Lost in the ICO frenzy of 2017 was a curious issuance.
In April of that year, Blockchain Capital raised $10m for its third
fund, a “tokenized VC fund.” Unlike most ICOs that purposely avoided
regulatory compliance, this was a compliant U.S. security, issued as a
token.
This was the beginning of an expected wave of so-called “tokenized”
securities that will offer legally compliant securities as tokens – a
change that will increase demand for and trading liquidity in these
securities by leveraging blockchain and smart contract technology to
automate aspects of trading, and will enable these instruments to offer
new, useful features expected to increase their value to issuers and
purchasers alike.
Under U.S. law, a variety of financial instruments are included in the
definition of a security, including stocks (i.e. equity), bonds (i.e.
debt), and investment contracts (recall that the SEC considers some ICOs
to be investment contracts). Although public company equity trading on
national stock exchanges like the NYSE and NASDAQ may be familiar to
most investors, a variety of regulatory exemptions allow issuers to sell
securities without becoming public and subject to expensive public
reporting obligations. These so-called “private placements” of
securities use regulatory exemptions, depending on the issuance, that
may limit the amount of money raised, the universe of potential buyers,
and the marketing of those investments.
Despite these limitations, private placement equity “rounds” are a
popular choice for start-ups. Fast-growing and capital-intensive
companies often use private placements to raise growth capital while
remaining private; about 270 “unicorn” companies worth more than $1
billion have chosen to remain private. Most tokenized securities, at
least initially, will be private placements.
Private placements accounted for more than $2.4 trillion in debt and
equity securities issued in the United States in 2017 alone. This number
dwarfs even the frothiest time of the ICO market by orders of
magnitude. Unlike ICOs, which provided value as an arbitrage against
regulation, which typically failed to provide legally required
disclosures to purchasers, and which generally offered a future right to
a product or service rights to their purchasers, tokenized securities
will comply with the law, and at least initially, fall into one of a few
categories or types.
A clear understanding of those types and the rights provided to their
buyers is critical to understand why tokenizing securities will improve
their utility, features, and marketability.
A proposed taxonomy
“Security token offering,” or STO, was coined to distinguish a
regulatorily compliant token offering from earlier ICOs which mostly
ignored compliance. STO, however, fails to capture the nuanced
differences among the types of securities to be sold as tokens.
To clarify the discussion, I propose the following terms to be used to
describe the various types of tokenized securities that already exist,
or that are expected to be developed:
1. Security-wrapped ICOs, a/k/a SICOs. These are “network assets” or
“utility tokens” of the ICO generation that are offered pursuant to
registration exemptions so that their offering complies with U.S. law.
SICOs typically do not offer debt (an enforceable promise to repay) or
equity (i.e. a proportional share of ownership, dividend right,
participation in issuer governance) rights to their buyers, and often
provide minimal investor protection, offer minimal issuer disclosures,
and afford limited recourse against the issuer. These assets are
natively digital unless offered as a secondary product to be distributed
by the issuer pursuant to a simple agreement for future tokens (SAFT)
or similar agreement.
2. Tokenized Equity or Debt, a/k/a TEDs. These are traditional
securities (i.e. equity/debt) issued in digital token form. These
products are identical to traditional private placements except that
they are issued in token form, rather than in the form of a spreadsheet
entry, or a piece of paper. These instruments will eventually
incorporate new features and functionalities like direct-to-holder data
reporting, and interactive governance.
3. Tokenized Asset-Backed Securities, a/k/a TABS. These are digital
tokens that represent an ownership claim against, or ownership share in,
an asset or pool of assets. This category includes products based on a
claim against metals, gems, commodities, securities, real estate, art,
unique goods, and other assets maintained by the issuer or issuer’s
designee.
4. Transactional Security Instruments, a/k/a TSIs. These assets are
securities, issued in token form, that may be redeemed or accepted by
the issuer or the issuer’s designee in direct exchange for products or
services. The process of redemption or acceptance of these instruments
allows an issuer to directly retire debt or redeem equity in exchange
for the performance of services or provision of goods for the investor.
Although these products do not yet exist, and would require updates to
certain securities laws to implement, they represent a new asset class
which may be enabled by tokenization of securities.
STOs != ICOs
Leaving aside the types of tokenized securities expected, the market
should understand other significant ways that tokenized securities vary
from ICOs.
1. Most securities are not bearer instruments. Tokenizing a security
will not make it into a bearer instrument. Issuers of securities are
obligated to track ownership of, and in certain cases, replace lost or
destroyed shares of securities; this obligation will continue for
securities in token form.
2. Private placements are not freely traded. Transactions of securities
require the participation of either (a) broker dealers, (b) alternative
trading systems (ATS), or (c) national stock exchanges. The issuer of
securities stands to potentially lose its exemption from registration
and to be forced to become a public reporting company if its securities
are traded in violation of these restrictions. Thus, tokenized
securities will be created on either (a) private blockchains that are
controlled by the issuer, or (b) public blockchains subject to
restrictive code that allows an issuer to control and track transactions
of these assets.
3. “ICO advisors” or “ICO consultants” should not participate in the
structuring or offering (i.e. marketing for sale) of securities unless
they have appropriate licenses. Generally, consultants who previously
designed “token economies” or the “tokenomics” of ICOs will be replaced
by Registered Representatives of broker-dealers who will perform
“structuring” or the design of the security, and placement of those
securities in compliance with relevant law. These Registered
Representatives are licensed to perform these services by passing FINRA
and or NASAA financial securities exams (i.e. “Series” exams). Issuers
of tokenized securities may rely upon technical service providers and
may obtain assistance for internal technical design but generally should
structure, market, and place their securities through Registered
Representatives of broker-dealers to avoid violating US law.
Although STOs are often hyped as the latest coming of ICOs on crypto
social media, they are different products that must be handled
differently.
https://www.geezgo.com/sps/53768
Join Geezgo for free. Use Geezgo's end-to-end encrypted Chat with your Closenets (friends, relatives, colleague etc) in personalized ways.>>
Comments
Post a Comment