Many investors believe in the transformative power of security tokens, but they do not know how to get financially involved.
Outlined below are options for investors. The goal is to fund the platforms, issuers, and companies which will be the market leaders of tomorrow.
As a disclaimer, I am an equity or token holder in all the investments and platforms listed below. These are not ranked in any order. No financial compensation was given for this article.
Bnktothefuture – Signing up for this platform is the easiest way for investors to get involved.
Lately Bnktothefuture has been featuring projects involving digital securities. One notable raise was Securitize.io which recently offered 20% equity for $8,000,000. This is the same Series A that was led by CoinbaseVentures, and Blockchain Capital.
This is the easiest way for investors to get access to phenomenal equity investments. Bnktothefuture is also developing a securities exchange platform, which will only enhance the value of the platform.
Polymath – This is a market leading token issuer, with some of the most strategic marketing in the industry. Many STOs are using this platform issuer. You can purchase the utility token from major exchanges such as KuCoin, Bittrex, and Binance.
This is by far the fastest way to gain exposure to STOs via a utility token.
StartEngine – This is a phenomenal crowdfunding platform which runs its own conference the StartEngine Summit. One notable STO raise was tZERO which is currently the most anticipated digital securities exchange set to launch in 2019.
While there are many STOs on this platform, what is more important is that StartEngine is currently running their own STO.
The raise amount is very fair considering the market traction they have gained. The STO raise is for $10,000,000. Since this is for accredited investors only, the minimum investment is $10,000.
Click Here to learn more about the StartEngine STO.
SPiCE VC – This is a venture fund with access to many security token platforms. SPiCE offers exposure to the massive growth of the Blockchain/ Tokenization ecosystem.
As of this writing the portfolio includes access to Saga an upcoming stable currency, Slice a platform for real estate, ROX the first dedicated exchange for security tokens. And Securitize.io, one of the leading token issuers.
SPiCE is currently trading on Open Finance.
NeuFund STO – This is another token issuance platform. They are currently the market leader in Europe. The softcap has been reached and the hardcap is €6,608,091.
You can view complete details about the Neufund STO on this page.
While there are other ICOs, and STOs that offer exposure to the space, the above are in my opinion the best positioned to gain traction in 2019. As a note I am not an investment analyst, the above information is based on my own personal investment philosophy and does not consist of investment advice. This is for entertainment purposes only.
Securities.io is not is not licensed by or registered with the U.S. Securities and Exchange Commission, FINRA, or any other financial services regulator. Specifically, Securities.io is not a FINRA registered Broker Dealer and does not offer or sell securities, or engage in any other Broker Dealer activity. Nothing in this website constitutes an offer, distribution, solicitation, or marketing of any security.
Furthermore, Securities.io is not an exchange, alternative trading system, escrow agent or transfer agent. Securities.io does not provide legal, accounting, tax, or regulatory advice, or hold custody of any cash, virtual currency, security token or other digital asset for or on behalf of any third party.
The Application of Broker-Dealer and Exchange Regulations to Secondary Markets – Thought Leaders
Sweat the Small Stuff and Maybe the Bigger Issues Will Take Care of Themselves.
The Application of Broker-Dealer and Exchange Regulations to Secondary Markets Trading of Digital Assets.
The U.S. Securities and Exchange Commission’s (“SEC” or “Commission”) recent enforcement actions involving AirFox, Paragon, Crypto Asset Management, TokenLot, and EtherDelta’s founder illustrate that market participants must still adhere to well-established and well-functioning federal securities law framework when dealing with technological innovations, regardless of whether the securities are issued in certificated form or using new technologies, such as blockchain.
Broadly speaking, the issues raised in these actions fall into three categories: (1) initial offers and sales of digital asset securities (including those issued in initial coin offerings (“ICOs”)); (2) investment vehicles investing in digital asset securities and those who advise others about investing in these securities; and (3) secondary market trading of digital asset securities. 1 See Statement on Digital Asset Securities Issuance and Trading by the SEC’s Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets (Nov. 16, 2018). https://www.sec.gov/news/public-statement/digital-asset-securites-issuuance-and-trading This article discusses some of the nuances of trading of digital asset securities in the secondary market.
As the Commission’ statement made clear “[a]ny entity that provides a marketplace for bringing together buyers and sellers of securities, regardless of the applied technology, must determine whether its activities meet the definition of an exchange under the federal securities laws. Exchange Act Rule 3b-16 provides a functional test to assess whether an entity meets the definition of an exchange under Section 3(a)(1) of the Exchange Act. An entity that meets the definition of an exchange must register with the Commission as a national securities exchange or be exempt from registration, such as by operating as an alternative trading system (“ATS”) in compliance with Regulation ATS.” 2 Id.
