Ryan Selkis ~ Digital Securities Panel

[Music] foreign ladies and gentlemen we have a great panel coming up on digital Securities super interesting Innovative aspect of our ecosystem a quick announcement we have a slight modification on this schedule we have drew from archertax giving a workshop called hacking your taxes if you're getting paid in tokens or want to hear advice on crypto and taxes head to the workshop room on the fourth floor uh just past the snack bar again that said uh 1 pm hacking your taxes on the uh fourth floor all right take two so this one's gonna be fun because I'm very skeptical on Securities tokens so I get to ask I get to ask fun questions and anyone in the audience that knows my style knows that's that makes me happy and it should make you happy because it's going to make for some entertainment um so my victims for this panel are going to be Tom Shala Tal and Freddie uh all working on different facets of of the emerging security tokens ecosystem so you know for for me just just by way a background um I'm saying that a little bit tongue-in-cheek I do think a lot of the work that's being done is super interesting and I do think that this convergence of kind of the old world and the new uh is is embodied in many ways in in the Securities token conversation what makes me skeptical is that I find this to be like this bear Market Cycles version of blockchain not Bitcoin um which was kind of the pervasive meme in 2015 2016. so you guys are going to help convince me otherwise and talk about all like the really cool that's getting built um and and let's poke holes along the way and have a little fun with it but uh before we dive deep why don't you guys just give the kind of 30 second introductions on how you guys are looking at this ecosystem and and what in particular you're doing and what problems your companies are tackling in the stack sure so I'm Thomas mcinerney Chief product officer at open finance we are a regulated uh security token trading platform we launched live on the mainnet on uh November 28th with uh spice VC and we have three security tokens trading now so we're kind of a kind of a hybrid uh Dex model we we do settle uh tokens peer-to-peer um in about eight seconds in a single block time so I'm Shayla Burroughs I'm the CEO of status group and we are a digital asset Investment Bank and we help issuers or those who are going to be issuing security tokens actually come to Market does that mean I get to take some of the time you didn't use I am a founder and managing partner of spice VC it's the first fully tokenized VC fund and we're also focused solely on investing in companies building the ecosystem of the tokenization industry so that's one way I'm related to this I'm also a founder of securitize it's the largest most active platform for issuing and managing compliance of security tokens throughout the life most security tokens that were issued to date are have been issued on securitized so I see the market from both Vantage points my name's Freddie Allen I'm director of digital Asset Services at Republic Republic is an angel list spin-off angelist had a a big hand in implementing the jobs act in 2016 and part of that recognized the opportunity and and Mission to to enable retail non-accredited investors to invest in startups private startups under reg CF regulation crowdfunding so Republican spin-off of angelist we've been doing that for for three years about 18 months ago we started raising Capital under reg CF for blockchain companies and crypto and over the past six to nine months we've been rapidly rolling out more products that are servicing issuers across the Spectrum so advisory Services kyc AML accreditation reg D Capital raising facilitation so really covering that that whole spectrum of security tokens so I'll start with the most obvious question and and and where I hope you guys will address some of my skepticism is that really when you're talking about security tokens the the pitches how can we unlock marginal liquidity in these illiquid assets and we know from other digital assets trading you know liquidity is liquidity it just doesn't kind of appear out of nowhere and you end up having much more liquidity in in higher value assets much of the security token conversation is small private companies it's securitized LP interests as fractionalized real estate but the dollars that we're talking about are still relatively small how do you guys bootstrap a security token and and ensure that the liquidity that it unlocks actually proves to uh hit the market in practice versus just in theory because uh I get the thesis and you know certainly you can make arguments either way but in practice how do we go from zero to one with this particular type of digital asset yeah so the just the the transfer times Alone um are the start of unlocking liquidity we look at uh the private Securities market today it takes sometimes up to eight weeks to clear and settle these things uh it's super fragmented lots of uh paper-based trading um so if you can get that down to to eight seconds that you know that's a start but people actually have to want to buy these things too just because they're digitalized doesn't mean they're more attractive if it's if it's crap it's crap but private placements are 1.6 trillion dollars a year there's lots of good stuff out there and we're you know we see a lot of of great upcoming projects um but but definitely kind of still in the proof of concept phase which type of assets in particular do you think are going to benefit the most is it private company shares is it LP interests you know we've we've heard about real estate yeah I think the real low-hanging fruit the stuff we're seeing to First actually tokenize is is uh real estate and uh private company Equity so it's it gets a little restrictive around uh how these things actually trade but that's what really benefits the most from from uh digitalization so since I'm a victim I'm going to actually pick on a part of your question and sort of uh go down the rabbit hole a little bit on it when you talk about bootstrapping a security token I would absolutely not bootstrap a security token I would only consider it if you had very real Capital behind you to be able to take it to Market because it is very expensive and it is very new and I think there are very real benefits to being at the front of that type of Market but I um you know I've talked to a number of entrepreneurs who have said to me I'm going to skip the seed stage series a equity round I'm going straight to a security token and I said please do not do that to yourself that is a terrible idea actually raise your initial Equity rounds and then come back when you actually have some Capital behind you because as an issuer it's such an excellent excellent non-dilutive form of funding for your business but in a in a growth round certainly not in the beginning stages I know that probably wasn't your question but I I hijacked It Anyway