Matthew is the CEO of iComply (iComply Investor Services Inc.) is an award-winning Regtech platform powering the digitization of institutional finance with coverage for over 160 countries.
You have been involved in cryptocurrency for many years now. Can you share with us how you first learned about crypto?
I first heard about cryptocurrency (Bitcoin) in 2011 at a meetup in Vancouver. Before that, I spent over half a decade as a wealth manager. I saw how blockchain technology would transform capital markets. Since then we have seen a ton of innovation. To compare it to digital media – if Bitcoin was the Napster of finance, Ethereum’s smart contracts were BitTorrent.
How did you come across the concept for iComply Investor Services?
The need for iComply arose out of two major events, in 2014, the fintech I worked for was building a platform for broker dealers and asset managers to manage their entire business from an iPad. For KYC, there were a few APIs on the market but even today most of these tools do nothing more than onboarding or identity verification.
Over the past 15 years, I have gone through many regulatory audit cycles and did my first AML training in 2005. I saw a need for a toolkit that would let businesses easily manage the global variations and frequent changes to local regulations – whether for onboarding, identity verification, AML, or even disclosures and legal agreements. Today, iComply offers institutional-grade identification and risk management tools that support AML compliance for the entire customer lifecycle.
You led a 2016 project to use Ethereum smart contracts to automate the matching and fulfillment of CME interest rate swaps trading over LIBOR. How did this work and what was the outcome?
Actually, I only led the technical part of this proof of concept (POC) with a team at MIT. Our goal was to build a business case and technical POC to identify if smart contracts could be used for clearing derivatives effectively. This required that we map out the entire workflows, business and compliance requirements of the second largest clearinghouse in the world. We connected the dots between transaction counterparties, their law firms, and a whole web of proprietary software.
Looking back, our solution was a mess – we had way too much logic and potentially confidential information on-chain, and Ethereum was integrated into a customized Salesforce interface. It was early days. Shortly after the DAO disaster unfolded and the resulting hard fork killed all interest from the major institutions. Still, the results from the POC were exciting – we could take a traditional institutional process that takes 4-6 weeks and costs upwards of $10,000 per transaction and boil it down to under a dollar of gas in under a minute.
We witnessed the ICO boom in 2017 with the follow-up crash in 2019. Why do you personally feel that STOs will be different?
First, ICOs were seeking to do something very different than digitizing a security – in many ways utility tokens are a new asset class, security tokens are new technology applied to, for the most part, very traditional financial instruments. I still believe there are excellent use cases for utility tokens – but many utility tokens still need to comply with all sorts of laws and regulations outside of the securities.
In contrast, STOs are focusing on operating within securities regulation. This means they will be held to a higher standard and their tokens have to observe the securities regulation of any jurisdiction they trade in – even for peer-to-peer transfers between wallets. These regulations vary widely from one country to another, in the world of paper or digitized PDF legal agreements there is little risk of a regulator in EU catching a US issuer raising capital for a private placement in a business, fund, or real estate deal.
Putting these transactions onto a blockchain completely changes this because regulators are already able to monitor the market in a way that is simply impossible to do today. Token issuers today are still buying basic APIs for KYC and AML, and many still think of global regulation as binary – SEC vs no-SEC (i.e. Reg D and Reg S). However, when a tokenized asset is able to easily manage the jurisdictional variations of identity, privacy, data, AML, and securities regulations, including disclosures and legal agreements, etc., the old way of doing things seems insane. That would be like someone using Telex today instead of Telegram, email, or Slack.
What are some of the tokenization use cases that iComply can assist companies with?
Since we launched Prefacto in Feb 2018, we have seen a lot of really cool token projects from Cryptokitties to tokenized funds, real estate, bonds, private shares, futures contracts, and even fractional ownership in casks of luxury Scotch, whiskey, and wine.
The Prefacto toolkit makes it simple, and very cost effective, for token issuers to manage compliance requirements not just for the initial offering – but for every transaction throughout the lifetime of the asset in almost every country in the world. If your lawyer is able to write up a term sheet, purchase agreement, or licensing contract – you can probably tokenize it.