In determining whether an individual, entity or platform is acting as a broker-dealer or an exchange, the SEC will conduct its analysis based upon 1) the totality of the activities conducted by the participant as well as 2) the functional reality of what those activities achieve. If an entity provides a marketplace for bringing together buyers and sellers of digital asset securities, the SEC may find that such an entity is operating as an exchange. If an entity or a person is effecting transactions in digital assets or buying and selling digital assets for its own account, the SEC may find that such an entity or individual is acting as a broker or dealer in securities. 3 See Scheibe, Taub, Selinger, Steele and Woodward, SEC DIVISIONS ISSUE DIGITAL ASSET SECURITIES STATEMENT November 28, 2018 https://www.mwe.com/insights/sec-divisions-issue-digital-asset-securities-statement/ Any such broker-dealer must register with the SEC, as well as become a member of a self-regulatory organization, such as FINRA. Registration as a broker or dealer also results in adherence to a far-reaching compliance and investor protection regime.
Some of the most basic requirements that can pose roadblocks or speedbumps for the development of secondary market trading of digital assets include:
- Books and Records: Registered broker-dealers must make and maintain current books and records. Rules 17a-3 and 17a-4 under the Exchange Act and FINRA Rule 4511, for example, require that broker-dealers preserve certain records for specified periods of time and use certain technology such as write once read many (WORM) format. How can a digital-asset ATS be sure that the use of Digital Ledger Technology for recording and maintaining such information is in compliance with the SEC and FINRA’s requirements? The short answer should be that the blockchain is immutable and thus satisfies this requirement but some regulatory assurances on this would be helpful.
- Customer Protection: Under SEC Rule 15c3-3, a broker-dealer must maintain the physical possession or control of all fully paid securities and excess margin securities carried by the broker-dealer for the account of its customers. It is currently unclear whether the requirements of Rule 15c3-3 are met where transactions in digital securities are recorded on a database that is maintained over a public or private network. Does a Broker-dealer have the ability to demonstrate receipt, delivery and custody of securities and other assets of their customer’s accounts where such records are held on chain? For example, is it required that ICO tokens, securities or other assets be held in a customer’s account (wallet) or does the ATS sponsor need to provide for the custody of these securities and assets with a third-party qualified custodian?
- Examinations: Broker-dealers and regulators are still figuring out these new technologies and how existing regulations apply to them. FINRA’s current examination module for an ATS may very well be ill suited to a digital asset ATS. FINRA in Notice 18-20 (July 6, 2018) made clear that is seeking additional information from broker-dealers and “to encourage each firm to promptly notify FINRA if it, or its associated persons or affiliates, currently engages, or intends to engage, in any activities related to digital assets”.
- Net Capital Rules: The Commission’s net capital rules will arguably have the most severe impact on the development of secondary trading markets in digital assets. The SEC has previously stated that Exchange Act Rule 15c3-1 “requires broker-dealers to maintain a minimum level of net capital (consisting of highly liquid assets) at all times.” 4 See SEC Securities Exchange Act Release No. 70073 (July 30, 2013) (Order Approving File No. S7-23-11). FINRA Rule 4100 Series (Financial Condition) expands the various requirements for broker-dealers to ensure compliance with the SEC’s net capital rules. Given that digital assets coming off the Reg D imposed restriction period are unlikely to meet the requirements for highly liquid assets, these net capital requirements may pose the biggest hurdle in allowing for deep and liquid markets to come into being in the near term. In order to allow this nascent digital asset securities market to grow and bring liquidity to shareholders, the Commission and FINRA may wish to allow for a pilot program to facilitate the development and oversight of this market.
In conclusion, the promise of DLT and the application of Exchange Act Rules still have some ways to go before digital assets can be traded freely and transparently on exchanges and ATS’. That being said, it’s not too early for market participants in this space and regulators to come together to address a roadmap for the near future in the U.S. A discussion of some of these topics at the upcoming SEC Forum 5SEC Staff to Hold Fintech Forum to Discuss Distributed Ledger Technology and Digital Assets, SEC Press Release 2019-35 (March 15, 2019) is essential for furthering this dialogue and unlocking the promise of liquidity that digital asset issuers aspire to.
