Your Official Guide to the Security Token Ecosystem
A new generation of tokens is upon us. If 2017 was the year of utility tokens, 2018 will undoubtedly be remembered for the birth of an entirely new eco-system of platforms, exchanges, and funds, all looking to capitalize on the trillion-dollar opportunity that is tokenized securities. Tokenization is becoming particularly popular amongst more traditional issuers and investors, allured by the benefits of blockchain technology, as well as the crypto whales, looking to hedge their increasingly volatile portfolios.
What are Security Tokens?
Security tokens, tokenized securities or investment tokens, are financial securities compliant with SEC regulations. These Gen-2 tokens can provide an array of financial rights to an investor such as equity, dividends, profit share rights, voting rights, buy-back rights, etc. Often these tokens represent a right to an underlying asset such as a pool of real estate, cash flow, or holdings in another fund. These rights are written into a smart contract and the tokens are traded on a blockchain-powered exchange.
Some evangelists claim that these securities will soon become so popular, traditional stock exchanges and OTC markets will be completely replaced over the next decade.
For more on types of security tokens and how they differ from utility tokens, please refer to an earlier piece here.
Advantages of tokenization include fractionalization of larger assets, increased liquidity, lower issuance fees, and greater market efficiency. However, the greatest benefit that security tokens provide an issuer is access to a global pool of capital. As these tokens can be sold and traded internationally (when compliant with regulations), they become more fairly priced and, therefore, attractive to investors. This SEC compliant offering is appealing to both institutional investors for it’s more recognizable structure, and to crypto investors for its technological innovation.
New Term to Know: “STO” — a security token offering. Similar to ICO for utility token offerings.
How to tokenize?
If you are thinking of tokenizing your next funding round, prepare yourself for a six month process of hiring advisors, lawyers, and engaging with some of the following platforms. When done correctly, your company should spend two months working with advisors and legal counsel on structuring the offering, and creating marketing materials, one month working with a technical platform to onboard your token, and three months conducting a roadshow for both traditional and crypto investors.
The following list should work as a solid starting point for figuring out what platforms and advisors to engage with, as well as blueprints from other issuances. Let’s get comfortable as we are about to go into some details.
Note: This is a living and breathing guide of notable players in the industry which will be updated periodically. Feedback is welcome. If you have a platform or an issuance that you believe should be added, please contact me via Twitter.
These platforms range from open-source protocols for token issuance, requiring technical expertise, to more turn-key technical and advisory services.
Polymath is a blockchain protocol that facilitates the issuance and distribution of legally compliant token-based securities. The protocol embeds financial security requirements into the design of new security tokens, streamlining the process of launching financial products on the blockchain seamlessly. The Polymath platform provides means to trade security tokens, authenticate investors, connect with legal delegates, and access a developers’ marketplace. Poly, an ERC20 token, powers the system and acts as the underlying economic unit that facilitates authentication, legal, and developer services.
Amount Raised: $59M (ICO)
Management: Trevor Koverko, CEO, Entrepreneur, blockchain speaker, and cryptocurrency investor
Anthony Diiorio, Ethereum co-founder, CEO at JAXX
Steven Nerayoff, Alchemist Ventures
Patrick Byrne, CEO at Overstock
Harbor is an open-source platform that enables traditional investment classes to migrate seamlessly onto the blockchain. Through a standardized process, Harbor streamlines regulatory steps to ensure that companies who migrate their assets comply with legal requirements. Through a Private Placement ICO, Harbor provides for a Reg D-compliant private sale, combined with a new token permissioning technology, the R-Token. The standard integrates requirements such as KYC/AML, tax rules, reporting information, and accreditation status into each new token formulated through the system.
Amount Raised: $10M (Series A)
Management: David Sacks, CEO, General Partner @ Craft Ventures, previously COO of Paypal, Founder of Yammer, CEO of Zenefits
Bob Remeika, CTO, VP Zenefits, Engineer at Yammer
Arisa Amano, CPO, VP Zenefits, Marketing at Yammer
Securitize is a regulatory compliant cloud service solution for the tokenization of securities, enabling tokenization of funds, companies, or other entities. The company provides several services including establishing the legal and regulatory readiness of the issuers and their legal team, streamlining investor registration in compliance with KYC/AML accreditation or other legal requirements, customizing smart contracts to match issuers’ unique requirements and security token data throughout the lifetime of the security. Spun out of SPiCE VC, the platform has secured commitments from companies running ICOs in aggregate of $500 million, including offerings from CryptoOracle, Kairos.com, Lottery.com and 22X Fund.
