transferable only in accordance with United States federal and state securities laws. All unexercised warrants have expired.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth certain information with respect to the beneficial ownership of the capital stock of the Company at March 31, 2021, and (ii) the ownership of Props Tokens as of the date following their distribution, and as adjusted to reflect the distribution of Props Tokens offered by use in the Regulation A offering, for:

 

  each person, or group of affiliated persons, who we know beneficially owns more than 5% of our common stock;

 

  each of our directors;

 

  each of our executive officers; and

 

  all of our directors and executive officers as a group.

 

 

The percentage of beneficial ownership shown in the table below is based upon 92,921,369 shares outstanding as of March 31, 2021. The percentage of token ownership sold is based upon 427,671,619 Props Tokens outstanding and issued or issuable as of March 31, 2021, including the (i) 247,671,619 Props Tokens outstanding and issued or issuable as described under “Token and Warrant Sales”, and all 180 million Props Tokens previously estimated to be included in the offering pursuant to Regulation A (based on the assumption that they are all distributed).

 

Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common stock. We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules take into account shares of common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable on or before the 60th day after March 31, 2021. Certain of the options granted to our named executive officers may be exercised prior to the vesting of the underlying shares. We refer to such options as being “early exercisable.” Shares of common stock issued upon early exercise are subject to our right to repurchase such shares until such shares have vested. These shares are deemed to be outstanding and beneficially owned by the person holding those options or a warrant for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

 

Except as otherwise noted below, the address for each person or entity listed in the table is c/o Open Props Inc., 12816 Inglewood Ave #637, Hawthorne, CA 90250.

 

   Beneficial Ownership of
Open Props Inc.
Common Stock
   Beneficial Ownership of
Props Tokens
 
Name of Beneficial Owner  Shares   Percentage   Tokens(8)   Percentage 
5% Stockholders:                
Entities associated with Venrock   31,767,261(1)   34.187%       * 
Entities associated with Union Square Ventures   13,509,847(2)   14.539%   3,571,429(8)   * 
Shatki Group   4,259,029(3)   4.584%       * 
Zeev Ventures II, L.P.   17,861,157(4)   19.222%       * 
Directors and Named Executive Officers:                    
Adi Sideman   14,899,727(5)   10.721%   55,253    * 
Yonatan Sela   6,843,887(6)   4.924%   44,506    * 
Nick Grossman   13,509,847(2)   14.539%   3,571,429(8)   * 
Shaival Shah   695,948(7)   *    40,000    * 
                     
All directors and executive officers as a group (4 persons)   35,949,409    30.184%   3,711,188    * 

 

* Represents beneficial ownership of less than 1%

 

(1) Consists of (i) 14,076,660 shares of Series B Preferred stock converted to common and 15,377,946 shares of Series B-1 Preferred stock converted to common held by Venrock Associates VI, L.P.; and (ii) 1,105,241 shares of Series B Preferred stock converted to common and 1,207,414 shares of Series B-1 Preferred stock converted to common held by Venrock Partners VI, L.P. Venrock Management VI, LLC and Venrock Partners Management VI, LLC (together, the “Management Entities”) are the sole general partners of Venrock Associates VI, L.P. and Venrock Partners VI L.P., respectively, and may be deemed to own these shares. Each of these entities disclaims beneficial ownership of such shares except to the extent of his or its pecuniary interest therein. Voting and dispositive decisions for these shares are made by the Management Entities, each of which has more than three members.

 

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(2) Consists of (i) 1,596,768 shares of Series A-1 Preferred stock converted to common, 2,456,665 shares of Series A-2 Preferred stock converted to common and 2,065,025 shares of Series B Preferred stock converted to common held by Union Square Ventures 2012 Fund, LP; (ii) 6,888,220 shares of Series B-1 Preferred stock converted to common held by USV 2012, LP; and (iii) 61,771 shares of Series A-1 Preferred stock converted to common, 95,037 shares of Series A-2 Preferred stock converted to common, 79,886 shares of Series B Preferred stock converted to common and 266,475 shares of Series B-1 Preferred stock converted to common held by USV Investor 2012 Fund, LP. Mr. Grossman is a managing partner at Union Square Ventures and, as such, he may be deemed to share voting power and investment control over the shares held by Union Square Ventures 2012 Fund, LP, USV 2012, LP and USV Investor 2012 Fund, LP. For purposes of this table, beneficial ownership of those shares is attributed both to the entities associated with Union Square Ventures and to Mr. Grossman. Each of these entities and Mr. Grossman disclaims beneficial ownership of such shares except to the extent of his or its pecuniary interest therein. Voting and dispositive decisions for these shares are made by the members of the managing partners at Union Square Ventures: Frederick Wilson, R. Bradford Burnham III, Albert Wenger, John Buttrick and Andy Weissman. Entities affiliated with Union Square Ventures also own 3,571,429 Props Tokens in connection with a direct purchase of Tokens.

 

(3) Consists of (i) 48,938 shares of common stock, (ii) 1,275,765 shares of Series A Preferred stock converted to common, (iii) 637,899 shares of Series A-1 Preferred stock converted to common, (iv) 1,020,631 shares of Series B Preferred stock converted to common, and (v) 1,275,796 shares of Series B-1 Preferred stock converted to common.

 

(4) Consists of 17,861,157 shares of Series B-1 Preferred stock converted to common.

 

(5) Consists of (i) 4,527,086 shares of common stock; and (ii) 63,792 shares of Series A-2 Preferred stock converted to common and 7,307,449 shares of the Company’s common stock underlying options owned by Mr. Sideman with an exercise price of $0.05. 100% of the option grants fully vested at issuance on April 18, 2019.

 

(6) Consists of (i) 108,000 shares of the Company’s common stock underlying options owned by Mr. Sela with an exercise price of $0.05; (ii) 55,583 shares of the Company’s common stock underlying options owned by Mr. Sela with an exercise price of $0.05; (iii) 54,687 shares of the Company’s common stock underlying options owned by Mr. Sela with an exercise price of $0.05; (iv) 75,000 shares of the Company’s common stock underlying options owned by Mr. Sela with an exercise price of $0.05; (v) 28,125 shares of the Company’s common stock underlying options owned by Mr. Sela with an exercise price of $0.05; (vi) 71,604 shares of the Company’s common stock underlying options owned by Mr. Sela with an exercise price of $0.05 and (vii) 3,080,793 shares of the Company’s common stock underlying options owned by Mr. Sela with an exercise price of $0.05. One-quarter (1/4) of the shares subject to the first three option grants shall vest on the first anniversary of its respective commencement date, which is either January 14, 2015, September 1, 2015 or August 4, 2016, respectively, with each of the following three option grants vesting 1/48th monthly from its respective commencement date, which is either January 1, 2017, January 10, 2018 or May 1, 2018, with each of the following one option grant vesting 1/12th monthly from its respective commencement date, which is December 31, 2019 subject to Mr. Sela’s continuing to be a Service Provider (as defined in the Plan) through each such vesting date.

 

(7) Consists of: (i) 51,054 shares of Open Props Inc.’s common stock underlying options owned by Mr. Shah with an exercise price of $0.05; (ii) 9,375 shares of Open Props Inc.’s common stock underlying options owned by Mr. Shah with an exercise price of $0.05 and (iii) 103,315 shares of Open Props Inc.’s common stock underlying options owned by Mr. Shah with an exercise price of $0.05. Mr. Shah’s first option grant is fully vested, and his second option grant vests 1/4th after one year from its commencement date, which is January 1, 2018, and thereafter the remaining balance vests 1/36th monthly. His third option grant vests 1/36th monthly from its commencement date, which is January 1, 2019. Mr. Shah disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein.

 

(8) Includes tokens that would be issuable upon claiming Pending Props associated with a YouNow Livestreaming App user account.

 

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DESCRIPTION OF THE PROPS TOKENS BEING OFFERED

 

Ownership of Props Tokens

 

Props Tokens are Ethereum-based and “ERC-20”-compliant cryptographic tokens, which means that they are a digital asset existing on the Ethereum blockchain. The rules governing basic functions of the Ethereum-based “smart contract” that creates Props Tokens (the “Token Code”) adhere to widely-known conventions. See “—Terms of the Token Code” below for additional information about what these conventions are. Ownership of Props Tokens, therefore, is only recorded in a record inscribed in the Ethereum blockchain. 

 

This ownership is evidenced through the association of a certain number of Props Tokens with a particular public key or wallet address as recorded on the Ethereum blockchain. See “—Token Transfers” for additional information about the process of associating Props Tokens with a public key or wallet address on Ethereum.

 

The initial associations with certain wallet addresses in the Token Code were as described in “—Token Supply.” Each such wallet and public key will have an associated private key, and in order to control the Props Tokens associated with a particular public key, including to send Props Tokens to another person as described under “—Token Transfers,” the token holder must prove she also controls the private key. Control of the private key is, in turn, proved by providing a digital signature on any digital record addressing Props Token operations associated with the public key—which signature can only be made if the holder knows the private key. As a result, control or knowledge of the private key associated with a wallet and public key determines a Props Token holder’s ability to control any Props Tokens issued to them. Props Tokens are not otherwise tracked, are not designated by a specific serial number or other unique identifier, and are, therefore, interchangeable and fungible.

 

As a result of the importance of controlling the private key associated with a wallet and public key address, it is necessary for a Props Token holder to ensure the security and privacy of a private key associated with the wallet and public key holding Props Tokens. If the private key is lost, the Props Token holder will no longer be able to control the Props Tokens. This will result in the holder’s inability to transfer the Props Tokens, though the holder may still be able to use the Props Tokens in Props Apps that already associate the holder with the wallet and public key address. If, however, the private key is stolen or otherwise shared with another person, the other person will be able to control the Props Tokens associated with that wallet and public key address, and as a result, may transfer the Props Tokens to another person, thereby denying the Props Token holder all of the benefits of ownership of those Props Tokens, including, for example, the use of Props Tokens in an app. See “Risk Factors—As a holder of Props Tokens, you will be responsible for securing and maintaining your private keys and otherwise following cybersecurity best practices. Failure to do so may result in the loss of all your tokens” for more information about the necessity of keeping private keys safe.

 

Terms of the Token Code

 

The Token Code defines rules as to what network operations can be performed on the Props Tokens. These rules constitute the terms of the “smart contract” and define what holders of Props Tokens may do with a Props Token on the Ethereum blockchain. The Token Code conforms to the “ERC-20” technical standard for “smart contracts” on the Ethereum blockchain, which is a technical standard that requires certain basic rules that define how the Token Code functions. These basic functions are generally described below:

 

  totalSupply: This function allows any user to query the Token Code to determine the total number of Props Tokens that may be issued by the Token Code.

 

  balanceOf: This function allows any user to query the Token Code to determine the total number of Props Tokens held by a particular wallet address.

 

  transfer: This function allows users with a wallet address associated with Props Tokens to send any amount of those Props Tokens to another wallet address.

 

  approve: This function allows users with a wallet address associated with Props Tokens to give permission to an external “smart contract” to transfer an amount of their Props Tokens. This is the standard way for contracts to interact with tokens, and a requirement for the ERC-20 specification.

 

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  allowance: This function allows any user to query the Token Code to determine the total number of Props Tokens a particular wallet address has “approved” to a particular smart contract.

 

  transferFrom: This function allows a “smart contract” which has previously been “approved,” to transfer a user’s Props Tokens, up to the approved allowance.

 

  settle: A special type of transfer that only Props App developers may perform, when sending Props Tokens to their users, which logs additional metadata to differentiate from regular transfers.

 

In addition to these basic, ERC-20-defined rules, our Token Code also provides for extra rules, in addition to the minimum standards for compliance with ERC-20, with the material terms generally described below:

 

  ownable: Certain functionality under the “smart contract” is limited to an owner, or “Controller,” as noted below. See “Description of The Props Network” and “Description of The Props Network—Props PBC” for additional details about the Controller.

 

  upgradeable: The Controller can deploy a new version of the Token Code. We may use this functionality to make changes to the Token Code as described under “—“Smart Contract” Modifications and Changes to Token Functionality.”

 

  mintable: The Controller can create tokens (i.e., create them and send them to a wallet address). This function was performed for the issuances to Props PBC and the initial creation of Props Tokens to be held by the Company and the Protocol Rewards Engine “smart contract.” Primary issuances by the Company are effected through transfers from the Company’s wallet to a third party’s wallet address.

 

  fixed supply: The Token Code has a maximum supply, set to 1,000,000,000 which is the maximum number of Props Tokens that can be created. This can only be changed by using the “upgradeable” function described above. See “—Token Supply” for additional details regarding changes to the maximum supply of Props Tokens.

 

  presigned transfer: This function allows Props Token holders to authorize the transfer of their tokens, but to permit a third party pay the “gas” fee on their behalf. See “—Token Transfers” for additional detail.

 

  bondable: This function will be disabled upon qualification, but, in the future, it will allow Props Token holders to “bond” a portion of their Props Tokens by using this function, which puts the bonded Props Tokens in a locked, non-transferable state. Running this function will also allow the holder to unbond any Props Tokens the holder previously bonded. Upon unbonding Props Tokens, there will be a 45 day waiting period before they can be transferred again. This function would be used in connection with an Oracle’s participation in any future requirement that an Oracle “stake” tokens in order to participate as an Oracle. See “Description of the Props Network—The Oracles” for additional detail regarding these plans for potential, future staking. In other words, Oracles could be required to run this function in order to participate as an Oracle. This bonding function would only be required of persons who are performing important functions for the Props Network, like Oracles. The 45 day waiting period after unbonding was chosen by the Company as a means to provide such important participants additional disincentives to perform malicious actions that could harm the value of Props Tokens. For example, upon incorporation of a staking requirement for Oracles, an Oracle cannot sell or transfer these Props Tokens during the time the Oracle is in a position to act maliciously—and for a period of 45 days thereafter.

 

We have provided a copy of the rules of the Token Code as an exhibit to the offering statement that includes this offering circular. Undetected bugs or flaws in the “smart contract” implementing software, however, may result in a failure of the network to observe all the rules outlined below, which could compromise the usefulness of the tokens and, as a result, their value. See “Risk Factors—The Props Network, including the Protocol Rewards Contract, relies on software and programming that is complex, and if it contains undetected errors, the Props Network could be adversely affected.” for additional details.

 

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In order to run any of these functions, a user must be running certain softwareeither Ethereum node software, which may be accessed at https://www.ethereum.org/build/, or “wallet” software compatible with Ethereum, including for example, Coinbase Wallet, Trust Wallet, Metamask and others. Upon running the Ethereum node software, the user will be able to submit transactions to the Ethereum network to run the above-described functions in the Token Code. Many users may, however, find that running “wallet” software is an easier way of interacting with Ethereum “smart contracts” like the Token Code. Upon running wallet software, a user will be able to submit transactions to the Ethereum network to perform the “transfer” function, and for many users, we would expect this will be the only function of importance. To submit transactions to the Ethereum network to run the other functions within a wallet, users will need to load a decentralized app (dapp) user interface within the wallet specific to the Token Code, which is often referred to as a “dapp browser,” to interact with the Token Code. Anyone can build one of these interfaces for wallet software and make it publicly available. The Company may build such an interface if there is a demand for users to access the non-“transfer” functions and no other interfaces are available.

 

In order to submit a transaction to the Ethereum network to perform any of these Token Code operations, a user will have to prove they have access to the private key paired to public key by providing an appropriate digital signature to the digital record of the network operation. See “Ownership of Props Tokens” above for additional discussion regarding private keys. Further, in order to perform any of these functions, a transaction should include both a “gas” payment as described under “—Gas Payments and Token Transfers” and any information necessary to complete the function. For example, in order to complete a “transfer” function, the user must include information about the addressee. See “Token Transfers” for additional information regarding this function. The specific types of information and formatting required in order to run each of these functions is defined in the Token Code.

 

Receiving Props Tokens

 

You may receive Props Tokens in the ways described in “Plan of Distribution.” For more specific descriptions of the ways you may receive Props Tokens in connection with the Props Apps, see “The Props Apps Annexes.

 

Any rewards and grants are, however, made subject to additional administrative steps and checks that must be completed prior to a Props App user or grantee claiming Props Tokens. Users and grantees will only be able to receive Props Tokens when they have completed all of these necessary steps. Below, we have described the steps that must be taken, subsequent to completing the in-app activities necessary to earn rewards or grants, in order to receive Props Tokens from us.

 

Steps to Be Taken by the User

 

Prior to any issuance of Props Tokens to any person, a recipient will be required to complete KYC and AML procedures, complete all requested tax forms and complete any other documentation we may require. See “Plan of Distribution” for additional details. In addition, if the recipient is receiving Props Tokens in connection with a Props App rewards program, the app user must complete all additional steps required by the relevant Props App, including anything required by the Props App’s terms of use, in order to receive Props Tokens in connection with the rewards program. See “The Props Apps Annexes” for discussion of these steps in the specific context of app rewards for users of these Props Apps.