Three Types of Security Tokens To Know – Thought Leaders
Similar to traditional security, a security token performs the same function except that it confirms ownership through blockchain transactions and also make fractional ownership possible. Federal laws that govern securities also apply to Security tokens with the intention of protecting investors on some levels. Security tokens are programmable. Tokenizing securities, in theory, remove the need of a third party by using smart contracts. For example, a loan “tokenized” on a blockchain could automatically make payments without the use of a traditional middleman like a bank. A detailed article on STO was written by Moonwhale that discussed deeper on the various regulatory requirements around security tokens.
Let’s take a look at three commonly known types of security tokens:
- Equity Token
- Debt Token
- Real Assets Token
Equity tokens represent the value of shares issued by a company on the blockchain. The difference between an equity token and a traditional stock lies in its method of recording ownership. A traditional stock is logged into a database and the records are then represented by a paper certificate. For an equity token, however, it is recorded on an immutable blockchain essentially digitizing the traditional means of recording. Owning an equity token entitles the investor a portion of the company’s profits and a right to vote. It is important to note that these tokens are not limited to only the early stages of funding though it is more common to find companies offering its tokens during seed round. There are three benefits to this system:
- Enables investors to invest in blockchain companies while staying in compliance with securities law
- New fundraising model for early startups
- Framework for regulators to evaluate the project’s fundraising
ICOs provided an opportunity for early startups to seek funding through utility tokens. However, it came under major scrutiny by authorities as utility tokens do not represent ownership to the company. An STO ensures their fundraising efforts are compliant with securities law. One example of an equity token offering is Documo. They will be launching one of the world’s first equity token offerings to fund its business initiative to drive the mass adoption of paperless document technologies. Their tokens DCMO represents actual equity ownership in Documo.
Debt-based security tokens represent debt instruments such as real estate mortgages and corporate bonds. The prices of these tokens are dictated by two factors: Risk and Dividend. A medium risk of default in a real estate mortgage cannot be priced the same way as a bond of a pre-IPO company. Therefore, modeling the price of a security token after risk and dividend is key. In blockchain terms, the smart contract representing a debt security token should include operations such as repayment terms that dictate the dividend model but also incorporate the different risk factors of the underlying debt.
The benefits of tokenizing debt include:
Fractionalizing debt vehicles brings new opportunities to a larger scope of investors
Tokenizing futures contracts and derivatives could open up a whole world of new opportunities. As a result, they can bring massive liquidity into the tokenized market, thanks to its highly leveraged nature. It also provides a great way of hedging portfolios.
- Market Size
The current public market that includes bond and debt security is worth $100 trillion dollars. Should tokenization be the next evolutionary step for financial instruments, the potential for debt-based tokens can be massive.
The difference between dividends from equity and from debt is its regularity. Dividends from bonds are typically more frequent than equity because dividends from equity heavily depend on the underlying companies’ performance.
Real Asset Tokens
This type of token represents ownership to a certain asset such as real estate or commodities. Commodity-backed tokens address issues of trust, their inefficiencies and the complexity of transactions, which typically involve multiple parties. Blockchain technology allows a transparent record of complicated transactions, track goods, and reduce fraud, which seems to make it a natural fit for the commodity business.
Tokens can be used as virtual currencies, which have the same characteristics as any commodity (like gold) that can be traded with profit-making intentions. Commodity-backed cryptocurrencies included tokens linked to gold, silver, and oil . And each of those commodity has its own advantage and disadvantage.
Commodity-backed stable coins are one of the most exciting developments in the crypto world. Commodities such as gold or diamonds giving the tokens stability and value.
- Bananas — a cryptocurrency backed by bananas.
- Cannabium — backed by liquid cannabis extracts from legal sources
- PowerLedger —backed by renewable energy of the sun.
- “El Petro” — Oil-backed. Venezuela’s economy has been plummeting.
- Diamonds are an easy-to-redeem commodity with a good potential of a soon-to-be unlocked market. Among commodities, diamonds are one of the most stable in value. While gold, silver, and other commodities are exposed to financial markets and speculators’ whims, diamonds have remained steady for over three decades (enjoying a positive appreciation).
The STO Market Today
With regards to these three types of security tokens, the majority of projects that offer the token is lacking in quality. There are several great examples of real asset tokens such as the project led by Inveniam Capital Partners to tokenize $260 million worth in real estate and debt transactions. However, buyers have to hold at least $10 million in Crypto to participate and purchase a minimum of $500,000 worth. It is clear that the world of security tokens are fundamentally geared more towards institutions.
