The popular security token exchange, Openfinance filed a Form D with the SEC this week. The company seeks to raise $50 million to further development of its secondary trading platform and security token ecosystem. The news demonstrates growing interests in the security token sector, specifically, exchanges that add liquidity to the market.
According to the SEC filing, Openfinance seeks to secure around $50 million to accomplish its new strategy. Interestingly, the company already raised $8.6 million successfully according to executives. Notably, this initial funding came from a variety of international investors. In total, 19 different investors participated in the first stage of the crowdfunding event so far.
The Openfinance exchange is no stranger to headlines. The platform became one of the first regulated security token exchanges in operation back in August 2018. Since that time, the platform continued to develop its tokenization capabilities. Recently, the company saw heavy coverage for its tokenization of the media firm, Current Media.
Openfinance is the dba of Decentralized Securities Depository, LLC. The firm provides a regulated secondary trading market for digital securities. As such, the platform has an alternative trading system (ATS) license. This license allows the platform to service both individual and institutional investors.
As part of Openfinance’s strategy, the firm partnered with some of the largest tokenization platforms in the market. According to executives, the company has strategic agreements in place with Securitize, Harbor, and Polymath.
In addition to its valuable partnerships, Openfinance opens and operates a licensed broker-dealer named Sageworks. The company also provides enterprise-level financial analysis and risk management software.
Liquidity is King
While the advantages of security tokens are immediately visible, there are still some concerns that the market lacks liquidity. Platforms such as Openfinance provide the additional liquidity needed to further the development of the sector. Both traditional and non-traditional markets benefit from this newfound liquidity.
For example, Openfinance provides investors with 24-hour trading. Comparingly, traditional securities investors must trade between the regular market hours of 9:30 am and 4:00 pm. While these investors can still match with buyers in the after-hours markets, the entire process is cluttered and leaves investors without many options. Tokenized securities are able to transfer and process at any time, including holidays.
Additionally, the platform’s tokenization capabilities allow for the creation of new market opportunities. For example, tokenization allows firms to add liquidity to traditionally nonliquidable assets such as debt-equity. Also, tokenization allows for more streamlined crowdfunding campaigns.
On top of the added features, the platform is available to both US and EU investors. Developers seek to expand the platform’s reach in the coming months. This strategy makes sense when you consider how the EU market continues to show strong security token development.
Openfinance – Moving Forward
It’s easy to see a scenario in which Openfinance becomes one of the most dominate exchanges globally. The firm provides smooth integration between brokers, custodians, transfer agents, and investors. As such, Openfinance plays a critical role in security token adoption.
Mr. Wonderful Aligns Efforts with Equity Crowdfunding Platform ‘StartEngine’
Moving forward, Mr. Wonderful will assume the role of strategic advisor for the platform. In doing so, StartEngine stands to greatly benefit from his vast network of connections, and the public attention that he is afforded.
Mr. Wonderful notes, in his inaugural address as strategic advisor to StartEngine, that crowdfunding comes with various benefits. The following are examples of these benefits:
- Flexibility of terms
- Participating companies have greater control of their valuation, and share price
- A potentially greater share of the company can be retained
- With a greater number of shareholders, each act as ‘brand ambassadors’, providing much greater exposure to company operations.
The JOBs Act, which was put into place during the Obama administration, laid the groundwork for Crowdfunding as we know it today.
Not all methods of crowdfunding are the same, however. In the following article, we take a look at what differentiates equity crowdfunding from investing in stocks, and simple crowdfunding seen through platforms like Kickstarter.
After successfully building and selling his company, SoftKey, for a staggering $4 billion, Kevin O’Leary (aka Mr. Wonderful), rose to fame in the public eye via Dragons Den. This fame was then solidified through years as a host on spin-off ‘Shark Tank’.
Whether looking at his experience as an entrepreneur, investor, or TV personality, few have experienced success like Kevin O’Leary. It is the culmination of these successes that has allowed him to become a prominent force in business.
Mr. Wonderful recently created an informative message, detailing his relationship with StartEngine, and what we can look forward to from the platform moving forward.
Kevin O’Leary has commented specifically on COVID-19 and how it relates to crowdfunding.