 

Once a recipient has completed these steps and regardless of the method through which Props Tokens are being provided, receipt of Props Tokens requires a “wallet”—which is the form in which a public key can be presented and recorded on the Ethereum blockchain. Wallet addresses are associated with Props Token ownership and, therefore, may be used to indicate the ownership of digital assets. Any “wallet” software compatible with Ethereum will support interaction with Props Tokens, and the Company is aware of several wallet providers that satisfy this requirement, including Coinbase Wallet, Trust Wallet, Metamask and others. Each Props App may restrict the use of specific types of wallets under its terms and conditions. Users generally may establish a wallet through these services with little or no information, though users may be required to choose a password or other basic account information with the provider. Props Tokens may be received into wallet accounts in any amounts, including in fractional amounts of a whole Props Token.

 

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Users may also be required to affirmatively “claim” Props Tokens before Props Tokens can be issued to their wallet, a process which may be established by each Props App prior to the issuance of Props Tokens to that user. We anticipate that each Props App will provide users with the ability to determine the number of Pending Props which represent the number of Props Tokens that may be issued to their wallet and give them information about how to claim such Props Tokens. Once a user has indicated the number of Props Tokens to be issued and the user pays the “gas” fees for such transfer, the issuance is effected on the Ethereum blockchain.

 

Props Tokens may be received into wallet accounts in any amounts, including in fractional amounts of a whole Props Token. In order for a transaction on the Ethereum blockchain to be initiated to cause the requisite number of Props Tokens to be associated with a “wallet” controlled by the user or grantee and thereby issue and settle a transaction in Props Tokens, the user or grantee must provide a wallet address. In addition, as noted, the user is required to pay “gas” fees with respect to each claim of Props Tokens.

 

Steps to Be Taken by the Props App

 

Once the above steps have been completed, if Props Tokens are being distributed in connection with an app rewards program, rewards may still subject to the completion of additional steps to be completed by a Props App before Props Tokens may be awarded to the user. Props Tokens may only be distributed to users after the completion of a Props App’s own processes to confirm that rewards are validly issued pursuant to the Props App’s terms of use. These extra app-specific requirements that may be imposed by individual Props Apps may vary depending on the requirements and the use case of the particular Props App. See each Props App’s applicable Annex in order to determine any such requirements. In addition, Props Apps may only complete these processes on certain dates or times.

 

After the completion of all of these steps, a transaction will be initiated on the Ethereum blockchain to cause the requisite number of Props Tokens to be associated with a “wallet” specified by the user. See “—Token Transfers” for additional information regarding Props Token transfers.

 

Users must affirmatively “claim” their Props Tokens, as described in “—Steps to be Taken by the User.” Props Apps users who have completed the steps described under “—Steps to Be Taken by the User” may only receive Props Tokens on a delayed basis. Final settlement will only be made once the transfer of Props Tokens to the user’s wallet is confirmed by Oracles on the Ethereum blockchain. In connection with this transaction, a corresponding number of Pending Props will be canceled from the user’s account at that Props App.

 

Prior to receipt of Props Tokens in their wallet, users and other participants have no right to receive Props Tokens, and if the Company or the operator of a Props App were to dissolve or liquidate, or to cease to reward users of that Props App with Props Tokens, then certain users and other participants will have no right to receive Props Tokens, and they may never receive these Props Tokens.

 

Pending Props in Props Apps

 

Prior to receiving Props Tokens, Props App users may receive an indication within a Props App that they may be entitled to receive Props Tokens in the future, upon the completion of additional necessary steps. This may, for example, be shown as “pending Props Tokens” (which we refer to as Pending Props) or with another indication within the Props App that additional steps are necessary for actual Props Tokens to be claimed. Users may see this indication upon contributing content to an app, otherwise participating in broadcasts or if they receive enough other virtual goods that they would be entitled to receive Props Tokens under an app’s rewards program. For example, a user of the YouNow Livestreaming App may receive indication within that app that they have “pending Props Tokens” after completing a broadcast that garnered much interest from other users. See “Annex A: YouNow Livestreaming App Plan of Props Token Usage.” In addition, users of Props Apps may be offered one-time discretionary grants for the purposes of “grandfathering” social status as described under “The Props Apps Annexes.”

 

There are other technological and financial restrictions imposed upon the claim of Props Tokens from Pending Props. Subject to the specific terms of use of each Props App, the user may be required to have accumulated a minimum number of Pending Props prior to claiming the corresponding Props Tokens. In addition, each time a user claims Props Tokens, the user must pay a “gas” fee to complete that transaction on the Ethereum blockchain. The “gas” fee at a given time is subject to fluctuation. Accordingly, even if a user amasses a sufficient amount of Pending Props to complete the necessary steps and to claim the actual Props Tokens, the transaction-based “gas” fee then in effect may make it costly or undesirable to do so.

 

As noted above, users will not receive Props Tokens immediately; users would only receive Props Tokens upon the user’s completion of all required steps described under “Description of the Props Tokens Being Offered—Receiving Props Tokens—Steps to be Taken by the User” and upon the Props Apps’ completion of all required steps described under “Description of the Props Tokens Being Offered—Receiving Props Tokens—Steps to Be Taken by the Props App”. All of these steps must be completed in order for the user to receive Props Tokens in connection with the use of any Props Apps.

 

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Pending Props are accounting mechanisms used by the Props Network participants to signify who is provisionally entitled to receive Props Tokens because they have completed certain in-app activities or received one-time discretionary grant rewards. These in-app activities and the grant offer are necessary but not sufficient for receiving Props Tokens; users who have Pending Props have only an indication that they may receive Props Tokens upon the completion of additional steps necessary to earn them as described under “Description of the Props Tokens Being Offered—Receiving Props Tokens—Steps To be Taken By the User” and the completion of the settlement procedures described under “Description of the Props Tokens Being Offered—Receiving Props Tokens—Steps To be Taken By the Props App.” As such, Pending Props are non-transferrable and exist only on the Algorand blockchain—the public blockchain which is used by the Props Network as a sidechain to the Ethereum blockchain. Each Props App will be able to record Pending Props on the Algorand blockchain, so that all other Props Apps may read these balances and similarly afford that user the benefits of Pending Props. See “Description of the Props Network—The Algorand Blockchain—Pending Props” for additional details regarding the process of recording Pending Props to the Algorand blockchain.

 

Props Apps may assign provisional functionality to users having recorded Pending Props, which may include social media-related benefits. These functionalities will not in all cases be co-extensive with the functionalities of Props Tokens. See “Description of the Props Tokens Being Offered—Functionality for Users” for additional details.

 

Users holding Pending Props may forfeit them upon a violation of the terms and conditions of the Props App that issued the Pending Props, as described in each app’s terms of use. See “—The Algorand Blockchain—Pending Props” for additional details on this process. As a result, users that would, for example, obtain rewards fraudulently will never be entitled to receive Props Tokens for the activity, and Props Apps on the Props Network are thereby afforded some protection from having to reward Props Tokens for, for example, fraudulent activity. Further, Pending Props may expire if a user does not complete the steps described under “Description of the Props Tokens Being Offered—Receiving Props Tokens—Steps to Be Taken by the Use” within 120 days of receiving them. As a result, if a user that is given Pending Props in connection with in-app activities or in connection with our one-time discretionary grant offer simply fails to complete the steps described in “Description of the Props Tokens Being Offered—Receiving Props Tokens—Steps to Be Taken by the User,” the Props App user may never obtain Props Tokens. Each Props App may cancel any such Pending Props. The Company does not anticipate any Props App Developer exercising this discretion to revoke Pending Props, but can provide no assurance that it will not do so. If any Props App Developer were to determine to exercise this discretion to revoke Pending Props, the Company anticipates that the Props App Developer would communicate with any user with such Pending Props prior to revoking them, but cannot require them to do so.

  

In order to limit the role of Pending Props on the Props Network and encourage users to complete KYC and AML checks, Props Apps may limit the number of Pending Props a user may accrue if they have not yet completed the types of steps described under “—Receiving Props Tokens—Steps to Be Taken by the User.” See “The Props Apps Annexes” for additional information.

 

Pending Props are features designed to improve Props App user rewards programs, and as such, enable Props Apps to track in real-time who is entitled to receive rewards and provisionally allow users to enjoy some of the benefits of provisionally earned Props Tokens prior to such Props Tokens being issued on the Ethereum blockchain. Further, Pending Props are Props App features only associated with earning Props Tokens in Props Apps, and as such, are only recorded on the Algorand blockchain for participants in the Props Offering—and are not recorded for participants in our other offerings.

 

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Functionality for Users

 

Props Tokens are digital assets that may entitle holders to access premium features on Props Apps and, also, share these experiences by, potentially, transferring Props Tokens to content creators, friends or other users of the Props App, or otherwise transferring Props Tokens to any other person as described in “—Token Transfers.” As of qualification of this post-qualification amendment, there are seven Props Apps. The first app was created by the Company: the YouNow Livestreaming App, a livestreaming application. The Company operated the YouNow Livestreaming App through February 29, 2020, and then, pursuant to an asset sale agreement executed February 26, 2020, transferred the operation of the YouNow Livestreaming App to a third party acquirer. See “Description of Business—Sale of the YouNow Livestreaming App.” Props Token holders are entitled to premium features in this app simply for holding a sufficient numbers of Props Tokens and need not “spend” them in order to enjoy these features. See “The Props Apps Annexes” for additional information. Additional Props Apps may, in the future, incorporate specific functionalities as well.

 

We believe that the Props Network and the Protocol Rewards Engine will incentivize app developers to attract Props Token holders to actively use their apps by giving Props Tokens additional functionality. We also expect that Props App Developers will enable Props Apps to implement functionalities for Props Tokens in a way that best fits their use case, community and user experience. It is, therefore, expected that Props Tokens will be used differently by different Props Apps across the Props Network. Any app developers working to create future Props Apps will have significant discretion with respect to the functionality that Props Tokens have for users—and developers may create less functionality for Props Tokens or even remove functionalities previously provided in other Props Apps. It is likely that the main check or limitation on this discretion will be that exercised, if at all, by granting or not granting a new app access and connection with the rest of the Props Network.

 

We expect, however, that Props Apps will incorporate functionality for Props Tokens on terms generally consistent with those the Company created in the YouNow Livestreaming App. Props App Developers are likely to seek to use Props Tokens in their apps to enrich user experience in a way that incentivizes more active use of apps and, in turn, enriches experiences for other users. These types of functionalities would also, likely be the type of functionalities created in apps that would become part of the Props Network. See “Description of the Props Network—Props PBC” for additional details regarding admitting new apps. Accordingly, we expect that functionality for Props Apps will generally entitle users to the types of functionalities described below:

 

  Application-specific premium features. Props Tokens may entitle holders to enjoy key features in apps, including, for example, the power to “upvote” or recommend content, a business or a service provider to other users, discounts for the purchase of in-app services, currencies or other in-app virtual goods, additional gameplay features like extra games or content only available to Props Token holders and the ability to vote on various matters relating to the rules of a Props App, its content, rules or desired features, as more fully described below. Each Props App is expected to have premium features for holders of Props Tokens. See “The Props Apps Annexes” for additional information.

 

  Unit of value transfer across Props Apps. Props Token holders may in the future be able to send each other Props Tokens directly, in order to transfer value directly from one user’s wallet to another. See “—Token Transfers” for additional details regarding transfers.

  

  Network Reputation and Status. If a user with Pending Props has linked a wallet address with a Props App, a Props App will be able to read the number of Props Tokens each user has on the Ethereum blockchain (each, a “Props Balance”) and the number of Props Tokens each user may be entitled to receive from a Props App in the future, as recorded to the Algorand blockchain (“Pending Props”). See “Description of the Props Tokens Being Offered—Pending Props.” Because the Props Tokens earned in any single app are fungible and the same as those that can be earned in any other app, this feature of the Props Network will allow users to, effectively, “port” their reputation and status across Props Apps and maintain a network-wide reputation and status.

 

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  In-App Voting. As described above, we anticipate that one in-app feature that may be offered within Props Apps, in the future, is the ability for Props Token holders to vote on in-app matters. We anticipate that all Props Token holders who use an app conducting a vote will be able to participate in such votes—though this would be within the discretion of the particular app. If permitted by the terms of the Props App conducting such a vote, the respective officers, directors, and affiliates who are natural persons of the Company and Props PBC may participate in such votes. Props Apps may, additionally, choose to allow Pending Props holders to vote on in-app matters. We anticipate that notices apprising users of voting opportunities will be communicated within the Props App in order to ensure each user is able to review information about the in-app vote, as well as through social media, and that the results of any of these votes will be similarly communicated.

 

  Props Network Voting. In addition, in the future, Props Token holders may be able to provide advisory votes on key issues affecting the Props Network, including the terms of the Token Code and the total amount of Props Tokens that it may issue, changes to the algorithm in the Protocol Rewards Engine or other updates to the Props Network “smart contracts.” See “Description of the Props Network—The Token Code” for additional details regarding Token Code terms. At a later stage in the Props Network’s development, we may also allow Props Token holders to vote on the choice of Oracles. We anticipate that, to the extent any such voting occurs, all Props Token holders will be able to participate in such votes. Additionally, the respective officers, directors and affiliates of the Company (other than Props PBC and the Company) may participate in such votes. Users that have entries of Pending Props but have not yet completed the steps necessary to convert Pending Props into Props Tokens will not be able to participate in such voting. Notices apprising Props Token holders of voting opportunities will be communicated on the www.PropsProject.com/offering website, through a Form 1-U and through social media channels. The results of any of these votes will be similarly communicated.

 

We anticipate that additional functionalities for Props Tokens will be added in the future. See the sections of this offering circular captioned “Description of the Props Tokens Being Offered—“Smart Contract” Modifications and Changes to Token Functionality” and “Description of the Props Tokens Being Offered—Third Party Token Modifications and Changes to Functionality” for further details. In all cases, however, the functionality of Props Tokens in any particular Props App will be subject to the terms and conditions of that Props App, and users may be denied the functionalities in accordance with that Props App’s terms and conditions.

 

In order for a Props App user to use Props Tokens in a Props App, the user may be required to “link” a wallet with the Props App, which may require verification steps.

 

Token Supply

 

The terms of our Token Code provide for the issuance of no more than 1,000,000,000 Props Tokens. 400,000,000 of these Props Tokens have been issued or are reserved for issuance pursuant to the Protocol Rewards Engine’s daily app rewards and Oracle rewards; 500,000,000 Props Tokens have been allocated to wallets controlled by the Company; and 100,000,000 Props Tokens have been issued to wallets controlled by Props PBC. We believe we have strategically earmarked these Props Tokens for uses in a way to best encourage the growth of the Props Network. Of the total number of Props Tokens available to be issued, we group these intended uses under five categories, as described below:

 

  We anticipate that all of the 400,000,000 Props Tokens reserved for issuance pursuant to the Protocol Rewards Engine will be used for daily app rewards or as Oracle rewards. See “Description of the Props Network—The Token Code” for additional details. Of the 400,000,000 Props Tokens allocated for this purpose, we are qualifying with the offering statement in which this offering circular is included up to 80,000,000 additional Props Tokens for distribution, in addition to the 135,000,000 Props Tokens originally qualified for distribution with the offering statement in which this offering circular is included.  As of July 15, 92,088,879 Props Tokens were issued by the Protocol Rewards Engine as daily app rewards or Oracle Rewards, including 30,457,557 Props Tokens issued to us. In the future, we intend to issue the remaining  Props Tokens in reliance on the exemption from registration provided by Regulation A. See “Description of the Props Token’s Role in Helping to Align Incentives of Network Participants—Incentives for Props App Content-Creators and Other Props App Users” and “—Sales By Props App Developers.” The sum of the maximum “aggregate offering price” and “aggregate gross sales”, as those terms are defined in Rule 251(a) of the Securities Act, of all of our offerings under Regulation A may not exceed $75,000,000 in any twelve month period.

 

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With respect to daily rewards, we expect that approximately 0.03475% of the remaining Props Tokens in the total pool to be allocated for issuance to operators of Props Apps or to end users each day.

 

With respect to Oracle rewards, each day, approximately 0.001829% of the remaining Props Tokens in the total pool will be allocated for compensation to Oracles for their efforts in acting as oracles from the Algorand blockchain to the Protocol Rewards Engine on the Ethereum blockchain. The Oracle rewards due to the Company in connection with its efforts as a Oracle will be allocations to the Company—which will effectively allow the Company to then make primary distributions as further described in “Plan of Distribution” or in transactions not qualified under this offering circular, for cash or other consideration. Oracle rewards due to third party Oracles will be paid as further described in “Plan of Distribution” and under “Description of the Props Network—The Protocol Rewards Engine—Oracle Rewards Allocations.”

 

  We anticipate that all of the 100,000,000 Props Tokens issued to wallets controlled by Props PBC in private placements will be distributed by Props PBC on a discretionary basis in the form of grants or expense reimbursements to developers building either applications on the Props Network or Props Network infrastructure, strategic content partners and other entities directly supporting the growth of the Props Network, advisors or, in transactions not qualified under this offering circular, sold for cash proceeds. Of these 100,000,000 Props Tokens, as of July 15, 2021, Props PBC issued 17,100,000 Props Tokens to Props Apps as grants and 8,700,000 Props Tokens remained issuable to Props Apps upon the achievement of certain milestones. In addition, as of July 15, 2021, Props PBC issued 43,495,675 Props Tokens to advisors (including 292,184 Props Tokens issued to a former adviser as liquidated damages in connection with the termination of an adviser relationship), 1,168,750 Props Tokens remained issuable to advisors upon the vesting of these tokens, and 587,127 Props Tokens remained issuable upon the provision of a wallet address to us by certain of these advisors. Of the 100,000,000 Props Tokens that have been issued to wallets controlled by Props PBC, we are qualifying with the offering statement in which this offering circular is included up to 37,500,000 additional Props Tokens for distribution, in addition to the 45,000,000 Props Tokens originally qualified for distribution with the offering statement in which this offering circular is included. In the future, we may qualify these distributions by Props PBC under Regulation A. See “Description of the Props Token’s Role in Helping to Align Incentives of Network Participants—Grants to Key Network Participants” and “—Sales by Props PBC to Support its Operations.” The sum of the maximum “aggregate offering price” and “aggregate gross sales”, as those terms are defined in Rule 251(a) of the Securities Act, of all of our offerings under Regulation A may not exceed $75,000,000 in any twelve month period.

