Claus Skaaning is the CEO of Digishares, a software solution that is used through the issuance process and the ongoing management of the tokenized shares.
You were previously the COO of Venturefusion – a crypto-security ecosystem for startup creation and growth. How did you transition to becoming CEO of DigiShares?
The vision of VentureFusion is to create a decentralized incubator platform for startups. It will work as a collaboration and bootstrapping platform where founders can tokenize the equity in their startups (even if no legal unit exists) and use the equity tokens as a means of payment for anyone that contributes to the startup. Founders can then make a plan for how much equity they want to spend to get various parts of their startup developed, making individual equity token allocation plans for short-term contributors such as freelancers and long-term contributors, such as co-founders and permanent team members, under vesting conditions. VentureFusion is still an ongoing active project but it primarily managed by my co-founder Yuriy Zubarovskiy these days.
VentureFusion prompted us to look at how to tokenize equity and in early 2018 this was a relatively new concept. We went to some of the first conferences in Europe on the concept and decided to create a new project, GoSecurity, which would focus on tokenization of securities. This project later re-branded to DigiShares and I became the CEO. It is now my primary focus to manage and develop DigiShares.
Could you elaborate on the services that DigiShares offers?
DigiShares is one of the leading providers of white-label infrastructure for securities tokenization issuance and management in Europe. Our first product was a single-project platform for issuance and longer-term management of tokenized securities, and we are just releasing a major upgrade that can handle multiple projects with a lot more functionality. We are one of few companies in Europe – and the only one in the Nordics that can provide an operational platform of this type.
Our platform can handle the complete workflow of an STO (security token offering), from investor registration, verification (KYC/AML), approval, to the actual purchase of tokens with fiat or crypto, signing of contracts (e-signatures), token holder cap table overview, communication with token holders, voting (shareholders’ meetings), payment of dividends, etc.
For tokenized equity, we offer a unique function where we allow a proportion of shareholders to be non-tokenized, i.e., as digitized as possible but not tokenized, so with no tokens issued. This is by customer request as some of our clients have voiced concerns that they would like to approach both crypto and non-crypto investors – and non-crypto investors may prefer a non-tokenized registration. Another unique function that we are working on is a mini-exchange, an internal OTC-like trading platform for the token holders within a single project.
Overall, we provide solutions to enable anyone to conduct their own STO or offer a number of simultaneous STOs. We primarily work in white label partnerships where clients offer the solution under their own brand name.
In addition to providing the software, we also provide access to the security token ecosystem. We have a big network of partners for legal, investments, custody, KYC/AML, etc. Some of these are integrated into the platform.
Digishares is one of the few companies in the industry that is headquartered in Denmark. Do Danish securities regulations support the digitization of shares?
While we are based in Denmark and concerned about local securities regulations, it is important to state upfront that we are jurisdiction agnostic and can operate from any jurisdiction. Indeed we have ongoing projects in both Europe and the US.
Locally, we are working with a Danish lawyer and the Danish regulators to establish whether shares can be represented as tokens. So far, our lawyer has established that tokenized shares are supported by Danish legislation but some details need confirmation from the regulator and the Ministry of Industry, Business and Financial Affairs. DigiShares has applied to participate in the sandbox of the Danish regulator to further analyze how tokenized securities can co-exist with Danish law.
Some countries do not support the tokenization of shares since they require either paper-based stock certificates or notarized trading. Fortunately the Danish securities legislation supports digitization of shares and has neither of those requirements.
The ability to tokenize shares (and other types of securities) is of course important for DigiShares and for Danish companies, but it will have importance outside of Denmark as well, since securities that are issued in Denmark can be passported to any EU member state. We believe Denmark could be a good STO destination for the above reasons – but also because we believe other typical STO costs can be significantly reduced here (incorporation, legal costs, etc.). As an added benefit, Denmark is a highly trusted financial jurisdiction with one of the lowest levels of corruption in the world.
How is the security token ecosystem and community in Denmark?
It is as of yet quite small but we are doing our best to develop it with regular conferences in Copenhagen. We’re organizing an annual conference focused on tokenized securities (Fintech Disruption Summit – http://www.fintechdisrupt.dk/en/home/) and regular events on different types of tokenization, next time on September 12 with a focus on real estate tokenization (http://www.digishares.io/events).
