Dave Hendricks is the CEO and cofounder of Vertalo which is a stakeholder Registry and Cap Table platform for SEC Compliant Security Token offerings. They connect broker-dealers, issuers, exchanges and ATS’s.
AT: Could you share with us what Vertalo does?
DH: Vertalo seeks to help more issuers, tokenize more assets, at lower cost and lower risk. And at less expense. Vertalo’s core offering is a crypto cap table, in other words a ledger of token holders. ICOs didn’t care about cap tables, but equity investors do.
Investors can be added to a Vertalo-built cap table before, during, or after a fundraise or ICO. Vertalo’s wallet registration process is the connective process between issuers – who want to know who owns how much of their company – and investors, who want to know how much they own of the company. Vertalo is glue for the overly confusing STO ecosystem. Vertalo helps issuers manage their investor community and Vertalo helps investor manage their holdings – all via a simple graphical interface that is way better than etherscan.
AT: Is this on a public or private blockchain? If both, could you elaborate what information is on the public versus the private?
DH: Most Security Token issuance development is Ethereum-based, and most smart contracts are written in Solidity, so Vertalo started its work in alignment with the community, but Vertalo was designed to be chain-agnostic. If an issuer wants to write their token using Hyperledger, or Hashgraph, or NEO, or Stellar they can do that and Vertalo’s cap table and investor registration functions will operate the same way. We see benefits of permission-less and permissioned Blockchains for Security Tokens.
AT: Do you perform the KYC/AML accreditation yourselves?
DH: Vertalo partners with major Accredited/Qualified and KYC/AML Services, since there are more than 200 different jurisdictions and we want to focus on what we do best. We are developing a subscription service with several of these vendors to simplify secondary trading (where KYC-AML is so important). More on that later in Q1.
AT: Could you describe how the platform enables issuers to manage the investor community?
DH: Vertalo’s Cap Table combines the features of a traditional ledger with network connectivity. The Vertalo cap table represents a relationship between two parties, determined by consensus. Issuers use the vertalo registration smart contract process to invite and add an investor to the cap table. That registration process creates a ledger which is more than a list of holders, it facilitates communications between the issuer and investor so that tokens, dividends, and documents can be transferred between the parties.
AT: There are many non-blockchain options to manage a cap table. What are the benefits of using a blockchain, and more specifically Vertalo?
DH: Token trading is real-time. If someone trades a security token, the investor ledger by law must be updated with the new address/holder of the token. So a blockchain-based cap table ledger operates at the speed of blockchain, faster than paper and with better record-keeping. Without a blockchain-based ledger for a blockchain based security, who would manage the legal requirements for maintaining a list of shareholders? This was not a concern for ICO issuers, so they didnt create this tech. ICOs just cared about exchanges. STO issuers need to maintain compliance with securities law.
Developing blockchain-based cap tables is also the first and fundamental step towards greater liquidity for private assets, because cap tables are where the investor ownership rights are best enforced. The reason that issuers and investors are tokenizing their offerings is to ultimately achieve greater liquidity by enabling their shareholders to sell on exchanges and ATSs subject to the issuers rules.
No traditional private equity cap table platforms connect to exchanges, and even obtaining a stock certificate from a traditional cap table platform is a days-long effort. And when you receive a paper share from a traditional cap table platform there is no where to sell it, since you have to get permission from the board, and then there are few marketplaces for anything other than Uber or Lyft, etc..
Tokenized offerings are issued on the predication that the tokens/shares will be ‘tradeable/’ after a restriction is lifted. By connecting the Vertalo blockchain-based cap table to exchanges and ATSs, we enable token holders to achieve the liquidity that is main differentiating feature of a security token offering, while complying with basic securities law.
AT: How does the Vertalo registry reduce costs for Broker dealers?
DH: Broker-Dealers have fiduciary requirements to check KYC and AML. Vertalo’s investor registry function, which connects KYC verified email addresses to blockchain wallets, was designed in conjunction with major broker dealers to help them comply with basic AML requirements. Vertalo built its platform to be whitelabeled by broker-dealers so they don’t have to build or manage this process themselves.
AT: You offer investors who register with Vertalo the opportunity to instantaneously share their investor profile with broker-dealers and issuers. How do investors sign up for this?