 

  We anticipate that approximately 268,000,000 of the Props Tokens allocated to wallets controlled by the Company will be issued by the Company to the Company’s equity investors, and current and future employees, subject in certain cases to certain vesting requirements, in reliance on the exemption from registration provided by Regulation D, though in the future, Props Tokens issued to current and future employees could be issued in compliance with Rule 701 under the Securities Act. We may, however, determine to use these Props Tokens to finance the Company’s operations or for other purposes in the future, including to satisfy an option to purchase 70,000,000 Props Tokens we granted to GSR Markets Limited.

 

  As of July 15, 2021, we issued 228,946,786 of the Props Tokens allocated to wallets controlled by the Company to persons who received rights to receive Props Tokens in private placements, and 2,633,900.36 remain issuable pending confirmation of wallet addresses. We issued these Props Tokens in compliance with exemptions from registration under the Securities Act. See “Certain Relationships and Related Party Transactions—Token and Warrant Sales” and “Other Offerings” for additional information, including for information regarding Props Tokens that have already been distributed.

 

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  As of July 15, 2021, we issued 4,829,123 of the Props Tokens allocated to wallets controlled by the Company to certain centralized digital asset exchanges upon which Props Tokens are listed and certain other service providers who received rights to receive Props Tokens as compensation, subject in certain cases to certain vesting requirements. These Props Tokens were issued in compliance with exemptions from registration under the Securities Act. See “Certain Relationships and Related Party Transactions—Token and Warrant Sales” and “Other Offerings” for additional information, including for information regarding Props Tokens that have already been distributed.

 

The total number of issuable Props Tokens is controlled by the Token Code. The Token Code’s terms, including the number of total Props Tokens issuable, may be updated and changed in the future. Currently, Props PBC is the Controller – the owner of the account with the ability to effect these changes to the Token Code and may, therefore, effect this change. Further, it is possible that it may be necessary for Props PBC to effect this change at some point in the future; because of the fixed number of Props Tokens and the incentive structures designed for the Props Network described in “Description of the Props Token’s Role in Helping to Align Incentives of Network Participants,” it is possible that key network participants will not be adequately incentivized by Props Tokens as the number of Props Tokens allocated or issued decreases over time, if the value of Props Tokens does not rise in the future. See “Risk Factors—We may need to increase the total number of Props Tokens issuable by the Token Code in order for the Props Network to operate in the future.

 

Factors Affecting the Value of Props Tokens

 

The fair market value of your Props Tokens will be difficult to predict. However, we expect the commercial value of Props Tokens on the Props Network to at least be an important factor in the determination of such value. This commercial value will depend on the number of applications on the Props Network, the number of users using those applications, and the extent to which those applications require or encourage the use of Props Tokens. The total number of Props Tokens available at any time relative to their potential use on the Props Network, and the potential increase in that number, will affect the value of your Props Tokens, and may dilute that value significantly. See “Risk Factors—The value of your Props Tokens will, in part, depend on the supply relative to demand for Props Tokens in the Props Network. Because we anticipate issuing a significant number of Props Tokens in the future, both through the Protocol Rewards Engine and, potentially, through direct issuances, the value of Props Tokens will likely be diluted and demand for Props Tokens from Props Network users will need to increase in order for Props Tokens to maintain their value.” Further, there is no guarantee that a person who receives Props Tokens in one type of distribution will receive terms that are equal to or more advantageous than the terms of another type of distribution, and not all forms of distribution will be available to all individuals.

 

These factors will, in turn, depend on many factors outside of our control, making the value of the Props Tokens difficult to predict. In addition, the liquidity of the Props Tokens may influence their fair market value, which may depend on the existence of secondary trading platforms. Any secondary market prices may reflect valuation for speculative purposes, which may or may not reflect the underlying value of the tokens. See “Risk Factors—The prices of digital assets like the Props Tokens are extremely volatile, and the value of Props Tokens may be materially adversely affected as a result.” There are currently no national securities exchanges or exchanges that have been approved by FINRA or registered under Form ATS with the SEC to support the trading of Props Tokens on a secondary market. However, Props Tokens are currently listed for trading by non-U.S. persons on three centralized digital asset exchanges outside of the United States with which we have entered into agreements, as well as four centralized digital asset exchanges with which we have not entered into any agreements and two decentralized exchanges with which we have not entered into any agreements. In addition, we have engaged a market maker to facilitate trading of Props Tokens on those centralized exchanges. The price at which transactions in Props Tokens are executed on such digital asset exchanges may provide an indicative valuation of Props Tokens. For further discussion of trading markets, see “—Secondary Markets” below.

 

Props Tokens will not provide you with any enforceable rights against the Company, its affiliates or any Props App developer, including any rights to receive payments, any control rights or any claims on assets. Holders of Props Tokens will not receive a right to any repayment of principal or interest, any interest in the profits or losses of the Company, its affiliates, or any Props App Developer, any rights to distributions from the Company, its affiliates, or any Props App Developer or any legal or contractual right to exercise control over the operations or continued development of the Company, its affiliates, or any Props App Developer. Holders of Props Tokens may not have any right to vote on any matters relating to the Company, its affiliates or any Props App Developer, including voting for board members. In the future, Props Token holders may be able to vote on in-app matters within one or more Props Apps and, in the future, we may potentially allow Props Token holders to vote on an advisory basis to help guide Props PBC in making key decisions affecting the Props Network based on their stake of Props Tokens. Further, we are not aware of any binding obligation on the Company with respect to the Props Tokens or the holders of the Props Tokens following the Props Tokens’ delivery. Any profit that you may receive on your holdings of Props Tokens may be based on the commercial utility of the Props Tokens, or on potential capital appreciation associated with the Props Tokens to the extent realizable through trading activity. As a result, information disclosed in this offering circular and elsewhere regarding our company and its ability to build the network may be relevant to the value of your investment, but the relevance may be limited and indirect.

 

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The material terms of the Props Tokens are described under “Description of The Props Tokens Being Offered—Terms of the Token Code.” Further, Props Tokens may have certain functionalities inside of Props Apps either now or in the future, including application-specific premium features, transfer to other users for no payment (“tipping”), voting and network reputation and status. See “Description of The Props Tokens Being Offered—Functionality for Users” for additional detail.

 

Token Transfers

 

Receiving Props Tokens requires a “wallet”—which is the form in which a public key can be presented and recorded on the Ethereum blockchain. Wallet addresses are associated with Props Token ownership and, therefore, may be used to indicate the ownership of digital assets. Any “wallet” software compatible with Ethereum will support interaction with Props Tokens, and the Company is aware of several wallet providers that satisfy this requirement, including Coinbase Wallet, Trust Wallet, Metamask and others. Users generally may establish a wallet through these services with little or no information, though users may be required to choose a password or other basic account information with the provider.

 

Props Tokens may be transferred by submitting a transaction to the Ethereum network to run the “transfer” function in the Token Code. See “—Terms of the Token Code” above. In order to do this, the user must know the public key wallet address of the intended recipient as generally described above, and include that information in the submitted transaction when running the “transfer” function. If using wallet software, a user will need to fill out the necessary information (recipient and amount), and the wallet will then generate a transaction, which is generally asks the user to confirm. Upon confirmation and payment of the “gas” fee, which may be significant, the wallet software will cause the transaction to be signed with the user’s private key, which generates a digital signature, and the transaction is then submitted to the Ethereum network.

 

The Props Tokens that are distributed under this offering circular and issued to users on the Ethereum blockchain will be transferable (meaning that users will be able to initiate the “transfer” function described above) both outside of Props Apps and, in the future, within Props Apps. In the future, users of any Props App may be able to transfer these Props Tokens directly to other users of that Props App by tipping other users. Outside of Props Apps, these Props Tokens may be traded using third party wallet software or Ethereum client software, and these trades may be made as part of a secondary trading market (either through an exchange registered with the SEC under Regulation ATS, or a privately run bulletin board), if any such market exists. There are currently no national securities exchanges or exchanges that have been approved by FINRA or registered under Form ATS with the SEC to support the trading of Props Tokens on a secondary market. Props Tokens are, however, listed for trading on three centralized digital asset exchanges outside the United States with whom we have entered into agreements, as well as four centralized digital asset exchanges with which we have not entered into agreements and two decentralized digital asset exchanges with which we have not entered into agreements. For further discussion of trading markets, please see “Secondary Markets” below. For further discussion of third party wallet software, please see “—Receiving Props TokensSteps to be Taken By the Users” above. The rights to receive Props Tokens pending the completion of processes described in “—Receiving Props Tokens” may not be transferred.

 

Running this “transfer” function initiates a transaction on the Ethereum blockchain that will submit a record of this communicated transaction to all persons running Ethereum blockchain “node” software. The submission of this transaction is irrevocable once initiated. See “Risk Factors—Props Token transactions may be irreversible, and, accordingly, losses due to fraudulent or accidental transactions or technology failures in your wallet software may not be recoverable” for additional information. Persons acting as validators of Ethereum transactions on the Ethereum blockchain, which are often referred to as a “miners,” receive indication that the transaction was submitted. In order for the transaction to become a part of the Ethereum blockchain’s record of transactions, an Ethereum validator must include the transferring transaction in a “block” written to the Ethereum blockchain. See “Risk FactorsThe operation of the Props Tokens and the Props Network depends on ongoing Props Token transaction validation efforts, which are conducted, in large part, by third parties that we do not control on the Ethereum blockchain.” This is Ethereum’s process of “mining,” and the result of this process is that the Ethereum blockchain includes a record showing a transaction in which the requisite number of Props Tokens to be associated with a “wallet” specified by the user. When the transaction is added to a block on the Ethereum blockchain by a miner, the transfer function in the Token Code is run, which adjusts the Props Token balances of the sender and receiver. At some point in the future, the Ethereum blockchain is expected to switch its consensus protocol to either a hybrid “proof-of-work” and “proof-of-stake” or “proof-of-stake” consensus protocol system.

 

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Generally, blocks cannot be removed from the blockchain, but during the validation process for large blockchains like Ethereum, competing blockchains may arise with respect to the last few blocks on the blockchain. As a result, a block is often not considered to be irreversibly on the blockchain until several additional blocks have been added to it and occasionally blocks with a handful of confirmations can be dropped and modified. Applications or other persons that account for Ethereum tokens that do not wait a sufficient period before treating blockchain as permanently written may lose assets and funds in exchange for blockchain payments that are never completed. See “Risk Factors—The technology underlying digital asset and blockchain technology is subject to a number of known and unknown technological challenges and risks that may prevent wide adoption and use of the Props Network and the Props Tokens” for additional information.

 

To achieve consensus regarding the correct copy of the database, the software creating the blockchain enforces certain rules about writing to the database. Although these rules may vary, they generally include the following:

 

  1. Records must be valid: Records added to the database must conform to a certain format and follow certain protocol rules. This helps ensure that the nodes on the blockchain network can read the records, but also that the transaction history of records makes sense—that, for example, a user owns the Props Token they are transferring to another user because of the existence of a previous transaction where they took ownership of it. Important to this rule is that the record must generally contain digital signatures from the participants for authentication purposes.

 

  2. Records must be added in sequence: Blockchains implement rules to ensure that records are written in the correct order. For example, on the Ethereum blockchain each new block written to the blockchain must have appended to it a digital fingerprint of the last block written to the blockchain. Since each new block contains a reference to the previous one and all network operations in a block are ordered within a block, all network operations have a definite ordering.

 

  3. Adding blocks to the blockchain is expensive or “hard:” This means that if an Ethereum miner wants to add a record or block of records to the blockchain, they must invest something—for example, the computing power necessary to solve a cryptographic puzzle (such as the “proof-of-work”), which is currently used in Ethereum. At some point in the future, the Ethereum blockchain is expected to switch its consensus protocol to either a hybrid “proof-of-work” and “proof-of-stake” or “proof-of-stake” consensus protocol system.

 

  4. Users pick out the longest blockchain available on the network as the correct version: When combined with the previous rules, this makes a blockchain very expensive to successfully forge, because forging a blockchain of a certain number of blocks will require the expenditure of computing power necessary to create a blockchain of that size—and if the blockchain in question is not the longest blockchain on the network, it will not be accepted by other Ethereum users. This is why once a block gets a sufficient number of confirmations on the network—in other words, once a certain number of blocks or network operations have been subsequently added to a version of the blockchain in which it is included—it therefore becomes improbable for anyone to delete or modify a block. This means that, effectively, records can only be added to the blockchain—they can never be deleted.

 

  5. Independent verification: A computer on Ethereum should be able to independently verify (without contacting any other computer or user) that all the above rules have been complied with when it inspects a copy of the blockchain database that it downloads off of the network-in other words, that the records included are valid, that they contain correct solutions to the mathematical puzzle (or reflect the expenditure of the largest amount of digital assets out of competing blockchains), and that each record is linked to the last one such that no records have been deleted and the database is complete.

 

“Gas” Payments and Token Transfers

 

To perform any transactions on the Ethereum blockchain, including functions with respect to the Token Code, you must pay a “gas” fee. In order to record a transaction on the Ethereum blockchain, including with respect to the issuance or transfer of Props Tokens, the “miners” on the Ethereum blockchain—who maintain and write the publicly-available record of these transactions—must be paid a “gas” fee to incentivize the performance of their services. As a result, all transfers of Props Tokens, which will be effected on the Ethereum blockchain, require the payment of transaction fees in the form of “gas” payments. Props Token holders incentivize Ethereum validators to record the transaction in the record comprising the Ethereum blockchain by paying this “gas” payment as described below.

 

This “gas” fee is paid in the form of Ether, the native currency of the Ethereum blockchain. The amount of any “gas” fee to be paid to Ethereum miners may vary and is determined by the person initiating the transaction. If a higher “gas” fee is paid for a transaction, the transaction is more likely to be quickly recorded to the Ethereum blockchain; transactions with lower “gas” fees may take longer to record on the Ethereum blockchain, which could result in delays in a user’s ability to enjoy the benefits of a received Props Token. You will be responsible for paying all “gas” fees to transfer your Props Tokens. As a result, if you do not own Ether or are unwilling to spend it in connection with the transfer of Props Tokens, you may not be able to transfer Props Tokens.

 

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In addition, Props Apps users who engage in activities that could result in the award of Props Tokens must pay a “gas” fee in order to receive or transfer such Props Tokens. Each Props App Developer may in the future pay transaction fees for Props Token transfers occurring through such Props App Developer’s respective Props App(s), but there can be no assurance that any Props App Developer will do so. To the extent that users or other Props Token holders wish to transfer Props Tokens under circumstances where the Props App Developer will not pay the Ether “gas” fee associated with a transfer of Props Tokens, these users and all other Props Token holders will be responsible for paying Ether “gas” fees in order to complete a transfer.

 

“Gas” fees for the recording of Pending Props on the Algorand blockchain are not paid by users of Props Apps.

 

Secondary Markets

 

The Props Tokens are designed to be used on the Props Network and derive their value from this use, but Props Tokens may be transferred on the secondary market as well (to the extent that a secondary market exists). The Props Tokens distributed in these offerings will not be restricted securities under federal securities law, and the Company anticipates that these Props Tokens will be usable without restriction on the Props Network, including, in the future, for any tipping functions. There are, however, currently no national securities exchanges or exchanges that have been approved by FINRA or registered under Regulation ATS with the Securities and Exchange Commission to support the trading of Props Tokens on the secondary market. If such a registered exchange or alternative trading system is approved by FINRA for the trading of Props Tokens by investors subject to the United States federal securities laws and does commence operations, we will notify investors by filing a supplement to this offering circular (if these offerings are still continuing at that time) and a Form 1-U, and posting a notice on https://www.props.xyz/token, and seek to have the Props Tokens listed for trading on such exchange or alternative trading system to the extent its listing requirements or rules can reasonably be complied with by the Company. Holders of Props Tokens that wish to transfer their Props Tokens will be required to make their own determination as to whether such transfer is in compliance with state and foreign securities laws.

 

We also expect that any exchange that might be approved in the future would develop its own criteria with respect to which digital assets it lists for trading, which may include criteria we are unable or unwilling to meet. For example, exchanges may only allow the listing of digital assets that use certain blockchains (for example, Ethereum, or the Bitcoin blockchain), as integration of each new blockchain into a platform will require additional work and add to the technical complexity of its operation. In addition, these exchanges may form partnerships or alliances with issuers or financial backers of digital assets other than the Props Token, which may lead them to exclude the Props Token or other digital assets from listing as a potential competitor.

 

In the event that no such exchange is authorized by FINRA, we may develop an internal bulletin board in compliance with SEC guidance, permitting price discovery for individuals wishing to purchase and sell Props Tokens.

