Digital Securities Essentials for Business. Your guide to digital securities and tokenized capital markets

1. Digital Securities
Essentials for Business.
16TH - 30TH SEPTEMBER 2019
Your guide to digital securities and
tokenized capital markets
Are security tokens the securities of
tomorrow? The answer is yes!

2. Tokenized securities are an innovative form of financial instruments,
enabled by the Distributed Ledger Technology. This new fundraising
method is able to reduce overheads associated with traditional
securities and allow businesses to attract capital from a much wider
pool of investors.
Due to these features, tokenization is starting to get increased
attention from SMEs, investment funds and traditional financial
institutions.
During the last two years, over 25 companies collectively raised over
USD $500 million (PwC). Major banks and exchanges are exploring the
DLT for settling securities transactions, and the first tokenized security
is already traded on the National Stock Exchange.
Stobox is your guide to this rapidly evolving industry.
Twice a month we deliver to your inbox the latest news about the
digital securities industry to provide a vision of where the market is
heading. In every edition, our CEO Gene Deyev conducts an interview
with a prominent expert to give you exclusive insights into how you
can extract the most value from tokenized securities. We do our best
to let you know today where the world of securities will be tomorrow.
Best regards,

3. Digest highlights
The first-ever public security token offering in the
United States, approved by SEC, raises over $23 million
One of the biggest mortgage companies in the US that
originated $32.3 billion of mortgages in 2017, begins
lending on blockchain platform
Tokenization of existing and new real estate funds:
$160 million deals that are worth looking at this month
Giving significant importance to blockchain
technology, Germany releases its blockchain strategy
Interview with Henri Arslanian, Chairman of the
FinTech Association of Hong Kong
1

4. Tokenization milestones in the U.S.:
first Reg A+ STO approved by SEC and
mortgages on blockchain
Blockstack – a decentralized computing startup -
raised over $23 million in the first-ever U.S.
Securities and Exchange Commission-approved
security token offering for retail investors
Why this is important: Blockstack fundraising campaign was the first
Reg A+ STO approved by the United States financial regulator. Its
success creates a foundation for other companies willing to conduct
public offerings of digital securities. It is going to simplify the
communication with the regulator, who now has the use cases to rely
on and understands how to assess digital securities offered to non-
accredited investors.
!
2
TOKENIZED ASSETS NEWS

5. Tokenization milestones in the U.S.:
first Reg A+ STO approved by SEC and
mortgages on blockchain
One of America's leading mortgage companies
Caliber Home Loans that originated $32.3
BILLION of mortgages in 2017 began lending on
the Provenance blockchain platform
Why this is important: The fact that one the biggest US mortgage
companies originated loans directly on a blockchain platform, marks
an increased level of trust in the technology and a big step for the
industry on the way to mass adoption. Although this is not an issuance
of digital securities it represents an interesting case of blockchain use
for debt instruments. This is important as these mortgages can be
structured and sold as DLT-based financial instruments. Generally,
trading of such securities is conducted OTC in a highly opaque
manner, which creates opportunities for fraud. In 2008 they were a
trigger for the financial crisis. Implementation of the DLT can bring
transparency into OTC debt derivatives market.
!
3
TOKENIZED ASSETS NEWS

6. Tokenizing real estate funds: $160
million deals
Digital platform Harbor announced a partnership
with Seattle-based real estate investment firm
iCap Equity, aimed at tokenizing $100 million of
shares in four real estate funds
Why this is important: This marks a big new use case for tokenization:
tokenizing existing securities of private companies instead of helping
companies do primary issuance of tokenized shares. This is done to
enable current investors to trade their securities. In the United States
according to Rule 144 (iCap operates under it) after 1-year lock-up
period securities can be traded to non-accredited investors;
tokenization technology perfectly caters to this, creating liquidity
opportunities where it did not exist before.
!
4
TOKENIZED ASSETS NEWS

7. Tokenizing real estate funds: $160
million deals
Marking the further expansion of blockchain
technology into the traditional real estate market,
AssetBlock announced that it will tokenize $60
million in real estate funds in a partnership with
Lodging Capital Partners
Why this is important: LCP is an owner and asset manager of high-
performing luxury hotels, with a portfolio of properties valued at more
than $1.5 billion. More and more traditional players are experimenting
with limited uses of DLT for securities on the real estate market to
assess feasibility. Successful experiments facilitate the adoption of the
entire industry’s level.
!
5
TOKENIZED ASSETS NEWS

8. Germany releases its blockchain
strategy, setting the government’s
priorities in the DLT space [spoiler:
digital identity, securities and
corporate finance]
Why this is important: the German government is giving significant
importance to blockchain technology in the financial sector, aiming to
support the digital transformation in several sectors, as well as to
tackle potential risks related to its use.
“These upcoming new rules could provide legal certainty and, with it,
a legal fundament to create more dynamics in the public sectors
(startups, investors, industrial corporations, financial organizations)”, –
comments financial analytic Philipp Sandner. According to him, with
this move by the German government blockchain will especially get
on the agenda for corporations.
6
TOKENIZED ASSETS NEWS
While the concern of businesses is liquidity and investment,
regulators care about dematerializing securities to enhance
transparency and combat fraud according to a risk-based
approach. This is a common ground to build communication
between regulatory authorities and private players on capital
markets. When all sides’ interests are ensured, this communication
will drive the mass adoption of the DLT-based securities.

