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Smart securities-2019

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The State of the Security Token in 2019

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Smart securities-2019

  1. 1. January 2019 The State of Smart Securities: 2019 Presented by: ANDRE SERRANO LEEOR SHIMRON BLAKE RICHMAN ALON GOREN
  2. 2. 2 State of Smart Securities 2019 1. Executive Summary 2. Evolution of Capital Formation 3. Introduction to Smart Securities 4. Benefits of Smart Securities 5. Segments of the Ecosystem 6. Case Studies 7. The Future - 2019 and Beyond 8. About Us
  3. 3. 3 Executive Summary 2019: The Year of Smart Securities
  4. 4. 4 "As the world's assets become increasingly liquid, the concept of ownership will evolve in ways we cannot yet imagine." Professor Stephen McKeon
  5. 5. 5 Evolution of Capital Formation Section Two:
  6. 6. 6 Evolution of Capital Formation Equity Crowdfunding Initial Coin Offering (ICO) Smart Securities Offering (SSO) The 2012 JOBS Act ushered in peer-to- peer lending and crowdfunding growth in the last decade, of which notable companies include Lending Club, Kickstarter, GoFundMe, and Indiegogo. This enabled retail investors to participate in the growth of early stage companies in a regulatory compliant way. 2017 saw the emergence of the Initial Coin Offering (ICO), in which thousands of companies launched “utility” tokens to raise capital. Utility tokens function by granting owners of the token a license to access or transact on a particular network or service. By the end of 2018, it became clear that the majority of ICOs need to comply with existing U.S. Securities regulations. The technology has unlocked a wave of innovation that stands to revolutionize capital markets, change the way traditional and alternative assets are bought and sold, and create new business models for companies servicing the industry. 01 02 03 Democratizing access to private capital.
  7. 7. 7 JOBS Act The JOBS act created regulatory frameworks for retail and accredited participation in exempt offerings under Regulation D, Regulation A+ and Regulation CF in the US, as well as increased the investor threshold for registration to 2000 for most issuances. Evolution of Capital Formation Reg D Reg A+ Reg CF 506(b) 506(c) Rule 504 Tier 1 Tier 2 Annual Offer Limit None None $5 million $20 million $50 million $1.07 million General Solicitation No Yes Permitted in certain situations Permitted before qualification (to check eligibility) Permitted before qualification (to check eligibility) Permitted with limits on advertising Investor Requirements Unlimited Accredited investors. Up to 35 sophisticated but non-accredited investors Unlimited Accredited Investors None None Non-accredited investors subject to limits Limitations based on annual income and net worth SEC Filing Requirements Form D Form D Form D Form 1-A + 2yrs of financial statements Form 1-A + 2yrs of audited financial statements Form C + two years of audited financial statements Restriction on Resale Restricted Restricted Restricted No No 12 month restriction Preemption of State Registration Yes Yes No No Yes Yes
  8. 8. 8 Equity Crowdfunding and Peer-to-Peer Lending Total global volume of transactions in marketplace lending is projected to grow at 29% CAGR through 2021. Platforms focused on crowdfunding and peer-to-peer lending have grown at a rapid rate, signaling the significance of democratized financing. Source: http://crowdfundcapitaladvisors.com/2017-state-regulation-crowdfunding-report/ Citi Business Advisory Services Evolution of Capital Formation 29 55 85 116 146 174 197 2015 2016 2017 2018 2019E 2020E 2021E TransactionVolume($Billions) Marketplace Lending Growth 2015-2021E 29% CAGR • Number of unique Reg CF offerings increased 267% from 179 in 2016 to 481 in 2017 • Average success rate of offerings to date is 66.7% • Total number of investors increased 158% from 28.2k in 2016 to 44.4k in 2017 • Median revenues for Reg CF issuers increased 131% in the year following the offering Crowdfunding Peer-to-Peer Lending • Transactional volume for lending platforms reached $55 billion in 2016 and grew to $116 billion in 2018 • By 2021, transaction volume is forecasted to be $197 billion, and $300 billion by 2025