We are presently the only Nordic company with an STO issuance platform and we are also the first to conduct an STO. However, we expect others to join us soon.
You’re currently in the process of raising funds for your own STO. How much are you raising, and what benefits will investors receive?
We are raising just below EUR 1 M. This relatively low limit was set to enable us to approach retail investors and market the STO publicly across Europe. In addition, we’ve filed a form D in the US so we can approach US accredited investors. European regulations is more flexible than the US and enables us to make a more “democratic” STO since we are allowed to target retail investors in almost all European countries.
We have designed our STO so investors receive common stock in the company with exactly the same governance rights as founders, similar to a standard IPO. Many STOs design “handicapped” tokens with quite limited governance rights for investors but we didn’t want to do that. In general, we believe it will be a problem for the STO industry if issuers keep creating tokens with very limited investor governance rights.
What are the plans for the raised funds?
The raised funds will be used to speed up our development & marketing efforts. In addition, there are certain licenses we would like to obtain in order to extend the scope of our business. In general, we are seeing more leads & opportunities right now than we have the resources to exploit.
You are arranging an event on tokenized real estate in Copenhagen on September 12. Do you see real estate as being the most promising asset class to be tokenized?
Yes, if you look at statistics and speak to industry experts, there is consensus that real estate is the biggest homogeneous chunk of the STO market right now. So currently, we are directing our marketing and development efforts in this direction. Our real estate tokenization event will be attended by around 100 real estate professionals from the Nordics. 90% of them are non-blockchain people that we hope to motivate and inspire to adopt blockchain. In general, we don’t go to many blockchain industry events but rather spend our efforts on the traditional financial & real estate industries.
We hope to announce a real estate STO quite soon, and we are also involved in a really exciting project about creating Eurasian security token exchanges.
What other asset classes will you be focusing on?
Through partners we are also looking at debt and bonds, but we are primarily focused on equity at this stage. The platform can handle any type of security.
Where do you see the industry being in 5 years and the role of DigiShares in this industry?
We currently see two major trends; one with startups attempting to create a new parallel financial infrastructure and another with incumbents adopting blockchain and approaching the new opportunities in their own speed. These two trends will eventually merge and a new financial infrastructure will emerge where some old financial institutions will still exist and some of the new players will be established as leaders. We will see just one or two main security token protocol standards. The consumer (investors) are the real winners with much decreased fees for trading, decreased interest rates for debt, increased interest rates for deposits, faster and more efficient financial operations, etc., etc.
Aaron Kaplan, CEO of Prometheum – Interview Series
Prior to Prometheum you were the Founder of EquityArcade, a platform that enabled consumers to buy shares in video game startups. Can you let us know how your experience at EquityArcade transitioned over to Prometheum?
EquityArcade was a Reg CF equity crowdfunding platform that allowed consumers (investors) to invest in the future revenue generated from indie game funded on the platform. Reg CF is part of the JOBS Act, which also contains the Reg A+ crowdfunding rules. Prometheum uses Reg A+ as a means to allow the general public to invest in blockchain securities. All JOBS Act regulations relate to online equity crowdfunding. As a result, we have been able to leverage many of the experiences and lessons from EquityArcade in building Prometheum’s Reg A+ offering platform.
Prometheum enables companies to raise capital by offering their own Smart Security Tokens (SSTs). Can you share with us how SSTs differentiate themselves from other industry standards such as STOs (Security Token Offerings) or DSOs (Digital Security Offerings)?
SSTs, STOs and DSOs are all different protocols that are attempting to solve the same problem. Until there’s complete regulatory clarity around certain critical components – including custody – of the blockchain securities ecosystem, it’s not possible to conclude which protocol provides the best foundation.
What’s the process for a company to launch an SST?
An issuer looking to issue a SST will submit an application for an offering to Prometheum. At that point, the issuer will submit all relevant documents that will allow Prometheum to conduct the requisite due diligence in order to determine whether the company is qualified to issue an SST. Upon passing the due diligence process, the issuer will complete the Reg A+ offering circular and submit that document to the SEC for qualification. Once qualified by the SEC, the offering will be listed on Prometheum’s offering platform and begin their capital formation activities. When the stated amount of capital is raised, there will be a closing and distribution of the SST into the investors’ Prometheum brokerage account. Upon distribution of an SST, Prometheum’s issuance platform coordinates the multi-signature, multi-stage process that is used to place investors’ SSTs in either their Master or Personal Wallet. Once the distribution occurs, Prometheum will list the SST on our retail based (i.e. open to all investors) Alternative Trading System (ATS), and secondary market trading will begin in the issuer’s SST.
