Aero Token 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 leads to a number of very troubling questions. Specifically, the company’s case is built around a particular reading of a handful of relatively obscure legal cases that raised red flags 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 commercial drone delivery is ridiculously uneconomic, and that there is in fact no meaningful market for such deliveries. Moreover, the AERO team has no background in the drone, blockchain, aerospace or in fact any remotely related industry, has virtually no project code, and is proposing a project that simply from the standpoint of network enrollment is likely 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 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 no experience in its target sector, no code, and a 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 that does not appear to exist, presented by people without any credible claim that they would be capable of solving it, someone needs to state the obvious. Doing so also presents an interesting opportunity to think about the complexities and challenges of due diligence, and to share a few of our own practices. While no two projects are identical, and there are no definitive methods for every due diligence enquiry, 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 does not state exactly, but appears to suggest 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, when framed in this way it appears 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 also suggests that even if there was a federal rule authorizing drone flights below 500 feet such regulation would 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 would be a complicated, time-consuming process that may prevent commercial drone operations for some lengthy, undetermined period.
Fortunately, AERO Token’s clever 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. fly commercially.
Concerns with AERO’s Arguments
While AERO’s presentation of the problem it is attempting to solve and of the value and feasibility of its proposed solution is 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 legal citations and interpretations is rather curious. It is frankly impossible for a reader without a legal background to evaluate the citations presented in AERO’s whitepaper. The intended effect from this appeal to expertise was perhaps to leave readers of the whitepaper impressed with the intelligence of lawyers that allows them to assemble such complicated arguments, while encouraging the lay reader to skip ahead to more intelligible sections of the document without pondering the arguments too deeply.
Our own reactions were of curiosity. 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? Do they represent the most relevant citations? Have they been superseded by more relevant cases? Are the interpretations presented generally accepted ones, or the subject of dispute within the field? For anyone other than a lawyer working in this field, it is simply impossible to evaluate these claims or the obvious questions that arise. In terms of best practices, we were bemused to see that a company proposing to raise $100 million had prepared a white paper that could not possibly be understood beyond a small group of lawyers or other professionals working in the drone or related aerospace industries.
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, the drone industry is much less certain. 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. They go on to suggest that whatever solution that does emerge will come about only after a series of court battles, likely even before the Supreme Court. Slate makes a roughly similar argument concerning the many questions about who actually owns overhead airspace in this 2011 piece. In both cases, 85 feet, and not 500, is described as the general understanding of the upper limit of property owner rights. All references to the 85 foot level trace their claim back to the same 1940’s court case 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 400 or 500 feet where a drone corridor could be designated. Regulations establishing such a corridor would instantaneously render AERO Token’s proposed solution completely superfluous.
Another source with whom we communicated, an academic working in the field, suggested exactly this as a likely 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, there clearly is a wider range of interpretations than AERO would have us 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, it would have been considerate of the company to point this out to potential ICO participants.
Troubling as the above is, additional questions about the so-called problem AERO 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. 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 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, likewise suggest the continuing absence of drone deliveries is more complicated than simply awaiting 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 solution to the legal status of commercial drone flights may be ignoring or overlooking larger issues. In this case the question is one of economics. AERO’s whitepaper makes no mention of any questions of finances. There are no micro discussions of any amounts property owners might expect as compensation, nor macro consideration 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 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.” The below infographic from the same article illustrates the financial realities of drone delivery relative to even same-day truck delivery.
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 exorbitant costs of drone delivery are also very substantial, and highly relevant to the question of what the actual missing steps are before drone delivery becomes commonplace. AERO Token makes no acknowledgement of these issues and 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 simply unacceptable for a project targeting an existing industry such as business-to-retail delivery.
The Question of Network Recruitment
Another daunting challenge confronting the AERO Token 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 Token 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. Giving the variety of ages, ideological backgrounds, and sentiments towards issues like privacy and drone flights amongst the American population, there is 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, 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?
AERO’s technology seems to be quite early stage, to the extent that any exists at all. Although various technical comments appear in the white paper, little appears to have been built. However, diagrams in the white paper describing how AERO “anticipates” its systems “will primarily consist of” various items introduces some doubt as to the extent to which the system has even been 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 none of AERO’s materials mention how any ICO funds raised will be spent, or if there is any sort of timeline to develop AERO’s technology.
AERO is led by a team with diverse expertise but unfortunately with no demonstrable background or experience in the drone industry. Founder Chase Perkins studied finance before earning a law degree from the Loyola University of Chicago School of Law. He 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. He also has no evident background in the drone industry. AERO’s third co-founder Hayley Halpin has a finance degree and investment bank experience in mergers and acquisitions. She too has no apparent link to the drone industry or background that would provide context for the challenges the company will likely face if it goes forward. Several advisors are also listed, all unable to document experience with the drone industry.
Conclusion: “Owning AERO Token prior to network availability may be analogous to owning gasoline before the availability of roads for automobiles.”
AERO Token’s project, as represented in its whitepaper and the company’s other materials, is a hodgepodge of omissions, misrepresentations, and poorly-argued attempts to construct a coherent narrative justifying investor support. The document appears to prey upon the uninformed and those unable or unwilling to do research beyond reading a company’s own documents. Even if, for the sake of an intellectual exercise, one chooses not to dispute the company’s argument for how its proposal would allow commercial drone flights to find a legal justification, the sheer economics of the issue ensure that AERO’s imagined drone superhighway will not be suffering from congestion and overuse any time soon. If the AERO team had secret information to prove the economic viability of delivery, they should have included it in their whitepaper, especially since a simple google search for “why we don’t have drone delivery” reveals the economic challenges.
Another interesting question that remains is that of intent. We obviously cannot claim to know whether the AERO Token leadership was merely incompetent in the preparation of their whitepaper, or whether they deliberately sought to mislead. Given that none of the 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. However, a curious comment in the otherwise brief ICO memorandum caught our eye, where the company referenced the future prospects of token holders: “Owning AERO Token prior to network availability may be analogous to owning gasoline before the availability of roads for automobiles.” While it certainly is a curious analogy that can be interpreted in a variety of ways, it is difficult to avoid wondering if this is not a protectionary clause intended to ensure that even if the network is never built and this problem is resolved in another way (or simply never resolved because there actually is neither a real need nor an underlying economic argument for drone delivery) that the AERO Token leadership would be able to point to this statement when confronted by angry token holders.
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.
|Team openness||Partially transparent|
|Technical White Paper||Not available|
|Available Project Code||Not available|
|Role of token||Access rights|
|Token supply||1 billion|
|Distributed in ICO||600 million|
|Emission rate||No new coins created|
|Consensus method||Proof of Work|
|Sale period||Sep 25th, 2017 to Nov 30, 2017|
|First price||proportional to participation|
|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|