In 2018, we started to see a lot of new blockchain startups launching platforms for issuance, trading, transfer agents, and cap table management such as Polymath, Blockport, Securitize, etc.. We started getting requests from a lot of STO platforms on how to handle the cross-border AML compliance for onboarding corporate investors so we released a second product, iComplyKYC, as a toolkit that easily plugs into these types of platforms. What we were not expecting was the demand from the traditional capital markets where back offices are simply not ready for blockchain. This is a very exciting trend because we are now connecting the dots for many of our clients bridging the gaps between traditional brokers, issuance platforms, and even some exchanges.
One of your exchange clients is Motto Technologies, a UK based cryptocurrency exchange going public on the LSE. Could you walk us through what Motto does, and how iComply was able to assist them?
Motto was early to the “let’s get regulations right” game. Their platform allows users to buy, trade cryptocurrency but they also give their users a Visa card that lets you easily spend your crypto anywhere that takes via. In order to get past audits from their banking partners, Visa, and the Financial Conduct Authority.
We helped Motto find local regulatory experts, get their policies and procedures ready for audits, approvals, and go-public due diligence. Before using iComply, their bank had required them to use an API based “e-KYC” tool which might have worked if they were just doing a traditional crypto-exchange. Our iComplyKYC toolkit enabled them to build and maintain a robust compliance program that could stand up to regulatory scrutiny. Most of the other platforms are still mucking around with 10 different APIs and manual systems to try to appease regulators. We helped Motto get ahead of this curve, and as a soon to be publicly traded company their shares will be available to accredited and non-accredited investors alike – I’m not aware of another exchange in the market that can say that.
One of your software products is Prefacto, a regtech solution for tokenized assets. What problems does Prefacto solve?
Prefacto enables businesses to manage end-to-end compliance on their tokenized assets. This includes planning and structuring, launching smart contracts, developing and implementing a compliance program, issuance and distribution, and finally ongoing token management. Compared to what many issuers are doing today, our clients can save time, money, and a whole lot of pain if they talk to our team early on.
iComply also offers KYC services. What are some of these services?
In late 2018, we started reaching out to other token issuance platforms, transfer agents, etc in the security token market to offer them demos and the opportunity to share knowledge and collaborate rather than compete. Several players took us up on the offer and we all learnt a lot. One of the key takeaways for iComply was that, while we thought Prefacto was cool, our compliance tech was a key missing piece to these other platforms.
At the time, none of the other platforms could manage compliance for corporate investors, distributed broker networks, or multi-jurisdictional variations in regulation. This led us to refocus our business on what we are known to be best at – intelligent compliance automation. It took about a year to refactor our platform and launch the current version of iComplyKYC, a suite of tools that makes it easy to build and maintain a robust global AML compliance program.
We built our own KYC tech because we knew the APIs on the market would not meet regulatory requirements – there is a reason you do not see these tools being used today by firms such as HSBC, Santander, Vistra, etc. After launching iComplyKYC, we discovered that the institutional players were very interested in using these tools because they were built to the current standards and frameworks of traditional compliance – we just do it for 95-98% lower cost per transaction than current mid and back office systems.
Where do you see the industry five years from now?
In 5 years from now – if you’re familiar with the concept of Gartner’s hype cycle – we’ll see security tokens start to take off in mainstream adoption. Right now, if you look at the digital media as an example, right now security tokens are for the people that would have used Napster or Kazaa. In five years we will have an iTunes, maybe even a Netflix.
Traditional firms will be past POCs and MOU press releases. Like the Netflix pivot from mail order DVDs to digital delivery, some of the big guys will have made public blockchains a core to their business strategy like EY has already done with Ethereum. Others will go the way of Blockbuster.
Simultaneously, the security token startups will be more collaborative and more interoperable. The cost of launching a token will be at least 90% less than it is today. The platforms who chose public blockchains, rather than proprietary private or purpose-built chains will start to see the benefits of this long term thinking.
Finally, over the next 1-3 years I believe we will see and hear a lot about private chains with the rational of scalability, security, etc. This is a last-ditch effort to protect their business model from being cannibalized by decentralization and democratization in finance. The early members of the R3 Consortium spent millions to learn this, Salesforce and S&P scrapped their Hyperledger project, JP Morgan recently gave up on Quorum – the truth is we have had DLT in finance for over 30 years, systems such as CDS are incredibly efficient and secure.