What type of fees should companies expect from launching an SST and hosting it on your platform?
Our goal is to allow companies to raise up to $50m in the most efficient way possible: faster, less expensive, and easier than any other legal capital raising method. In terms of direct fees, we plan on charging issuers a small percentage of the total amount they raise (1-3% dependent on the total raised). Once a token has been distributed and is trading on the ATS, companies are charged a quarterly membership fee of $2,500 for maintaining their order book.
Indirect fees not charged by Prometheum can vary and are related to legal and prep for the creation of the Reg A documents, accounting, auditing, marketing, and other possible professional services.
SST will be Reg A+ issued. For investors who are not familiar with this legislation and what does it mean? Could you explain the benefits?
Regulation A+ allows issuers to raise up to $50 million from the general public annually, and such securities, when issued, are freely tradeable on a secondary market. Reg A+ is really the perfect regulation for issuing blockchain securities as it meets the spirit that was initially conceived by the crypto community- it allows the general public to invest, and the asset is freely tradeable upon distribution but in a regulated manner (unlike many historical token investments).
Tokens that are created on your platform will then be tradeable on a custom ATS (Alternative Trading System). Could you elaborate on how your ATS will operate?
On the surface, the ATS operates just like a traditional equities electronic market. Every token has as order book representing supply and demand for that token – bids (what buyers are willing to pay, and the number of tokens they want) and asks (offers to sell, or what sellers are willing to sell for, and the number of tokens they want to sell). This order book is managed by the matching engine which uses an algorithm to arrange the bids and asks into a price, upon the price quote the engine then utilizes time priority, and ultimately “matches” buyers and sellers when they meet at the same price. There is an online trading platform, similar to Etrade or Schwabb, which allows traders and investors to see the order book, look at charts, enter orders and see their account status and previous transactions. Through the use of omnibus accounts, other broker-dealers will be able to offer their customers access to SSTs. Our ATS intends to operate 2 sessions everyday, both 11 ½ hours long with two 30 minute breaks for settlement. When there is an executed trade, meaning an order between a buyer and seller is matched, the trade is written to the blockchain, as well as recorded to a database to ensure compliance with traditional record keeping.
Are SST tokens launched on your platform tradeable on regular security token trading exchanges such as OpenFinance and tZERO?
SSTs are compatible with Prometheum’s ATS and work as both securities and utility tokens in the Prometheum ecosystem. It may be possible for SST issuers to create a bridge to other exchanges or blockchains by building smart contracts on the Prometheum Utility Blockchain. As the equivalent of a national market system for digital assets develops it will likely be necessary for digital assets to have the ability to trade across security token exchanges and alternative trading systems.
What are Ember (MBR) tokens and what role do they play in this project?
The Ember SST fuels all SST transactions and allows holders to provide services at the protocol and application layers. Prometheum’s Ember token has both profit-making utility (work/access) and proprietary payment currency features. Ember provides the fuel for the Prometheum blockchain Network and demonstrates the versatility and value provided by a modern approach to using securities to transfer value in a decentralized, blockchain based environment. Ember is the first SST issued on the Prometheum Blockchain and sets the legal and technical precedent for further SSTs.
It seems like you are building everything from scratch, why not use an existing blockchain?
The Prometheum blockchain is required in order to ensure that regulatory requirements are met while also providing a viable method for the use of blockchain securities as utility tokens. This includes direct interaction with distributed applications as well as processes for moving blockchain securities in and out of brokerage accounts when a user wishes to trade them on the Prometheum ATS.
Is there anything else that you would like to tell us about Prometheum?
Prometheum is creating the market infrastructure needed for digital assets to go mainstream. When the SEC essentially declared that tokens were securities in the 2017 DAO report, such infrastructure didn’t exist, which meant that there were no compliant facilities for the issuance, trading, clearing, settlement and custody of token securities. Prometheum sought to fill that void and is creating the infrastructure that will allow the general public to invest and trade in digital assets, while also providing mechanisms for clearance, settlement and custody after trades are made. The Prometheum Network is meant to allow the general public to participate, which is required in order for digital assets to go from a new asset class to a mainstream asset class.