Management: Carlos Domingo, CEO and Chairman, Managing partner at Spice VC, Former CEO at Telefonica R&D
Jamie Finn, President, Former EVP Business Development Aki, AT&T, Kontera, Telefonica
Shay Finkelstein, CTO, CTO at SPiCE VC.
Swarm tokenizes real-world assets using the SRC20 protocol, a cryptographic standard for security tokens. Tokenized objects become “assets” that can be easily managed, governed and traded on the Swarm network. Swarm Invest, launched in January 2018, allows tokenized assets to be offered as investment opportunities. Individuals can invest cryptocurrency such as SWM, BTC, and ETH (and soon, fiat) into real world assets and receive SRC20 tokens in return, granting them ownership and governance rights, a legally enforceable right to any revenue the asset generates, and the ability to trade the tokens in a regulatory compliant manner. Areas of focus include real estate, renewables, agriculture, tech companies, crypto hedge funds, impact investments (development projects and post-disaster rebuilding), infrastructure, among others.
Amount Raised: $5.5M (ICO)
Management: Philipp Pieper, CEO; Timo Lehes, Chief Investment Officer; Chris Eberle, COO
Notable Advisors: Anthony Di Iorio, CEO & Founder at Jaxx & Decentral, Co-Founder at Ethereum
Chris Kitze, Chairman of the Alphabit Digital Currency Fund
David Drake, Founder and Chairman, LDJ Capital
Templum is a regulatory compliant solution for security token issuance and subsequent secondary trading. Templum Markets (formerly Liquid M Capital, acquired by Templum for $1.3M) is a registered alternative trading system (ATS) and a broker-dealer firm. Templum offers a platform that both enables the initial sale offering of security tokens and operates as a marketplace in which secondary trading can take place by issuers and investors. Like many other solutions, Templum will integrate AML and KYC as part of the platform to comply with regulatory requirements.
Amount Raised: $2.7M (private round)
Management: Christopher Pallotta, CEO, MD at Raptor Capital Management
Josef Schaible, COO, Former Director at Salt Lending
Founded in 2015, Securrency offers a protected, scalable platform providing liquidity to previously illiquid assets. The company’s platform consists of several products: (1) Securrency™ — facilitates regulatory compliance and enables the trade or transfer of tokenized securities, (2) RegTex™- provides regulatory compliance services such as, KYC/AML reporting, validation of investor accreditation and eligibility, reporting, and tax submissions, (3) SmartContraX™ — a blockchain smart contract development service, (4) InfinXchange™ — provides standard interfaces for payments, exchanges, asset pricing, and other transactions.
Amount Raised: $10M
Management: Dan Doney, CEO, previously Chief Innovation Officer, Defense Intelligence Agency
Ron Poe, Compliance Officer, Captain U.S. Marines
John Hensel, COO, Retired U.S. Navy Captain, managed aerospace portfolios valued in excess of $15B
tZERO, a subsidiarity of Overstock.com, focuses on the development of various blockchain supported solutions for the capital markets. The company’s present offering consists of brokerage services, stock inventory management systems, smart order routing solutions through a network of more than 100 brokerages, a 24-hour trading platform, as well as other services. The company handles traditional equities but is planning on scaling its operations by integrating a token trading system for crypto securities. The company’s token — tZERO, is an ERC20 security token, that pays 10% of adjusted gross revenues to token holders on a quarterly basis.
Amount Raised: $114M (ICO in progress)
Management: Patrick Byrne, CEO, Founder and CEO Overstock.com, Founder Medici Ventures
Joe Cammarata, President, CEO SpeedRoute (tZERO subsidiary), CEO and founder at Sonic Trading
Ralph Daiuto, COO and General Counsel
John Gilchrist, CIO, previously VP of at Merrill Lynch
OpenFinance Network (OFN) is an open-source platform specializing in secondary markets for alternative assets. The OFN team has been working together since 2014, offering trading, clearing and settlement services. Recently, the team has refocused their attention on blockchain solutions and has developed a compliant standard by which tokenized securities can be exchanged and eventually issued on the blockchain. Last Month, OFN enabled one of the first verified compliant security token transactions and is now accepting applications to list additional security tokens.