DH: This feature will be built out later this year. Our focus is on the Picks and Shovels for our business clients.
AT: One of the tools that you offer is the verification of wallet ownership? How is this performed?
DH: The Vertalo Wallet Registration process uses a smart contract to run a process that is similar to the method by which a bank verifies your ownership of an account, by depositing random amounts into an account. We send an email to the registered account holder, with a link to kick off a process. If you can log into that account and verify the amounts, that is the beginning of proven ownership. It’s actually a little more complicated than that, but to the proper owner of a wallet, it is a very smooth process. We use a special utility token (no, you can’t trade or transfer it) and smart contracts for this process.
AT: Are there any notable projects that are currently using the Vertalo platform?
DH: We were our first client. I think that Vertalo issued the third or fourth real, US compliant Security token in March 2018. That is why we built this. We are working with PrimeTrust, Issuance, Entoro, and we will be announcing some Major real estate, fund, and debt issuances that are launching in February and March. By the end of Q1 there should be more than 10 projects or Broker-Dealers using the tech to simplify their token issuances, investor relations and cap table management.
AT: Is there anything else that you would like to share about Vertalo?
DH: Issuers should create a great product, find a great law firm, find a great broker-dealer and call Vertalo. We can stitch all the parts together for you and also help you save a tremendous amount on your overall tokenization costs.
Interview Series – Dana Farbo, COO of Augmate
Dana Farbo is the Chief Operating Officer and an investor in Augmate. He is driving growth and building the ultimate platform for device management for the Internet of Things (IoT). Using distributed ledger technology, Augmate brings better control and security for the billions of devices in use by enterprise and consumers.
AT: Augmate started in 2014 and was one of the first companies to offer IoT device management. Could you tell us how you got started?
DF: Augmate began as a Google Glass at work partner to help make the introduction of Google Glass in enterprises work well. We became one of a select group of 10 companies certified by Google to provide solutions for this new technology. Rather than focus on consumers, we saw the use on manufacturing floors, logistics and in other businesses as being the best use cases for the growing head-mounted-wearable business.
AT: In 2015 you introduced the Augmate Wearable Environment Manager (WEM). What is this exactly?
DF: W.E.M. is a centralized platform for IT management to control and command the head-mounted-wearable devices that they were putting on their networks. There wasn’t anything in market that could help these companies deploy and manage for things like over-the-air updates, permissioning to the right user at the right time, security for the devices including the ability to individually lock and manage content and much more. W.E.M can be used as a SaaS or as a server based on-premise solution. IT has the full control of the devices through the platform because we work with equipment manufacturers of wearables to have them sign our code and the code to be placed at the core of the device.
AT: What are some of the more popular use cases for WEM?
DF: View this link for detailed background information. The easiest is in remote worker support:
Companies around the globe are leveraging their distributed work forces by giving them technology such as head-mounted wearable computers with video and audio capabilities. Imagine a worker who is repairing a generator in the field but needs expert help that may be located 1000 miles away. By using a wearable device with a camera and audio, the worker can keep both hands free to work while a support person guides them by seeing-what-they-see. Augmate is the layer of device management and control that enables these devices to be managed remotely and updated effectively so that there is not an interruption in their usage. Augmate gives addition capabilities to the management staff such as automatic wifi connectivity for approved networks, restricted access control so that only the workers allowed to use them are able to log in and much more.
AT: Could you tell us about Augmate Connect?
DF: Augmate Connect brings a new paradigm to device management. It is built using an open architecture framework to allow for unlimited device types to be added to it for management. It can be “plugged” into other systems to extend their capabilities using API’s or built upon using a SDK so that additional components can be added from a community of developers. It is built with the ability to integrate blockchain and distributed ledger technology without being locked into any single solution. This flexible framework is the key to a solid foundation that can extend over time and scale to unlimited potential.
AT: How does Augmate Connect keep IoT devices secure?
DF: Security is both built in and supported via add-on technology. Security can range from the types of encryption for data during transmission to use of blockchain and device identification on the blockchain. As stated, 3rd party integrations such as network health can be done with single dashboard monitoring. Policies can be written to give management the opportunity to write security protocols directly to the system. Security is core to the Augmate Connect framework planning and implementation with all effort focused on maximizing protection and minimizing disruption.