  9. 9. 9 Initial Coin Offering (ICO) Approximately $12 billion was raised through ICOs globally in 2018, despite a significant reduction in Q4. • Blockchain-enabled smart contracts have formed the basis for a novel funding model, allowing the formation and exchange of digital assets. • Teams were able to crowdfund development of their platform or service with 90% of ICOs issued on the Ethereum based ERC-20 token standard. • The success of fundraising via ICOs has established the significance of a democratized capital market based on ERC-20 or next-generation protocols. Evolution of Capital Formation Source: https://icobench.com/stats $1,360 $1,685 $1,749 $1,103 $1,086 $1,610 $672 $779 $390 $533 $375 $270 168 185 230 222 251 267 214 167 168 167 177 275 January February March April May June July August September October November December Number of ICOs & Amount Raised ($Millions USD) Number of ICOs Amount Raised 2018
  10. 10. 10 Smart Security Offering (SSO) 01 Automatically Verify Investor Eligibility 02 Improve Cap Table Management 03 Automate Investor Rights 04 Enforce Regulations for Investor Participation • As regulators crack down on non- compliant ICOs, digital securities emerged as a new framework to ensure initial and on-going compliance. • Digital Security Offerings use blockchain technology to significantly automate securities offerings while enabling a large investor base to participate. Whereas "utility tokens" provide access to a platform or network, smart securities (AKA security tokens) represent programmable ownership of traditional assets. Evolution of Capital Formation
  11. 11. 11 Introduction to Smart Securities Section Three:
  12. 12. 12 What is a Smart Security? Definition: A smart security is a blockchain-based digital interest that represents an ownership claim in an underlying asset which may include real estate, private placements, equities, debt, derivatives, and other instruments of value. Synonyms: digital security (DSO), security token (STO), tokenized asset (TAO), asset-backed token *Note: at the moment, the terms above are used interchangeably. We propose the industry coalesce around Smart Securities because it accurately reflects the programmability of these new financial instruments. Tokenized Gold Funds / Private Placements Real Estate Shares
  13. 13. 13 Market Sizing $228T Global Real Estate $8T Gold $70T Global Private Equity $544T Global Derivates How big is the opportunity? Values in USD ($Trillions) Introduction to Smart Securities Source: http://www.mcguire.com/blog/2017/04/savills-world-worth/
  14. 14. 14 Smart Security Stack 1. Financial Rights Tokens may represent total value of equity and/or debt of the underlying asset and a claim on asset appreciation, dividends, or cashflow. 2. Ownership Rights Tokens are treated as any other asset class and holders can sell/transfer ownership at their discretion. Tokens may also include specific investor obligations such as holding periods or voting rights. 3. Utilization Rights Tokens may include a new set of utilization rights that include incentives from the assets they invest in. These incentives may come in the form of discounted rates or preferential access to use the asset. Investor rights, transfer restrictions, dividend payments, company obligations, and more can be programmed directly intro the smart contract. Conditional Dividends Conditional Cash Flows Goal-Based Corporate Behavior Conditional Incentives & Restrictions Minimum Holding Periods Investment Longevity Rights Early Access Preferred Pricing Collaborative Credits Milestone-based Financial Rights Company Obligations Investor Obligations Investor Utilization Rights Distributed Ledger Terms listed in smart contract Conditional Financing Source: Citi Business Advisory Services Introduction to Smart Securities