There is nothing innovative about a private blockchain or mesh network in finance. Look at Java and C#, they won the race to build the internet. Public cloud solutions such as Google, AWS, and Azure won the race for shared public server architecture. For digital finance, public blockchains enable full transparency which builds trust and reputation in a way that a private chain cannot. Within 5 years you will see SIX, ASX, GBX, and similar players will have scrapped their current infrastructure in favour of lower costs per transaction and lower cost of technology ownership, to adopt public blockchain infrastructure.
Is there anything else that you would like to share about iComply?
Our focus at iComply is to ensure companies can easily build and maintain a robust, global, and institutional grade compliance program. The problem we see in the market is that the institutional grade tools are too manual and expensive to enable digital transformation. Meanwhile, in the fintech, startup, and security token markets we see a lot of players that have a lot of deep experience in securities or finance – usually only in one market – but no real world experience in what happens in the mid and back office, much less compliance on an international level. They simply don’t understand that when you sell a Reg S to someone in Germany there are compliance requirements from BaFin, the European Commision, etc.. For the sake of this whole industry, I would urge token issuers to look at compliance holistically, and as early as possible.
Our clients realize very quickly that we’re offering a holistic approach. We support our clients through audits from regulators, banks, and financial partners – they need this in order to become successful. The eKYC API built for Uber and AirBnb don’t do this because they know their tech will not pass an audit – once they close the sale that’s it. This is what is unique about our focus at iComply, we are here to help our clients do business – we have aligned our business model with our client’s success.
Hirander Misra, Chairman of GMEX Group & Chairman of SECDEX – Interview Series
Hirander Misra is the Chairman and CEO of GMEX Group (GMEX), offering innovative solutions for the creation & operation of electronic exchanges and post trade infrastructure in securities, FX, derivatives, commodities, crypto & digital assets.
Can you start by sharing what GMEX Group is?
GMEX Group (“GMEX”) is a global provider of innovative multi-asset exchange trading and post trade business solutions and technology ecosystems. As a market infrastructure vendor, we focus on technology and interconnectivity. Our solutions address the end to end regulatory and contract environment needs for issuance, trading, clearing and settlement of securities across exchanges, across all asset classes including traditional, alternative and digital assets, digital currencies as well as hybrid digital securitisation of traditional assets including derivatives.
GMEX’s focus is on digitally transforming global financial markets, enabling participants to launch new solutions, expand current operations and scale to meet market demands. We carry this out using two proven engagement mechanisms to enable our clients to use technology to achieve their commercial goals:
- Market Advancement Programme (MAP), which delivers multi-asset Exchange and Post-trade enablement with an optimal combination of traditional and digital market infrastructure technology and services
- Partnership-driven Approach, we do not just sell technology, rather we use a combination of FinTech, business and investment solutions empowering partnerships and ventures.
What sparked your interest initially in launching GMEX?
When we started out in 2012, the existing market infrastructure vendors were very much of the customer-supplier mindset, providing legacy technology at inflated prices without taking into account the real business and operational needs, including any commercial constraints which may exist. This was our opportunity to differentiate ourselves!
We provide business expertise, the latest technology, connectivity & operational expertise delivered through an aligned partnership driven approach for exchanges, trading venues, clearing houses, depositories, registries and warehouse receipt platforms. In many cases this also allows us to align interests by taking equity in the ventures we are working with, as and where such opportunities make sense.
In 2016 we were able to capitalise on the opportunities that blockchain presented, initially on provenance of commodities and subsequently within capital markets. We were surprised at how most projects just harnessed the technology in the same way that traditional technology was being used and thought, what is the point? That spurred us on to look at ways in which the technology could be leveraged to revolutionise and democratise the way capital markets and marketplaces for other asset classes operated.
Can you tell us about GMEX Investments, and what type of investments are made?
The investment focus for GMEX is early stage equity and token strategic investment in market infrastructure and related FinTech companies, which are synergistic with what GMEX does in terms of servicing and product capabilities. In addition, we also venture build our own initiatives.
Given the interesting pre Series-A FinTech opportunities we are coming across, we have also launched Digital Investment Fund PCC (“DIF”) in the Seychelles, which is the is the world’s first fully regulated tokenised hybrid fund. We have an interest in companies, which have genuine intellectual property in the blockchain and artificial Intelligence (“AI”) space within financial services, combined with early client traction.
Can you elaborate on the digital exchange trading and post trade technology offered by GMEX Technologies?