AT: Since Augmate uses the blockchain, what makes this more secure than using a database?
DF: Blockchain holds the promise of a scaling, decentralized environment where secure authentication is paramount. Centralized databases can be breached, and, in many cases, this is due to human error in password management. Hacking can also penetrate via known or unknown vulnerabilities. Blockchain can still be prone to human error but the vulnerabilities of direct hacking are lessened considerably due to the way transactions are validated.
AT: In 2017 you successfully completed a proof-of-concept with IOTA. Will this be the blockchain that is used on a going-forward basis?
DF: Augmate is an OS and blockchain agnostic platform. We are evaluating and using several technologies based on use-case need. IOTA holds the promise of scale and no or minimal transaction costs. Other DLT technology is being developed that are purpose built for IoT.
AT: Augmate was initially wrestling with the idea of launching an ICO versus an STO. What swayed you to raising via an STO?
DF: It became clear during early 2018 that SEC guidance was indicating a need for companies to consider an investment raise using tokens to be compliant with securities laws. Augmate has customers, employees and shareholders and it was important that we not put any of those at risk by trying to force a new way of thinking about investment raises based on a desire to be an ICO versus a STO. Our own team debated this many times as the advantages of an ICO were enticing. However, we took counsel’s advice and the common sense approach that led us to making sure we were doing everything possible to protect our stakeholders while participating in the new area of investing that we feel will continue to grow.
AT: You have an impressive list of partners which includes Toyota and UPS. Could you tell us more about these partnerships?
DF: Partnerships are the basis for our growth strategies. We have strategic investors and customers such as UPS and we have application partners that showcase us to their customers. Hardware partners allow us to dig deeper into what helps them succeed while we prepare the future solutions to maximize their impact. We are all in this IoT ecosystem together and our belief is that by making our partners stronger, we become that much stronger ourselves.
AT: Is there anything else that you would like to share about Augmate?
DF: Augmate has built a world-class team and we have some of the best customers in the world. We are excited to be a leader in blockchain and DLT and focused on providing solutions for managing the massive opportunity that IoT is bringing to enterprises.
Interview Series – Juan Hernandez, Founder and CEO of OpenFinance Network
Juan Hernandez is the Founder and CEO of the OpenFinance Network (“OFN”) and an experienced fintech entrepreneur. The OFN launched in December 2018 as the first live, regulated security token trading platform in the United States. OFN continues to lead the way in regulated security token trading.
RS: OpenFinance Network (“OFN”) is well known as the first platform that allows people to trade security tokens, but OFN is a lot more than simply security token trading. Can you explain some of the features available to users of the OFN?
JH: Aside from security tokens, we’re set up to trade all alternative assets such as real estate, private equity, venture capital funds, hedge funds, non-listed REITs and other limited partnerships. These “traditional” alternative assets are all great candidates for tokenization and it is within this area where we see significant growth potential going forward.
RS: OFN’s first competitor, TZERO, just recently launched. Can you tell us what differentiates OFN from TZERO?
JH: OpenFinance ATS strives to create an open environment for trading. We are currently the only ATS that has listed multiple tokens from securities offerings under valid SEC exemptions. Further, we have partnered with multiple platforms across the industry to ensure that our users have access to a wide variety of product offerings.
RS: What does the onboarding look like for an investor to get an Investor Passport and start trading security tokens?
JH: Onboarding requires 4 simple steps. First, we ask you to set up your MetaMask Account, which is a tool that allows you to manage your Ethereum wallet in your browser and is required to trade on the OFN platform. Next, we ask you to complete your investor passport which serves as a one-time verification process allowing you to invest based on your eligibility. Once you’ve been approved, all that’s left to do is fund your trading wallet and start trading! We’ve created tutorial videos for setting up your MetaMask Account as well as setting up your Investor Passport.
RS: Obviously, individual investors interested in trading security tokens would want to use the OpenFinance platform, can you tell us who else OpenFinance appeals to and what value the platform gives them?
JH: Aside from investors, issuers also gain value from our platform by having a regulated, trusted forum where their investors can seek liquidity.
RS: Non-Accredited users can open accounts on OFN, what, if any, actions are these users limited to?