9. How to attract investments with STO: a
practical guide
The main application of digital securities is attracting investments. The
process of attracting investments with digital securities is often called a
Security Token Offering (STO), Digital Securities Offering (DSO), Equity
Token Offering (ETO), etc. However, they are simply digital extensions
of traditional ways to raise capital with securities. We will examine
three main types of securities offerings and how they can be improved
with implementing DLT for accounting securities.
But before that, a comment is needed on a fundraising type, which
isn't a securities offering - an Initial Coin Offering (ICO). The benefit of
it is that constraints on the participation of retail investors and
reporting requirements do not apply to the ICO. However, there are at
least two problems with this type of fundraising.
The first is the utility tokens have an unclear legal status and many
ICOs are an unregistered securities offering. The rule of thumb: if utility
tokens are bought in hope of their appreciation resulting from a
company activity and not to use the service or a product in the future,
they are securities and should comply with all corresponding
requirements. The company that conducts an unregistered securities
offering is subject to fines and its management body to a criminal
provision. These risks are problematic not only for founders but also
for sophisticated investors, who are more risk-averse and are unlikely
to invest in an asset, which provides them with no legal protection.
3.5 Forms of Securities Offerings
7

10. The second is that pure utility tokens are much less attractive as an
investment opportunity. The enormous amounts of investments in
ICO in 2017-2018 came from people who saw them as an opportunity
to make profits, not as a means to have exclusive rights to access a
service or product. Pure utility tokens will be bought only by those
investors, who are interested in using a product or service, which is a
much less broad category. This is backed up by evidence of a ten-fold
decline of ICO funding volumes in 2019 YTD (summer) compared to
2018 (PwC).
Due to these reasons at Stobox we focus solely on regulated securities
offerings, willing to build a lasting business for us and our clients. The
three main types of regulated securities offerings are IPO, private
placement and equity crowdfunding. Depending on the jurisdiction
this classification doesn’t necessarily reflect actual legal terms but it is
the most convenient from the practical standpoint.
3.5 Forms of Securities Offerings
8

11. Henri Arslanian
Chairman of the FinTech Association
of Hong Kong
Questions are asked by Stobox CEO
Gene Deyev.
Gene Deyev: For the past weeks we’ve seen several huge news for
tokenization space in the US: the first STO for retail investors raised
over $23 million, one of America's leading mortgage companies
began lending on Provenance blockchain platform. Has blockchain
finally proven its legitimacy for financial industries to the wider
public, or it still had a long way to go to reach mass adoption?
Henri Arslanian: Whilst there have been very interesting developments
in recent months, we all need to acknowledge that we are still in the
very early days. These developments, as exciting as they are, are still
not even a drop in the broader global financial services ocean. I think
many of us in the blockchain ecosystem often forget how big is the
broader “traditional” financial services industry, with some putting the
figure as high as US$10 trillion dollars a year. That being said, I truly
believe that it is only a question of when, not if, we will see the
tokenization of assets be more mainstream.
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INTERVIEW WITH AN EXPERT

12. 10
INTERVIEW WITH AN EXPERT
GD: You are the Chairman of the FinTech Association of Hong Kong.
What is the current situation around tokenization and blockchain in
the region? Is it influenced by the recent advances in the United
States?
HD: The Hong Kong blockchain and crypto ecosystem have really
grown organically over recent years and many of the members of the
ecosystem have become global leaders. For example, startups in
Hong Kong have become some of the largest crypto exchanges in the
world or are now publicly listed. Also, many of the best practices being
developed in the industry are coming out of Hong Kong. The best
practice guide for token sales issued by the FinTech Association of
Hong Kong is a good example.
There are also a lot of developments going on with tokenization. The
most obvious use case is being real estate. Hong Kong has some of
the most expensive real estates globally and tokenization of such
assets should hopefully allow more people to enter the real estate
ladder.

13. 11
INTERVIEW WITH AN EXPERT
GD: A lot of blockchain-related companies and, for example, funds
willing to tokenize, face difficulties with opening bank accounts.
When do you see this changing, and what should be done to
facilitate it?
HD: Opening a bank account remains a major problem for the crypto
ecosystem globally. For many crypto star-ups, opening a bank
account is simply impossible. The vast majority of large crypto players
are banked with a handful of players. I would argue that the bank
account difficulties are probably one of the biggest challenges slowing
the growth of the crypto ecosystem today.
However, I am encouraged by some of the recent developments,
from Switzerland’s FINMA approving the first crypto banks to Hong
Kong HKMA granting the first virtual bank license. These new players
will hopefully be a breath of fresh air for the ecosystem as they are
tech first, are leveraging the latest RegTech offerings for KYC/AML,
have very good risk management tools and, most importantly, could
be ready to spend the time to understand this new industry.

14. For any questions regarding this digest and tokenization in general,
feel free to reach out to us at info@stoboxplatform.com
stoboxplatform.com
About Stobox
Stobox provides a full range of services to help companies issue digital
securities and attract capital from a large pool of non-institutional
investors, including legal structuring, technical setup and marketing
campaign. We build a platform for issuance and secondary OTC
trading of digital security. The platform is to be fully compliant with EU
securities and financial markets regulations.