  15. 15. 15 Public Sector Resources Private Assets Luxury Items Individual Assets Smart Security Asset Classes The variety of potential asset classes that can be tokenized is expansive. Infrastructure Natural Resources Commodities National Parks Professional Sports Team Commercial Real Estate Debt Art Planes Precious Gems & Metals Homes Personal IP Collectibles Introduction to Smart Securities The introduction of Smart Securities as an investment vehicle creates an arms race to tokenize previously illiquid asset classes. These developments provide an unprecedented set of choices for accredited and institutional investors to gain portfolio diversification, long-term asset appreciation, and additional sources of revenue across an asset’s lifecycle. Source: Citi Business Advisory Services
  16. 16. 16 Smart Security Launch Process Set up phase. Company is formed and offering is structured. Legal review and marketing activities. Issuance phase. Token is issued, and investor eligibility (KYC/AML/Accreditation) evaluated. Overview Lifecycle management phase. Secondary trading on exchanges commences; ongoing compliance; investor communications. Introduction to Smart Securities
  17. 17. 17 2018 Accomplishments First Publicly traded Smart Security 02 03 04 05 First Regulated Exchange Goes Live First Real Estate Smart Security Offering First Tokenized Student Housing First Tokenized Accelerator Fund Introduction to Smart Securities 01
  18. 18. 18 Benefits of Smart Securities Section Four:
  19. 19. 19 Benefits of Smart Securities Fractional Ownership 24/7 Global Markets Automated Compliance Cost ReductionIncreased LiquidityRapid Settlement Smart securities transform the capital formation process by automating costly compliance requirements through a transparent, immutable ledger. Additional benefits include:
  20. 20. 20 Fractional Ownership Blockchain enables fractional ownership, which allows investment assets to be easily divided into smaller parts. Several unrelated parties are able to share in the ownership of a high-value tangible asset. Benefits of Smart Securities • Commercial and residential real estate, early-stage private companies, infrastructure, commodities and more can be transformed by lowering the barrier to entry and reducing capital requirements. • Issuers are able to access a wider pool of capital. Reducing Initial and ongoing compliance costs enables asset managers to lower investment minimums for accredited and retail investors. • This advancement in technology creates greater opportunities for portfolio diversification and the potential for new types of ownership. Bundling Unitization
  21. 21. 21 LONG SHORT 1. Midtown Manhattan 2. French Impressionists 1. Brooklyn 2. Modern Art Targeted Investment Theses http://fortune.com/go/tech/security-token-harbor-ceo/ 1. Real Estate: create index funds of Class A in Midtown Manhattan, Upper East Side, Downtown, Brooklyn, NJ 2. Fine Art: create index fund of minority ownership in various Monet pieces Benefits of Smart Securities • REITs and index funds bundle together thousands of different properties and assets. As a result, investor choice is limited. • Fractionalization enables customizable portfolios and leveraged long and short positions. • Unbundling value can create new investment products • Securitization of distinct revenue streams (i.e. Long iPhone, Short Apple Watch) • Commercial real estate cash flow (i.e. rental income stream vs. property appreciation) Fractional ownership allows for targeted investment theses to be expressed, enabling a new class of potential investment vehicles.
  22. 22. 22 24/7 Global Markets • US blue chip stocks are listed on foreign exchanges, but other mid – large cap companies are harder for International investors to access. • Smart securities will allow for global participation in investment assets: an individual in Estonia can have exposure to a diversified portfolio of Manhattan commercial real estate, high tech early stage ventures, and blue chip stocks. • The US equity markets are only active Monday through Friday 9:30 AM – 4:00 PM EST, and subject to closure on US holidays. Blockchains enable smart securities to be traded 24/7 with near instant settlement. Benefits of Smart Securities Smart securities are creating global pools of liquidity for retail and accredited investors across jurisdictions.
