Token Sale

Aero Token ICO: Dubious Prospects for the Drone Superhighway

AERO proposes a blockchain-based system for granting, utilizing, and paying for avigation easements for commercial drone flights in the United States. With billions of dollars spent developing drone technology, and despite years of forecasts that drone deliveries are just around the corner, America’s commercial drone delivery fleet has nevertheless remained grounded. AERO Token argues this is because little attention has been given to the challenging legal and administrative aspects of drone operation, specifically relative to questions of right-of-way. Aero Token seeks to address what it labels a critical and overlooked step with its plans to establish a network where property owners can voluntarily incorporate their largely underutilized overhead airspace into the sharing economy by authorizing drone overflights. In the process participants can earn additional income, facilitate the almost instantaneous satiation of America’s commercial needs, and help long-promised thirty-minute delivery finally become a reality. The ultimate result will be the emergence of an overhead “drone superhighway” as drone use soars, once freed from the shackles of legal uncertainty.  So critical is this need, and so important is AERO Token’s solution to the long-stalled efforts to make drone deliveries a reality that AERO feels comfortable declaring unequivocally in its whitepaper that “If drones had a permissible framework to operate within, the future of commercial air services would come to fruition.”

While the project is immediately appealing upon casual consideration, a closer examination lead us to have a number of very troubling questions. Specifically, the company’s case seems to be primarily built around a particular reading of a handful of relatively obscure legal cases that raised red flags for us once we considered them more carefully. Subsequent conversations with a number of sources confirmed to us that AERO’s interpretation of these cases is considerably outside the mainstream. Morevor, AERO presents its solution as the missing link allowing commercial drone flights to begin, as noted above, without any mention of the fact that under the existing scenarios as we understand them, commercial drone delivery is ridiculously uneconomic, and that there is in fact no meaningful market for such deliveries. Moreover, upon reviewing the bios posted to the AERO website, the AERO team appears to have no direct background in the drone, blockchain, aerospace fields, has virtually no public project code, and is proposing a project that simply from the standpoint of network enrollment seems to us to be highly unworkable.

At Smith + Crown we spend hours each week reading whitepapers and learning about different technologies, teams, and industries. The range in quality that we see in projects is enormous. Time permitting, we tend to write on the most interesting, usually from technical, blockchain or industry perspectives, because we enjoy doing so, because readers tell us they appreciate it, and because this is a decent strategy for directing readers to ICOs offering what we believe to be likely better prospects for success. Projects we consider to be of average, or worse, quality or significance we tend to ignore, at least publicly. Today we are deviating from our standard practice to explore an ICO we consider to be of, at best, poor quality. We do so out of a desire to contribute to industry efforts to self-police and demand best practices from companies presenting ICOs. We also feel that a proposal to raise $100 million from a group with apparently little direct experience in its target sector, no public code, and what appear to us to be a relatively poor understanding of the problems facing the industry they seek to disrupt to be a bit excessive. While we chuckled at media reports “of companies raising $10 million with merely a whitepaper,” (because in fact our data shows very few cases of this actually happening) when the bar is raised to $100 million for an effort to “solve” a problem with a solution that does not seem to be feasible, then perhaps it’s an opportunity for a case study in poor practices in token sales. It’s also a chance to discuss the complexities and challenges of due diligence in this industry. While no two projects are identical, and there are no definitive methods for every due diligence enquiry, we believe that a generally skeptical attitude is usually an effective default position.

What is the Project

The AERO Token (Avigation Easements Rights and Ownership) seeks to employ the blockchain to create, monitor, and monetize temporary Right-of-Way (ROW) corridors for commercial drone operations. These corridors will be established when property owners enroll in the AERO network and advertise to the blockchain the availability of the airspace above their property for use by delivery drones. Drone operators will pay for airspace reserved through the network by using AERO tokens, and members will be compensated with tokens when drones pass overhead.

The AERO white paper argues, through a carefully crafted chain of legal citations, that at present drones flying over private property at low altitudes are formally considered to be trespassing, and that there is little hope of legislation resolving this problem due to a complex set of legal precedents and jurisdictions. AERO creates this perception by referencing a series of legal cases dating as far back as the 1940’s, when precedent was set establishing a property owner’s overhead air rights to “as much space above the ground as they can use in connection with the land.” AERO also appears to suggest (but does not state explicitly) that this area of privately-owned airspace extends from the ground 500 feet up. Further, AERO argues, the Federal Aviation Authority (FAA), which establishes airspace rules across the country and has authority over all airspace above 500 feet, is not qualified to authorize commercial drone flights below 500 feet because such airspace is considered to belong to the property owner, and property rights are established at the state level. Importantly, characterizing the situation in this manner creates the presumption that there is no place for drones to fly; above 500 feet is restricted airspace reserved for commercial transport, while below 500 is the exclusive domain of property owners.