It will take a considerable amount of time to incorporate the true beauty of initial coin offerings into security tokens. Initial coin offerings democratize the fundraising process which was only open to larger institutions and accredited investor. Imagine a world where a student living in Argentina being able to own equities to a company based in Russia simply from their phones. But for now, the Argentinian student has to wait and proceed with the current ways to invest in security tokens. The STO market is definitely one to watch for in the next coming years as we attempt to revolutionize the financial markets.
Security Tokens End 2018 on a High Note
2018 has been a wild ride for the world of blockchain. The industry began the year at the peak of an unsustainable bubble. As a result, it is now finishing the same year at what many believe to be the bottom of the market – Meaning 2019 has tremendous upside.
Potential growth in the digital securities sector is a major part of that potential upside. 2018 saw a crack-down on ICOs and an amazing amount of fraudulent tokens. However, 2019 promises to deliver functional products that are regulated, liquid, and secure.
A Year in Transition
There was a clear transition away from ICOs throughout the year, despite a record amount of funding being brought in through them. However, it is important to remember that a select few ICOs raised a good chunk of the total money gathered.
This transition can primarily be attributed to the Securities and Exchange Commission. While warnings from the SEC began much earlier, it wasn’t until mid-2018 that they actually began to enforce regulations. For instance, it was here that eyes really began to shift towards security tokens.
There is a race to develop user friendly platforms, for both potential token issuers, and investors alike. While there are many promising platforms that have jumped into the fray, here is a look at the two leading the way – One in North America, the other in Europe.
Securitize (North America)
- This company immediately comes to mind. Led by CEO, Carlos Domingo, Securitize recently received over $12million in funding from industry stalwarts such as Coinbase.
- Services offered by Securitize have seen more adoption than most. Companies such as Spice VC, 22x Fund, Blockchain Capital, and Augmate, have all turned to Securitize in some capacity.
- NeuFund is well poised to continue gaining traction, having just completed their own STO. Figures from their own token sale were double of those expected.
- This platform represents, perhaps, that with the most adoption in Europe. Neufund has at least 10 companies lined up to complete STOs.
One thing is certain – 2018 was a productive year for product development. With this out of the way, 2019 should see the adoption and usage of these services.
An increased focus on security tokens has led to increased scrutiny on the viability of certain protocols to provide the needed security and efficiency. In other words, by recognizing that simple ERC-20 tokens would not work as securities, multiple companies decided throughout the year to develop their very own protocol, tailored specifically towards the digital securities sector. For example, here is a look at a couple of those standards:
- Developed a variation of the ERC-20 token standard, known as ST-20. This standard has seen minor industry adoption, as it provides the necessary security and transparency features necessary in the digital securities sector. As development continues, Polymath finds their protocols evolving with the advent of ERC-1400.
- The Harbor platform has already gone live. This means that token issuers are able to utilize the in-house standard known as ‘R-Tokens’. These regulated tokens represent Harbor’s bid to become the industry standard for protocol use.
2018 was most definitely a year primarily noted for its development of industry infrastructure. With this in mind, there were multiple instances where companies capitalized on this burgeoning sector. Here are a select few STOs that took place, and were successful in 2018:
- Raised $18 million through the sale of digital securities representing equity in a luxury Ski-Resort
- Raised $12 million through the sale of digital securities representing shares within an incubator fund for start-ups working in blockchain
- Raised $134 million through the sale of digital securities representing fractionalized ownership of tZERO. Above all, a company that specializes in integrating traditional finance and blockchain services.
2019 and Beyond
Overall, 2019 is shaping up to be promising for not only digital securities, but for the blockchain industry as a whole. Industry fundamentals have never been better. In addition, infrastructure is rapidly being developed which will support the next boom.
Looking back, we have seen the launch of a variety of platforms, and multiple STOs successfully hosted on them. In addition, we have seen the creation and adoption of various token standards. Furthermore, we have seen a steady increase in excitement towards this burgeoning sector.
Closing out 2018, here are a few words from Brian Armstrong. Speaking at TechCrunch 2018, he commented on the future of digital securities, stating, “It makes sense that any company out there who has a cap table… should have their own token. Every open source project, every charity, potentially every fund or these new types of decentralized organizations [and] apps, they’re all going to have their own tokens,”
- The Application of Broker-Dealer and Exchange Regulations to Secondary Markets – Thought Leaders March 21, 2019
- ABACA Partners with CoolBitx on CEZEX March 21, 2019
- Equity Tokens vs Security Tokens March 20, 2019
- Archax Gears up for Launch with Quod Financial March 20, 2019
- seriesOne to Utilize ST-20 Standard by Polymath March 20, 2019