  23. 23. 23 Automated Compliance Compliance can be automated at the protocol level, reducing the cost burden of companies and regulators. Benefits of Smart Securities 01 02 03 04 05 KYC/AML Accreditation Status Private placement exemption-specific restrictions (I.e. number of investors, offer limit) Transfer restrictions in secondary transactions Disclosures and investor communications Compliance procedures that can be automated include: Each procedure can be programmed into an immutable ledger, ensuring transparency and authenticity
  24. 24. 24 Efficient Settlement • Fragmentation of internal ledgers results in costly reconciliation processes • Designated trust companies provide final clearing and settlement for all public equities • Every broker/bank maintains own ledger of ownership that ultimately resolves to the Trust company's ledger • Common settlement time for any given transaction is T+3 days • Blockchain allows for near instant settlement Source: https://www.bloomberg.com/opinion/articles/2017-02-17/dole-food-had-too-many-shares • In 2013, CEO of Dole Food took the company private for $13.50/share. Shareholders thought this was too low and sued, winning an additional $2.74/share • The class action covered 36.8M shares, but shareholders made claims for 49.1M shares due to cap table mismanagement by intermediaries • Blockchain would have eliminated the need for a claim process because each participant would be able to reconcile their claim on the shared ledger Dole Foods Case Smart securities use blockchain as an immutable ledger in which every cap table change and transaction is recorded chronologically. Benefits of Smart Securities
  25. 25. 25 Increased Liquidity • Frictions to buy and sell alternative assets (i.e. lack of market depth, high spreads, and high settlement costs) cause many assets to trade at a discount to NAV. • Eliminating the illiquidity discount may increase net asset valuations 20-50%. • Blockchain transactions reduce frictions by providing divisibility, low cost global transfers of ownership, automated compliance, and an immutable record of ownership claims. Source: http://people.stern.nyu.edu/adamodar/pdfiles/country/illiquidity.pdf Smart securities enable marketplaces and peer to peer transfers for previously illiquid assets. Benefits of Smart Securities Most Liquid Least Liquid Treasury bonds Private business without control Highly rated corporate bonds Stock in liquid, highly developed market Lightly traded, OTC, or emerging market stock Real Assets Private business with control More opportunity for tokenization
  26. 26. 26 Cost Reduction • The majority of cost savings accrued through ongoing legal, administrative and compliance automation • Post issuance, burdensome administrative costs around ownership reconciliation can be effectively eliminated $835 $690 $738 $260 TRADITIONAL TOKEN/DIGITAL Initial Offering Ongoing Cost Savings Analysis – Traditional vs. Digital Security $1.6M $950K Ongoing • Regulatory Compliance • Tax Compliance • Ownership Transfers • Admin • Listing Fees Initial Offering • Legal • Accounting • Executive Compensation • Travel/Roadshows • Automation/Platform Digitization of private placement issuance has estimated cost savings of 40% over a five year period. Source: Entoro Capital – Cost Benefit of Digitization vs. Private Placement Benefits of Smart Securities
  27. 27. 27 Segments of the Ecosystem Section Five:
  28. 28. 28 Securitize utilizes the DS protocol to provide end-to-end compliance for digitizing securities on the blockchain. Digital issuers on the platform include Spice VC, Science Blockchain, and Blockchain Capital, which have tokenized their LP interests to add secondary-market liquidity. Polymath is developing a suite of tools for participants to launch, invest and trade in financial products on the blockchain. The Polymath platform will facilitate interactions between issuers, service providers (specifically KYC providers and legal firms), investors and developers. The POLY token is used for payments between participants on the platform. Harbor is an all in one platform for tokenizing private investments. Harbor provides a fully compliant solution with KYC/AML integrated into the blockchain protocol. Primary focus is on real estate with initial investment offerings including housing complexes across the US. Trust Token aims to build a legally enforceable protocol with blockchain-based ownership and control of real-world assets via smart contracts. The company created TrueUSD, the current largest USD backed stablecoin by market capitalization, and plans to tokenize assets including fiat currencies, commodities, and real estate. Issuance Platforms Technology and service providers that write the smart contract code to tokenize assets. Segments of the Ecosystem