This interpretation by AERO also suggests that even if there was a federal rule authorizing drone flights below 500 feet, such regulation might very well be invalid as this would represent an encroachment on state-based property rights. While laws governing drone corridors could be enacted at the state level, obtaining passage of a law in every state likely would be a complicated, time-consuming process that could very well prevent commercial drone operations for some lengthy, undetermined period.

AERO Token’s proposed solution is that into this regulatory uncertainty landowners can interject themselves by voluntarily enrolling in AERO Token’s blockchain-based registry that will advertise to the blockchain that certain airspace is available for overflight. Homeowners will be able to indicate precise periods during which their airspace is available. As an increasing volume of homeowners enroll with AERO, broader swathes of contiguous airspace will begin to emerge, eventually forming full-fledged, contiguous networks. Commercial drone operators will query the database when planning a flight, notify AERO’s network of chosen itineraries, and spend AERO tokens to compensate the landowners beneath their intended routes. The result, AERO believes, is that property owners will have their long-awaited solution to the question of underutilized overhead airspace, and commercial drone operators will finally have legal access to the itineraries necessary for their drone fleets to soar freely.

Concerns with AERO’s Arguments

While AERO’s presentation of the  current landscape and its proposed solution at first glance seems clever and superficially appealing, a number of problems emerge upon a more careful perusal of its arguments. Methodologically speaking, presenting an argument to laypeople involving a specific set of rather nuanced legal citations and interpretations we believe can easily lead to confusion and misunderstanding.

Our own reactions were of curiosity. In our experience, whitepapers rarely base their arguments around legal interpretations, particularly not complex ones requiring specialized knowledge and background. When presented with a series of legal citations for which we could not possibly have the training or contextual knowledge to analyze, a number of questions immediately came to mind. First, we could not help but wonder whether the citations were correct and cited faithfully. Were the most relevant citations represented, and represented accurately? Have they been superseded by more relevant cases? Are the interpretations presented generally accepted ones, or the subject of dispute within the field? We believe that for anyone other than a lawyer working in this highly specialized field, it is simply impossible to evaluate these claims or the obvious questions they naturally raise.

Interestingly, our own research yielded evidence suggesting a range of industry interpretations of the same legal precedents AERO cites to present its argument for individual ownership of airspace below the 500 foot level. While AERO implies the questions of airspace rights are clear cut, our research revealed that the drone industry is much less certain about such conclusions. A recent blog post from Aerotas, consultants and providers of drones for land surveyors, conveniently titled “Who owns the air above your home?” argues that there is no common understanding of the status of air rights between 85 and 500 feet above one’s property. Aerotas goes on to suggest that whatever solution eventually does emerge will come about only after a series of court battles, likely even to be determined ultimately by the Supreme Court. Slate makes a roughly similar argument concerning the many questions about who actually owns overhead airspace in a 2011 article. In both cases, 85 feet, and not 500, is described as the general understanding of the upper limit of a property owner’s air rights. All references to the 85 foot level trace their claim back to the same 1940’s court cases that AERO implied justified a 500 foot ownership claim. This is an absolutely essential distinction, for if a landowner’s claim is commonly understood to stop at 85 feet above ground there remains a significant space between 85 and 500 feet where a drone corridor could be designated. If regulations establishing such a corridor were indeed promulgated, this would instantaneously render AERO’s proposed solution completely obsolete.

Another expert with whom we communicated, an academic working in the drone field, suggested exactly this as a potential outcome. He observed that if the FAA were to create a designated zone for autonomous drones, perhaps in the 400-500 foot range, well above the 85 foot limit widely recognized as being associated with individual property holdings, such a declaration would likely go uncontested. He also observed that if this or another corridor was reserved for drones to overfly private property there would be absolutely no need for AERO or its tokens. While handicapping potential outcomes from amongst these legal and regulatory prospects are well beyond our area of expertise, we believe that there clearly is a wider range of interpretations of existing legal interpretations of air rights ownership than the AERO whitepaper would lead a reader to believe. More importantly, given that AERO Token faces a major “catastrophe risk” from the standpoint of essentially unquantifiable exposure to a judicial or regulatory decision that might invalidate its entire business case, we believe it would have been at minimum considerate of the company to point out this potential major flaw to prospective ICO participants.