Philip Moustakis, Counsel at Seward & Kissel LLP – Interview Series
Philip advises companies and individuals on SEC enforcement matters, including criminal enforcement investigations, internal investigations, and cryptocurrencies and blockchain technology.
Philip has extensive experience with securities enforcement matters. For more than a decade prior to entering private practice, he served as senior counsel in the SEC’s Division of Enforcement, investigating and prosecuting complex matters involving violations of the federal securities law.
Before being employed with Seward & Kissel LLP you were a member of the SEC’s Cyber Unit which focused on cryptocurrencies and ICOs. How were you initially recruited for this Cyber Unit?
I started in the SEC’s Enforcement Division in 2008 and began working on Bitcoin and cryptocurrency-related matters about five years prior to the creation of the SEC Cyber Unit. I brought the SEC’s first Bitcoin-related enforcement action against the operator of Bitcoin Savings & Trust and led other cryptocurrency-related matters as well. I briefed Chair Mary Jo White and the other Commissioners, and frequently conducted training for the FBI, FINRA, and others, on Bitcoin and blockchain technology. I also presented in academic settings on my work. So, when the Cyber Unit was formed in 2017, with a mandate that included cryptocurrencies and ICOs, I was a natural fit.
How did the action against ‘Bitcoin Savings and Trust’ influence future enforcement actions by the SEC?
Bitcoin Savings and Trust, which raised a staggering 700,000 Bitcoins from investors, was charged as a plain vanilla Ponzi scheme, with the exception that all investments were solicited, and purported returns paid, in bitcoins. But it was notable for several reasons. First, it established that the investment of Bitcoins could satisfy the “investment of money” prong of the test for an investment contract, otherwise known as the Howey test. Second, it demonstrated that the SEC could conduct a flow-of-funds analysis on the Bitcoin blockchain. While we could not demonstrate where every Bitcoin came from or went, we could show that more Bitcoins were going out to investors than came into Bitcoin Savings and Trust from any source other than investors, thereby proving the Ponzi. Third, we did not take the position that Bitcoin itself was a security. And finally, the case was significant for the disgorgement theory advanced by the SEC, namely, that the disgorgement ordered by the court should reflect the dramatic increase in the value of Bitcoins from the time the investors handed their Bitcoins over to the defendant, to the date of the judgment. The Bitcoins the defendant raised from investors were worth about $4.5 million at the time, but the final judgment against the defendant was for more than $40 million in disgorgement and penalties.
You were a founding member of the SEC’s Distributed Ledger Technology Working Group. What is the purpose of this group, and how does it impact both investors and STOs?
With the wider adoption of blockchain technology, the SEC’s Distributed Ledger Technology Working Group was simply an effort to coordinate both with other regulators and within the SEC. It was important to ensure the various divisions and offices of the SEC were not working at cross-purposes with one another. The SEC has since built on the work of the group with the creation of its Strategic Hub for Innovation and Financial Technology (FinHub), which engages in outreach to both investors and issuers.
You were responsible for investigations into multiple initial coin offerings (ICOs) for possible violations of securities laws. What’s the most blatant violation of securities law that you have witnessed?
Without hesitation, it’s the ICO craze of 2017 and 2018. In February 2018, SEC Chairman Jay Clayton, testifying before the Senate Committee on Banking, Housing, and Urban Affairs, famously said, “I believe every ICO I’ve seen is a security.” A few months later, in a televised interview, Commissioner Robert Jackson said, “if you want to know what our markets would look like with no securities regulation, the answer is the ICO market.” On the whole, I agree with those sentiments. Most ICOs, during that period, were traditional capital raises, with the basic difference being that, in an ICO, one could purchase shares in a company’s primary asset rather than shares in the company itself. It’s not to say that most ICOs were frauds or not well-intentioned. However, there wasn’t much ambiguity about the fact that they were unregistered securities offerings.
It’s common practice for ICOs to block investments from USA investors. Nonetheless, those same blocked investors can then later purchase these tokens on cryptocurrency exchanges. Does this strategy of initially blocking USA investors keep ICOs safe from SEC enforcement action?