Ryan so I'll answer your question that's why we have four panelists I'll say several things one several things that were said in the previous panel are really relevant to uh what we're talking about here first thing is we have to look at the end picture and not get stuck on the current situation the security token industry and by the way it's already called digital Securities now um is really it's an infancy right now and unlike crypto it requires very significant ecosystem and infrastructure business infrastructure in order to um to gain it's its full potential when you think about financial markets traditionally most of the money moving around in financial Market come from institutional investors and not from Individual investors although sometimes it looks different institutional investors require a lot of infrastructure institutional grade infrastructure and it's not built yet so it's been in the process of being built we see now just as an example over the last six months we've seen over 100 companies enter this domain and start working on different pieces of this infrastructure but we're probably about a year year and a half away from seeing institutional money coming into this uh into this industry because we're going to start seeing major pieces of the infrastructure coming in business infrastructure I mean coming in within the next year so 2019 we'll see a lot of this being put in place and we'll start seeing institutional investors coming in towards the end of the year you're absolutely right that when you talk about Securities and it doesn't matter if security tokens or Securities liquidity comes from the interest in the asset so if the asset is not interesting it's not moving anywhere it's not going to be a lot of liquidity right no difference and it's true that what you're seeing right now in many cases it's the low-hanging fruits again it's the entrepreneurs of that industry that stepped in first but we're already seeing projects coming about that are much more serious and Syria is not just in terms of size but also in terms of the interest to the public in those assets and the choices they're making for example two of our portfolio companies are issuing security tokens that are public offering Securities in other words they went through the whole process with a regulator to get approved as a public offering and then chose not to issue it on the New York Stock Exchange for example but to issue it as a security token that's not for liquidity reasons it's for other reasons right but I would argue that it might be just for the the first mover value because you can imagine that some of these are going to get bit up based on the meme that surrounded security tokens for this year it's not uh it's not I know the companies you'll know it when they're announced but no the reasons are different they're operational they're not they're not first mover Advantage can you give an example yes um one of the we're going down a rabbit hole but I'll give the example anyways one of the issues that companies wrestled with is this dichotomy between utility tokens and security tokens and being here in the U.S the SEC was very clear about what needs to be a security token um but there are companies that um truly need a utility to hurt my opinion at least a utility token is to smoother operation not for raising money Sherlock doesn't agree with me but uh not for raising money but for smoothing operations and I can give a lot of examples for companies like that one of the companies I'm talking about is a company like this and there are multiple ways to settle this Duality one is to have two separate tokens one utility token and one a security token you use the security token to raise funds use the utility token to smooth transactions with no relationship between them the other possibility is have the two and have some conversion mechanism at a certain point in the future that is defined between them I'm I'm invested in a company like that too and the third option is to issue a security token that is fully scale that can become a utility token later on so you use it to raise funds and then when you're operational and the service is fully there you use it as a utility token these are pure operational reasons for going retail with a security token today have we seen that conversion yet in what sense a security two-way utility no do you just to give people a sense that that still seems like something that's many many months if not years out that is correct uh if you look at uh the the process for approving a retail security it's give or take a year with the SEC when you think about it that it's the first one that is going to be a security token then it's going to be more than a year they started the process uh beginning of January 2018 and they're just completing it now so just to get it approved took more than a year and then um this will be operational probably third quarter of 2019 so you'll see the conversion happening late in 2019. now again it's an industry that is truly it's in its infancy so you're watching it and you have to constantly look at where it's going and where it's going is what's interesting I think it's the one of the largest use cases that is the most immediate in terms of need for a distributed Ledger and tokens and there is a tremendous drive both by institutional players and by assets that want to tokenize and assets are not just physical assets it's also economical assets that will drive this industry there's money in this industry there is a lot of value in this industry and it's potentially huge you're talking hundreds of trillions of dollars in potential size now you're not going to get there in a year you're going to get there in 10 years right but it's definitely an industry that is worth building Freddie Tom mentioned some of the early use cases private companies real estate you guys more on the private company front yeah absolutely um for reg CF of course and and red D but our asset Asset tokenization Advisory Services which is a big piece that I focus on um we are seeing a lot of interest from commercial properties and uh and big companies for instance 30 mil Revenue 15 mil Eva gait companies looking to tokenize their Securities so we're seeing that progression of the security tokens moving from funds to properties and now to bigger companies and more exotic things like stadiums friendship for instance we so we've talked about the conversion from security tokens to utility tokens uh Tyler you touched on this have you had any teams come to any of your companies that did an Ico that floated a utility token and is now thinking actually this would make a whole lot more sense as a security because there have been a couple of teams uh economy comes immediately to mind uh that have begun that conversion process and realize yeah we're probably going to bang our heads against the wall and ultimately lose if we just continue with this narrative that this isn't a security and and we have U.

