An Introduction to Security Token Offerings

Transcript

alright so next up we have zooming you who is and actuarial manager at covermore travel insurance and he will be talking more about security token offerings thanks Bonnie so device touches so in a bit of disclaimer so I'm not a lawyer not not giving any legal or financial device so this is just pure personal research and

also I've sent the material to a steel check come to review so I'm very grateful to them but all the errors and missions on my own so soon just some just to give up some idea of how I why I got into the security token space so basically I'm an actuary so I studied to be a qualified actually at the extras Institute in Australia I'm also a data scientist so I'm very interesting using machine learning or data analytics tools to solve business problems so I work for government travel insurance and at the beginning of last year I got into

blockchain space through attending this bulky Poobah workshop which is held here in Sydney once or twice a week actually bulky happens to be an actuary as well so just a nice coincidence and let go mean to developing some smart contracts so I actually proposed the EOS e120 1 token standard this standard tokenize is the rental rights so with all that background you know it prepared me well to look into the security token space because I got both the financial industry background and also the blockchain knowledge so let's start with this question what

are security tokens so fundamentally security tokens there are still securities so token may be its form but you know they're still the same security they were used to so by the way this talk is focusing on the u.s. jurisdiction obviously every jurisdiction has its own definition of securities so but because US is still the dominant jurisdiction I'm gonna focus on us so let's go back to 1946 there's a guy called mr. Howie and he owns a bit of orange grove and he was you has no way to make some money so he was saying you know I need money to make

money how do I get some money how about I go and sell these orange plots to people you know I would still look after the oranges I'll pick at the oranges out juice them and you just give me the money and and at the end of the year I'll give you the profit so SEC comes along and said that's a security and mr. Howie said no it's just lots of oranges so this case actually went all the way to the Supreme Court of the US and the outcome of that is that the u.s. now has a very clean definition of securities so this letter leads us to the Howey test so there are four criteria so it needs to be an

investment of money and it needs to be in a common enterprise with an expectation of profit and the profit needs to derive from the efforts of others so in in this case the efforts of mr. Howie so the first application in the crypto space is actually the Dow report which was released by the SEC after Dow hack and basically the Dow is considered to be a security because it's it's a venture capital but based on crypto and the the profit the you can expect largely derived from the efforts of these startups

so that's why it's considered security on the other hand the SEC has very clearly stated that bitcoin is not a security mainly because you know there's really no common enterprise so you know who is Satoshi Nakamoto right and who is really driving Bitcoin that there's no central body there and also I think recently and they also indirectly confirmed that a cerium is no longer security so when you first got started when they have nothing it might be a security because you're buying this token hoping to make money and you know and nothing has been built yet but but now just look at the community you got

so many developers around you know it's all very decentralized so so it's serum is ok as well so assuming now you are a start-up and you want to do an sto there are couple ways so the first ways is a registered sto so you go and go to the SEC and register as a public offering you have to go through very onerous processes submitting all sorts of documents or you could do what most other companies do do an exempt sto basically it's a private placement so rather than try and sell to Mum and Dad who may or may not have you know

knowledgeable investment you actually sell to sophisticated or accrediting investors so these are basically people with lots of money so many millionaires the the regulator is actually not know they're doing a lazy job in terms of verifying who is sophisticated or not because you may have money and you still have no clue right but for some for simplicity they just go okay well just stick with the millionaire test now they have a few different regulations under this pass so you go reg D reg ass like a plus and reg CF so reg D is probably one

of the best-known category so they're actually two subcategories you go 5 6 b & 5 6 c so 5 6 b was the old reg D before the Obama jobs that the Jobs Act was a was approved by the Obama administration it doesn't allow you to go out and solicit to the general general public so you can't really you know come on stage like here and say hey I've got a you know sto you can't do that but with reg D 5 6 see you can do that the only catch is that you have to approve every individual and verify that they are accredited for both categories you can raise unlimited amount of money

so that's a real plus and then you also got the Reg s so with ragas tailoring to investors from outside the US now with post reg Deandra guess there's a lockdown period of one year with reg D you can really sell until a year later with Vegas you can't sell back to the US within one year now there's also something more interesting called a plus now this is more similar to the ICO space where you're selling to him to Mum and Dad and you can only raise fifty million dollars

a year but there should be more than enough for most startups the and but but the issue is that the regulator hasn't really approved any reg a plus so far you know in there quite a few attempts I think just yesterday there was a project called block stack and they just registered a reg a plus of fifty million dollars I was SEC so it will be interesting to see if they they can be the first reg a plus Sto and finally you got the crowdfunding route which you can raise a million dollars but the you got a little bit more onerous reporting