Troubling as the above is, additional questions about the problem AERO claims it is addressing can also be identified. One is that the question of regulation extends beyond the matter of height limits for commercial drones flying above private property. Commercial drones are also prohibited from flying above “uninvolved” people such as pedestrians, and over public spaces such as roadways where people or moving vehicles are present. It is unclear how AERO’s proposed solution to the problem of drone right-of-way would address this issue. Even if an entire neighborhood enrolled with AERO to allow drone overflights, it is unclear how a drone would access that neighborhood without crossing a public roadway likely populated with “uninvolved” people and moving vehicles. Other technical issues, such as drones still being largely unable to avoid objects in their flight paths, “whether power lines, other drones, balloons, or thrown shoes,” as one commercial drone operator stated to us, suggests to us that the commencement of large-scale drone deliveries is going to take more than simply the establishment of a blockchain-based right-of-way system.

Even if the problems of regulation and authorization were to simply disappear, somehow magically resolved entirely in AERO’s favor, there is another angle from which AERO’s ostensible solutions would still have to grapple (and also which was not disclosed in the whitepaper). For instance, the question of plausible economics. AERO’s whitepaper makes no mention of any questions of finances, which is something we would have expected to see. There are no micro discussions of any amounts property owners might expect as compensation, nor macro considerations of whether there are indeed sufficient volumes of goods that might be transported by drones willing or able to pay fees associated with the network. These are critical issues in any whitepaper, for we believe that a project must ultimately prove commercially viable. Readers of whitepapers and potential ICO investors have a right to at least a minimum explanation of a project’s economic context and strategy.

Fortunately, a December 2016 Marketwatch article explored the economics of drone delivery at some length, concluding that well-publicized drone deliveries are “always a one-off thing” and “a pretty good publicity stunt” but as they are “about 10,000 times more expensive than UPS or FedEx Ground,” drone deliveries are generally without underlying financial justification. “For the vast majority of goods, drone delivery does not make economic sense,” and that “[t]he key is finding a big enough niche where people will be willing to pay this huge price premium for, honestly, a marginal improvement in speed.”

While there are legitimate and financially viable use cases for business-to-consumer drone delivery, they remain relatively few. Even the cases where the economics are more favorable–places like Lesotho which lack a complete road network–aren’t the patchwork of private properties that might need a distributed economic system for one-off permission. And although the legal and regulatory uncertainty surrounding aspects of the drone space is real, the economic realities concerning the relatively exorbitant costs of drone delivery are also very substantial, and highly relevant to the question of what the actual missing steps are before we believe drone delivery becomes commonplace. AERO in its whitepaper makes no acknowledgement of these issues or how it is addressing them. Whether this is a deliberate omission or simply lack of awareness is perhaps less important than the fact the whitepaper’s complete lack of discussion of its business case is in our view simply unacceptable for a project targeting an existing industry such as business-to-retail delivery.

The Question of Network Recruitment

Another daunting challenge which will likely confront the AERO team, should a need for the network emerge, is the issue of enrolling property owners. This is actually comprised of a number of distinct problems. Once property owners are identified, they must be introduced to the concept, which presumably would require some variable amount of time and effort, before they can be signed up to the network. However, before enrolling in the network property ownership status must be verified. While not the most difficult problems in the world, when multiplied by millions of potential members that would be required for AERO’s project to develop as a comprehensive network, the sheer quantity of time required begins to add up. While the challenges of network enrollment may account for the target raise amount of $100 million, most ICO investors would presumably be somewhat alarmed to learn they had just committed to funding what would effectively become a vast, nationwide door-to-door marketing pitch.

AERO claims to have planned for the challenges of initial enrollment operations, reserving a substantial quantity of tokens to incentivize early adopters to the network. These early adopters will be rewarded with AERO tokens from shortly after their enrollment, as if the network was fully operating. The assumption is that word of mouth will do much of the heavy lifting of advertising; as neighbors hear that someone down the street is making a few dollars a month renting their airspace, “an underutilized asset which they likely were not using anyhow” in the parlance of the sharing economy, they too will want their share of ICO-funded free money.

Whether these assumptions prove correct is difficult to estimate at the current time. Given the variety of ages, ideological backgrounds, and sentiments towards issues like privacy and drone flights amongst the American population, there certainly seems to be reason to be cautious. While the idea of “free money” from leasing the underutilized airspace above one’s home is obviously appealing, a few dollars per month while drones zip overhead may be deemed not worth the disturbance by many. AERO’s white paper contains no effort to estimate subscriber densities that would be required for the network to begin to function effectively. This question seems central, as even if this project went forward somehow, the value of the network would remain effectively zero until the point when contiguous flight paths take shape across enough regions for shippers to have access to enough available flight paths for them to begin to incorporate drones and the AERO network into their operations. Sadly, we believe that this critical omission is yet another example of AERO overlooking information that many would consider relatively central to a serious business plan.

What is the State of the Technology?