Amount Raised: $2.2M (Series A)
Management: Juan M. Hernandez, CEO, Founder of PeerRealty, and the Pop Stock Exchange
Ian Shipman, Head of R&D
Orderbook is a decentralized exchange that automates the process of investor verification through a specialized token. The token, named RAP, ensures that ICO and other crypto related transactions are compliant by cross-referencing local jurisdictions requirement with its database of RAP token holders credentials. For example, If an investor who does not meet the proper regulatory requirements attempts to buy a token on the exchange, the system compares the investor’s permission level against an internal database and prevents them from finishing the purchase.
Management: Andrii Zamovsky, Founder
Stephen Pettibone, CCO, Former VP of compliance at NASDAQ
Bancor offers a liquidity model that connects multiple tokens to one pool of capital, enabling price discovery and ensuring liquidity even in low transaction volume environments. In the context of securities, this model complements existing best practices and provides alternative ways to achieve liquidity, enhancing the benefits of moving securities to the blockchain. Bancor is often described as the long-tail of value creation, that is, the long tail of low demand and low volume products. In the tokenized security market, one example for this use case is found in the partnership between SPiCE VC, a tokenized VC fund and Bancor. As part of the arrangement, SPiCE VC is committed to holding up to 5% of its capital on the Bancor network, so that token holders can benefit from additional ways to liquidate their holdings.
Amount Raised: $152M (ICO)
Management: Guy Benartzi, Co-Founder, previously CEO @ Mytopia, President @ Particle Code
Galia Benartzi, Co-Founder, previously Venture Partner @ Founders Fund, CEO Particle Code
Eyal Hertzog, Product Architect
One of the big promises of the tokenization of assets is to open the floodgates of the global pool of capital, eliminating siloed demand and supply dynamics restricted by geography and infrastructure. Airswap is a decentralized exchange that enables trading on a global scale, connecting individual entities across markets. In the context of security tokens this results in increased liquidity and a generally more stabilized, less volatile demand environment.
Amount Raised: $36M (ICO)
Michael Oved, Co-Founder, Algo-trader, Partner at Virtu-Financial;
Don Mosites, Co-Founder
Existing Tokenized Securities:
Brave the new world. As there are only a handful of existing issuers and only about a dozen more in the works, this is the frontier of financial innovation.
Pioneered by Brock Pierce himself, Blockchain Capital was arguably the first to introduce a public offering for a securitized token. In its ICO, Blockchain Capital hoped that it could improve the emerging token sale industry in multiple ways. The offering created a blueprint for future tokenized securities, invested in other ICO’s that embodied some of the best practices and accepted funds only from accredited investors. The token sale reached its hard cap of $10M within six hours. The proceeds from the offering were transferred to one of Blockchain Capital’s funds. According to the offering memorandum, the fund’s managing partners collect a 2.5% management fee and a 25% performance fee. The remainder of profits are to be distributed to token holders.
Amount Raised: $10M
Management: Brock Pierce, Co-founder @ Blockchain Capital, DNA.fund, EOS, Tether and more
Bart Stephens, Co-founder & Managing Partner
Bradford Stephens, Co-founder & Managing Partner
Science Blockchain is a fund and an incubator focused on blockchain investments. Thus, it’s almost logical that the fund was raised through an Initial Coin Offering of a security token (SCI). The SCI-token provides token holders with rights to up to 70% of the stream of new tokens generated from portfolio companies. Additionally, the fund’s proceeds from liquidity events are anticipated to be used to repurchase tokens via a buyback program, thus allowing investors to enjoy equity appreciation.
Amount Raised: $12.3M
Management: Founders Peter Pham, Mike Jones and Greg Gilman, founders and investors in the original Science incubator.
Lottery.com, formerly AutoLotto, is a mobile lottery service. The company intends to utilize blockchain technology to enhance its services through instant payouts, transparency, flexibility, and expansion across international markets. The company is nearing the close of the private sale of it’s STO, rumored to be in the nine-figure range. This securitized token produces a financial yield to token holders based on gross raffle sales. Securitize and Cashbet have partnered with Lottery.com to help bring the offering to the market.