S customers um what could that process hypothetically look like because that could be another driver if you think about security tokens infrastructure helping bridge the gap um not just between old world Securities and and new but bridge the gap between utility tokens and security tokens and help teams navigate the Spectrum so the it's uh it's definitely pretty tough um we we do see a lot of projects out there but I think that um what I'd really like to see I I there's some really clever applications of utility tokens and I think the the compliance and the fact that it's a Securities is how how the money was raised but the compliance just comes an afterthought that's that's kind of where we want the tech to go where you don't there's no such there's no distinguished the security token or utility token it's you have these these they are all if they're if you did like an SEO or or raised money uh and it's rep in the tokens or tokens representing Equity it yeah it's for sure security but it you know it can also have a utility value to it um the conversion process if it's already started trading is is Pretty Tough uh it's all actually you guys have worked on a few yeah so so we need to understand that when you talk about a security token it's a token representing a security right and it's not just the name it means not just what the token itself is it means how the whole process is treated and managed from the get-go through issuing the token and then managing compliance of everything that is done with the token every single transaction in secondary trading and throughout this lifetime so when you talk about converting a utility token really you're talking about a situation when a company did an Ico that should have been an sdo or should have been a security token issuance and now they want to change it so there are several issues one the token is wrong because it you know the code doesn't include all the smart contracts that they deal with all the regulatory stuff that needs to be managed throughout the life of the token so that's one you have to replace the token but that's just technology that the main issue is that this token was born in sin and you can't you can't go back from that you can't go back from that so there were cases where the SEC um I've had discussions with issuers of utility tokens and they agreed on a process right it's almost like reversing the birth in sin and doing it again but that's where the blessing of the SEC and we've seen that done and actually Securities have done a couple of these but uh but that's with the blessing of the SEC without the blessing of the SEC it's great but you're not really solving the problem because in the eyes of the SEC you've already sinned right if the SEC is God in this example I don't I don't know that I want to live anymore um but that's a totally different story um you know let's let's talk about um one of I think the the most tangible security tokens offerings which would be real estate um we've we've heard a few different projects including securitize uh announce security tokens offerings for sizable real estate plays help help people understand that that's going to be an Institutional focused market for a while um what is the path to getting this in retail hands as an alternative to buying a stock on the New York Stock Exchange because some of the rules get pretty esoteric pretty quickly rule 144 and and how some of these things come to Market but the end goal is to get this in individual hands not just Institutional Investor hands so the SEC is a little bit problematic all right so um so I represent the world not just the us because spice has uh token holders all over the world and in other jurisdictions out the U.S it looks differently that it's true that even private offerings of Securities are kind of targeted at qualified investors but most countries in Europe for example allow a quota of non-qualified investors so for example in most countries in Europe every country allows spies to have up to 150 local token holders that are non-qualified and that's putting VC investments in total retail hands in the US the only way right now from roguelo tourist standpoint unless you're doing crowdfunding and so on is to to do a full publicly trade public offering and that's a very expensive lengthy complicated process and you will not see real estate assets going this way anytime soon unless they're really huge if you're talking about billions of dollars in an asset then you can afford to go through this process otherwise it's not economical so I think for the next little while you'll be still seeing when you're looking at real estate deals and looking at the US you'll see accredited investors only deals in my mind I think one important takeaway at least for me as become as security tokens are becoming more of a meme and more ubiquitous is the absolute Delta between the marketing narrative and where security tokens and their infrastructure actually exist right now and I think that's what tall is pointing to which is to say that if you're seeing articles that are purporting this vast Groundswell of uh money into this industry that that is not really in line with exact reality it's going to take a few years for us to really get there and there is a bit of a stepping stone as well reg CF allows retail investors to get into their reggae plus also before you get these full Securities registrations and full time consuming expensive prospectuses and the likes so there is that stepping stone on the way and without getting too legal about this I would also say that my strong belief is that as this industry grows the SEC will change its regulation in terms of what's accessible to