  29. 29. 29 PrimeTrust is a global blockchain-focused financial institution. The company provides custody services for digital and traditional assets; escrow services; exchange & OTC services; as well as traditional banking services. BitGo is blockchain security company and the leading custody provider for digital assets. The company provides multi- signature wallet solutions for enterprise. Kingdom Trust is a qualified custodian servicing individual and institutional investors, including fund managers, broker dealers, and metals brokers. Bankex is a diversified fintech company with retail and institutional custody services. Tokenizing blockbuster movie production, real estate, art, and other verticals. Custody Implement institutional grade security to hold digital assets and prevent theft or loss of the assets under management. Segments of the Ecosystem
  30. 30. 30 Through its broker-dealer, Propellr provides vertically integrated, digital end-to-end capital markets services for clients and investors seeking alternative investments. Services include capital raise, structuring, and on-going compliance. Entoro is a global investment bank that offers blockchain ecosystem advisory and STO strategy frameworks. The company serves as a placement agent for capital formation and also services clients on M&A advisory solutions. Atomic Capital is a digital investment bank that offers an underwriting consulting service, digital issuance platform, and fundraising. The company has offices in NYC and LA and launched in July 2018. In July 2018, Coinbase announced its progress towards a broker dealer license following its acquisition of Keystone Capital Corp., Venovate Marketplace, Inc., and Digital Wealth. The Company subsequently indicated its plans to work with regulators to tokenize existing types of securities. Broker Dealers Broker dealers have legal authority (registered through FINRA) to sell securities and primary issuances to investors. Segments of the Ecosystem
  31. 31. 31 Airswap is a scalable, peer-to-peer trading platform based on Ethereum. The product is primarily intended to attract institutional/OTC clients through its bulletin board-style user interface. Airswap facilitated the first compliant security token transfer on a public blockchain for the Spice VC token. OpenFinance Network is a US regulated trading platform for digital alternative assets. It is the first exchange for smart securities to go live with listings including Spice VC and BCAP. Through its affiliated broker dealer, Templum plans to create a primary issuance platform for ICO/STOs and will also create a secondary trading facility for registered and unregistered digital securities. Issuers will be able to launch a digital security through a Tokenized Asset Offering, in order to raise capital while being regulatory compliant. Raising $134M, tZero is one of the higher profile STOs of 2018. tZero is creating a regulated security token exchange that is planning on using blockchain to reduce the antiquated standard settlement cycle of T+2 to instantaneous settlement. Trading Exchanges provide liquidity for digital assets post-issuance and are marketplaces for buyers and sellers to trade. Segments of the Ecosystem
  32. 32. 32 Vertalo is a digital asset compliance platform that certifies ownership (provenance) and investor eligibility (KYC/AML/Accreditation) on the blockchain in order to reduce costs for issuers and streamline the process for buying and selling digital securities. VerifyInvestor provides a fast and cost-effective method of compliance for companies seeking to verify their investors as accredited investors. Onfido is an AI based software platform that uses photo IDs and a selfie to confirm identity. The identity can then be cross-references against international credit and watchlist databases. IdentityMind provides a plug-in software solution that handles the necessary KYC/AML compliance process required for primary issuance. Compliance Technology and service providers that ensure issuance of digital securities are regulatory compliant, pre and post-issuance. Segments of the Ecosystem
  33. 33. 33 Case Studies Section Six:
  34. 34. 34 Property Details Key Parties 436 & 442 East 13th Street, NYC Deal Structure Two Token Waterfall
  35. 35. 35 Investment Terms Property Details Key Parties St. Regis Resort in Aspen, CO https://aspencoin.io/ https://templummarkets.com/aspen
  36. 36. 36 Investment Terms Property Details Key Parties Hub at Columbia, Luxury Housing at University of South Carolina https://hubatcolumbiareit.com/
  37. 37. 37 Portfolio Companies Key Personnel Blockchain Capital (BCAP) Blockchain Capital is a blockchain-focused VC fund that launched the BCAP token for one of its funds. The BCAP token represents a liquid LP interest in Blockchain Capital III Digital Liquid Venture Fund, LP. Performance* NAV: $2.93 NAV up +193% since inception (April 2017) Exits Block.one (+50x return) ZeroX (+25x return) Power Ledger (+15x return) *Data as of 12/31/2018 Source: https://blockchainloop.com/blockchain-capital-releases-q3-2018-bcap-token-nav/ P. Bart Stephens Co-founder & Managing Partner W. Bradford Stephens Co-founder & Managing Partner Spencer Bogart Partner