It is unclear how far along AERO’s technology actually is. To date, they have not shared any code that would be used in the system they are proposing. Diagrams in the white paper describing how AERO “anticipates” its systems “will primarily consist of” various items suggest that the full system may not yet be fully conceptualized. AERO management indicated that the exact product timeline would be dependant upon the amount raised in the ICO.

Also of note is that  the AERO white paper does not mention how any ICO funds raised will be spent, or if there is any sort of timeline to develop AERO’s technology, both of which are things that we believe should be a material part of any such document.

Team

AERO is led by a team with diverse expertise but from the bios we were able to review on its website, evidently with no demonstrable background or experience in the drone industry. According to the AERO website, co-founder Chase Perkins studied finance before earning a law degree from the Loyola University of Chicago School of Law, and previously founded Thoughtly, a Machine Learning for Natural Language Processing Startup. Co-founder Eric Wroble, who has not actually listed the project on his LinkedIn profile, is a database architect with a mechanical engineering degree. AERO’s third co-founder Hayley Halpin has a finance degree and investment bank experience in mergers and acquisitions. Thus, from the information listed on the AERO website, none of the co-founders seems to have either a direct link to the drone industry or background that would be expected in order to provide context for the challenges the company will likely face in pursuing its stated goals. Several advisors are also listed on the website, and these also seem not to have any direct experience in the drone industry.

Conclusion:

AERO Token’s project, as represented in its whitepaper and the company’s other materials available from its website, seems to be an incomplete appeal for investor support. The whitepaper does not address important and relevant concerns that industry experts have—or that anyone who performed casual research beyond the company’s documents would unearth. Even if one chooses not to dispute the company’s particular interpretation of legal precedent, the economics of drone flight would present formidable challenges to adoption of AERO’s proposed technology. AERO would have been better served addressing the issue of economics in its published materials.

Given that none of the AERO team appears to have any background in the drone industry, their apparent lack of familiarity with mainstream industry interpretations of the issue of airspace ownership may simply be due to a genuine lack of understanding of the space.

Finally, thinking more broadly about the question of best practices surrounding ICOs and the broader context of this discussion, the past week was an eventful one. Both Wikipedia founder Jimmy Wales and the highly perceptive hedge fund manager Kyle Bass warned of the outright scams that can occur within the world of ICOs, in each case while affirming that the underlying technologies and long-term potential were genuinely interesting. From our perspective, we are often cautious relative to comments about “the scam-ridden world of ICOs” by noting that the number of outright frauds remains relatively low–despite some significant and high profile cases, as well as numerous small-scale thefts, hacks, and scams about which we have no interest in being apologists for or dismissing as insignificant–but we also prefer to focus on the transformative innovations also being advanced by many groups in the sector. We also take satisfaction from looking at our data that shows–and we will write more about this on another day–that the ICO market is actually quite discerning in that the poorest and most unlikely projects have a strong record of receiving little to no funding.

Nevertheless, the success of the ICO market, with well over $2 billion raised so far, unfortunately has a significant magnetic attraction for a number of groups who apparently feel compelled to try their hand at their own ICO because they seem to think free money is being handed out in the space. If investors and project supporters continue to exercise the critical, discerning approach our data shows they generally have until now we suspect most such opportunists will quickly leave the sector. This process could be accelerated if regulators globally consider emulating their Australian counterparts who this week declared that ICO promoters are subject to the same legal risk from deceptive or misleading practices as are other Australian business, and specifically to ensure they do not have misleading or deceptive statements in their whitepapers. Such a move could prove highly effective in ensuring that some of the poorest and most misleading ICO attempts are never presented publicly, and would protect investors who might be unwittingly duped by misleading, superficially appealing projects. It would also allow capital interested in supporting the space and its many exciting and promising prospects to more easily focus their attentions on solid prospects with realistic hopes of building something useful.

Project Details

Incorporation status Contents
Team openness Partially transparent
Blockchain Developer none
Technical White Paper Not available
Available Project Code Not available
Prototype Not available

Token Details

Role of token Access rights
Token supply 1 billion
Distributed in ICO 600 million
Emission rate No new coins created
Blockchain Ethereum
Consensus method Proof of Work

Sale Details
Sale Details

Sale period Sep 25th, 2017 to Nov 30, 2017
First price proportional to participation
Accepted currencies BTC
Investment Round First public offering
Token distribution date 2 weeks after crowdsale
Min investment goal none
Max investment cap 25,000 BTC
How are funds held Smart contract
Minimal Viable Product mid 2018 or after
Bonus Schedule — Tier 1 30.00% —–1 to 66 million
Tier 2 15.00% —– 66 million to 112 million
Tier 3 10.00% —– 112 million to 171 million
Tier 4 5.00% —– 171 million to 231 millions
Tier 5 0.00% —– 231 million to 294 million


Official Resources