retail through security tokens because one of the things that I think LED in the past to the dichotomy between private offerings and public offerings was the fact that SEC was not able to supervise the vast amount of private offerings in the case of security tokens because it's coded into the token SEC does not need to supervise because all it needs to do is to audit the token and then it knows everything transactions that are not regulatory compliant simply cannot execute they will not execute and I think once Regulators understand that the regulation will change as well but again I think we're like two three years from that so much of um the just publicly traded securities what what you go through the SEC to to do is is get the blessing uh to list on the New York Stock Exchange or NASDAQ but the end result once you're approved is that um on an ongoing basis you really just have to abide by certain disclosures requirements and certain internal compliance requirements you can probably programmatically uh take care of a lot of the compliance issues with Securities tokens so I buy that thesis that narrative um how how are the Securities tokens issuers do you guys are dealing with uh differ from like a publicly filing company in terms of the disclosures elements so so what actually needs to be put forth in order to complete a Securities token offering on a reg D basis on a reggae Plus on a reg CF because if people could just swallow the the paperwork uh and and and have an easier way to be forthcoming about how these things should function the actual functionality of the security itself should be fairly easy to audit once this infrastructure has been built and these smart contracts have been audited and the systems that are built in these underlying Protocols are a little bit more robust so a reg CF is is quite straightforward it's it's capped at one million and seventy thousand dollars for any issuer in a 12-month period and you can raise as I mentioned a couple of times you can raise from retail and not accredited investors but in terms of what's required for the issuers it's simply just filing a form C which is very straightforward it's not expensive it's not time consuming and that really is focused on startups either they don't have they don't have the capital to spend on going through all these expensive time-consuming filing requirements and and um and compliance the reggae plus is like an IPO light it's capped at 50 million dollars it's um it has more extensive uh requirements filing requirements reporting requirements but not as expensive and cumbersome as a full IPO full prospectus so uh I'll talk about Rec D um spice was issued as uh and Rick D just to Define that is for private accredited investors in the U.S that have made over 200 000 for the last couple of years in salary or have a million in liquid net worth that's correct um and so it's very restrictive in terms of who can participate that's the that's kind of the default of the Saft and many other private fundraising mechanisms in the in the token realm that's right and I wanted to step back from the jargon because I realized no no I don't want people's eyes glazing over that's very helpful uh but I'll say that as uh as as an issuer that was aiming for token holders all around the world U.S was not the only regulation we're concerned with regulation with every we're concerned with every regulation in every jurisdiction uh where we marketed or have token holders and that's many different uh regulatory constraints in the U.S you said it right it's accredited investors in Europe in Asia there are different definitions smarter I think over time but we had to comply with them all it's a little bit more restrictive not in terms of who can protect not just in terms of who can participate but also in terms of what you need to disclose uh and Reporting and so on it's still not like public offering but you still need to to issue a prospectus it goes through legal approval um it's so our prospectus is uh 60 page um kind of very very dense document that has been uh approved by a lot of lawyers um and that is a legally binding document unlike white papers um if an investor in any of the jurisdictions feels that we did not fulfill what we committed to in the perspective they can complain to the local regulator and they will start an investigation against us and I can end up in jail right which is not true for the traditional icos so it's very it's very significant even though it's not as honorous as going through the publicly that the public offering process even with that with that Reg D private placement or Regus for example you have to go through a series of steps at least in the process we've talked a lot about the front end paperwork but there is and this is so often forgotten uh suitability um and it's a very manual process and you have to understand if this type of investment is even suitable for this investor you know if they're 90 years old then they're starting to invest in security tokens like you know I'd be careful right it's a high risk profile um and so once you get past suitability then you have kyc which is know your customer who are you AML and anti-mundering laundering and then an accreditation on top of that right so there are many wickets to run through in that process and it's it's on you as the issuer to understand who is your tokens because that will come back to you if the wrong if they get into the wrong hands the what we'd really like to see is is uh reggae pluses that's gonna trade uh the most it's going to be the most liquid for for a secondary Market operator that's exactly what we want the problem is it costs half a half a million to sometimes