“With the coronavirus pandemic causing economic uncertainty, startups and small businesses are having an incredibly hard time accessing capital, so you’re going to see a material increase in interest in crowdfunding companies like StartEngine that are solving that problem…We’re going to look back on this period as the start of the rise of equity crowdfunding, and I think it’s an industry that StartEngine is going to win.”
Speaking with Howard
Upon announcing the development discussed here today, StartEngine CEO, Howard Marks, took the time to share his thoughts.
“We saw huge growth in crowdfunding during the last economic downturn when entrepreneurs needed to find alternative capital sources. We are similarly ready to provide a funding solution now, in what is shaping up to be another challenging period…With the high level of uncertainty, we’ve already seen venture capital and angel funding slow significantly. The opposite is true on StartEngine — we’re seeing tremendous interest from everyday investors in the opportunities on our platform.”
Howard Marks continued,
“Crowdfunding is unique in its ability to find large numbers of shareholders that are aligned with a company’s mission and goals and are not on compressed timetables — a problem that currently plagues the traditional private equity and venture financial services industry”
In our on-going interview series, we have in the past had the pleasure of having a thorough discussion with StartEngine CEO, Howard Marks. This conversation provides insight into the beginnings of StartEngine, and how they grew into the platform we know today.
Founded in 2014, StartEngine maintains operations in Los Angeles, CA. To date, the company has helped hundreds of companies raise over $135 million in funding. This funding was made possible through a network consisting of over 235,000 active investors.
CEO, Howard Marks, currently oversees company operations.
In Other News
Much like the blockchain sector, crowdfunding is young and still experiencing a period of discovery and growth. In the past we have looked at various platforms which facilitate such methods of capital generation, in addition to operational differences between Canada and the United States.
Various Proposals Put Forth Amending Prospectus Exemptions
As alternative forms of capital generation, such as crowdfunding, continue to grow in popularity, regulators have recognized a need to make amendments in their approaches.
Whether looking back at the SEC’s proposal for a newly defined ‘accredited investor’, or potential ‘safe harbor’ programs, it is obvious that regulatory bodies are not content to sit idly by.
The most recent examples of such proposed amendments have been put forth in varying nations over the past few weeks.
- United States
The amendments put forth by each country’s respective regulatory bodies are focused, specifically, on crowdfunding, Reg. A, and Reg. D.
United States – SEC
The SEC has noted and referred to current regulations surrounding prospectus exemptions as ‘patchwork’ and the result of being ‘built over decades’. They note that this most recent proposal looks to fill in regulatory gaps and restrictions which have arisen over time – making the patchwork seamless.
The most recent proposal, coming on behalf of the Securities and Exchange Commission, saw Chairman Jay Clayton state,
“Emerging companies—from early-stage start-ups seeking seed capital to companies that are on a path to become a public reporting company—use the exempt offering rules to access critical capital needed to create jobs and scale their businesses…The complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth. These proposals are intended to create a more rational framework that better allows entrepreneurs to access capital while preserving and enhancing important investor protections.”
The following are a few key points which, if adhered to, would allow eligibility for a Prospectus Exemption. The SEC notably includes amendments for multiple means of raising capital – crowdfunding, Reg. A, and Reg. D.
- Increase offering caps to $5 million
- Updated investor cap criteria to favour non-accredited investors
- Increase offering caps to $75 million
- Increase secondary sales cap to $22.5 million
- Increase offering cap to $10 million
Canada – CSA
Securities laws within Canada may be viewed as disjointed, at times. This is, usually, due to the fact that there is no Federal regulator overseeing pertinent sectors. Rather, regulations are implemented on a provincial level – which can sometimes lead to inconsistencies through comparison.
The CSA have noted this, and state the following in their 45-110 proposal,
“We have heard from market participants that a harmonized regulatory framework tailored for securities crowdfunding available across Canada would foster the use of securities crowdfunding as an alternative for start-ups and early stage issuers to raise capital…The CSA have proposed the Instrument [45-110] to improve the harmonization of the regulatory framework for securities crowdfunding by start-ups and early stage issuers. Although the Instrument shares key features with the start-up crowdfunding blank.”
The following are a few key points which, if adhered to, would allow eligibility for a Prospectus Exemption.