GMEX offers the first truly hybrid exchange and post trade ecosystem, Fusion, bridging the gap between traditional and digital assets underpinned by regulatory frameworks. This is quite analogous to interconnected telecommunications networks. We ensure our solutions are aligned with the business objectives of our clients and partners. GMEX Fusion is a hybrid centralised & blockchain distributed ledger technology suite and middleware, which is deployed and trusted by multiple international regulated financial institutions around the globe. The suite includes:
- ForumPortal, a tokenisation, registration and issuance platform;
- Forum Trader, a secondary trading front-end and order management system;
- ForumMatch, a high-performance exchange trading platform with integral matching engine;
- ForumDetect, a market surveillance system;
- ForumIndex, an index calculation and dissemination system;
- ForumCustody, a digital custody platform for clearing and settlement;
- ForumWallet, a wallet management platform, which can also interface with third party wallets;
- ForumCCP, a clearing platform facilitating credit checking, position keep and margining;
- ForumCSD, a central securities depository and registry platform facilitating settlement;
- ForumPay, a simple and secure platform for making international payments, money transfer, withdrawals and deposits across multiple financial instruments.
Why are cryptocurrency exchanges attracted to using GMEX?
Cryptocurrency and digital assets exchanges are attracted to using GMEX because they appreciate we have genuine proven solutions and a practical understanding of digital assets as opposed to the hype and vapourware that some are touting out in the market.
They like the fact that the technology stack is designed for the needs and quirks of cryptocurrency and digital asset markets, which can include 24 hour trading, 18 decimal places due to fractional ownership, high volume requirements and the need to offer tokenisation and digital custody services beyond just exchange solutions.
Importantly, as markets in this space become increasingly regulated, GMEX is able to support our clients with our regulatory and business expertise in operating markets across the globe, which is highly valued.
How scalable is GMEX technology?
Cryptocurrency and other types of digital asset exchanges are facing a very serious challenge with the increasing volumes of orders they need to cope with. Investors and speculators expect their orders to be executed within a few milliseconds especially in hectic market conditions i.e. when volumes are at their highest peak. Any slowness in order execution will cause loss of confidence and order flows to switch to other venues. Exchanges must ensure their technology can stay ahead of the fierce competition. Recent volatile cryptocurrency market conditions were a performance wake-up call for cryptocurrency exchanges.
Our technology stack is modular and component based and is designed to flexibly support multiple assets and numerous private and public blockchains. It also has the ability to easily interconnect many nodes, whether they are running our technology or are third party platforms. Our low-latency and high-throughput exchange solutions combined with high availability ensure successful operation in critical market infrastructure environments. Superior performance is also achieved by way of a low hardware footprint. We also include appropriate open source components to remove third party licence fees. The technology stack scales through use of virtualisation and cloud services, as an alternative to local deployment, where there is a need for a turnkey Software-as-a-Service (“SaaS”) model to be offered as an option.
You are also Chairman of the SECDEX, the Seychelles based Securities, Commodities and Derivatives Exchange. Could you tell us about the SECDEX and why it matters?
The SECDEX Group business consists of a regulated:
- Central counterparty clearing house (CCP);
- Central securities depository with registry;
- Digital marketplace; and
- Digital custodian.
SECDEX is unique as it is the first fully-regulated, multi-asset, hybrid market infrastructure ecosystem combining the benefits of a digital exchange with those of a traditional exchange to deliver seamless trading, clearing and settlement. It is based on the strengths of GMEX Group as a founding shareholder combined with the professional services of Digital Partners Network (DPN) as a co-founding shareholder. DPN services include specialist legal, finance, compliance, corporate structuring, finance, strategic consulting, technology-enabled digital transformation and potential investment through a digital fund.
This is game changing, as until now there have been too many intermediaries for these different services, and they have not been offered cost-effectively under a single umbrella. This means that in addition to the listing of traditional securities and derivatives, Security Token Offerings (STOs) can be undertaken in a regulated, trusted environment with issuance, full professional services support for the tokenisation process covering legal and valuations in addition to capital raising, with listing and secondary trading on the SECDEX Exchange.
It was also recently announced that the SECDEX group has welcomed a new addition to their ranks – SECDEX Digital Custodian (SDC). Could you tell us about this digital custodian solution?