 

Since January, 2021, we have entered into agreements with three centralized digital asset exchanges outside the United States to list Props Tokens for trading. Those agreements provide that trading on such exchanges is for persons who are not U.S. Persons (as defined under Regulation S under the Securities Act), and such exchanges have made commitments to us that Props Tokens will not be available for trading by U.S. Persons. In addition, four other centralized digital asset exchanges with which we have not entered into any agreements have chosen to list Props Tokens for trading, and as such they have not made commitments to us that Props Tokens will not be available for trading by U.S. Persons. Props Tokens are also listed for trading on two decentralized digital asset exchanges with which we have not entered into any agreements, and as such they have not made commitments to us that Props Tokens will not be available for trading by U.S. Persons.

 

On October 19, 2020, we entered into a Liquidity Consulting Agreement with GSR Markets Limited (“GSR”) pursuant to which GSR assists us in improving liquidity in the Props Tokens on centralized digital asset exchanges outside the United States. Under the agreement, GSR agreed to consult with respect to additional centralized exchanges on which Props Tokens could be listed and assist in obtaining such listing. In addition, GSR agreed to provide market making services with respect to Props Tokens on these non-U.S. centralized exchanges. Under the terms of the agreement, we loaned 70,000,000 Props Tokens to GSR for it to use to fulfill its obligations under the agreement. GSR has the right to pay back the loan of Props Tokens either in Props Tokens or at a fixed price per Props Token. In addition, under the terms of that agreement, we agreed to reimburse GSR’s trading fees in connection with the provision of services by GSR.

 

“Smart Contract” Modifications and Changes to Token Functionality

 

We expect that, in the future, the Company may make one or more modifications to the Token Code, as well as the Protocol Rewards Engine, in order to implement additional functionality for holders of the Props Tokens or otherwise modify how the Props Network works, and the Company reserves the right do so, provided that the Company will not remove of any of the rights of Props Token holders described under “—Terms of the Token Code.” In addition, the operator of each Props App is not expected to remove any of the functionalities for Props Tokens, although we cannot ensure that they do not do so. In addition, the operator of a Props App may vary or remove these functionalities if user demand for that Props App falls below a minimum viable level for a reasonable period of time, in their judgment. The modifications that the operator of a Props App may attempt to effect may include, without limitation, changes in the total number of Props Tokens issuable pursuant to the Token Code and fixes to bugs in the Token Code’s code.

 

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In order to foster a more active Props Network community, the Company may in the future seek advisory votes on such changes. See “Functionality for Users—Props Network Voting” for a description of potential future voting. The Company, however, reserves the right, in its sole discretion, to initiate these changes without obtaining advisory votes. Upon the adoption of any changes to the Token Code or Protocol Rewards Engine, the Company will also file a supplement or amendment, as required, to this offering circular describing the new functionality in the Token Code or the Protocol Rewards Engine. Any changes that substantively change functionality will also be made with at least thirty day’s public notice and with the approval of Props PBC. Upgrades that only fix bugs in the Token Code or Protocol Rewards Engine’s code will be made with the approval of Props PBC only, without prior public disclosure.

 

As described in “—Functionality for Users,” many of the benefits of holding Props Tokens are determined by Props Apps and not by the terms of the “smart contracts” on the Props Network. Props Apps provide functionality for the Props Tokens. The basic functionalities for Props Tokens in Props Apps are as described in the Props Apps Annexes.” We expect that, in the future, the operator of a Props App may propose one or more modifications to the functionalities for Props Tokens in that Props App. Third parties may, in addition, create additional functionalities for Props Tokens in additional apps that could be added to the Props Network in the future. The operator of each Props App may implement additional functionality for Props Tokens in that Props App or modify the functionalities for Props Tokens in that Props App, or create additional or different functionalities.

 

Third Party Token Modifications and Changes to Functionality

 

Third party groups or individuals involved in the network may at any time propose upgrades or changes to the open-source software underlying the Props Tokens in a way that could result in the creation of a “fork” in the Ethereum blockchain or the Algorand blockchain. The term “fork” is used to refer both to any situation where there are two or more competing versions of a blockchain on a network (a situation that may arise and resolve itself in the ordinary course of network operations due to lags in communication between persons running Ethereum software or Sidechain Node) and any software update that is proposed for adoption by the nodes of a blockchain network that may result in a persistent fork on the network, with core nodes that adopt the update recognizing one version of the blockchain and those which do not recognizing another. A fork on the Ethereum blockchain could also effectively create duplicate versions of the Props Network’s “smart contracts.”

 

We do not believe that third party modifications to the open-source software underlying the Props Tokens or the Props Network present significant risks to the Props Network or Props Token holders. Because Props PBC will be the Controller of the Props Network’s “smart contracts,” Props PBC would remain the Controller of these “smart contracts” on each fork in the Ethereum blockchain. If a fork on the Ethereum blockchain created duplicate versions of the Props Network’s “smart contracts,” Props PBC would be able to determine which version of the Props Network’s “smart contracts” should continue to be supported and updated, and which version of the Props Network’s “smart contracts” should not continue to receive technical support because it was no longer being used by the Props Apps. See “Description of the Props Network” for additional information regarding the Controller functions. Due to the safeguards described above, the Company expects it will retain control over the Props Network, even after a continuing fork or other modifications by third parties, and that the Company will be able to ensure that the Props Network is not substantially affected by third party modifications to the Props Network’s software.

 

We anticipate that Props Token holders will be made aware of the existence of any such modifications to the Props Network if such modifications result in a persistent fork in the Ethereum blockchain. If this occurs, we expect that we will directly communicate with Props Token holders through Props Apps or required public filings through which we will explain how the Company and Props PBC intend to respond to the fork. We will not file any offering circular with respect to competing tokens created through any fork under federal securities laws because we will not provide technical support to a duplicate copy of the Token Code and the Props Tokens. We also do not believe that any such filing would be important to Props Token holders, because Props Token holders will continue to hold Props Tokens supported by the Company and the Props Network and will be properly apprised of which record of transactions is legitimate within the Props Network. In addition, the Company would not file periodic reports with respect to the tokens in any competing record of transactions.

 

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As described in “—Functionality for Users” and above under “— “Smart Contract” Modifications and Changes to Token Functionality,” many of the benefits of holding Props Tokens are determined by Props Apps and not by the terms of the “smart contracts” on the Props Network. Props Apps provide functionality for the Props Tokens. The basic functionalities for Props Tokens in Props Apps at the time of qualification are as described in “The Props Apps Annexes.” Additional functionalities for Props Tokens may also be enabled by Props Apps that are created or that join the Props Network in the future. As described in “Description of the Props Network,” we have designed the Props Network so that it may incorporate Props Apps into a functioning network and token economy as third party apps have begun operating on the Props Network. In the future, these third parties may create additional Props Apps, which may add additional functionalities for Props Tokens. In the future, we may file an amendment or a supplement to this offering circular with respect to issuances of Props Tokens to additional Props App Developers and the users of their Props Apps. See “Description of the Props Network—The Props Apps” and “Description of the Business—Government Regulation” for additional detail.

 

Eligibility for Future Sales

 

Prior to these offerings, no public market for Props Tokens existed, and a liquid secondary trading market for Props Tokens in the United States may not develop or be sustained after these offerings. Future sales of Props Tokens could adversely affect prevailing market prices of the Props Tokens. Sales of Props Tokens, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to sell Props Tokens in the future.

 

In general, persons who have beneficially owned restricted Props Tokens for one year and one day, and any affiliate of the Company who owns either restricted or unrestricted Props Tokens, are entitled to sell their securities without registration with the SEC under an exemption from registration provided by Rule 144 under the Securities Act. Persons who have beneficially owned Props Tokens for at least one year and one day but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of Props Tokens that does not exceed 1% of the number of Props Tokens then outstanding. If the Props Tokens are listed on a national securities exchange, then such affiliates would also be entitled to sell, if greater, the average weekly trading volume of the Props Tokens on such exchange during the four calendar weeks preceding the filing by such person of a notice on Form 144 with respect to the sale. Such sales by affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144.

 

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DESCRIPTION OF THE PROPS TOKEN’S ROLE IN HELPING TO ALIGN INCENTIVES OF
NETWORK PARTICIPANTS

 

We expect Props Tokens to play several key roles in the incentive structures that will be a part of the Props Network infrastructure. Specifically, Props Tokens will serve as the currency of payment in the Props Network for performing these roles. As a result, the success of the Props Network depends on the ability to allocate and issue Props Tokens in exchange for various services and actions to be performed on the Props Network, as well as on the token network effects that are created by a large user base of Props Tokens users across multiple apps.

 

The roles involving the types of distributions being qualified under this offering circular are described below:

 

  Incentives for the Use of Props Apps:

 

As discussed in “Description of the Props Network—The Props Protocol Rewards Engine,” an algorithm inscribed into a “smart contract” on the Ethereum blockchain takes into account the overall user activity that each Props App on the Props Network generates, then makes daily allocations for issuance based on the amount of daily usage of Props Apps. We anticipate that these distributions will incentivize the development and operation of popular Props Apps.

 

Upon allocation to a Props App Developer, the Protocol Rewards Engine will distribute Props Tokens to that Props App developer. See “Description of the Props Network—the Protocol Rewards Engine” for additional detail. We anticipate that, in general, 65-70% of the Props Tokens distributed to a Props App developer will then be distributed as rewards to users of the Props App, although individual Props App Developers may distribute a greater or lesser percentage. We will file a Form 1-U publicly disclosing the number of Props Tokens distributed to users of Props App quarterly, promptly following the end of each of our fiscal quarters. The Company is qualifying with the offering statement in which this offering circular is included the distribution of Props Tokens by the Company to users of the Props Apps.

 

For example, we have entered into agreements with the Props App Developers governing the distribution of Props Tokens to their users, two of which are included as exhibits to the offering statement in which this offering circular is included. If any of these agreements were to be terminated and the applicable Props App Developer were to cease operating Props Apps on the Props Network, we will file a supplement to this offering circular announcing such termination. Each Props App Developer’s method for determining the amount of Props Tokens to be issued to its users for in-app activities is described under “The Props Apps Annexes. Each Props App Developer offering Props Tokens distributed to such Props App Developer to its users will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act with respect to these Props Tokens.

 

Our officers, directors, employees and their affiliates may be eligible to receive rewards of Props Tokens for their in-app activities in a Props App in the same manner as any other user of a Props App.

 

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  Incentives for the Development and Operation of Props Apps:

 

Props Tokens may be distributed as rewards for the development and operation of Props Apps developed by third parties. An algorithm programmed into the Protocol Rewards Engine will allocate rewards for operation of Props Apps among the Props App Developers, and upon allocation to a Props App Developer, the Protocol Rewards Engine will distribute Props Tokens to the applicable Props App Developer. The Company is qualifying with the offering statement in which this offering circular is included the distribution of these Props Tokens by the Company to Props App Developers. See “Description of The Props Token’s Role in Helping to Align Incentives of Network Participants—Incentives for Props App Content—Creators and Other Props App Users” for additional detail. Information about new Props Apps and new Props Developers will be added to the offering statement in which this offering circular is included by amendment or supplement, as appropriate.

 

As discussed below under “—Sales by Props App Developers,” Props App Developers will be free to use any Props Tokens they may receive in whatever way they see fit, including by selling them, and any Props App Developer will need to evaluate for itself whether such resale is being made in compliance with United States federal and state securities laws.

 

Because each Props App Developer will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act, the issuance of Props Tokens from the Company to such Props App Developer may be characterized as an underwriting commission. Even to the extent that these issuances could be characterized as commissions, we do not believe that the any Props App Developer is acting as a broker-dealer, and therefore, do not believe that any compensation arrangements must be cleared with FINRA.

 

  Grants to Key Network Participants:

 

One of the key roles Props PBC plays in supporting the Props Network is supporting and encouraging the efforts of persons developing key apps or otherwise contributing to Props Network development efforts. As a result, Props PBC makes grants to key network participants as a means to encourage additional development on the Props Network and the Props Network’s growth. See “Plan of Distribution” for additional details. We believe there are four primary methods of contributing to network development efforts that will qualify persons for the award of grants under the Props PBC Offering: 1) developing apps on the Props Network or integrating Props Tokens into existing apps, 2) contributing to the development of software on the Props Network, 3) developing creative content and 4) providing business advice and strategic consulting to promote the growth and development of the Props Network. In the future, we may determine other methods of contributing to network development efforts that would be eligible for grants under this offering.

 

We are qualifying with the offering statement in which this offering circular is included the secondary distribution by Props PBC of Props Tokens as grants to these key Props Network participants. All of the distributions made by Props PBC and qualified under this offering circular will be made for this purpose.

 

Distributions of Props Tokens for grants will be made at Props PBC’s sole discretion, taking into account factors including, but not limited to, the following: the potential grantee’s potential contribution to the further development of the Props Network infrastructure or growth of the number of active users of the Props Network; the number of Props Tokens that the potential grantee would need in order to complete its project successfully; Props PBC’s evaluation of the potential grantee’s ability to complete the project; the level of risk, if any, that failure of the potential grantee’s project presents to the Props Network; the number and size of grants made in a given quarter or year; and the needs of the Props Network’s community and how the project will contribute to the Props Network’s economy.

 

In connection with integrating Props Tokens into the Listia app, Props PBC has awarded a grant of 1,500,000 Props Tokens to Listia Inc.; Listia Inc. has not yet received these Props Tokens. See “Annex D: Listia Inc. Plan of Props Token Usage for Listia App.”

 

In connection with integrating Props Tokens into the Tegger app, Props PBC has awarded a grant of 497,600 Props Tokens to Tegger DLT Inc.

 

Props PBC has awarded a grant of 1,800,000 Props Tokens to Roomi Inc. in connection with prior discussions concerning the integration of the Roomi App; Roomi Inc. has not yet received these Props Tokens.

 

Props PBC has awarded grants of a total of 500,000 Props Tokens to certain SuperWorld executives in exchange for business development services. Those Props Tokens are subject to certain vesting requirements.

 

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  Payments to Third Party Oracles:

 

Third parties may earn Oracle rewards as compensation for acting as an oracle function from the Algorand blockchain to the Protocol Rewards Engine on the Ethereum blockchain. Daily Oracle rewards to be paid to third party Oracles will be issued directly from the Protocol Rewards Engine. Each Oracle rewards allocation for a given day will be in an amount equal to, in aggregate, approximately 0.001829% of the remaining Props Tokens in the Daily Rewards Pool each day, which will be split pro rata among all Oracles.

 

In addition, Props Tokens will also play key roles in ways that don’t require qualification or don’t currently require qualification under this offering circularand that may be addressed in future amendments or supplements to this offering circular. These key functions are described below:

 

  Powering Functionality in Props Apps:

 

As discussed in “Description of the Props Tokens Being Offered—Functionality for Users,” Props Tokens may entitle holders to access premium features on Props Apps and, also, in the future, share these experiences by transferring Props Tokens as tips to content creators, friends, other users, or otherwise transferring Props Tokens to any other person as described in “—Token Transfers.” As described above, we also expect that, in the future, Props Token holders will be able to vote on in-app matters, and in the future, may be able to provide advisory votes on key issues affecting the Props Network. See “Description of the Props Network—Props PBC” for additional details.

 

  Sales by Props App Developers:

 

Props App Developers will be free under the network’s rules to use any Props Tokens they may receive in whatever way they see fit, including by selling them. Props App Developers may, thereby, support the continued operation of Props Apps popular with Props Network users. The number of Props Tokens that may be sold by Props App Developers will be determined in the sole discretion of each Props App Developer receiving Props Tokens as daily rewards.

 

While any current or past Props App Developer is free to sell Props Tokens it holds, including those it gains control over as a result of the operation of the Protocol Rewards Engine, none of these sales is being qualified under this offering circular.

 

Props App Developers may also be free to sell any Props Tokens they may receive, including those they are issued as a result of the operation of the Protocol Rewards Engine. Such sales are not, however, being qualified under this offering circular, and any Props App Developer will need to evaluate for itself whether such resale is being made in compliance with federal and state securities laws. See “Description of the Props Network—The Props Apps,” “Description of the Business—Government Regulation” and “Risk Factors—We may need to address additional regulatory issues in connection with our plans for the further development of the Props Network.” for additional detail.

 

  Sales by Props PBC to Support its Operations:

 

Props PBC may sell Props Tokens to support its own operations. We are not qualifying with this offering circular any of these sales for cash by Props PBC.

 

Because the terms of our Token Code provide for the issuance of a fixed number of Props Tokens, the amount of Props Tokens available to serve as incentives in the above-described ways will decrease over time. See “Description of the Props Tokens Being Offered—Token Supply” and “Risk Factors—We may need to increase the total number of Props Tokens issuable by the Token Code in order for the Props Network to operate in the future.” If necessary, Props PBC has the power, as the Controller, to increase the total number of Props Tokens that may be issued. See “Description of the Props Network—The Token Code” for additional details.

 

We may make additional grants of Props Tokens to individuals or entities who provide valuable services to our platform, including, for example, our content reviewers and moderators. We reserve the right to determine how many Props Tokens will be granted to such individuals or entities and when these grants will be made. Any such grants in the future will be registered or exempt from registration under the Securities Act.