The short answer is no. If an issuer accesses the U.S. capital markets, if it offers or sells securities in the U.S., directly or indirectly, the SEC will have jurisdiction. The SEC has made it clear that it is not sufficient to take cosmetic or half measures to prevent one’s security token offering (STO) from reaching U.S. investors.
Do you believe that the SEC will become more proactive in pursuing legal action and shutting down unregulated cryptocurrency exchanges?
Yes. Bringing enforcement actions against exchanges that decline to come into compliance for whatever reasons, despite the SEC’s messaging in the space, makes sense for the Enforcement Division. Not only to give teeth to prior statements by the Chairman, other commissioners, and certain members of senior management, but also because an enforcement action against an exchange, on the whole, should have a greater programmatic impact from a regulatory perspective than an action against a single issuer.
Do you have any comments regarding the SEC’s most recent actions against Telegram Group Inc and its unregistered securities offering?
In my view, there are a couple of important takeaways. First, related to your earlier question, the Telegram case demonstrates the SEC will pursue overseas issuers of digital assets or cryptocurrencies who offer or sell those assets into the U.S., or otherwise access the U.S. capital markets. Additionally, I think this could be an interesting test case for the utility token argument. Telegram has taken the position that, while the token purchase agreement for the Gram was a security, the token itself is not. In its complaint against Telegram, the SEC alleged there was no daylight between the Gram offering and the Gram token. Rather, the SEC alleged, the offering was a traditional capital raise because, among other things: the company used funds raised for operations and to build out its ecosystem; there were no goods or services for which one might use the Gram; and Gram purchasers had and – absent the emergency action – would continue to have a reasonable expectation of sharing in the company’s profits should it succeed in building out the functionalities it promised. It will be interesting to see how the facts and arguments develop on this issue as the litigation progresses.
Could you share with us details regarding your current role with Seward & Kissel LLP?
I joined Seward & Kissel in February 2019 and work closely with several of the firm’s practice areas in both New York and D.C., including the Government Enforcement and Internal Investigations, Investment Management, and Blockchain and Cryptocurrency Groups. I spent the majority of my career at the SEC in the Enforcement Division’s Asset Management Unit, and Seward & Kissel has one of the largest and well-known Investment Management practices in the U.S., working with managers across all asset classes, including digital assets. As a result, much of my current practice centers on counseling our investment management clients on SEC and other regulatory examinations, investigations, and enforcement matters; internal investigations; and digital asset offerings. I have also been asked to lead the Enforcement Committee for the Virtual Commodity Association in connection with its efforts to establish a self-regulatory organization (SRO) for cryptocurrency marketplaces.
What are some recommendations that you have for companies that are considering launching an STO?
In my view, the best course of action is to engage counsel with deep knowledge of both securities law and cryptocurrency. While some lawyers have gotten up to speed on blockchain technology, many may be doing their clients a disservice because they are not as well versed in the fundamentals of the securities laws.
At what stage should companies who are considering launching an STO contact you or other legal counsel?
The earlier the better – ideally before any contact with a regulator, and certainly before the offer or sale of any token.
Is there anything else that you would like to share with our audience?
The SEC’s enforcement actions against ICO issuers clearly have had an impact on the market. However, Telegram, Block.one, and Kik were just three of the larger ICOs from the 2017-2018 period. We should see more such cases in the coming months or year. The SEC has brought enforcement actions against celebrity promoters of digital assets, but I would expect a continued focus by the SEC on promoters and sellers. It’s worth noting that one stated goal of SEC enforcement actions is to change the behavior of market participants, so I anticipate the SEC will continue to police digital asset exchanges and trading platforms. It’s the natural next step for the SEC after the issuers and promoters and, as I mentioned, an opportunity to have a wider impact on the market. In a similar vein, while a substantial number of the SEC’s enforcement actions in the space have involved alleged Ponzi schemes or offering frauds, with a continued focus on exchanges and trading platforms, I would not be surprised if, not before long, the SEC unearths more complex frauds involving market manipulation schemes or other market abuses. However, even well-intentioned market participants can be swept up in this and can find themselves the subject of enforcement attention as the SEC continues its efforts to increase industry compliance with securities laws and regulations. Seward & Kissel has been advising clients in financial services, corporate financing, and capital markets for more than 125 years. Our lawyers have extensive experience with STOs and digital asset offerings.