  38. 38. 38 "As a sharing economy marketplace, Airbnb succeeds when these hosts succeed… We believe that enabling private companies to grant hosts and other sharing economy participants equity in the company from an earlier stage would further align incentives between such companies and their sharing economy participants to the benefit of both.” - Company Executive • Airbnb announced their intention to give hosts that utilize their platform ownership over the company. The company requested a change to SEC’s rule 701, which governs ownership of equity in companies. Particularly, this change would enable a new kind of shareholder class for workers who participate in the gig economy. • In this example, hosts are able to earn tokens that represent non-voting shares of equity in the company by providing key services (listing their homes) and receiving positive reviews, which improves the value of the company overall, and ensures that incentives are aligned with all ecosystem participants. Sharing Economy Hypothetical Case Study Source: https://techcrunch.com/2018/09/23/airbnb-wants-to-give-its-hosts-equity-in-its-business/
  39. 39. 39 Professional Sports Hypothetical Case Study Green Bay Packers are notable for being the only publicly owned sports franchise in the United States. Instead of having one owner, or a handful or partners like most professional teams, the Packers are owned by thousands of fans across Wisconsin. The company first sold shares in 1923 to finance operations when the franchise was on the verge of bankruptcy. According to its website, there have been five issuance of stock through a public offering and today, there are over 360,000 owners of the franchise, representing 5,000,000 shares. • There are limited financial and ownership rights associated with the common stock the Packers issued. Shareholders do not receive any dividends and there is no liquidity or secondary market for those shares. • However, the franchise could elect to create a subclass of shareholders for diehard fans and sell a percentage of equity in exchange for capital to fund team operations, players salaries, and improve stadium amenities. • The smart contract could be programmed to include: • Financial rights: dividends, claim on cash flows • Utilization rights: priority access to season tickets, annual meetings with franchise players and management, and exclusive merchandise • Ownership Obligations: residential requirements, minimum holding periods Source: https://www.si.com/nfl/green-bay-packers-shareholders-team-owners
  40. 40. 40 The Future - 2019 and Beyond Section Seven:
  41. 41. 41 The Future - 2019 And Beyond 01 02 03 Market Education Smart Securities NOT Security Tokens BUIDL and Deploy Infrastructure Frameworks 04
  42. 42. 42 Challenges to Overcome Liquidity Need to build buy-side volume for organic liquidity. Early days, exchange volume will be low and order books will be thin. Possibility that digital securities will trade at discount to NAV. Regulatory Compliance KYC/AML/OFAC and sanctions screening mechanisms need to be automated. Legal frameworks need to be established to reduce legal barriers to entry (I.e. accredited investor restrictions, cap table limits, etc.). Custody & Insurance Secure and regulated qualified custodians are a pre-requisite for larger institutions to become involved. The largest asset managers will only be comfortable when traditional asset custodians (I.e. State Street) enter the space. Digital Identity Need to have robust solutions for digital identity. Self- soveriegn identity solutions will enhace privacy by removing data honeypots and ensuring users retain ownership of personal data .
  43. 43. 43 About Us Section Eight:
  44. 44. 44 NovaBlock Capital is a digital asset investment firm building the foundation for a blockchain capital markets ecosystem. We believe blockchain technology will fundamentally change society’s conception of ownership and alter the way people buy, sell and trade financial assets. Our mission is to identify and invest in blockchain-based digital assets and companies that are developing infrastructure for broader adoption. LEEOR SHIMRON CEO & GP ANDRE SERRANO COO BLAKE RICHMAN CIO Novablock.io
  45. 45. 45 The Ownera concept is a global base-layer Proof of Ownership protocol on which the market can compete to manage all regulated asset ownership and trade. Digitizing the ownership of trillions of dollars in assets, and creating a global liquid market is an unparalleled financial opportunity with massive socio-economic implications. AMI BEN-DAVID ALON GOREN JOSEF HOLM TAL ELYASHIV DIEGO BESPROSVAN YUVAL CARMEL Founding Team: Ownera.io
  46. 46. 46 April 8th, The Ritz-Carlton Los Angeles From the producers of Crypto Invest Summit (Josef Holm & Alon Goren), the world’s largest investment focused blockchain and cryptocurrency conference, Security Token Summit is the preeminent Digital Securities Industry event of the year. Security Token Summit is a one-day, exclusive, high-end Security Token and Digital Asset focused event. SecurityTokenSummit.com
  47. 47. 47 Thank You! To this amazing, collaborative industry…. Vertalo for the industry sector graphics, see the updated infographic here: https://www.vertalo.com/st-ecosystem/ And especially our friends and advisors who gave us incredible feedback and helped us shape this report.
  48. 48. 48 Disclaimer The information contained in this report is for discussion purposes only and is not exhaustive. Information provided does not constitute or include professional financial and legal or any other form of advice and should not be relied on as such.