Launching Aboveboard for blockchain securities

We’re launching Aboveboard to issue international securities on public blockchains. We are harnessing the energy and machinery of the ICO market, currently a $6B market, and applying it to the much bigger universe of real stocks and bonds, which totals more than $100T of assets globally.

We are building software that allows issuers to stay in compliance with security laws by selecting, qualifying, and tracking buyers. We’re signing up broker-dealers to distribute the securities in many different countries. We’re working with issuers on both traditional equity deals and creative new models.

We are recruiting advisors: people who have experience in sell-side investment banking, securities law, various national markets, blockchain markets, and developing our target issuers (ICO, startups and VC, private company liquidity, cross-border finance). We’re offering significant amounts of founder stock. We need advice to help us define the product and the unique value we add to this huge opportunity. Join us.

The story so far

Security tokens are a third wave in the crypto markets. The first wave was cryptocurrencies, emerging from 2010 to 2016. The second wave was ICOs — global communities coming together to invest in shared software infrastructure. The third wave, in 2018, will transform the securities industry by offering real securities in blockchain format.

A pure ICO is a beautiful thing. A community comes together to fund the development of open source software which will connect them, and they agree to use “utility tokens” to pay for the resources in that community. The Ethereum ICO was a great example, and it has returned more than 1000X for its investors.

However, this is a very unusual case. Most businesses are not constructed from open source software networks. A joint stock company that pays dividends can invest in any type of business. A coin issuer cannot. Recent ICO’s are often closer to bad stock offerings. This exposes some major problems. Their investment offerings are stripped of the most valuable rights — governance, interest, dividends, and liquidation rights. They don’t make the disclosures that protect the buyers of real securities. Regulatory agencies in many countries, including the US, are increasingly insistent that most coin offerings should be handled as securities. They are threatening to ask issuers to give the money back, halt trading, etc. We can solve a lot of these problems by finding a simple way to handle blockchain issues as securities.

The blockchain opportunity

Issuers and investors are flocking to the blockchain format for several reasons:

•Global: Blockchain tokens are purchased and traded globally, which expands the market about 4X beyond traditional national securities

•Liquid: Blockchain tokens move relatively quickly to trading

•Direct: Issuers of obligations sell directly to buyers with few intermediaries. This is much more transparent and efficient than legacy markets

•Open access: Innovation is unleashed. Innovators connect directly to blockchains and design new issues, token economies, exchanges, and a wide variety of financial products

The immediate mission

Our mission is to preserve these benefits of the blockchain markets, while protecting issuers and investors through compliance with securities laws.

Our customers are security issuers and their sell-side broker dealers.

• We protect issuers from claims that they violate securities law. This protects them from regulators (and lawyers) in multiple countries that have threatened to force them to give money back or stop trading.
• We give issuers the ability to increase the value of their token offerings with a wide range of security rights.
• Money! We provide an international syndicate of broker dealers that can sell a security and access a large base of professional investors.

The big picture

Over the next five years, I anticipate some big changes in the securities industry.

We will see new types of issuers that are creatively using international markets, startup funding, mutual ownership, security token + utility token economies, and self-governed minority rights protection. At least one of these categories will be huge.

There will be an increasing demand for assets in blockchain format, because they can be accessed by scripts and APIs. Scripts will efficiently deliver the risk/reward bundles that currently go into labor-intensive products like ETF’s, asset allocation, asset backed securities, and reinsurance. There will be a big demand for yield and fixed income securities, to satisfy the needs of scripts that want to park assets such as cash and insurance premiums.

This will drive a migration of assets from the existing $100T securities pool, into blockchain formats.

The new securities will be global rather than national. We will need an I-FINRA — an organization that advises governments on best practices for handling international securities, and can self-regulate to those practices. We hope to start this process with our legal and broker task force.

The conceptual leap — International securities

Securities as we know them are issued, regulated, and traded inside one country. If you want to buy the security, you have to hire a broker in the country of issue. Blockchains don’t work that way at all. Blockchains are borderless. They bring us a new type of international security.