SECDEX Digital Custodian Limited (SDC) is a regulated digital custodian offering cold storage and custodial services for cryptocurrencies, security tokens and other digital assets. SDC caters to retail, high net worth (HNW) and institutional users including exchanges, marketplaces, brokers, banks, payment service providers and traditional custodians.
SDC services include:
- Safeguarding of digital assets
- Transaction recording and reporting for its users
- Automated transfers, balance confirmations and account related requests
- Escrow services
- A multi-signature authorisation protocol to ensure that no single party is able to initiate and complete a transaction within its custody. Furthermore, under its technological platform operated by the venue, each key is held with segregated accounts.
SDC, in a short space of time, has already attracted USD 544,718,948 of assets which it has tokenised with immutability and transparency on the Ethereum blockchain.
One of your other projects is promoting Blockchain solutions to drive financial inclusion across Africa. Could you share some of your views regarding this?
There are an estimated 700 million unbanked farmers in sub-Saharan Africa and every country has its own structures and complexities. At the heart of the problem is the lack of price transparency for farmers for their produce. Better prices would mean improved income, allowing them to better afford seeds, pesticides, fertilisers and even opening up credit.
FinComEco, the financial and commodities ecosystem, links agriculture to the latest financial technology down to the individual smallholder farmer level and beyond from origination to destination. This is achieved via a model which is adaptable to local requirements with an underlying ecosystem of technology, finance, exchanges, logistics, sourcing and supply chain infrastructure. Its aims are to:
- Facilitate financial inclusion with social impact for smallholder farmers;
- Bank the unbanked through facilitation of finance;
- Facilitate cheaper inputs and access to warehouses; and
- Provide commercial farmers better access to markets.
Is there anything else that you would like to share regarding either GMEX or SECDEX?
GMEX has collected feedback about digital asset deployments from securities exchanges who are
- Conscious of the importance to offer digital assets for trading
- Concerned by new technology investments
- Uneasy with the Blockchain/DLT technology due to a few scandals and scams
- Reluctant because of unknown legal and administrative implications
GMEX, DPN and SECDEX have responded by combining their strengths in a single value proposition with a multitude of technology, regulatory and services options to enhance the knowledge and associated business opportunities available to traditional securities exchanges.
With a growing number of jurisdictions recognising security token equivalence to traditional securities, it is now evident that exchange operators should embrace the transition to digital or, more appropriately, a hybrid integrated approach. Traditional exchanges, whether incumbent or challenger, are now acting under similar regulatory frameworks and are on the same level playing field with regard to digital assets. Early movers are taking advantage of this new territory. However, given the pace of change and anticipated exponential growth of the digital economy, firms should see this as a catalyst to re-engineer their objectives, processes, and strategies rather than just replace like for like. It is vital to act now to leverage this opportunity and to be part of the paradigm shift into this new era of digital exchanges and post trade, which ultimately can benefit investors, SMEs and the wider capital markets.
Thank you for the great interview answers. Readers who wish to learn more should visit:
GMEX Group (GMEX), offering innovative solutions for the creation & operation of electronic exchanges and post trade infrastructure in securities, FX, derivatives, commodities, crypto & digital tokenised assets.
SECDEX, the Seychelles based Securities, Commodities and Derivatives Exchange, which is a full ecosystem for digital and traditional assets enabled by blockchain technology.
Andrew Adcock, CEO of Crowd for Angels – Interview Series
Andrew is the Chief Executive Officer at Crowd for Angels an equity crowdfunding platform. He often attends and speaks at events on Crowdfunding, Alternative Finance and Investment. Previously, he worked at NinetyTen, a web application developer and provider of Private Social Networks, whose clients included Nokia, Channel 4 and Shop Direct
You were one of the original Co-Founders of Crowd for Angels. Can you discuss the inspiration behind launching this business?
I was indeed one of the Founding team at Crowd for Angels, but the inspiration for launching the company comes from our Director Tony de Nazareth, who combined his decades of financial knowledge with the ‘social media’ approach. This was to get the community involved when funding and supporting a business, thereby creating brand advocates that not only financially supported the aspirations of a company but also became a voice and customer of the company.
How much do you involve yourself in the pitch decks and packaging the deals that are found on Crowd for Angels?
I am involved in most companies that seek to list on Crowd for Angels. I take a genuine fascination in the lives of start-ups and companies looking to expand. Each has its own story and passion, which I am enthused by. Having raised funds for my own company and invested in many others, I hope to provide insight for the company.