 

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DESCRIPTION OF THE PROPS NETWORK

 

Overview

 

We view Props, by which we mean the Props Network, Props Apps, Props Tokens and other elements of our infrastructure, collectively, as a project that is intended to empower users in the digital economy and help app developers align with their engaged users. Currently, developers have developed and are continuing to develop a network of consumer-facing apps that operate and will operate on the Props Network. Props Apps operate, in most respects, as traditional apps that may be downloaded and accessed by users in a manner similar to any other mass market app, but the apps that are and will be part of our Props Network all share a common, special feature: they will incorporate our open-source software that is designed to both enable Props App Developers to give Props Tokens holders extra levels of premium functionality and, also, link these apps to the other Props Apps in the Props Network and a network infrastructure, all with the intention of rewarding the people who help digital communities grow.

 

This Props Network infrastructure, which is described in more detail below, is designed to both connect Props Apps to the Props Network and incentivize key functions to be performed on the Props Network, which we refer to as collective network effects. We have designed it to have this effect by, among other things, rewarding activities popular with the user base and encouraging growth. These token allocation mechanics for the benefit of popular Props App Developers are designed to attract additional independent developers interested in building user-empowering apps to incorporate Props Tokens and join the Props Network, and enable them to use Props Tokens to create user-empowering apps. This, in turn, provides opportunities to reward the creation and maintenance of popular apps on the Props Network and, also, content contributions and other user contributions to individual Props Apps.

 

As more fully described below, the Props Network’s infrastructure incorporates the Algorand blockchain, which for our purposes serves as a sidechain to the Ethereum blockchain where we process Pending Props transactions, and, also, “smart contracts” we have built and are continuing to build on the Ethereum blockchain. This infrastructure has eight key components: (1) open-source software tools that establish the connections/interfaces with the rest of the apps on the network and the rest of the network infrastructure; (2) the apps that incorporate this software into their code; (3) the Algorand blockchain, which we use to create a publicly-available record of both app usage data and future rights to Props Tokens created from data supplied by Props Apps; (4) the Oracles that act as oracles to the Protocol Rewards Engine; (5) the Token Code described in “Description of the Props Tokens Being Offered”; (6) the Protocol Rewards Engine “smart contract,” into which Oracles will input daily usage data and which will ultimately allocate a percentage of newly available Props Tokens to the Props App Developers, based on their relative popularity with users; (7) Props PBC, which oversees key functions for the Props Network; and (8) app users.

 

This Props Network is, however, still being enhanced. There are currently seven apps on or in the process of joining the Props Network. See “The Props Apps Annexes.” In the future, we expect to add additional Props Apps to the Props Network.

 

The Open-Source Software

 

We have created open-source software to establish the connections/interfaces between Props Apps participating in the Props Network and, also, between these participating Props Apps and the Props Network’s blockchain-based infrastructure. These software tools are designed to be incorporated into Props Apps—and so, become a part of the Props Apps that Props Network users download and use. This software thereby enables key functions of the Props Network, including each user’s ability to easily check the number of Props Tokens such user has on the Ethereum blockchain (each, a “Props Balance”) and the number of Pending Props each user has earned from a Props App as recorded as a provisional accounting entry to the Algorand blockchain; each Props App’s ability to read the user’s Props Balance and Pending Props; and each Props App’s ability to communicate usage data and a user’s potential entitlement to receive Props Tokens from the Props App in the future. See “—The Algorand Blockchain” for additional details regarding the data recorded to the Algorand blockchain, including Pending Props.

 

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We have developed two components of the software. We have made available to the Props community open-source software with the following functions, respectively:

 

  PropsKit is designed to make it simple for Props App Developers to interact with Props Tokens and the Algorand blockchain, and enable them to create a smooth user experience for their users. This means that it will allow each Props App to display a user’s Pending Props and Props Balance.

 

  Sidechain Node is designed to allow each Props App to maintain or review its own copy of the record of daily usage and Pending Props recorded to the Algorand blockchain. This software also allows the Oracle to create this shared record. The Sidechain Node software also incorporates the software we formerly called our Props Sentinel software, which is designed to allow Props App Developers to more easily access information about users on the Props Network. Specifically, this software will give Props Apps the ability to easily read a user’s Pending Props and Props Balance. In this sense, it performs functions similar to the PropsKit—but is app-facing. As a result, this software also enables a key functionality on the Props Network: because all Props Apps can incorporate this software, the user may enjoy the privileges of Props Token ownership earned in one Props App on another Props App. Because Props Apps can read a user’s Props Balance and Pending Props, users can effectively “port” the elevated status they have earned in one Props App to another.

 

The above-described open-source software is publicly available and free for any person to use and incorporate into apps, subject to compliance with the terms of the software’s applicable open-source software license. Any app wishing to participate in the Props Network must be admitted to the Props Network, as described below under “–Props Apps.” The terms of the applicable open-source software license for each software component will be publicly available at www.github.com or linked from https://www.props.xyz/token or other publicly available websites.

 

Separate from the above-described open source software, the Company has created a server software that integrates the open source PropsKit software and provides a simple set of APIs for apps to do common actions like sending Pending Props or transferring Props Tokens to users. Currently, the Props API Server is proprietary, but we eventually plan on licensing it with an open source license, so that other Props Apps can run it themselves.

 

The Props Apps

 

Props Apps are user-facing applications that both incorporate the above-described open-source software and are, in addition, admitted to the Props Network so that their daily usage can be taken into account by the Protocol Rewards Engine. In order for apps to be admitted to the Props Network, Oracles must begin taking account of the app’s daily usage and the party or parties administering the Protocol Rewards Engine, which is currently a role held by Props PBC, must update the Protocol Rewards Engine’s list of eligible app developer wallet addresses. See “—Props PBC” for additional details regarding these updates. Once admitted, the future Props App Developer or its users may be issued Props Tokens in the form of issuances of daily rewards from the Company.

 

Props Apps may have a variety of functionalities for Props Tokens, as determined in the Props App Developer’s discretion and subject to the Props App’s terms and conditions of use. See “Description of the Props Tokens Being Offered—Functionality for Users” for additional details. These Props Tokens may be earned by the user in other Props Apps or acquired by the user as tips (there are currently no national securities exchanges or exchanges that have been approved by FINRA or registered under Form ATS with the SEC to support the trading of Props Tokens on a secondary market in the United States)—but Props App Developers may also distribute Props Tokens to the users of their Props Apps using an in-app rewards system designed by the Props App Developer. Users may, for example, earn Props Tokens from Props Apps by contributing video content to that Props App or by winning a merit-based game in that Props App. See “Description of the Props Token’s Role in Helping to Align Incentives of Network Participants—Incentives for the Development and Operation of Popular Props Apps,” “Plan of Distribution,” “Description of the Props Tokens Being Offered—Receiving Props Tokens,” “The Props Apps Annexes” for additional details on user earnings of Props Tokens.

 

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We anticipate that, in the future, additional apps will be built by independent developers, and the Props Network’s infrastructure is designed to incorporate them into a functioning network and token economy if or when they are ready to begin operating as Props Apps. Before any additional developers’ apps join the Props Network, however, we will file an amendment or supplement to this offering circular addressing any issuances to these app developers or their users.

 

Separate from the Props economy, Props Apps are free to monetize their Props Apps by, for example, incorporating in-app purchases with U.S. Dollars, selling subscriptions, sponsorships or incorporating advertisements into their apps. In the current version of the YouNow Livestreaming App, for example, users can purchase “Bars”, an in-app currency that may not be transferred outside of the YouNow Livestreaming App, in exchange for U.S. Dollars, and users may then use these Bars to purchase digital gifts such as a “thumbs up” for other YouNow Livestreaming App users. See “Annex A: YouNow Livestreaming App Plan of Props Token Usage.” The proceeds of these in-app sales are solely the property of the Props App Developer and, while these proceeds may be shared with users, Props App Developers need not do so, and the Company has no control over the use of such proceeds.

 

There is no requirement that a Props App must be available on either the Apple iTunes App Store and the Google Play Store, and one or more Props Apps may not be available from either of those stores. However, we expect that a significant portion of Props Apps users will access Props Apps on the Apple iTunes App Store and the Google Play Store, to the extent that a Props App is available there. As a result, Props Apps and the business of Props App Developers may be subject to the standard policies and terms of service of these third party platforms, which govern the promotion, distribution and operation of applications on the platform. These platforms may have terms that limit the operation of apps that incorporate digital assets like Props Tokens and Ether. We have taken the position that our business does not violate the respective terms of service of the Apple iTunes App Store and Google Play Store. For additional information see “Risk Factors—Developers of Props Apps and users of the Props Network will initially rely on third-party platforms such as the Apple iTunes App Store and the Google Play Store to distribute the YouNow Livestreaming App, or other applications on the Props Network. If Props App developers or the users of the Props Network are unable to access or otherwise to maintain Props App availability on the platforms, including as a result of changes or violations of terms and conditions, access to and utilization of the Props Network and the Props Tokens may suffer.

 

The Algorand Blockchain

 

We use the Algorand blockchain as the accounting record for Pending Props. This data is communicated by Props Apps running Sidechain Nodes to all other persons running the Sidechain Node software. See “—The Oracles” below for details regarding the specific tasks and role of these Oracles. Initially, this data has two components, which are each described below:

 

  Usage Data

 

Each Props App is expected to communicate usage data composed of a record of user sign-ins. Each time a user signs into a Props App, this data will then be communicated to participants running the Sidechain Node software, including the Oracles. This data is communicated on a continuous basis and includes the number of sign-ins performed by persons with Props Balances and Pending Props, together with the respective amounts. This data serves an essential purpose in the allocation of daily rewards of Props Tokens; daily excerpts of this usage activity are collected by the Oracle each day and entered into the Protocol Rewards Engine. See “—The Oracles” for additional details. This data is then used to determine daily rewards allocations by the Protocol Rewards Engine. See “—The Protocol Rewards Engine.”

 

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  Pending Props

 

As discussed under “Description of the Props Tokens Being Offered—Receiving Props Tokens,” users do not receive Props Token rewards prior to completing all necessary steps required in order to earn Props Tokens. Prior to receiving Props Tokens, however, a Props App may record a Pending Props associated with that user’s account. See “Description of the Props Tokens Being Offered—Pending Props” for additional detail regarding Pending Props. Each time a Props App records a Pending Props for the user, this data is communicated on a continuous basis to participants running the Sidechain Node software, including the Oracle, and this information will be immediately recorded to the Algorand blockchain.

 

Transactions on the Algorand blockchain relating to Pending Props are limited to (1) issuances of Pending Props and (2) removal of recorded Pending Props upon the issuance of Props Tokens or forfeitures.

 

Only upon the user’s completion of the steps described in “Description of the Props Tokens Being Offered—Receiving Props Tokens—Steps to Be Taken by the User” and the Props App’s completion of the steps described in “Description of the Props Tokens Being Offered—Receiving Props Tokens—Steps to Be Taken by the Props App” will the Props Apps may begin the process of issuing the user Props Tokens. Upon the completion of the issuance of Props Tokens, the Oracles cancel a corresponding number of recorded Pending Props. The Oracle’s Sidechain Node software watches the Ethereum blockchain for that issuance, and the Oracles complete the cancellation of the Pending Props upon the completion of the Props Token issuance. Each Props App may complete this process immediately or only at certain times, in its sole discretion, according to each Props App’s reward program. The Company, for example, anticipates that the YouNow Livestreaming App Operator will issue Props Tokens to users of the YouNow Livestreaming App once per week.

 

If or when a user violates the terms and conditions of the Props App that recorded the Pending Props, the Props App which intended to issue the Props Token for the user will inform her of the Pending Props being revoked and list the reason. For example, if the YouNow Livestreaming App issued a user Pending Props and that user was found to have been rewarded with Pending Props as a result of fraudulent or some other malicious activity in the YouNow Livestreaming App, the YouNow Livestreaming App can communicate the cancellation of the Pending Props to the Oracles—which will then cancel the appropriate number of Pending Props associated with the user’s account.

 

The Oracles

 

Once usage data is written to the Algorand blockchain, each Oracle aggregates the data and submits it to the Protocol Rewards Engine each day. If a majority of the Oracles have submitted identical summaries of daily usage data, the data is considered correct, and the data is used by the Protocol Rewards Engine to calculate rewards for that day. See “The Protocol Rewards Engine” for additional detail. Initially, more than 50% of the Oracles will need to reach agreement on the correct usage data in order for the Protocol Rewards Engine to recognize the usage data as valid. See “Description of the Props Tokens Being Offered—Terms of the Token Code” regarding changes to this threshold. If Oracles do not reach this agreement, then no app rewards will be made for that day.

 

We task the Oracles with compiling a daily subset of the data from the Algorand blockchain and communicating it to the Protocol Rewards Engine. More specifically, on a daily basis, the Oracles communicate aggregate usage data, including information regarding how much activity was undertaken by Props Token holders and their Props Balances and Pending Props within each Props App, to the Protocol Rewards Engine. This information is used by the Protocol Rewards Engine to make its daily allocations of Props Tokens to Props Apps. See “—The Protocol Rewards Engine” for more detail. In this capacity, each Oracle performs an “oracle” function to the Protocol Rewards Engine.

 

The Company has designed the Sidechain Node software to make the performance of the oracle function to the Protocol Rewards Engine, automatic operations performed by the Sidechain Node software when run by the permissioned Oracles. As a result, the performance of the Protocol Rewards Engine oracle function depends on the Sidechain Node software. Further, this key function also depends on the ability of the person or persons acting as a Oracle to run this software and remain connected to Props Apps transmitting it data, so that it may receive data and communicate to the Protocol Rewards Engine each day.

 

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We expect that Oracles, in aggregate, will receive compensation for these services in an amount equal to, each day, approximately 0.001829% of the remaining Props Tokens in the pool initially composed of the 400,000,000 Props Tokens allocated to the Protocol Rewards Engine (the “Daily Rewards Pool”). See “Description of the Props Tokens Being Offered—Token Supply” and “The Protocol Rewards Engine—Oracle Rewards Allocations” for additional details.

 

The Company and two other entities are currently serving as Oracles. In addition, in the future, up to four other persons or entities may serve as Oracles. Props PBC will select the persons to serve as Oracles in its sole discretion, though we expect each selection will be made in a manner consistent with Props PBC’s stated public benefit purpose to create an open, sustainable and equitable media network that fairly rewards all participants in the ‘Props Network’ (a digital media platform launched by Props PBC’s corporate parent, Open Props Inc.), for their contributions to the Props Network, by supporting and promoting the growth, research, development, and adoption of the protocol and token underlying the Props Network. In the future, we may allow Props Token holders to provide advisory votes on the choice of Oracles, and we may require candidates for Oracle roles to stake Props Tokens against their right to act as Oracles.

 

In order to participate as an Oracle, the potential Oracle must satisfy two criteria. First, the Oracle must run the Props Sidechain Node software. See “—The Open Source Software” for additional information. In most cases, we expect Oracles to run it via cloud computing platform. Second, Oracles must be added to the list of Oracles in the Protocol Rewards Engine by the Controller. See “—Props PBC” for additional information. At this point, the Oracle will be participating as a Oracle, and other Oracles will begin communicating with this Oracle by sharing information to be recorded on the Algorand blockchain for validation. In the future, we anticipate that Oracles will also be required to bond or “stake” Props Tokens, in order to receive rewards.

 

In order to receive rewards, a Oracle must remain online and participate in the creation of the record of Pending Props on the Algorand blockchain, and submit an accurate daily summary to the Protocol Rewards Engine. If they fail to do either of these actions for any given day, they will not receive rewards for that day. If the Oracle fails in this way three times, the Protocol Rewards Engine will prevent them from performing as an Oracle in the future, unless re-authorized as an Oracle by Props PBC. As a result, the Oracle will be unable to receive Oracle rewards as described under “Plan of Distribution.”

 

In the future, Props PBC may select additional Oracles, or select additional Oracles to replace Oracles who have stopped performing Oracle functions as described above. Once third-party Oracles have been selected, Props PBC must register the wallet addresses of each such entity serving as an Oracle with the Protocol Rewards Engine. The Company or Props PBC may, at any time, remove any person as an Oracle in each of their sole discretion. Such removal will be made if the Oracle is failing to complete the duties of an Oracle (for example, not consistently operating as an Oracle, twenty four hours a day and seven days a week) or is manipulating usage data or any other data or functions related to the Props Network. See “Risk Factors—The operation of the Props Tokens and the Props Network depends on ongoing Props Token transaction validation efforts, which are conducted by third parties that we do not control on the Ethereum blockchain” for additional detail.

 

The Token Code

 

Props Tokens exist as digital assets in a “smart contract” deployed to the Ethereum blockchain (the “Token Code”). See “Description of The Props Tokens Being Offered—Terms of the Token Code” for additional detail regarding the Token Code. The Token Code maintains a ledger that records the ownership of Props Tokens by associating certain numbers of Props Tokens with a particular wallet address. See “Description of the Props Tokens Being Offered—Token Supply” for additional details.

 

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The Props Network “smart contracts,” including the Token Code, may be changed in the future; specifically, certain components of the Token Code may be updated and each of these “smart contracts” may be replaced. For example, the Token Code could be replaced with a new version. Props PBC will be the Controller with the ability to effect changes to these “smart contracts” and may, therefore, effect these changes. If, in the future, a different entity or group were to become the Controller, such change would need to be approved by the board of directors of Props PBC and would be based upon criteria determined by the Props PBC board of directors. At the time of this offering circular, the board of directors of Props PBC has not determined such criteria.