requirements now what are the benefits of Sto so first you've got 24 7 markets now we may think that that's normal you know crypto Never Sleeps but if you look at the traditional securities market you know you look ASX you got nine to four trading monday to friday this is a huge improvement and then you also have rapid settlement so you know we're talking about t plus two so so you execute a trade and two days later get settled and in the middle it's just sitting there whereas because now we're using blockchain the execution happened at the same time of settlement you go automated

compliance so you could make all your compliance rules into the smart contract so for example you're not allowed to sell within a one within one year so you can actually write into the smart contract and the Reg actually makes the life of regulator much easier because you know it's actually written in the code and you go fractional ownership as well there's a huge advantage for illiquid assets like real estate you know add currently for example if you wanna buy the Mona Lisa painting you know who can buy there who's got billions of dollars but imagine if you can't organize some aspects of it then we can all own a part of it and finally

innovation so the ICO stage has shown that there's a huge benefit in network effects so by distributing tokens to people they start to use it and generate more usage and therefore more popularity now with the security token space you can do the same by giving special perks to two security token holders for example a sports club it might be able to use that to engage their fans now there's a few different types of tokens security tokens so you can't organize equity that SS derivatives even insurance risk tokens maybe you can also

do revenue share which is quite common now imagine your startup so you need to engage a lot of providers so this is the security token ecosystem you will be surprised to see you know there's actually a lot of players here so first you would engage them lawyers like Bonnie and then you go and talk to an issuance platform where they can write you some smart contracts in consult in consultation with the lawyers to make sure all the compliance rules are baked in and then you go to talk to your broker dealer who will be able to source some investors for you if you're lucky you raise enough money you go and list your token on the exchange and then you

engage some compliance provider as well to make sure you know all the KYC and AML verification are done properly and you also needs custody because no institutional investors can invest without a proven custody solution and we know that a big costly provider like fidelity got into this space and it's a really positive now there's some blocks in consideration as well so first would you do public private blockchain you know we may be thinking you know public is the best right but actually some people have other thoughts private blockchain may be able to get you there faster because it's easier for the regulator to control everything and then there's also

a serum or other blockchains a serum is still the dominant dominant blockchain but the other the other blocks in trying to catch up and you got yeah I see 20 or the new security token standards 20 is easy and you really have a big network you know like you know Dharma for for landing you go divide the X for derivatives I recall that ecosystem built but the newer smart contracts tried to baking order you know dividend governance voting all that stuff and then finally just want to say technology is not the biggest hurdle compliances so we think compliance probably is 80%

of the work so let's just go through two case studies first one is t0 it's a subsidiary of overstock.com and that the owner is Patrick Byrne he's he's been a long time Bitcoin advocate and they're trying to launch a secret how can exchange or 80s so alternative trading system and doing a reg D and reg S so Taylor's both domestic us invest in the overseas investors and the doing and 10% revenue share the token has been issued already as a as a yes to 20 token mysterium they raise 134 million by August last year and the platform went

live in January the currently only training their own token but I think in August they expecting to open it up to trading other tokens or onboarding under credit investors and the second case study is real estate so it's a project called Aspen coin and they're backed by SS pandigital which is a single single asset read the real estate investment trust which owns the Aspen Regis sir the edges and ridges Aspen result which is a quite a famous property in the US and it's a reg D 560 offering and the token has

been issued as a asset 20 and they raised 18 millions by October 18 so as you can see this industry is still at its infancy lots of the groundwork is happening right now with a few exchanges trying to raise money or we're trying to get over the compliance hurdle and also the institutions are variants interest in this space but you know we expect to see growth or oil texas is a one big company like you know apple ii tokenize its shares then you immediately go from about 200 billion market cap to over one trillion right because apples was over about 900 billion

so that's I think there's the trillions of dollars of assets waiting to be tokenized so ya interested add me on LinkedIn thank you thank you seeming for the shoutout also I just have actually two questions for you I think you mentioned something quite interesting you sort of talk about security tokens and I think that you know security tokens exist on a spectrum you go all the way from the very left which is sort of traditional financial assets like a share when you talked about Apple and then you go all the way to I guess the Aspen coin that sort of fraction Eliza's real estate sort of and the idea behind that is you can unlock illiquid value which sort of

is more innovative so what are you more interested in in on that spectrum yeah I'm just interesting that the whole space I think a lot of it is just traditional Rises and it's nothing new the security law has been around for nearly a hundred years but there's also the new things and we don't really know what's going to happen I think this analogy about radio and when TV was first invented people were trying to put radio program on TV so they have no idea you know you could you could do all sorts of you know videos on TV so I think yeah I'm also interesting this innovative approaches I think you also

mentioned something quite it's just a passing comment you sort of mentioned sort of private in public blockchain and obviously it's the public walk chain that's better but I sort of remembered there's as one podcast that I heard vitalic do in which he said sort of the short term definitely it's sort of more private blockchain and in the long term will be see the public box shame I think it was a bit lower shin so if he's around I'd love to sort of also hear his comment but that's really interesting thank you