What type of due diligence is performed on the companies that are listed?
A lot! Crowd for Angels breaks due diligence down into 3 key areas, firstly, we conduct factual checks such as KYC, AML, PEP, Credit Checks on the directors, reviewing accounts produced by the company and verifying facts stated on their pitch. Secondly, we conduct market checks, for instance, is the product available and as described, is there an addressable market, is the valuation reasonable, what legal challenges the company might face and is it ethical. The final check is one of sanity, which is not only tested by Crowd for Angels, but also by our Angels, who will ask the company their own questions.
What are some of the main reasons behind companies being turned down for listing on the platform?
There can be a number of reasons but a few we find most common are as follows:
- The valuation is simply too high in comparison to the companies position
- The company does not provide documentation (business plan, management accounts, incorporation documents)
- The product is too early-stage or not yet developed
- The directors have no ‘Skin in the Game’
What are the biggest benefits of equity crowdfunding?
I personally believe the biggest benefit is the ability to create brand advocates, people who support your business financially and become active customers, drawing in others to check out your brand, whether that is through word of mouth or social media.
Could you give us a success story of a company that raised funds on the Crowd for Angels platform?
One of my favourites is a company called CNPPS. A young entrepreneur, who was studying engineering at university at the time had created a permeable pavement solution that used recycled aggregate. Now that might not sound as fascinating as an app, but our world is covered in roads and pavements. His solution, used 100% recycled aggregate and was carbon negative, furthermore, it allowed water to pass through. Working with the entrepreneur we were able to raise £100,000 for a phase of testing that has now led on to a commercial contract and further funding for the company.
What made it interesting was the ethical approach the company had took to change an old industry, the tenacity the entrepreneur showed never giving up and that a business can truly be grown from the ground up, out of university none-the-less. So far in a 2 year period, the company’s valuation has increased 4 fold, delivering a solid return for the Angels involved.
Crowd for Angels is one of the few crowdfunding platforms that accept bitcoin. How many investors use bitcoin, and where do most of these investors originate from?
Yes, we have been accepting cryptocurrency as a form of payment for investment since early 2016. At that time, we integrated this payment option to allow foreign investors to invest in UK companies without the costs and time associated with international bank transfers. Initially, we saw a number of Australians, Chinese and mainly Asian investors utilise this form of payment. However, as bitcoin and other cryptocurrencies gained in popularity, we did see growth in European investors utilising cryptocurrency. Partly this is due to the gains they might have experienced and I believe the convenience cryptos offered. Now, we have over 14,000 members registered with a cryptocurrency wallet on our platform, with many of them in Europe.
A few years ago, the ANGEL token was released. What are the use cases for this token?
The ANGEL token was released to drive down the user acquisition cost of investors whilst rewarding stakeholders for interacting with our platform. It is hoped that when users interact and share content in the network, say an investment they had just made in a fledgeling company, that they would be rewarded with ANGEL. Crowd for Angels has then committed to buy back and burn ANGEL linked to the revenue generated from our pitches, thus creating a virtuous circle. We hope in the future, our Angels will also be able to use the ANGEL token as a method of payment towards an investment.
Crowdfunding utilises technology to allow the masses to invest small amounts into pitches, but the shares are usually held with a nominee and should you wish to sell them or give them to someone else, it is difficult. Therefore, the integration of digitalised assets should be a no brainer, because it potentially gives the control of the asset back to the investor and follows a set of rules, that can’t be broken. In a utopian world, you would allow investors to purchase, hold and trade any assets that they wish. With the blockchain, you benefit from an immutable ledger that would record these transactions, giving you efficiency and transparency. I believe we are only a stones throw away from some big changes.
Is there anything else that you would like to share about Crowd for Angels?
We are always open to ideas, a conversation can go a long way.
Jim Dowd, Founder & Managing Director of North Capital – Interview Series
James Dowd is Founder and CEO of North Capital Private Securities (NCPS), a registered broker-dealer focused on origination, placement, and clearing of exempt securities; North Capital Investment Technology (NCIT), which provides technology for the exempt securities market; and North Capital Inc., a registered investment advisor. NCPS is the designated broker-dealer for many securities funding platforms in the early stage equity, real estate, private funds, and securities token markets.
