Coming Soon: Deploy your own Permissioned Exchanged
We at Cooperativ Labs focus on creating better infrastructure for otherwise traditional businesses. We want to make companies easier to form, fund, and grow. The majority of existing finance serves an important economic purpose, so increasing the liquidity and efficiency of common investment relationships would do a lot of good.
Decentralized finance projects largely operate adjacent to, rather than build on, the majority of global finance. They focus on building new marketplaces that facilitate novel relationships between investors and assets, often creating entirely new investment products in the process. OpenSea lets average people invest in art. Uniswap lets anyone trade standardized tokens with anyone else while removing the middle man. Liquidity mining is a new way of earning returns in exchange for providing liquidity. These projects and mechanisms are sometimes lucrative and usually very cool, but they don’t address the investment types that are important to most investors.
For this reason, we are building a platform that lets existing businesses quickly create and deploy private token exchanges. This approach offers three major advantages. First, it aligns with the modern paradigm of private investment, allowing investors to more efficiently invest in the efforts they already understand. Second, it creates a bridge into DeFi for old-school investors, and in doing so, creates investment opportunities for other on-chain projects. Third, it accommodates the current regulatory environment. Organizations creating investment products can conduct due diligence just like they always have, then offer a much better experience to the investors they approve.
Building for real businesses means starting with a real use case
Cooperativ Labs is partnering with REI DAO to build a prototype of our Permissioned Exchange product tailored specifically to real estate investment syndications. Cooperativ will develop the technology and product experience, while REI DAO cultivates a community to put it to use responsibly, transparently, and compliantly. Not only does this relationship give us access to deep real estate syndication expertise, but it also lets us work with real users even before we start building.
With only a few modifications, business angel associations, investment clubs, MMO games, co-op patronage programs, art galleries, and large corporations with tradable employee incentive assets could significantly improve usability, efficiency, and liquidity by using Permissioned Exchange.
Focusing on real estate syndications offers a number of advantages. Real estate is the largest asset class globally. Syndications are an exceedingly common investment structure, and are familiar to many high-net-worth investors. They also have clear legal and regulatory processes with which syndicators are already familiar. This means that a large base of users already exists and has the expertise required to implement compliant exchanges in their own jurisdiction.
Once we have completed the prototype, Cooperativ Labs will generalize it to other forms of private investment. With only a few modifications, business angel associations, investment clubs, MMO games, co-op patronage programs, art galleries, and large corporations with tradable employee incentive assets could significantly improve usability, efficiency, and liquidity by using Permissioned Exchange.
What exactly are we building?
Creating, investing in, and managing real estate syndications is a tedious, manual process. Under the current system, every transaction related to shares of a given property involves significant legal paperwork. By allowing syndicators to replace the one-to-one investment contract model with an exchange model, we can reduce paperwork, increase liquidity, and improve the user experience for both syndicators and investors.
Our platform will allow syndicators to create share tokens by linking a syndication legal agreement to a smart contract. The smart contract issues tokens, each of which serve as a proportional claim to the funds held in the smart contract. The tokens therefore serve not only as a contract-backed legal claim to a share of ownership, but also as the conduit through which revenue is distributed. As a result, participants on the exchange can easily trade the syndication’s tokens, which have real value, instantly, without the legal paperwork that usually accompanies such sales.
Under our model, the syndicator can easily manage compliance by vetting each investor once before giving them access to the syndicator’s private exchange. From then on, the approved investors can participate in any of that syndicator’s future offerings, quickly, without additional paperwork.
The product goals
Remove the General Partner from the secondary sale process while maintaining compliance.
Our approach maintains the GPs control over who has access to the offering (and in particular, over KYC and AML) simply by adding and removing permissions in an interface. Once an investor is given access, she can freely trade with other approved investors (after the required one-year lockup period). For a sale to take place, one approved investor will be able to simply sell tokens to another. Ownership and access to distributions move automatically with the token.
Different private investment offerings have different restrictions under securities regulations. For example, the regs often place a limit on the number of investors who may invest in a particular offering. Our platform will let syndicators program those restrictions into each syndication to ensure — if we continue with the above example — that no more than 99 investors hold shares at any time.
Note: For the purposes of the real estate prototype, we are focused on Reg D in particular.
Reduce duplication of work, particularly regarding the process of vetting investors.
Once an investor has been given permission, the GP should never have to approve that investor again for future offerings. In order to launch a new syndication, the GP can simply tokenize a new property and sell those tokens into their private exchange.
We also think there is an opportunity to let our users benefit from each other’s work. GPs will be able to designate GPs from other syndications as “verified” and automatically (or through an abbreviated process) admit investors who the verified GP already approved. Consortiums of syndications could use this mechanism to effectively build much larger exchanges while retaining independence and final control of their own due-diligence procedures.
Give the investment process a modern user experience
By structuring investments as tokens on an exchange rather than one-to-one syndication subscription contracts we can streamline compliance for syndicators, remove administrative and legal overhead for approved investors, and increase the speed, consistency, and clarity of information for prospective investors. Discovering and trading real estate shares should, after a compliance process, be just as easy as discovering and trading NFTs or cryptocurrencies.
We are currently looking for another software engineer to help us build smart contracts and connect them to our backend infrastructure. We are tentatively considering using Reach as our development language.
I would also love to hear from real estate syndicators who are interested in this project. I’d be happy to connect you with the folks at REI DAO.
You can contact me at email@example.com.