The SEC has taken the common sense position that if people are investing money in a management team, for future gain, they are buying a security. Over the past two months I have talked to many lawyers who are making a lot of money from issuers of unregulated ICOs, and are very frustrated with the SEC position that most of them should be handled as securities. They face a very difficult problem, a seemingly impossible task. How is it possible to handle these offerings as securities, when the blockchain is global, and buyers are present in a hundred different countries? No one law firm could figure that out. That’s why everyone is bending over backwards to try to do unregulated “coin” offerings instead of offering regulated securities. And, that is why we get weird offerings that are stripped of securities rights.

We have to figure out a way to fit our blockchain securities into the differing rules of all of the different countries where we have buyers.

It seems impossible, but it’s not. We can solve this problem in a straightforward way if we use blockchain thinking, and harness a distributed community.

How we do it

Aboveboard provides three things:

1)Technology to guarantee that an issue is purchased and traded by only qualified buyers, as defined by the issuer’s policies, and the buyer’s jurisdiction.

2)Technology to confidentially update a registry of buyers. Our technology protects privacy and complies with national rules restricting the flow of personal data. Armed with this registry, issuers can satisfy almost any reporting request or KYC/AML requirement. They are also protected from technical problems because they can move the registry to new tokens and ledgers.

3)A global syndicate of broker-dealers. They are the distributed community that can apply local rules to qualify buyers in each jurisdiction. And, they have access to professional-scale investors.

Our unique contribution

Aboveboard serves issuers by giving them the simplest and most direct way to sell security tokens in compliance with local laws.

When we can plug into other systems, we will absolutely do it. Our commitment is to fund innovation by protecting and serving issuers. We will deliver on that mission by being compatible and collaborative. Our commitment to customers is to continuously move them toward the most effective markets and tools.

There is a lot to do, and a lot of new investment in the space. Market momentum is building around some new players. For example:

A full-service broker: BnkToTheFuture has a lot of experience selling unregulated ICO’s, and a methodical plan to bring regulated securities to their investor base. They are one of the best examples (there are a number of others) of the players that want to provide a full-service sell-side solution: representing sellers through their own broker dealer, and providing the exchange services. They are not really providing infrastructure for everyone else in the industry, but they are a good example of the full-service broker approach.

An exchange: Tzero raised more than $100M in their December SAFE offering. Exactly what they will do with the money is still unclear, and because it seems to involve an extensive technology stack, it may take a year or more to mature. They have been working on this for more than three years. They have also positioned themselves as a full-service solution, but with a focus on settlement — the process of swapping cash for securities. We need innovation in settlement. Currently, crypto exchanges hold both the cash and the tokens, and swap them internally. This is insecure, as it does not give investors any choice about where they save their cash and tokens except to throw themselves on the mercy of the exchanges. In the legacy stock market system, the stock exchanges just match bids and offers, and then they send the “trade report” to a semi-manual settlement process of figuring out where to send the securities and where to send the cash. This is slow, error prone, and can lead to “naked shorts”, which the Tzero founder hates. I believe that the securities token market will include exchanges that just do trade matching, but it will dramatically improve settlement by sending trades for a fast blockchain-based “atomic swap”, perhaps through new distributed exchange and “hashlock timelock” technology.

A market: Polymath is generating a lot of excitement with their token airdrop and ICO. This is going to pull a lot of people into the market for securities tokens. They are building an open market for investor qualification, securities design, and broker-dealer services. As a side effect, they get to sell a token that is a medium of exchange in this market. I’m not sure that everyone will want to use their token to pay for these services, but the market looks like it is going to be a success that rapidly builds the size of the security token market.

A syndicate: Aboveboard’s approach is to support a syndicate of broker-dealers, which qualify investors, and sell the offers. This helps us achieve our goal of “simple and direct.” We use existing broker-dealer capacity to cover many countries and reach their big investors. We have less machinery and a faster path to market because we are plugging into the existing ICO and securities industry. The members of our syndicate can rely on each other to follow the requirements for qualifying investors, so it may offer more reliable compliance than qualification provided by an open market. It is simpler than trying to organize a completely new market. As the marketplaces and exchanges emerge, we’ll use them.

Signing up advisors

We are recruiting advisors to join us, people who have experience in sell-side investment banking, securities law, various national markets, blockchain markets, and developing our target issuers (ICO, startups and VC, private company liquidity, cross-border finance). We’re offering significant amounts of founder stock. We need advice to help us define the product and the unique value we add to this huge opportunity. Join us.