Paul Claudius, CEO of BlockState – Interview Series
Paul Claudius is Co-Founder & CEO of BlockState.
BlockState is a Swiss security token platform for non-bankable assets such as SME equity and debt or real estate.
How did you initially get involved in digital securities?
I stumbled upon Blockchain and Bitcoin in early 2013 by pure coincidence. I was introduced to the Satoshi WP by a friend who has a computer science background. It took me some time to realize the impact the technology would actually have on capital markets and finance. As I started my career in Investment Banking and Private Equity I was very aware of the legacy process and involved costs charged by highly payed intermediaries. The opportunity to use DLT as a catalyst to transform an entire market, not only digitize new assets but in particular the opportunity to make them more accessible to a broader investors base was the reason I decided to build BlockState with my co-founders.
Outside of real estate and debt what are some examples of non-bankable assets?
Blue chips and other traditional assets are at an all-time high in terms of valuation. At the same time bonds deliver the lowest yields we have seen in the past years. This drives demand for alternative assets providing higher yields, not only for institutional but also retail investors. Therefore I believe we will see a lot more SME debt raised in the form of tokens by issuers but also other yield generating assets such as project financing or reverse leases that have been only investible for more sophisticated investors in the past made accessible through tokenised securities.
In July BlockState released a report on the state of the current Global STO market. Were there any findings in the report that surprised you?
We wanted to validate our assumptions we internally had on the market. Our findings confirmed the early stage we are currently in. At the same time regulators have been addressing the need and shown their willingness to clarify regulation building the necessary trust that is required for the market to accelerate what I believe we will see in early 2020. Also, necessary infrastructure providing liquidity in secondary markets through regulated exchanges will have an impact on the market adoption in 2020.
Could you share with us some details regarding the upcoming Streetlife STO?
Depending on the approval of the regulator we will see them go live in Q4 2019 or Q1 2020. For now, this is all that we can share as a large part of the issuance details are reserved for a prospectus that needs to be approved by the regulator. Apart from the Streetlife STO we are working on a number of other Swiss and German regulated issuances. We will share the update with the community as soon as we receive all the necessary approvals.
We previously reported on the BlockState’s intent to migrate a number of ERC-20 tokens from the Ethereum blockchain to a private distributed ledger developed by R3 – Corda. What was the rationale behind this, and has this been implemented?
A core value proposition of DLT based financial markets is to create accessibility to financial instruments. That’s why we believe it is important to create interoperability between different infrastructures that enable different investor types to access such assets. We see that regulated institutions currently have a tendency to prefer non-public infrastructure for a range of reasons that make a lot of sense. R3 provides an excellent infrastructure to these clients. We therefore want to enable an interoperability between our ERC based tokenised securities in order to make them accessible to market participants relying on R3 infrastructure.
Blockstate is able to launch an STO in as little as 10 weeks, could you share what BlockState does to make this a reality?
The time to go live is mostly defined by the time the regulator needs to approve issuances that address retail investors through a public offering. Apart from that issuers usually require some time to prepare their fundraising activity.
When it comes to the set-up time for the tech and infrastructure, we can execute an issuance within a week. With the new prospectus directive enabling issuances depending on the member state for up to Euro 8 million without a formal prospectus we will see the time of 10 weeks decrease even further.
For companies that are interested in your STO services, what are the minimum listing requirements? Also, how do you select which companies/products to tokenize?
We work together with companies who either have a very strong community or large client base which they convert into investors or more mature companies who have healthy financials and therefore are also attractive to more conservative and slightly more institutional investors. As of now there are no defined hurdles a company needs to provide. We look at each case individually.
For investors who are interested in funding an STO on your platform, what are the details that they should be aware of. Do you accept USA clients?
Investor acceptance depends solely on the offering, not on our platform. Usually we support with public offerings which enable the participation of both retail and institutional investors, making sure that our infrastructure caters to the issuer’s specific needs through self- custody and regulated custody partners.
US clients are a special case as compliance requirements create additional processes and reporting related tasks. Therefore, our clients often don’t accept US investors in their offerings.
Is there anything else that you would like to share about BlockState?
As we are in an early stage developing this market, I want to highlight some of the great industry bodies we have been working with who are helping to building the framework for a professional digital asset space. I can very much getting in touch with INATBA, ITSA and MAMA to anyone working in this space.