Tokenized securities are seen by many as the future of blockchain fundraising. For example, when the Nash Exchange’s NEX security token was approved by the country of Liechtenstein in Europe, the team was able to conduct a successful token sale despite overall market conditions that were very difficult for fundraising. However, despite being a member of the European Union, the small country of Liechtenstein and its progressive securities laws are still an outlier. NEO’s Tamar Salant told NEO News Today in February 2019, “At the moment, security tokens are an interesting phenomenon, and it’s bringing a lot of interest to blockchain, but there’s still no clear [regulatory] vision, especially from the bigger jurisdictions.”
NEO’s Digital Asset Alliance (DAA) was founded to bring legal clarity and development standards to the current hazy and uncertain regulatory environment. The DAA is a NEO-backed initiative that seeks to develop an open-source platform and best practices for future offerings of digital securities. NEO Global Development has also created the “Global Blockchain Compliance Hub” which aims to create a global almanac of blockchain-related legal details across different jurisdictions.
The DAA held its fourth “Round Table Meeting” on March 21st, 2019. The attendees included four representatives from NEO Global Development in Shanghai, China, and four representatives from projects involved in the space:
- TokenSquare chief strategy officer Martin Rerak, whose firm offers advisory services for companies seeking to issue digital securities;
- Maven 11 Capital investments and trading head Balder Bomans. Maven 11 is a European investment firm focused on blockchain technology;
- Bridge Protocol CEO Stephen Hyduchak, whose project seeks to simplify secure identity verification;
- Curio Capital CEO Rey Verboonen, whose “Car Tokens” on its Liechtenstein-based Curio Invest platform offer financial exposure to selections from a collection of “rare, investment-grade collectible cars”.
Round Table Discussion
The meeting lasted 90 minutes. Full minutes from the meeting were produced by NEO Global Development, and are summarized here.
STOs vs. IEOs
The participants commented on two of the growing fundraising trends in blockchain: security token offerings, and initial exchange offerings, which have been utilized in multi-million dollar sales through the Binance and Bittrex centralized exchanges in 2019.
Maven 11 Capital’s Bomans stated, “The exchange does not even have broker-dealer licenses” and said the two “are quite incomparable. The IEO is hot, but it feels like a little bit unsustainable”.
TokenSquare’s Rerak added, “There’s significant potential… If they could just make sure that they’ll be compliant and start extending that into security tokens.”
“We see a lot of car enthusiasts, but the market was only viable for elite investors due to the skyrocketing prices of collectible cars”, says Curio Capital’s Verboonen. Tokenization of carefully selected investment-grade cars lets Curio offer fractional exposure to retail investors and smaller investors. Verboonen noted that “We still don’t have digital security exchanges, but this is coming” in both Switzerland and Liechtenstein.
Verboonen also added that the legacy system of government regulation for securities was welcomed by his project because the regulations and legal status helps “make sure that all the stakeholders are well protected and well informed” when compared to a fully decentralized system.
Bridge Protocol’s Hyduchak stated, “If you want to do STO, you need to do KYC and AML… We have solutions for both ICO and STO.” KYC (Know Your Customer) and AML (Anti-Money Laundering) checks are “universal,” he added, and will be used to build a database of whitelisted addresses from accredited investors.
“I think that’s the rule of how you will do STO. But I’m hoping… we can get more clear guidelines in the future.”
Jurisdictions For STOs
Curio Capital’s Verboonen expressed happiness with his company’s decision to register in Liechtenstein because its European Union membership gives Curio access to investors in Europe and Switzerland. However, one drawback is that Curio cannot offer tokens in the USA or Asia, because the laws regarding security tokens consider both country of residence and citizenship.
TokenSquare’s Rerak separated investor jurisdiction from issuer jurisdiction, and noted that many foreign-registered entities are choosing to remain compliant with United States regulations because of the SEC’s global reach.
Bomans from Maven Capital expressed a cautious attitude towards the current trend of company registrations. He pointed out that many projects are seeking refuge in Malta and other jurisdictions with relaxed regulations. However, he pointed out, “The rules are already in place” for European issuance of securities, so it’s a “huge red flag” for investors when projects seek to avoid existing regulations in major jurisdictions.
Preparing For An STO
Rerak advised projects interested in issuing a security token to get their traditional affairs in order. A prospective issuer should have completed a background check on its directors and officers, and have a business plan with full and accurate disclosure, including forecasts.
According to Rerak, the next step for projects is to pivot towards building an “airtight legal case” which includes fully resolving the token’s issuance details, with review from legal counsel, and further tailoring of the project to reach full compliance with one’s chosen jurisdiction.
Rerak said that the profiles of his prospective clients have changed “drastically” over the last year; projects are no longer “pre-revenue,” but are existing businesses that are seeking to raise capital without an IPO. He claimed of his present clientele, “They’re not doing this just to raise money… this is a way to help them grow their company… they want to be extremely compliant.”
NEO Global Development’s roundtable discussions with industry experts are an ongoing series.