 

The Protocol Rewards Engine

 

A second “smart contract” has been deployed to the Ethereum blockchain, which we refer to as the Protocol Rewards Engine. The Protocol Rewards Engine “smart contract” has been allocated all of the Daily Rewards Pool, and it further allocates or issues these Props Tokens for app rewards and for Oracle rewards, as described below:

 

  Daily Rewards Allocations:

 

Daily Rewards Allocations are allocations made on the basis of daily usage activity of Props Apps, in order to reward the creation and operation of popular Props Apps. We anticipate that, each day, the total amount of Props Tokens allocated in this way will be equal to approximately 0.03475% of the remaining Props Tokens in the Daily Rewards Pool each day.

 

The Protocol Rewards Engine allocates a portion of these daily rewards allocations to the Company and the other Oracles. The Protocol Rewards Engine does this by initiating a transaction on the Ethereum blockchain to cause the requisite number of Props Tokens to be associated with a wallet directly controlled by the Company. The Props Tokens allocated to the Company may then be distributed by the Company as described in “Plan of Distribution.” In effect, each daily allocation increases the number of Props Tokens that the Company may distribute pursuant to the offering statement in which this offering circular is included.

 

In addition, an algorithm programmed into the Protocol Rewards Engine will also allocate Props Tokens for usage by Props App Developers. A portion of these Props Tokens, which we anticipate will be approximately 65-70% on an annual average, will then be distributed as rewards to users of the Props Apps. Rewards for usage of Props Apps developed will be distributed to users of the Props Apps, through the Props Apps. See “—Description of the Props Token’s Role in Helping to Align Incentives of the Network’s Participants” for additional detail. The Protocol Rewards Engine will initiate a transaction on the Ethereum blockchain to cause the requisite number of Props Tokens to cease to be associated with a wallet controlled by the Protocol Rewards Engine and instead be associated with a wallet controlled by Props App Developers, which will then distribute the Props Tokens through the Props Apps. The Oracles will pay the “gas” fee with respect to each such transaction transferring Props Tokens from the Protocol Rewards Engine to Props App Developers. The remaining Props Tokens allocated to the Props Apps for usage of the Props Apps will be distributed to and retained by the Props Apps Developers as rewards for development and operation of the Props Apps.

 

As described above, these future allocations of available rewards for app usage between various apps will be determined on the basis of the daily usage data communicated by the Oracle to the Protocol Rewards Engine each day—with the algorithm in the “smart contract” allocating more importance to the Props Apps garnering more daily usage and giving particular weight to usage by users with higher Props Balances and Pending Props. See “—The Algorand Blockchain” for additional details regarding this data. We intend for allocations of available rewards for app usage will be determined by the below algorithm.

 

αΡ + βΜ + γW

 

Where:

 

Ρ: the total amount of Props Tokens that users possessed in the app

Μ: the median amount of Props Tokens that the users possessed in the app

W: the number wallets that possessed Props Tokens in the app

α,β,γ: coefficient (weight) for different variables.

 

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In effect, we expect for Props Apps Developers to compete for an allocation out of the Daily Rewards Pool—and as a result, apps will compete for higher daily usage that will be recorded on the Algorand blockchain and used by the Protocol Rewards Engine in making allocations. Each Props App Developer will, therefore, be incentivized to grow the active user base of their Props App(s) and create usage for Props Tokens in their Props App(s) and also to distribute Props Tokens to their users, as a potential incentive to attracting users who also will thereafter have Props Tokens. With more of these users, a Props App may be entitled to a greater allocation of Props Tokens from the Protocol Rewards Engine.

 

  Oracle Rewards Allocations and Issuances:

 

Oracle Rewards Allocations” are allocations made in order to compensate Oracles for acting as oracles to the Protocol Rewards Engine. We anticipate that each daily Oracle Rewards Allocation will be in an amount equal to approximately 0.001829% of the remaining Props Tokens in the Daily Rewards Pool.

 

The Company’s share of these Oracle Rewards Allocations will be made as an allocation by the Protocol Rewards Engine to the Company. The Protocol Rewards Engine will do this by initiating a transaction on the Ethereum blockchain to cause the requisite number of Props Tokens to be associated with a wallet directly controlled by the Company. This is a function entirely internal to the Company; in effect, the “smart contract” releases more Props Tokens to the Company as a result of the Company’s service as an Oracle. Once this function is completed and the Props Tokens are, thereby, made available for the Company’s use, the Company may then distribute these Props Tokens as it sees fit, in its discretion, including as described in “Plan of Distribution.

 

The portion of Oracle rewards to be given to third-party Oracles acting as an oracle to the Protocol Rewards Engine will be issued directly from the Protocol Rewards Engine. In other words, the Company will issue Props Tokens to these third-party Oracles. The Protocol Rewards Engine will do this by initiating a transaction on the Ethereum blockchain to cause the requisite number of Props Tokens to be associated with a third party Oracle’s wallet. See “Description of the Props Tokens Being Offered—Token Transfers” for additional information regarding Props Token transfers. In effect, we expect for the Oracle rewards to incentivize performing the necessary administrative tasks of acting as an oracle to the Protocol Rewards Engine.

 

As discussed above, each daily Oracle rewards allocation will be in an amount equal to approximately 0.001829% of the remaining Props Tokens in the Daily Rewards Pool. These daily Oracle Rewards Allocations will be allocated equally among the participating Oracles that day, including between the Company and the other Oracles. As an example, if there are seven Oracles, including the Company, each will receive one-seventh of these rewards. As discussed above, the Company’s share will effectively make those Props Tokens available for its use, and the third party Oracles will receive their share as issuances from the Protocol Rewards Engine.

 

As described above, in order to receive rewards, an Oracle must remain online and submit accurate daily summaries to the Protocol Rewards Engine. If an Oracle fails to do these actions for any given day, that Oracle will not receive rewards for that day. If the Oracle fails in this way three times, the Protocol Rewards Engine will prevent that Oracle from performing as an Oracle in the future, unless re-authorized as an Oracle by Props PBC. As a result, the Oracle will be unable to receive Oracle rewards.

 

Because the Daily Rewards Pool is set at 400,000,000 and each of the above-described allocations will be made as a percentage of the remaining pool, the amount of Props Tokens available to be allocated as daily rewards allocations and Oracle Rewards Allocations will, initially, be larger and will decrease over time.

 

The terms of Protocol Rewards Engine contain rules governing certain basic “smart contract” functions, with the material terms generally described below:

 

  ownable: certain functionality under the “smart contract” is limited to a Controller, as noted below. See “Description of The Props Network—The Protocol Rewards Engine” and “Description of The Props Network—Props PBC” for additional details about the Controller.

 

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  upgradeable: the Controller can deploy a new version of the Protocol Rewards Engine. We may use this functionality to make changes to the Protocol Rewards Engine as described under “—“Smart Contract” Modifications and Changes to Token Functionality.”

 

  add/remove validator: the Controller can use this function to add and remove addresses which may participate as Oracles. See above under “—The Oracles” for additional details regarding the selection and removal of Oracles.

 

  add/remove app: the Controller can use this function to add and remove wallet addresses associated with Props Apps. As this function is used to add additional Props Apps to the Props Network, we file amendments or supplements to this offering circular to address these additions by the Company.

 

  submit data: Oracles can use this function to submit data representing the day’s usage data. See “—The Algorand blockchain” for additional detail.

 

  distribute rewards: Oracles and Props Apps can collect any rewards that have been allocated to them on previous days with this function. Users of Props Apps must “claim” their rewards by requesting the allocation of the rewards, while Oracles’ rewards are distributed automatically.

 

  settings: the Controller can adjust settings for the protocol, including, for example, the number of Oracles, the required threshold for agreement on usage data validly communicated to the “smart contract,” and the rewards algorithm used to determine the number of tokens to be distributed to Apps and Oracles. Any settings changes take effect the following day.

 

The Props Network “smart contracts,” including the Protocol Rewards Engine, may be changed in the future; specifically, certain components of the Protocol Rewards Engine may be updated and each of these “smart contracts” may be replaced. For example, variables in the rewards algorithm programmed into the Protocol Rewards Engine can be updated and either “smart contract” could be replaced with a new version. Props PBC is the Controller and may, therefore, effect these changes. If, in the future, a different entity were to become the Controller, such change would need to be approved by the board of directors of Props PBC.

 

Props PBC

 

Props PBC is a Delaware public benefit corporation and wholly-owned subsidiary of the Company. See “Description of Business” for additional details. Consistent with its stated public benefit purpose to create an open, sustainable and equitable media network that fairly rewards all participants in the ‘Props Network’ (a digital media platform launched by the Corporation’s corporate parent, Open Props Inc.), for their contributions to the network, by supporting and promoting the growth, research, development, and adoption of the protocol and token underlying the Props Network,” Props PBC plays a central role in the ongoing operation of the Props Network, including with respect to the below-listed functions:

 

  Props PBC grants Props Tokens to persons developing key apps or otherwise contributing to network development efforts. See “Plan of Distribution” for additional details regarding grants by Props PBC. In the future, Props PBC may also sell Props Tokens in transactions registered or exempt from registration under the Securities Act.

 

  Props PBC determines who will serve in key roles in the Props Network, including for example, by admitting additional Oracles, or admitting additional Props Apps to the Props Network. These changes may be effected by the Controller of our “smart contracts.” Props PBC is currently the Controller of each of these “smart contracts” and may, therefore, effect these changes.

 

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  Props PBC may make other changes or updates to the Props Network “smart contracts,” including the Token Code or the Protocol Rewards Engine. In addition to the above-described changes, certain components of the Token Code and the Protocol Rewards Engine may be updated. For example, variables in the rewards algorithm programmed into the Protocol Rewards Engine can be updated and either “smart contract” could be replaced with a new version. Props PBC is currently the Controller of each of these “smart contracts” and may, therefore, effect these changes. Further, in its current capacity as Controller of the Protocol Rewards Engine, Props PBC may temporarily hold Props Tokens allocated to the Protocol Rewards Engine as described under “Description of the Props Tokens Being Offered—Token Supply” in order to help minimize risks related to hacking of the Protocol Rewards Engine. See “Risk Factors—The Props Network, The Company and Props PBC may be at increased risks of cyberattack or other security incidents—which may result in the loss of Props Tokens and adversely affect the Props Network and the value of Props Tokens.” for additional detail regarding this risk.

 

  We anticipate that Props PBC will, in the future, propose the taking of advisory votes from Props Token holders on certain key issues affecting the Props Network, including the terms of the Token Code and the total amount of Props Tokens that may be issued, changes to the algorithm in the Protocol Rewards Engine, or other updates to the Props Network “smart contracts.” While these advisory votes would be nonbinding, we expect that, given Props PBC’s stated public benefit purpose to create an open, sustainable and equitable media network, Props PBC will generally act in ways consistent with the outcome of these advisory votes. We anticipate that all Props Token holders will be afforded equal rights to participate in such votes on a pro rata basis, based on their Props Token holdings.

 

The Users

 

Subject to the terms and conditions for the use of Props Apps, any other applicable rules and the availability of Props Apps for download, we anticipate that anyone will be able download and use Props Apps on publicly available sites like the Apple iTunes store or the Google Play store.

 

Users with only casual or no interest in digital assets like Props Tokens may interact with Props Apps. They may also enjoy app features—including rewards paid in U.S. Dollars, for example—and may never claim their Props Tokens. They may also enjoy the benefits of holding Props Tokens within Props Apps without ever claiming Props Tokens or creating a wallet on the Ethereum network. See “Description of the Props Tokens Being Offered—Pending Props in Props Apps” and “Description of the Props Tokens Being Offered—Token Transfers” for more detail regarding receiving Props Tokens. Once a user completes the required steps to claim Props Tokens, the PropsKit open-source software is designed to make it easy and inviting for users with near-zero knowledge of digital assets to hold and use Props Tokens.

 

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OTHER OFFERINGS

 

In the past, we have sold rights to receive Props Tokens in various other offerings, as more fully described below:

 

  SAFT Offerings:

 

In December 2017, we offered SAFTs to certain investors, and the Company entered into SAFTs to distribute Props Tokens to “accredited investors” as defined under Regulation D under the Securities Act, in reliance on the exemption from registration it provides (certain of whom are also “qualified purchasers” as such term is defined in the Investment Company Act of 1940).

 

Pursuant to the terms of these agreements, we were obligated to return the amount we raised in such offering if we did not distribute Props Tokens to the general public, launch our Rize platform, and have a functional Props Token within ninety days of the issuance of the agreements, as adjusted by a thirty day extension. In March 2018, we offered to these investors a rescission of their SAFT purchases or, alternatively, amendments that would extend the deadlines under the agreements to March 4, 2019 in exchange for increasing the number of Props Tokens the purchasers would be entitled to receive under their agreements by 10%. The vast majority of the purchasers chose to amend and affirm their SAFTs. As of December 31, 2018, the number of Props Tokens issuable pursuant to the SAFTs, net of rescissions granted in March 2018, was 188,596,811.

 

In March 2019, we began issuing Props Tokens to holders of our SAFTs. As of June 30, 2021, we have issued 186,492,414 Props Tokens to these investors, including in this number the 15,065 Props Tokens issued to an investor who, prior to March 2019, was incorrectly thought to have completed a refund in connection with the March 2018 rescission offer discussed above (and, ultimately, received the Props Tokens). A portion of these Props Tokens were subject to vesting such that they were not transferable until a future date, according to the terms of the individual holder’s SAFT. As of June 30, 2021, no Props Tokens remained subject to these restrictions, which were enforced by the terms of “smart contracts” we created on the Ethereum blockchain for each such SAFT holder that determines when the Props Tokens are released from restriction. As of June 30, 2021, 1,980,785 Props Tokens issuable pursuant to the SAFTs remain un-issued because some SAFT holders did not respond to our several requests and other communication prompting SAFT holders to provide a wallet address to which the Company could send Props Tokens. 123,613 Props Tokens originally issuable pursuant to a SAFT will not be issued in connection with an investor’s requested cancellation in 2019 of half that investor’s investment.

 

The form of SAFT, together with the Form of Amendment No. 1 to the SAFT, are included as exhibits 3.1 and 3.2 to the offering statement in which this offering circular is included.

 

  DPA Offerings:

 

YouNow Services LLC (“YouNow Services”), a wholly-owned subsidiary of the Company, entered into Debt Payable by Asset agreements (“DPAs”) with investors pursuant to which YouNow Services raised an aggregate of approximately $690,834, net of already-issued refunds, as of June 3, 2019. The total amount raised, prior to already-issued refunds, was $1,070,000. During 2018, the Company repaid $331,322 to 274 DPA holders in U.S. dollars pursuant to refunds as described below. As of June 3, 2019, the Company repaid $47,844 to 26 DPA holders in 2019, in U.S. dollars pursuant to refunds as described below. Lenders under these agreements had the right to at any time require that YouNow Services return up to 80% of the amount raised under each agreement before the second anniversary of the issuance of a DPA. In aggregate, 80% of the proceeds from the sale of these DPAs, or $552,667 was subject to this early repayment right as of June 3, 2019.

 

In accordance with the DPAs, repayments could have been made in the forms of Props Tokens or cash, with interest in certain circumstances. The determination as to whether the Company’s obligations could have been settled by delivery of Props Tokens or payment of cash is set out in the DPAs, and was based in part upon YouNow Services’ ownership or control of a certain amount of Props Tokens. Until YouNow Services or its assignee had ownership or control of a number of Props Tokens adequate to satisfy certain percentages of its repayment obligations under the DPAs, YouNow Services or its assignee could at any time repurchase the DPAs for their initial purchase price, and as discussed above, each DPA holder could have tendered their DPA to YouNow Services for 80% of the purchase price. If and when YouNow Services or its assignee had ownership or control of a sufficient number of Props Tokens, it was required to make its repayment obligations by the delivery of the Props Tokens, except as discussed below. If YouNow Services or its assignee did not have such ownership or control of Props Tokens, its repayment obligations would be required to be satisfied by cash payments.

 

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The number of Props Tokens issuable pursuant to the DPAs was determined, pursuant to the terms of the DPAs, by the amount of each investor’s purchase price, plus interest in an amount equal to 20% of the purchase price, divided by $0.1369. In March 2018, however, we offered to the DPA investors a cash payment in rescission of their DPA purchases or, alternatively, a 10% bonus on the number of Props Tokens each DPA holder was previously entitled to receive pursuant to the DPA’s terms.  As a result, we intend to issue the number of Props Tokens equal to 110% of the amount of each investor’s purchase price, plus interest in an amount equal to 20% of the purchase price, divided by $0.1369, to each DPA investor who did not elect a cash payment in rescission of their DPA purchase or did not seek early repayment of their DPA in cash. As adjusted per the increased interest rate and net of all refunds already issued, as of June 3, 2019, the DPAs could be satisfied by either YouNow Services’ delivery of, in aggregate, 6,661,073 Props Tokens, including the bonus Props Tokens, or payment in cash.