North Capital recently completed the membership approval process with FINRA and achieved acceptance of Form ATS Initial Operations Report by the SEC. For those who are unfamiliar with this form, what makes it so important for North Capital and its clients?
Great question. Our customers and many other issuers, investors and intermediaries who are involved in private securities markets want to see more transparency and liquidity in private markets. Investing in private deals has traditionally involved a minimum 7 to 10 year capital commitment, since there is typically no interim liquidity and no definitive exit plan. I have one private investment that has been outstanding for 19 years, another that has been alive for 14 years, not to mention the many investments that did not work out. Once someone makes a private investment, if they have second thoughts or change their opinion, it’s too late. Almost every investor who allocates to private deals knows or should know this, and most would like to have liquidity and real price discovery for the private securities in their portfolios. We hope our ATS will help to realize this vision, at least for the issuers, investors and intermediaries who share it.
The launch of this ATS serves as a natural extension to North Capital’s existing private securities infrastructure, TransactCloud. What is TransactCloud?
TransactCloud is our API-first technology stack that facilitates primary offerings of exempt securities. We work with issuers and professional intermediaries — broker-dealers, RIAs, and funding platforms — to allow the offering, transaction, document processing, escrow, payments and clearing of exempt securities online.
To be clear on this point, we ourselves are not investing in digital assets; we are providing infrastructure to allow trading of digital asset securities through our regulated marketplace, the PPEX ATS. We will not be trading cryptocurrency or utility tokens. The SEC regulations related to alternative trading systems are very clear: ATSs are for the trading of securities only. We also will be listing and trading non-digital exempt securities.
North Capital also offers investment opportunities which are deemed as “frontier alternatives”. Could you share some details on what you would consider frontier alternatives?
“Frontier” in the context of investment management refers to the most emerging of emerging markets. We coined the term “frontier alternative” to convey the same idea ~ some examples would be investments in art, collectibles, fine wine, litigation pools, digital currency, race horses, athletes, etc. I fully expect that in ten years, some of these will have become mainstream alternatives. Private credit is a good example ~ ten years ago, private credit was considered exotic; today there are registered funds that invest in private credit and it’s considered a mainstream alternative asset class.
North Capital has been involved in over 1,000 primary offerings totaling $1.9 billion. What are some of these notable offerings?
It’s difficult to single out specific deals. We have so many great partners who are doing innovative work. Groups like Jamestown, Crowdstreet, RealtyMogul, RichUncles, Securitize, SportBLX, Exponential, Roofstock, Mythic Markets, Otis, Commonwealth, SeedInvest. Quadrant Biosciences has a Reg A+ offering that we’re working on right now ~ our first collaboration with WeFunder. Metaurus is one of our partners, run by a talented team led by Rick Sandulli and Jamie Greenwald, who I worked with 30 years ago at Bankers Trust. They have two listed ETF-style products that are patent-protected and could revolutionize the way equity investors take risk. I know I am leaving somebody out so I’ll apologize in advance.
Could you share some of the Broker/Dealer services that are offered by your firm?
We are a full-service broker-dealer for private and other exempt offerings, along with investment companies such as mutual funds and ETFs. We also are an escrow agent for private offerings including serving as a qualified third party for Reg CF offerings. Compliance support is integral to all of our activities — we help issuers and platforms to comply with securities laws. Last year we were approved to broker EB5 deals, but that market is shuttered for now, given the COVID-19 pandemic.
What type of custody services are offered?
Today we custody cash, private securities, and mutual fund shares. It’s still early days for our custody business, and we have deliberately limited our rollout to allow us to test systems and procedures. But this is a high growth segment of our business.
Could you also share some details regarding the advisory services that are offered?
The advisory part of our business is done through a separate, SEC-registered investment advisor. It’s a technology-enabled financial planning and wealth management business, along with a bespoke, consultative advisory practice for family offices and business owners.
The firm also offers technology-based investment solutions to broker-dealers, banks, fund managers, funding platforms, and private issuers. What are some of these solutions?
On the advisory side, the evisor platform is an online financial planning and wealth management platform. We’re currently working with one bank on a pilot program, and we’re integrating it into our broader advisory and 401k business. On the exempt offerings / broker-dealer side of our business, TransactCloud is a collection of products and services used by issuers and professional intermediaries for online securities offerings.
Thank you for taking the time to answer our questions. Readers who wish to learn more should visit of North Capital Private Securities.