- $1 million cap on funds raised within 12months of crowdfunding campaign
- Investors may purchase $2500 each, or $5000 when advised by a broker
- Investor grace period
- 48hr period ‘return’ period in which securities purchased can be voided
Latvia – FCMC
“In a bid to help startup and real-estate sectors access better funding options, the present changes to the securities law are making Latvia a more attractive EU member state for capital raising. The present regulatory environment allows Fintelum to serve small and medium-sized enterprises raising up to EUR 3 million, within 36 months, with lower capital markets entry barriers. Investors will be able to invest in fiat or cryptocurrencies and access fractionalized ownership of dividend-yielding projects, open to retail investors. With Fintelum tokenization and compliance tools, fractional owners of securities, or utility tokens, will be able to swap interest in projects using our peer-to-peer secondary market and thus increase liquidity in typically illiquid assets. For example, if you own a part of a company that owns either a real estate or represents a commercial company, you can digitally buy or sell these fractions among existing shareholders, or you can seek new investors interested in the project.”
The following are a few key points which, if adhered to, would allow eligibility for a Prospectus Exemption.
- €1 million cap on
- €1 million to €5 million elibible for simplified prospectus
- €3 million cap for a 36mth period
Whether all of these proposed changes come into effect remains yet to be determined. What can be said, though, is that it is promising to see regulators growing with their industries.
Stagnant regulation can often lead to stagnant growth. Notably, each country has chosen to drastically increase capital caps for issuers and investors alike. This, alongside adept protection measures, does not imply stagnant growth.
Hopefully these potential amendments will foster continued acceptance and access to alternative means of raising capital.
In Other News
On various occasions in past months, we have touched on developments pertaining to crowdfunding and regulation changes. The following articles are a couple examples of this:
CSA Seeks Input on Proposed National Instrument 45-110
In an attempt to spur innovation in the security token offering (STO) sector, the Canadian Securities Administrators (CSA) released a public request for comment regarding proposed changes to the country’s securities laws – Proposed National Instrument 45-110. The changes would provide companies access to more capital and, raise the maximum investor amount under the exemption. This news showcases the desire of Canadian regulators to embrace crowdfunding moving forward.
Officially, the Proposed National Instrument 45-110 Start-up Crowdfunding changes enhance the Canadian market’s capabilities. These upgrades are designed to bring the market in line with emerging technology. Specifically, blockchain tech such as tokenized securities are more cost-effective and easier for companies to issue. As such, regulators want to upgrade the current legislation to allow more activity and liquidity in the market. Importantly, the changes would have far-reaching effects. The CSA is responsible for regulations in securities markets in British Columbia, Alberta, Saskatchewan, Manitoba, Québec, New Brunswick, and Nova Scotia.
Proposed National Instrument 45-110 Upgrades
Under the new Registration and Prospectus Exemptions, start-ups and early-stage issuers can raise up to $1 million each year via crowdfunding campaigns. This is an increase of double over the previous legislation. Additionally, the maximum investment a purchaser can make went up to $2,500. This change represented a $1000 increase over the current regulations. Interestingly, an investor can double that amount to $5000 if they get the approval of a registered dealer.
Importantly, investors would gain a two-day grace period to consider their investment decision. The statement calls this a “two-day contractual right to withdraw from your agreement to purchase the security.” This proposed change is a consumer protection mechanism the CSA would like to see instated to combat investor confusion. Of course, it’s hard to say how issuers will feel about this add-on. Lastly, the proposed changes require funding portals to annually certify that they have the working capital to continue operations for the next year.
Discussing the proposed changes, Louis Morisset, Chair of the CSA and President and CEO of the Autorité des marchés financiers spoke on the need to “harmonize” the securities crowdfunding sector. He explained how universal standards provide companies with more access to capital. In this way, the thresholds for capital-raising and investing can increase safely.
Proposed National Instrument 45-110 Start-up Crowdfunding Public Input Request
The official input request continues for 90-days in total. Consequently, the comment period expires on May 27, 2020. Importantly, the CSA welcomes the public to comment and ask questions. Regulators are ready to direct you regarding the proposed changes and how they may affect your business moving forward.
The CSA Seeks to Spur Innovation
You have to hand it to the CSA on their approach to the market. This strategy allows regulators to get a feel for the market and what its participants require to continue the growth of their businesses. This decision falls in line with a recent push by Canadian regulators to remain at the forefront of the digitization of the economy. You can expect to see some adjustments made to the propositions after the CSA examines all the feedback. For now, Canada continues to play a dominant role in the tokenized securities sector.