a million dollars to in in legal fees to actually get that going they the SEC has not approved so they haven't approved anything with reg D I guess you file the forms after you after you raise radio plus you have to get approved the and they they haven't done any of that they during our ATS application you know they were pretty receptive and they they were interested in in learning but they're not you know they're not very fast Learners so they're kind of uh taking their time you don't say reggae plus is the mythical buff of corn yes so fingers crossed for when those start to come up okay so this is this is perfect segue to my last question um which is we've talked a lot about traditional assets uh getting securitized one thing that the SEC did do a very good and thoughtful job of was breaking down how the Dow was a security and if you think about um some new forms of Securities right so new entities new uh assets that would give the holder residuals or rights or claims on cash flow which the SEC would almost certainly Define as a security but his native and new and unique to blockchain Tech uh and and these ecosystems um do you think that those could be some of the breakout Securities tokens right so someone that actually does a dow as a security token offering maybe it won't even be in the U.

S um but at least uh it would be a a token that was structured in a way gives people legal claims to whatever was generated by that entity so I'm bearish against something like that happening I'm most bullish on traditional assets because I think um when you're when you're trying to convince institutional buyers to actually come into this Market you're already educating them on the front end part of the process that's really different than what they've encountered before and you're also educating them on what custody and control looks like you know they're they're it's practical right like how great I have these tokens what what on Earth do I do who holds these things oh my gosh get them out of my hands um and so but it wouldn't necessarily be institutional right you you would expect that it would probably be crypto funds that would that would drive some of that initial investment well their balance sheets are into this Market is um that in and of itself is an educational process so um making the second part of it which is actually learning about the product um and getting to know that just becomes over complicated and you sort of lose people um in that I mean but that's my thesis and maybe tall will totally disagree I will not totally disagree but I think it's possible it's definitely possible I think the market is so embryonic right now but I think it's it's very interesting to see that we see a lot of experiments going on um the nature of security token as an instrument is very synthetic it's very different than traditional instruments the traditional Securities that were developed into two types right you got equity and you got debt and you got almost nothing else and security token being coded uh started as a very open synthetic thing and there are a lot of very interesting experiments like lottery.com which is a token that was issued um about a month ago and it's exactly what you said it's right to revenue stream from from a company it's not an equity and we see a lot of experiments developing around different kinds of debt with daily payment and and things like that that are very non-traditional so I think what you're saying is is definitely possible I think we'll have to see after all those experimentation what the market actually adopts and where the masses really are and and I think it's too early to um to project now but I think it's uh or to predict now but I think um it's definitely a playing Ground that allow a lot of this financial experimentation and different types of uh of participation of investors um and I think we'll come out of it with different Financial assets than we're used to seeing historically yes I I do actually kind of agree with you I think that it's going to be a while and uh as we were kind of talking about before the the early stuff is going to be the traditional assets that tokenize to reduce transfer inefficiencies and costs um you know just by using a public blockchain you've eliminated the need for a Securities repository a transfer agent a Clearinghouse um so that eliminates a lot of friction and that's why existing assets were will be the first to tokenize and already have been newer companies too but the the large boom will come from um will come from traditional assets at first but I do think that there are going to be some really really interesting projects that start to come to play um probably sooner than we think for any last words are we good just to reiterate uh yeah absolutely we're seeing a lot of interest themes uh and coming out in in the debt markets how to securitize debt but absolutely agree it starts in the traditional assets and we'll progress from there but the the possibilities are endless so we'll see some really really interesting structures moving forward with Revenue sharing and royalty streams and and cash flows so maybe to put a bow on things um I I tend to believe that this is not a matter of if but when and and I think uh despite my near-term skepticism of of some of the breakout potential and some of the promises that I think are being made um this is going to be a massive part of the market to watch just given the sheer size of the Securities market and and and the fact that this could be a structural Improvement on how these These funds move around so thank you to all our panelists best of luck and uh look forward to seeing some of these breakout apps soon