JH: All users on the platform, be they international or US-based, accredited or non-accredited, have different actions available to them on the platform. Our Investor Passport mechanism allows us to distinguish these different types of users and ensure that they are participating only in securities they are allowed to fully participate in. For example, certain securities, like Reg D, have a 12-month lock-up period, while others, like Reg A+ and Reg CF are unrestricted securities that non-accredited investors can participate in. Our Investor Passport handles all of the checking for these different regulations to provide a smooth, seamless experience for the user.
RS: For companies that wish to have their security token listed on the platform, what are the listing requirements?
JH: Listing a digital security to trade on the OpenFinance Network ATS includes both technology and compliance reviews. From a technological perspective, companies must use one of our approved standards. Starting with the compliance checklist, issuers must submit all related documents regarding the offering and company details. After we have received the items, our team completes due diligence on the issuance to ensure all regulatory requirements were followed throughout the various steps in the process, such as KYC/AML and hard accreditation checks (for 506(c) exemptions). Upon approval, we can then enter into the listing agreement with the issuer.
RS: OFN is affiliated with an Alternative Trading System, and a broker-dealer. Can you explain to the readers how this is beneficial to users of the OFN?
JH: We are affiliated with a broker-dealer (Sageworks Capital, LLC) and an Alternative Trading System (ATS) for alternative assets (including security tokens). Being affiliated with a registered entity means that we’re held to a higher standard with protecting our users when it comes to securities transactions. Not only are there certain requirements we have to adhere to with the regulators, but we are also have a broker-dealer of record on all trades that is subject to FINRA and SEC regulations.
RS: You recently partnered with Krypital Group, can you tell us a bit more about this partnership?
JH: We are excited to partner with Krypital Group as we continue to align ourselves with leaders in the blockchain consulting and advisory services. We look forward to working together to bring further adoption of compliant security token offerings for issuers worldwide.
RS: You have regularly stated that regulation is necessary for the maturation of the industry. What regulation specifically would you like to see implemented, and why?
JH: There is still a lot of debate around “security token vs. utility token” (see the Kin vs SEC situation) that needs to be clarified in order for more issuers and participants to be comfortable enough to step into this market.
RS: What token standards are currently accepted on the OFN, and do you have plans to incorporate additional standards?
JH: We work with our partners on incorporating different token standards on the platform. For example, several of our partners have protocols that they have published which we are integrating with, including Securitize’s DS-20 protocol and Harbor’s R-Token protocol.
RS: Are there any exciting things in the pipeline that you can tell the readers about?
JH: We currently have three listed security tokens on the platform that are actively trading, including Blockchain Capital, and we expect to be listing many more security tokens in the coming weeks.
RS: Is there anything else you would like the readers to know about the OpenFinance Network?
JH: OpenFinance ATS is open to everyone. While alternative assets have traditionally been available to a small subset of qualified investors, we are making these opportunities available to everyone. Our Investor Passport ensures that users are only trading based on their eligibility. As we continue to add more assets to the platform, the opportunities for all investors to participate in trading will increase.
For those who wish to learn more about the OFN you can visit the Open Finance Website.
Interview Series – Matthew Sullivan, CEO of QuantmRE, Inc
Matthew Sullivan is the CEO and Founder of QuantmRE. A seasoned entrepreneur, Matthew has a proven track record in real estate innovation through his experiences as Co-Founder of the $50M Secured Real Estate Income Strategies Fund, and as Founder and President of Crowdventure.com, a real estate crowdfunding company.
AT: QuantmRE invests in single family owner-occupied real estate via an equity share. Can you share with us how this works?
MS: QuantmRE’s EQRE Agreements allow the owners of single-family detached properties and condominiums the ability to grant an economic right to some portion of the future appreciation of the property in exchange for a fee or other consideration.
An EQRE Agreement is not a loan or credit-based transaction, but rather is an equity-based consumer finance instrument designed as an alternative to traditional mortgage debt.
The proceeds paid to the homeowner may be used for supplementing retirement income and funds, improving the property, reducing debt, investment diversification and other financial purposes.
AT: Is there a transfer of title on the property?
MS: No – the homeowner remains listed as owner on title. QuantmRE will record with the county recorder’s office a Performance Deed of Trust on your property. This is a lien on the property that protects our interests, but is not a loan, security or swap instrument. Our agreement with the homeowner is simply a consumer contract that memorializes our investment in the property.
