To understand the power and the magnitude of the coming capital transformation, a quick look at history is needed. The concept of ownership and selling equity in a venture goes back several centuries. Ownership represented as a Paper Security lasted until the mid-1970s. At that time transfer of securities was done manually and often by bike messenger. Electronic Securities came next, and have had a productive 50-year run. The inefficiencies and shortcomings, however, include lack of peer-to-peer trading, settlement times of 2 to 3 days, cap table inefficiencies, lack of direct personal ownership and numerous friction points and tolls along the ownership and trading lifecycle. Blockchain-related technologies have allowed the creation of Security Tokens or Digital Securities. Because this method of representing ownership repairs so many of the problems that exist with electronic securities, there are some experts who claim that there will be a future when all securities will be required to be tokenized.
PrefLogic’s SaaS solution, the Securities Matrix leverages three things to create what may be one of the most powerful capital creation tools in history.
These include:
1. Favorable change in legislation (JOBS Act)
2. Technological advancement provided by blockchain and smart contracts
3. Distribution power and network effects provided by the internet
Following the decrease in small business activity in the wake of the 2008 financial crisis, changes in SEC regulation came in the form of the JOBS Act (Jumpstart Our Business Startups Act) with Titles I through VII enacted between 2012 and 2016.
One of the most impactful changes was the allowance of marketing and selling of securities through on-line or open platforms. The true impact and full potential of the JOBS Act is now being optimized through blockchain technology.
Securities can be represented in digital form, marketed with the global and exponential power of network effects and distributed via the internet with automated compliance provided by the token smart contracts. The most important things to remember when comparing this to ICOs is that what is being sold, in a fully regulated and compliant fashion, is equity in a company or an asset. Converting a bad idea or a poorly run company to a digital security does not, in itself, convert this to a good investment.
Through due diligence, investors will need to use the same scrutiny as always when evaluating investment opportunities. There will also need to be ongoing education with regard to early stage or seed round investing as the risk / reward profile is very different from later stage or public company investing. While the reward can be much higher, the investor needs to fully understand that risk of failure is also higher.
The core difference over time is that regional brokers and investment bank capital in the $1M to $10M range effectively became unavailable post-2008. Many good ideas and early stage companies didn’t get their start, or failed because of lack of access to seed or growth capital. I was drawn to this space because of that very fact, having started an Electronic Medical Record (EMR) software company in 2003. As a physician, from the very first line of written code, the software was designed to be intuitive, easy to use and a true efficiency tool. We succeeded in that goal. Despite enormous effort, after raising initial seed rounds, we failed to land venture capital or other sources of growth funding. The business along with it’s amazing product and clients in 6 states closed after fifteen years.
I’m 100% convinced that if we had had access to the PrefLogic Securities Matrix and could have marketed to existing and potential users of the product the ability to also be part-owners and developers of the product, long term success would have belonged to everyone involved. This is what PrefLogic is selling: Empowered opportunity.
The PrefLogic Securities Matrix is agnostic to deal size. This may in fact be a great example of “if you’re a hammer, everything looks like a nail.” Even though the maturity of projects can span the full spectrum from early start-up to a publicly traded company, in the end, the process and the final result are the same; ownership interest is represented in a secure, immutable form on the blockchain where cap table management is available real time.
There will be a future where a company can fundraise through a digital security and have all the voting, shareholder communication, buy/sell/transfer restrictions and KYC (know your customer) baked into the “token” that has the ability to trade on an SEC/FINRA regulated exchange. Unlike exchanges of today, trading will be 24/7.
In short, blockchain, through high-level math (Cryptography) and a distributed (Public) network ledger, create automated trust and an immutable or tamper proof record; in other words, a continuously updated record of who holds what.
In future writings, I will try to speak very little of blockchain and the underlying technology. As with the personal computer, understanding how “1’s” and “0’s” are used is no longer important to PC and mobile device users. Similarly, an understanding how blockchain and cryptography work is not necessary for users of this technology in the capital market space. What I will focus on in future blogs are the opportunities for capital growth that the advent of digital securities is promising us.
By: R. Jeffrey Cole, MD
Advisor to PrefLogic
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DISCLOSURE REGARDING ENDORSER. Dr. R. Jeffrey Cole, the author of this blog, owns a promissory note that is convertible into a significant number of shares of PrefLogic common stock at a fixed conversion price. In addition, PrefLogic has issued to Dr. Cole shares of PrefLogic common stock to compensate him for providing management and marketing advice to PrefLogic.