Amount Raised: in progress
Management: Tony Dimatteo, CEO
Matt Clemenson, President, Crypto Thought Leader
Zach Goldberg, CTO, previously Google, Tencent, WeChat
Notable Advisors: Miguel Forbes, Founder @ Forbes.com
Joey Krug, Chief Investment Officer @ Pantera Capital
Miko Matsamura, Co-Founder @ Evercoin
While VCs have been behind almost all the greatest disruptions of our time, the VC industry has remained almost untouched. SPiCE VC intends to change this through its tokenized VC fund model that offers almost immediate liquidity for investors. If, in traditional VC funds, LPs had to wait anywhere between 7–12 years until they gain full access to their funds, SPiCE token holders get a piece of the exit pie, while enjoying a tradable asset. Even though the company intends to invest in some utility tokens, SPiCE is focused first and foremost on security tokens, with Securitize being their first portfolio company.
Amount Raised: $40M
Management: Carlos Domingo, Managing Partner, Former CEO of Telefonica R&D
Tal Elyashiv, Managing Partner, Former CIO at Capital One, Bank of America
Ami Ben David, Managing Partner
Startup fundraising is hard. That’s why a group of entrepreneurs from a recent batch of 500 Startups, a highly selective accelerator, came together to form a new tokenized fund. 22X Fund will invest in up to 30 of the startups that graduated from the San Francisco 2017 500 Startups batch. The fund will hold between 2.5%-10% equity in the companies it invests in. Token holders receive their returns by trading the tokens on an exchange or through a token repurchase program that applies after a portfolio company experiences a liquidity event such as an exit or an IPO.
Amount Raised: $22M to date (goal $35M)
Notable Management and Advisors: Jamie Finn, Porfolio Manager
Tim Reynders, Investment Advisor
PropertyCoin is another example of how security tokens can transform existing markets. PropertyCoin is opening up real estate, one of the largest asset classes, through a 100% asset backed token. Aperture, the operator behind the STO, intends to invest the proceeds in two business areas — (1) flipping residential properties and (2) lending to other property investors. 50% of the profits will be shared with token holders through reinvestments.
Amount Raised: Seeking to raise $50M+ via STO
Notable Management and Advisors: Andrew Jewett Co-CEO, Former Executive at leading Real Estate operator, RBS securities
Matt Miles Co-CEO, Former Executive at leading Real Estate operator, RBS securities
Sia is a blockchain-based, decentralized cloud storage platform on which Renters can lease storage capacity from Hosts. Sia utilizes two tokens, Siacoin and Siafunds. Siacoins are used by Renters and Hosts as the currency in which deals are performed on the platform. Renters and Hosts are required to pay network fees to the Sia platform that amount to 3.9% of all spending. Siafunds are entitled to receive a proportional amount of those fees. Nebulous, the operating company of the Sia platform, is offering 750 Siafunds out of a total of 10,000 Siafunds, as a Reg D security token. This is an example of a ‘two-tier’ or dual tokens issuance, which is used both a security and a utility token.
Amount Raised: In Progress
Management: David Vorick CEO, Core Developer, Ex IBM, Rensselaer Polytechnic Institute
Luke Champine, Co-founder, Core Developer, Rensselaer Polytechnic Institute
Slice is a commercial real-estate (CRE) investment platform for cross-border investors. It functions as the underwriter, issuer and placement agent for prime real-estate securities. Slice offers liquidity to conventional real estate equity investments, while creating portfolio diversification tool for high net worth investors. Slice’s investments will provide investors with a choice between stable quarterly distributions from cash-flowing properties, or high-yielding value-add projects with large but infrequent dividends. Accredited investors can deploy investments directly into institutional-grade commercial real-estate utilizing Slice’s tax-advantaged structure. Slice combines the Bancor Protocol with Stellar’s built-in decentralized exchange to ensure high liquidity for the CRE-backed tokens issued on the Slice platform.
Amount Raised: $2M (Series Seed) + upcoming STO
Management: Ari Shpanya, CEO; Tomer Ravid, CIO; Yevgeniy Spektor, CTO
Advisors: Eyal Herzog, Product Architect at Bancor
Some of the legal heavy-lifting such as KYC/AML will be automated by the issuances platforms. Nonetheless, getting good lawyers to structure your security token is crucial.
For the best token structures and lawyers, continue to our next article here.
Enjoyed this post? Please “clap” 50X in the bottom left corner so it will be shared with more people. Tweet me with any additions, corrections or feedback.