AT: Could you share with us your underwriting criteria when it comes to entering into these equity agreements?
MS: We use a three-tier underwriting standard based on the equity position in the home. Each tier takes into account initial LTV, origination combined LTV, and depending on tier, some level of FICO and mortgage performance history. Post-transaction, maximum CLTV is 90%.
AT: You’ve stated that you are focusing on California property. Are there specific regions or cities in California that you either avoid or target?
MS: As returns on the EQRE Fund are determined by the increase in value of the underlying assets, we intend to target the areas in California that are likely to see healthy asset price appreciation.
AT: What happens to the equity once a homeowner sells their home or if the homeowner wants to repay QuantmRE before they sell their home?
MS: The homeowner sells a percentage of the equity in their home to QuantmRE. In exchange we pay the homeowner with US$. This real estate asset that we have purchased from the homeowner, a percentage of the equity in their home, goes into a pool with other equity from other homeowners. Our investment tokens are irrevocably tied to these pools of assets. Proceeds received from the sale of our investment tokens will be used to fund the purchase of additional fractional equity interests in single family residences.
When a homeowner sells their home, they pay QuantmRE the value of the percentage of equity that we originally bought, plus any agreed appreciation / depreciation associated with our equity portion.
If the homeowner wants to repay QuantmRE and not sell their home, the repayment amount will be based on the value of the home at the time of the proposed repayment, within certain provisions in our agreement to ensure that QuantmRE does not unnecessarily take a loss on equity in the event that market conditions are not favorable at that time.
AT: You often mention the term “equity freedom.” What does this mean and how does it benefit the homeowner?
MS: We describe our service as ‘Equity Freedom’ as there is no loan, interest charges or monthly payments associated with the arrangement. Our Shared Equity program is designed to enable homeowners to release the so-called ‘dead money’ that is locked up in the equity in their homes without taking on more debt. That means owner-occupiers, owners of second homes, vacation properties and income/rental homes could get access to significant amounts of capital with no interest to pay, no monthly payments, and no restrictions on how they might spend the money.
AT: What happens if the homeowner stops paying the property tax or mortgage payments?
MS: The property owner has responsibility to properly maintain the property, pay all property taxes on time and make sure that the property is properly insured in accordance with the provisions of the shared equity agreement with QuantmRE. If the homeowner is unable to make these payments, QuantmRE may step in and assist the homeowner in order to protect our asset, however payment of the home mortgage and all taxes is an important and key term of our agreement.
AT: You chose to partner with Securrency for investor onboarding and token minting. Can you tell us more about this partnership?
MS: Securrency provides a critical technology piece on QuantmRE’s offering, which is to provide an off-chain validation service that enables us to control the distribution of our asset-backed tokens. With Securrency’s technology, we are able to ascertain the KYC and AML status of a prospective investor, issue securities tokens and track the change of ownership down to a fractional level. The ability to maintain an updated cap table is a critical securities law requirement, as is the ability to distribute dividends and replace lost or stolen tokens. Most important, Securrency enables us to reliably control how, where and when our tokens move from wallet to wallet. This means that we are able to meet the most stringent BSA, AML and KYC requirements for our offerings, both to national and international investors.
AT: You’ve partnered with Prime Trust, could you tell us more about this partnership?
MS: QuantmRE’s partnership with Prime Trust enables investors to buy EQRE securities tokens without the need for their own digital wallet – Prime Trust acts as the regulated and insured custodian for these digital assets and is able to hold digital assets such as EQRE on behalf of the investor.
AT: Can you let us know when you expect to launch the STO for the EQRE token?
MS: Accredited investors are able to invest in EQRE tokens today by visiting www.QuantmRE.com.
AT: Is there anything else that you would like to share about QuantmRE?
By bringing Blockchain technologies to the real-estate sector in a regulated and compliant way, QuantmRE is re-imagining the way houses are financed. At the same time we are solving a number of problems relating to the intrinsic value of tokens which we believe will generate new levels of trust for asset-backed tokens and provide the launchpad for the mass adoption of crypto security token offerings.
Thank you for the interview, this sounds like one of the more unique real estate projects out there. For those who wish to learn more visit the QuantmRE STO website or view the QuantmRE token listing details page.
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