 

One June 4, 2019, the Company caused YouNow Services to assign the DPAs to the Company, so that the Company could then begin to satisfy its payment obligations under the DPAs in Props Tokens. Through June 30, 2021, we issued 6,032,394 Props Tokens to holders of our DPAs. As of June 30, 2021, an additional 653,115 Props Tokens remain issuable pursuant to these DPAs pending confirmation of wallet addresses.

 

As a result of the Props Tokens to be paid in interest and the Props Tokens to be paid as bonus Props Tokens, the weighted average price of each Props Token distributed to a DPA holder is $0.1037 per Props Token. As of December 31, 2018, the Company’s obligations under these agreements could have been satisfied by YouNow Services’ delivery of, in aggregate, 7,122,181 Props Tokens or payment of cash.

 

Upon the delivery of Props Tokens pursuant to the terms of a DPA, the DPA will terminate pursuant to its terms, and neither the Company nor any of its affiliates will have any continuing obligations to the DPA holder under the DPA’s terms.

 

The form of DPA is included as exhibit 3.3 to the offering statement in which this offering circular is included.

 

  Advisor Agreements:

 

The Company has entered into agreements with certain of our advisers for the issuance of Props Tokens. These agreements were entered into with these advisers in order to induce them to provide professional services to the Company, and the form of written agreement governing the majority of these relationships is included as an exhibit to this offering circular.  We may not have received representations necessary from these advisers for us to establish all necessary facts in order for us to rely on an exemption from the registration requirements of the Securities Act, as well as those of various state securities laws. The Company, however, believes it had a reasonable basis as to the accredited investor status of all but four of its advisors who are U.S. persons.

 

In March 2019, the Company began issuing Props Tokens to certain of these advisers. As of July 15, 2021, we issued 16,341,333 Props Tokens to these advisers (including 292,184 Props Tokens to a former adviser as liquidated damages in connection with the termination of an adviser relationship). 1,154,167of the Props Tokens issuable to these advisors remained subject to vesting requirements. As of July 15, 2021, an additional 587,127 Props Tokens remained issuable pursuant to these agreements pending confirmation of wallet addresses. 27,154,342 Props Tokens have been issued pursuant to a token option agreement entered into with an adviser, at an exercise price of $0.00125 per token. Further, if the Company creates Props Tokens that, together with all other Props Tokens then in existence, represent more than 1,000,000,000 Props Tokens and any amount of the newly-created are then issued to wallet addresses controlled by the Company or its equity investors, then one of our advisers will be entitled to receive from the Company 2.825 Props Tokens for every 26 Props Tokens issued to the Company or its equity investors. The Company did not distribute Props Tokens to four of the advisers because the Company believes that it did not have a reasonable basis as to these advisers’ accredited investor status. For these advisers, the Company paid them in cash, rather than Props Tokens.

 

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Props App Developer Agreements

 

Paltalk Agreement:

 

In May 2019, we entered into an agreement with Paltalk, Inc. to facilitate the integration of two of its apps, the Camfrog app and Paltalk app, into the Props Network. This agreement provides for the grant of rights to receive Props Tokens upon the achievement of certain milestones described in the agreement, including the execution of the agreement and mutual public announcement of the agreement, and the integration of the apps. According to the terms of this agreement, in aggregate, Paltalk, Inc. could have earned the right to receive up to 15,000,000 Props Tokens upon the achievement of these milestones, and additional 1,500,000 Props Tokens if these milestones were all reached prior to October 31, 2019. In September 2019, we amended the agreement with Paltalk, Inc. so that, in aggregate, Paltalk, Inc. would earn the right to receive up to 10,500,000 Props Tokens upon the achievement of these milestones, instead of the 15,000,000 Props Tokens contemplated in the original agreement, and an additional 1,000,000 Props Tokens if these milestones were all reached prior to December 31, 2019 or, if Post-Qualification Offering Circular Amendment No. 1 to the offering statement of which this Offering Circular is a part had not been qualified by December 2, 2019, 30 calendar days after such qualification. Paltalk, Inc. already earned the right to receive in the future 3,000,000 of these Props Tokens in connection with its entry into the initial agreement. This agreement was amended and restated on January 30, 2020, in order to, among other things, extend the dates of the milestones to March 15, 2020 for launch of the Camfrog app on the Props Network, and to April 30, 2020 for launch of both the Camfrog and Paltalk apps on the Props Network. This agreement also allows Paltalk, Inc. to terminate its relationship with the Company and the Props Network at any time and for any reason upon ninety (90) days’ written notice. As of the date of this offering circular, 10,500,000 Props Tokens have been delivered as milestone payments to Paltalk, Inc., notwithstanding the fact that not all of the milestones have yet been achieved.

 

The written agreements, as amended, governing this relationship are included as exhibits 6.4 and 6.5 to the offering statement in which this offering circular is included.

 

Listia Agreement:

 

In August 2020, we entered into an agreement with Listia Inc. to facilitate the integration of its app, the Listia app, into the Props Network. This agreement provides for the grant of rights to receive up to 5,500,000 Props Tokens, all of which have been earned and delivered. This agreement also allows Listia Inc. to terminate its relationship with the Company and the Props Network at any time and for any reason upon thirty (30) days’ written notice.

 

Tegger Agreement:

 

In February 2021, we entered into an agreement with Tegger DLT Inc. to facilitate the integration of its app, the Tegger app, into the Props Network. This agreement provides for the grant of rights to receive up to 1,100,000 Props Tokens, all of which have been earned and delivered. This agreement also allows Tegger DLT Inc. to terminate its relationship with the Company and the Props Network at any time and for any reason upon sixty (60) days’ written notice.

 

Roomi Agreement:

 

In April 2021, we entered into an agreement with Roomi Inc. to facilitate the integration of its app, the Roomi app, into the Props Network. This agreement provides for the grant of rights to receive up to 4,200,000 Props Tokens, none of which have been delivered. This agreement also allows Roomi Inc. to terminate its relationship with the Company and the Props Network at any time and for any reason upon sixty (60) days’ written notice.

 

SuperWorld Agreement:

 

In May 2021, we entered into an agreement with Roomi Inc. to facilitate the integration of its app, the Roomi app, into the Props Network. This agreement provides for the grant of rights to receive up to 4,500,000 Props Tokens, none of which have been delivered. This agreement also allows SuperWorld Inc. to terminate its relationship with the Company and the Props Network at any time and for any reason upon sixty (60) days’ written notice.

 

We may in the future enter into additional similar agreements and make additional grants of rights to receive Props Tokens in connection with entering into such agreements.

 

  Contributor Agreements:

 

In September and October 2019, we entered into conditional agreements with four content partners that, subject to the execution of an acceptable grant agreement, provided the content partner with the right to receive Props Tokens pursuant to Regulation D in exchange for broadcasts in the YouNow Livestreaming App and other off-platform promotional activities of those broadcasts. In aggregate, these agreements would have given these content partners the right to receive approximately 2,332,352 Props Tokens. In 2020, the Company canceled these agreements.

 

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  April 2020 Private Placements

 

From April 21 through April 27, 2020, we closed the April 2020 Private Placements, which consist of a number of private placements of Props Tokens with multiple investors, including new institutional investors, two entities that are stockholders of the Company and are associated with one of our directors and the executive officer of one of the Apps that participate in the Props Network. In the private placements, we raised approximately $1,342,500 in cash and an additional fraction of that amount in the form of other consideration, at a price of $0.07 per Props Token. In addition to receiving Props Tokens, each investor in the April 2020 Private Placements received warrants to purchase an additional number of Props Tokens, equal to up to 30% of the number of Props Tokens initially purchased, at an exercise price of $0.07 per Props Token. 26,857,143 Props Tokens were sold in the April 2020 Private Placements, and a total of 4,735,713 Props Tokens were issued upon exercise of the warrants. All Props Tokens issued or issuable pursuant to the April 2020 Private Placements are transferrable only in accordance with United States federal and state securities laws. The Props Tokens issued to the investors upon exercise of the warrants are non-transferable until May 2022, and will then be transferable only in accordance with United States federal and state securities laws. All unexercised warrants have expired.

 

Exchange and Vendor Agreements

 

In 2021, we have entered into agreements with three centralized digital asset exchanges, Gate,io, KuCoin and OKEx, to list Props Tokens. Pursuant to those agreements, we granted 4,810,623 Props Tokens to the exchanges. In addition, in 2021 we issued 18,500 Props Tokens to a provider of marketing services in exchange for services.

 

We have provided below a tabular presentation of the total number of investors, the total number of tokens issued or issuable pursuant to these agreements, and the total consideration received in connection with these agreements as of July 15, 2021.

 

    Number of
Investors
    Tokens
Issued and
Issuable(1)
    Total
Consideration
($)
 
Simple Agreements for Future Tokens     543       188,473,199 (2)     20,610,636 (3)
Debt Payable by Asset Agreements     1,062       6,685,509 (4)     693,684 (5)
Advisor Agreements     52       45,236,969 (6)     2,418,433 (7)
Props App Developer Agreements     5       25,800,000 (8)     2,862,990 (9)
April 2020 Private Placements     13       31,592,856 (11)     2,211,500 (12)
Exchange and Vendor Agreements     4       4,829,123       661,107 (13)
Totals     1,679       302,617,656       29,458,050  

 

(1)For purposes of this table, the term “issuable” includes Props Tokens which we have a potential obligation to issue in the future but have not yet issued, principally because the obligation will not mature until some future time; the recipient has not paid consideration due or not performed some other condition precedent to issuance; or the issuance is subject to the vesting of an entitlement or the exercise of a warrant or other right.

 

(2) Includes 186,492,414 Props Tokens that were distributed pursuant to SAFTs (as amended) that we entered into under Regulation D, including the issuance of 15,065 Props Tokens to an investor who, prior to March 2019, was thought to have completed a refund in connection with the March 2018 refund offer. Also includes 1,980,785 Props Tokens that remain issuable pursuant to outstanding SAFTs. Does not include 123,613 Props Tokens, originally issuable pursuant to a SAFT, which will not be issued in connection with the SAFT investor’s requested cancellation in 2019 of half that investor’s investment.

 

(3)Represents the aggregate purchase price paid by SAFT investors. In March 2018, we offered to these investors a rescission of their SAFT purchases, and purchasers, with an aggregate purchase price of $2,374,608 accepted this offer, thereby decreasing the total consideration received to $20,610,636. The undiscounted price per Props Token offered in our SAFT offering was $0.1369. Certain of the SAFT purchasers, however, received discounts from this price in connection with their election for early investment or vesting schedules on their Props Tokens, once distributed. Upon election of these terms, subscribers were given discounts from the undiscounted price. As a result, the weighted average sale price of all of the Props Tokens issued and issuable pursuant to the SAFTs was $0.1093 per Props Token.

 

(4) Includes the payment of 20% interest on the aggregate loan amounts under the DPAs and a 10% bonus on the total amount of Props Tokens paid or payable pursuant to the terms of the DPAs. Through July 15, 2021, we issued 6,032,394 Props Tokens to holders of our DPAs. As of June 30, 2021, an additional 653,115 Props Tokens remain issuable pursuant to DPAs, pending confirmation of wallet addresses.

 

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(5)In March 2018, we offered to these investors a rescission of their DPA purchases, and in addition, some DPA holders exercised their rights to early refunds of their investments. As of June 4, 2019, purchasers with an aggregate purchase price of $379,166 were either granted rescissions or early refunds of their investments, thereby decreasing the total consideration received to $693,684.

 

(6) Includes 16,341,333 Props Tokens issued as of July 15, 2021 pursuant to agreements with our advisers (including 292,184 Props Tokens that the Company conditionally intends to issue to a former adviser as liquidated damages in connection with the termination of an adviser relationship). Also includes 587,127 Props Tokens that remain issuable as of July 15, 2021 pursuant to these agreements pending confirmation of wallet addresses, 1,139,583 Props Tokens issuable as of July 15 subject to certain vesting requirements, and 27,154,342 Props Tokens that were issued pursuant to a token option agreement entered into with an adviser, at an exercise price of $0.00125 per Props Token.

 

(7)

Advisors did not pay cash in connection with entry into these agreements. This amount is calculated based on a price of (i) $0.1369 per Props Token for all Props Tokens issued pursuant to these agreements on or before June 30, 2021, which was (a) the effective undiscounted per Props Token price paid by purchasers of our SAFTs and (b) the price per Props Token at which Props Tokens were offered in the Props Offering and the Props PBC Offering on or before June 30, 2021, and (ii) $0.0600 per Props Token for all Props Tokens issued or issuable pursuant to these agreements on or after July 1, 2021, the per Props Token price of the Props Tokens being qualified for issuance in the Props Offering and the Props PBC Offering on or after July 1, 2021, provided that the price of the Props Tokens in the Props Offering and the Props PBC Offering is subject to further change. See “Terms of the Offerings—Pricing.” For all Props Tokens issuable pursuant to the token option agreement, this amount is calculated based on a price of $0.00125.

 

(8)Includes the 10,500,000 Props Tokens that Paltalk, Inc. earned the right to receive upon the achievement of certain milestones, the 5,500,000 Props Tokens that Listia Inc. received in connection with entering into an agreement with the Company and that it earned the right to receive upon the achievement of a milestone, the 1,100,000 Props Tokens that Tegger DLT Inc. received in connection with entering into an agreement with the Company and that it earned the right to receive upon the achievement of a milestone, the 4,200,000 Props Tokens that Roomi Inc. may receive pursuant to its agreement with the Company and the 4,500,000 Props Tokens that Roomi Inc. may receive pursuant to its agreement with the Company.

 

(9)

None of the Props App Developers paid cash in connection with their entry into their agreements with the Company. This amount is calculated based on a price of (i) $0.1369 per Props Token for all Props Tokens issued pursuant to these agreements on or before June 30, 2021, which was (a) the effective undiscounted per Props Token price paid by purchases of our SAFTs and (b) the price per Props Token at which Props Tokens were offered in the Props Offering and the Props PBC Offering on or before June 30, 2021, and (ii) $0.0600 per Props Token for all Props Tokens issued or issuable pursuant to these agreements on or after July 1, 2021, the per Props Token price of the Props Tokens being qualified for issuance in the Props Offering and the Props PBC Offering on or after July 1, 2021, provided that the price of the Props Tokens in the Props Offering and the Props PBC Offering is subject to further change. See “Terms of the Offerings—Pricing.”

 

(10) Cash was not paid in connection with entry into this agreement with the Company. This amount is calculated based on a price of $0.1369 per Props Token, the effective undiscounted per Props Token price paid by purchasers of our SAFTs.

 

(11)Includes 4,735,713 Props Tokens that were issued in connection with the  exercise of warrants granted in connection with the April 2020 Private Placements. The warrants were exercisable at $0.07 per Props Token. Warrants for the purchase of 3,321,430 Props Tokens expired unexercised.

 

(12)Includes the total cash and non-cash consideration paid in connection with the April 2020 Private Placements, assuming that all warrants issued in connection with such sales are exercised at their exercise price of $0.07 per Props Token.

 

(13)None of the exchanges or the marketing services provider paid cash in connection with their entry into their agreements with the Company. This amount is calculated based on a price of $0.1369 per Props Token, the effective undiscounted per Props Token price paid by purchases of our SAFTs.

In the future, we may sell Props Tokens or rights to receive Props Tokens in additional private offerings.

 

Prior to the date hereof, the Company issued 100,000,000 Props Tokens to Props PBC for no cash consideration. Props PBC may distribute up to 45,000,000 additional Props Tokens pursuant to this offering statement, in addition to the Props Tokens previously distributed by Props PBC pursuant to the qualification of 45,000,000 Props Tokens under this offering statement. See “Plan of Distribution—Props PBC Offering” for additional details. Because Props PBC will be deemed to be a statutory underwriter under Section 2(a)(11) of the Securities Act, the issuance of Props Tokens from the Company to Props PBC may be characterized as an underwriting commission. Any of the Props Tokens distributed by Props PBC in connection with the Props PBC Offering will, however, be distributed for no cash consideration.

 

The Props Tokens distributed in these offerings will not be restricted securities under federal securities law, and the Company anticipates that these Props Tokens will be usable without restriction on the Props Network, including, in the future, for any tipping functions. As of the date hereof, we are not aware of any national securities exchange or exchange registered under Form ATS with the Securities and Exchange Commission that lists the tokens for trading. Since January, 2021, we have entered into agreements with three centralized digital asset exchanges outside the United States to list Props Tokens for trading. Those agreements provide that trading on such exchanges is for persons who are not U.S. Persons (as defined under Regulation S under the Securities Act), and such exchanges have made commitments to us that Props Tokens will not be available for trading by U.S. Persons. In addition, four other centralized digital asset exchanges with which we have not entered into any agreements have chosen to list Props Tokens for trading, and as such they have not made commitments to us that Props Tokens will not be available for trading by U.S. Persons. Props Tokens are also listed for trading on two decentralized digital asset exchanges with which we have not entered into any agreements, and as such they have not made commitments to us that Props Tokens will not be available for trading by U.S. Persons. Holders of Props Tokens that wish to transfer these Props Tokens will be required to make their own determination as to whether such transfer is in compliance with state and foreign securities laws, as applicable.

 

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DESCRIPTION OF BUSINESS

 

Overview

 

The Company is a Delaware corporation founded in April 2011 under the name Bnow, Inc. On November 19, 2012, the name was changed to Open Props Inc. The Company has five wholly-owned subsidiaries, Open Props Research and Development Ltd., Switch RTC Ltd., Open Props Services, LLC, The Props Foundation Public Benefit Corporation, and Props International Corp. (“PIC”). Open Props Research and Development Ltd. is an Israeli company that was formed in September 2014 with the purpose of recruiting and employing engineers in Israel. Switch RTC Ltd. is an Israeli company acquired by the Company in February 2018 for its many-to-many video infrastructure, which was integrated into the Company’s product offerings. Open Props Services, LLC is a Delaware limited liability company that was formed in December 2017 to facilitate the offering of the Props Tokens under the DPAs. PIC is a Panamanian corporation that was formed in April 2020 to enter into strategic transactions with non-U.S. counterparties. The Props Foundation Public Benefit Corporation is described in more detail below.

 

Historically, the Company was in the live streaming video industry and was the first company to popularize social, live video streaming on mobile devices in the United States. Since 2017, the Company has leveraged its technology, expertise, user community and other assets to build the infrastructure for an open, decentralized digital media network called the Props Network. Given the Company’s substantial experience in developing and operating a consumer-facing mass market participatory video app using digital currency, we believe we are uniquely positioned to help develop this next-generation digital media network.

 

The Company’s first mobile application, the YouNow Livestreaming App, provides a platform on which any user can broadcast to a live audience, watch video content and engage with content creators (broadcasters) and other users. Subsequently, the Company developed two additional apps: the Rize app, which was merged into the YouNow Livestreaming App in October 2018, and the Game Show App. We discontinued operating the Game Show App in early 2019. At the time, we anticipated that the Props Tokens would be released for usage in our apps much earlier, and we built Game Show App on that premise. We thereafter decided to discontinue the Game Show App.

 

In order to enrich the participatory experience, encourage user engagement and empower content creators on the YouNow Livestreaming App, the Company created one of the first two-sided virtual economies in the United States, with incentives for both content creators (broadcasters) and other users (fans). The Company’s effective digital economy, powerful video technology and broadcasting tools, and the engaging, gamified user experience it has created helped it attract over 2.8 million content creators and more than 50 million registered users to the network since its inception, all of whom make up the seed user base for the YouNow Livestreaming App.

 

With the launch of the Props Network, the Company’s Props team continues to pioneer a network of applications and users operating within a decentralized economy. In March 2019, the Company began distributing Props Tokens to SAFT holders as described under “Other Offerings,” and thereafter, the YouNow Livestreaming App provided functionality for Props Tokens, as described in “Annex A: YouNow Livestreaming App Plan of Props Token Usage.” Our goal is to create a network that empowers its content creators, developers and users, and that is fundamentally structured to better align the incentives of these various network participants. The Props Token, the Props Network and open source tools will serve as the enabling infrastructure for the Props Network.

 

The Company merged the YouNow Livestreaming App and the Rize app in October 2018 in order to shift all of the Company’s existing users to the Props Network.

 

On February 26, 2020, the Company sold the YouNow Livestreaming App to a third-party acquirer, and at the end of the day on February 29, 2020 transferred the operation of the app to that acquirer. The YouNow Livestreaming App was key to the Props Network launch and the initial adoption of the Props Token, and continues to reward its community with Props Tokens. Following the sale of the YouNow Livestreaming App, the Company is focused exclusively on growing the Props Token economy. The team works with a wide variety of apps and acts solely as a token propagator and shepherd of the Props Network development, and not as the operator of any consumer apps.

  

The Props Foundation Public Benefit Corporation is a Delaware public benefit corporation that was formed in September 2018, with a designated public benefit purpose of creating an open, sustainable and equitable media network that fairly rewards all participants, for their contributions to the network, by supporting and promoting the growth, research, development, and adoption of the protocol and token underlying the Props Network. In addition to ensuring early fundamental utility, Props PBC is responsible for overseeing the development of critical infrastructure used by the ecosystem, including wallets and other services for holding or spending Props Tokens. In addition, it is anticipated that Props PBC will sponsor activities like hackathons, competitions and promotions to develop ecosystem infrastructure, build the Props Network developer community and grow awareness for Props Tokens. Bounties, which may be publicly published by Props PBC, may be associated with specific projects. We anticipate that administering Props PBC’s discretionary grants and infrastructure development budget will be a diligent process to ensure investments in the ecosystem yield maximum value. It is also important to diversify decision-making processes and Props PBC will direct a portion of its grants based on input from Props ecosystem participants and Props token holders.

 

The Company and Props PBC expect to fund their future operations through income generated from sales of Props Tokens in transactions not qualified in these offerings, which will be either registered or exempt from registration under the Securities Act, and from purchases and sales of other digital assets. The Company is also exploring other potential revenue sources.

 

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Props Network

  

The Props Network was designed to address the problems inherent in today’s highly centralized digital media landscape, in which a small number of large companies effectively control digital media distribution and access. These companies have accumulated hundreds of billions of dollars in enterprise value, yet only a very small fraction of that value flows back to the people who create value for these networks, namely their content creators, curators and publishers, and the developers building on top of them. These issues are not unique solely to digital media, and Props Tokens are being considered by developers of other types of consumer apps as well. The large companies that control the networks monetize the attention and information of their users and extract the vast majority of financial value out of the network, while network users and contributors do not benefit from the vast majority of financial value of the network they constitute.

 

We believe networks that incorporate distributed ledger technology and digital asset-economic business models offer opportunities to build a digital media platform that better aligns the incentives of network participants, enabling the facilitation and enforcement of value sharing, empowering a sense of community ownership. As a result, our long-term strategy is to create a decentralized token economy that operates across many apps, where the Company and Props PBC play an increasingly smaller role in making key decisions affecting the Props Network as other network participants, in turn, play increasingly larger roles in maintaining the Props Network. We believe that through our platform, we will tokenize the digital economy so as to reward the users and participants who help digital communities grow.

 

Props Tokens are a key element of the Props Network. Props Tokens are Ethereum-based and “ERC-20”-compliant cryptographic tokens, which means that they are a digital asset existing on the Ethereum blockchain. The rules governing basic functions of the Ethereum-based “smart contract” that creates Props Tokens (the “Token Code”) adhere to widely-known conventions. See “Description of The Props Tokens Being Offered.

 

The Company and Props PBC Network Support

 

Initially, as described in “Description of the Props Network,” both the Company and Props PBC play significant roles in guiding the development of the Props Network. In part, the Company will play this role by performing essential functions in the Props Network—as in the case of developing the network open-source software and serving as an Oracle. In addition, as discussed above in “Description of the Props Network—Props PBC,” Props PBC plays a key governing role with respect to the Props Network “smart contracts,” and plays a key role in determining who may become a part of the Props Network. Props PBC also may make grants or expense reimbursements, on a discretionary basis, to (i) developers building either apps on the Props Network or Props Network infrastructure, (ii) strategic content partners, and (iii) other entities directly supporting the growth of the Props Network, as well as issue Props Tokens for cash. Props PBC intends to support these functions in light of our stated public benefit purpose to create an open, sustainable and equitable media network.

  

In January 2018, we formed a nonprofit foundation based in the Seychelles, The PROPS Foundation. That company is no longer in existence.

 

Expected Development Timeline and Costs

 

We operate the Props Network with eight key components, which include (1) open-source software tools that establish the connections/interfaces with the rest of the apps on the network and the rest of the network infrastructure; (2) the apps that incorporate this software into their code; (3) the Algorand blockchain, which we use to create a publicly-available record of both app usage data and future rights to Props Tokens created from data supplied by Props Apps (4) Oracles; (5) the Token Code; (6) the Protocol Rewards Engine; (7) Props PBC, which will oversee key functions for the Props Network; and (8) app users. The software and infrastructure for the basic functions of these key components of the Props Network have been operational since qualificationalthough the number of participants working with this software and infrastructure is now limited to three Oracles, including the Company. See “Description of the Props Network” for additional details regarding the Props Network’s key components.

 

The Props Network is, however, still being further enhanced, and we expect that we will continue to make developments and improvements on the above-described key components to the Props Network into the foreseeable futureas well as expand the Props Network’s operations by increasing participation. We expect, for example, that we may make updates to the Props Networks’ “smart contracts” on and will continue to create or encourage the creation of additional functionality for Props Tokens. See “Description of The Props Tokens Being Offered—“Smart Contract” Modifications and Changes to Token Functionality” and “Description of the Props Network” for additional details. We expect that these efforts will continue throughout the foreseeable future. We also expect to add additional Props Apps to the Props Network.

 

The further development of the Props Network will not affect the ability of the operator of any Props App to deliver the Props Tokens to users of that Props App. Further, there will be no delay in the delivery of Props Tokens due to the need for further development of the Props Network.

 

We devoted a significant amount of our development efforts to preparing the YouNow Livestreaming App for the integration of Props Tokens throughout 2019. See “Annex A: YouNow Livestreaming App Plan of Props Token Usage” for a description of the YouNow Livestreaming App and “Risk Factors—Risks Related to the Further Development of the Props Network” for additional discussion regarding risks related to the development of a substantial user base and the Props Network. Because the Props Tokens may be users’ first experience with digital assets, we expect that each Props App Developer will need to devote significant efforts to help acclimate users to Props Tokens, and we have designed some of the Props Network’s key components, including the wallet functions, in order to make the experiences of Props Apps users of digital assets relatively easy.

 

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We are devoting significant efforts to working with app developers who are interested in developing additional Props Apps. We expect that, as the base of users for the existing Props Apps grows, additional app developers will become interested in developing Props Apps. Props PBC may make grants of Props Tokens to some of these developers. See “Plan of Distribution—The Props PBC Offering” for additional detail regarding the grants program. 

 

Assignment, Decentralization

 

In the future, we could take a less active role in guiding the development and administration of the Props Network. This could occur as a result of the assignment of the ownership of the Protocol Rewards Engine or other parts of the Props Network infrastructure to Props PBC or taking other actions that we would deem necessary to assign the operation and maintenance of the Props Network infrastructure to Props PBC. Depending on the actions we take and how completely the essential managerial and entrepreneurial efforts that Props Token holders would be relying upon would become those of Props PBC and not the Company’s, we believe that this could result in Props PBC becoming the issuer of the Props Tokens. We believe that this determination could only be made in consultation with counsel and, if appropriate, the SEC or its staff. If this were to occur, we will work to ensure that Props Token holders receive notice through public filings on EDGAR, through Props Apps, and through social media. We will also work with the SEC to help ensure that Props Token holders have adequate advance notice of these changes. We do not, however, anticipate that Props Token holders will have any rights in determining that decentralization of the Props Network to this extent has occurred. See “Risk Factors—In the future, we could assign essential components of the Props Network, including the Protocol Rewards Engine, to Props PBC, which ultimately could negatively affect the Props Network and the value of the Props Tokens, and may ultimately result in us disclaiming our status as the issuer of the Props Tokens.

 

We could at some point in the future take a less active role in guiding the development and administration of the Props Network as a result of increasing decentralization of the Props Network. For example, we anticipate that, in the future when there is a healthy ecosystem of Props App developers and users on the Props Network, we could entrust the Controller authority to a DAO, which would then enable Props Token holders to vote on changes to these “smart contracts.” We do not believe that decentralization like this will occur at any time in the foreseeable future and therefore do not presently have a fixed procedure for how it would be implemented. If any significant change to our platform such as this were to occur, it would require the approval of the board of directors of Props PBC and the substantial support of our community of users and Props Token holders. Users and Props Token holders will not, however, have any enforceable rights with respect to decisions regarding significant changes to the platform. We anticipate that we would communicate our consideration of such a change to our users and Props Token holders using methods that may include the following: posting on our social media accounts (including on twitter and telegram), providing notifications on our website, sending out emails to our mailing list and, if applicable, filing a post-qualification amendment or supplement to this offering circular. Our users would be invited to provide input using methods that may include the following: replying to our messages on social media and through email, completing surveys, providing non-binding, advisory votes on proposals (voting mechanisms may include voting through the use of a Props Token) and attending virtual video “town hall” meetings to engage in discussion and provide feedback. In addition to providing notification and soliciting our users’ input, we would need to create additional technological capabilities in order to successfully effect such decentralization. Further, while the law for this is evolving, we believe that, subject to the view of the SEC, it is possible that at some point in the future the Props Network could become so decentralized that Props Tokens would no longer be considered to be securities issued by the Company.

 

We believe that the determination that the Props Network is so decentralized that the Company is no longer the issuer of the Props Tokens likely will turn on whether purchasers reasonably expect the Company to carry out essential managerial or entrepreneurial efforts. A mix of facts and circumstances may inform whether the efforts of the Company are no longer a key factor for determining the success of the Props Network and the Company may no longer have an informational advantage over others, so that disclosures by the Company may be less meaningful. We do not believe, for example, that this will necessarily occur if we entrust Controller responsibilities to a DAO, and we believe that this determination could only be made in consultation with counsel and, if appropriate, the SEC or its staff. If this were to occur, we will work to ensure that Props Token holders receive notice through public filings on EDGAR, through Props Apps and through social media. We will also work with the SEC to help ensure that Props Token holders have adequate advance notice of these changes. We do not, however, anticipate that Props Token holders will have any rights in determining that decentralization of the Props Network to this extent has occurred.

 

Borderless Agreement

 

As part of the closing of the April 2020 Private Placements, a memorandum of understanding between the Company and Borderless Management LLC (“Borderless”), one of the new institutional investors, became binding. The memorandum of understanding requires us to, among other things, migrate a portion of our operations (relating to the holding and delivery of Pending Props) from the Props Blockchain to the Algorand blockchain; work to create a version of the Props Token that can run on the Algorand blockchain; collaborate with Borderless to increase the liquidity and availability of Props Tokens on the Algorand blockchain; collaborate with Borderless to increase the possibility of exchange listings of Props Tokens; and collaborate with Borderless to use good faith efforts to introduce existing or future Apps to the Algorand blockchain for integrating with the Props Network, as and when feasible. See “—Foundation Agreement” below.

 

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Foundation Agreement

 

On April 24, 2020, PIC, a Panamanian subsidiary of the Company, entered into an agreement (the “Foundation Agreement”) with Algorand Foundation Ltd. (the “Foundation”). The Foundation is a non-profit Singapore public company whose stated objectives include the establishment of an open, public and permissionless blockchain based on the Algorand protocol and open source software initially designed by Silvio Micali and others. Pursuant to the Foundation Agreement, the Company agreed to migrate the Props Blockchain for Pending Props to the Algorand blockchain. The Foundation Agreement also provides that the Company and the Foundation will enter into a formal collaboration to explore the feasibility and desirability of a broader transition of the underlying infrastructure of Props Tokens from the Ethereum blockchain to the Algorand blockchain, following a successful completion of the Pending Props migration, subject to both parties reasonably concluding that completion of this broader transition is feasible on commercially reasonable terms and desirable for both the parties and the holders of Props Tokens. The Foundation Agreement offers various incentives to the Company in the event the Pending Props transition is successfully completed and in the event the broader transition is undertaken thereafter and successfully completed. The migration of Pending Props to the Algorand blockchain has now been completed.

 

Sale of the YouNow Livestreaming App

 

On February 26, 2020, we entered into an agreement (the “Asset Purchase Agreement”) for the sale of certain of our assets relating to and including the YouNow Livestreaming App. The sale was made to YouNow Media, LLC (the “Acquirer”), an unaffiliated entity, on an arm’s-length basis. As of the same date, we and the Acquirer closed the sale and the Acquirer entered into a separate agreement with us (the “Props Services Agreement” and, together with the Asset Purchase Agreement, the “Agreements”) to continue to operate the YouNow Livestreaming App as part of the Props Network and to continue to reward YouNow Livestreaming App users with the issuance of Props Tokens. Thereafter, as of March 1, 2020, the Acquirer became the YouNow Livestreaming App Operator and hired all of our employees whose functions principally involved operation of the YouNow Livestreaming App (but not our senior executives). We refer to the foregoing events collectively as the “Transaction”.

 

Effects of the Transaction

 

By consummating the Transaction, we believed that we had achieved a number of our near-term business goals, and had improved our ability to achieve our longer-term business goals. As a result of the Transaction, we established a formal separation between our role as an issuer of SEC-qualified cryptographic Props Tokens, which can be used across multiple mobile applications and websites belonging to the Props Network, and our former role as the YouNow Livestreaming App Operator, which is part of the Props Network (alongside six other Props Apps. The Transaction also removed the potential concern that we might provide preferential treatment to our own app in our operation of the Props Network; as a result, our sale of the YouNow Livestreaming App may make joining the Props Network more attractive to additional third-party apps.

 

We also believed that the Transaction might increase the Company’s appeal to investors as a “pure play” token and network propagation business, and thereby facilitate the raising of additional investment, which is critical to our continued operations. Moreover, the Transaction provided the Company with additional working capital. The Company has long been projecting its need for additional cash and cash equivalents to fund ongoing operations. See, e.g., the Company’s amended Offering Statement on Form 1-A/A filed September 27, 2019, in the Risk Factors section at page 33 (projecting cash availability through May 31, 2020), most recently affirmed in the Company’s amended Offering Statement on Form 1-A/A filed February 10, 2020. In the near term, the Transaction also reduced the Company’s ongoing monthly operating losses and its cash burn rate, which were higher when the Company’s operations included the YouNow Livestreaming App as well as the operations associated with Props Token issuance and the Props Network.