Security Token Case Analysis: Aspen Coin — The First Real Estate Security Token Offering
By Krypital Blockchain Institute | Author: Edison, Jay & Rena
At the beginning of August, Indiegogo’s website appeared a special page regarding to a Security Token Offering (Short for STO) project about a real estate project. Many missed this important milestone in STO industry, we want to write an article shows how the first real estate security token offering works and some of our thoughts regarding to STO.
The St. Regis Aspenis located in the famous resort town of Aspen, Colorado, home of year-round events such as The World Cup ski races, The ESPN Winter X Games, The Food & Wine Classic, and The Aspen Music Festival.While skier visitation can vary dramatically from year to year, depending on snowfall, the national economy, and international economic and political dynamics, the Rocky Mountain region is known to have the most reliable snow, the longest ski season, the most resorts, and some of the best vehicular and air access of the five major ski regions in the United States. St. Regis Aspen Resort property itself is a world class, year-round destination resort. Its brand name attracts celebrities, high net worth individuals, tourists, and corporate executives, among others.
Beside St. Regis Aspen Resort itself, there are multiple participants involved in this STO process. This chart below shows their relationships.
Aspen REIT, Inc.is a recently-formed company that intends to own the St. Regis Aspen Resort. Quite interestingly, Aspen REIT filed for IPO almost a year ago, offering 1,675,000 shares at $20 per share, aiming at becoming the first single-asset REIT to trade on an American exchange. However, the management decided to withdraw the IPO later on, saying it “is modifying its offering process.” They start to working their security token offering under Reg D 506(c).
Templum Markets, LLC is both the issuance and trading platform for Aspen Coin, it is a financial technology company and broker-dealer registered with U.S. Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Templum Markets is the operator of an Alternative Trading System (ATS) for the secondary trading of digital assets that are securities. Investors need to register and pass KYC/AML and verify their accredited investor identification through this platform in order to invest in Aspen coin. Aspen Coin will be issued using ERC-20 standard. Worth to mention that there are also other security token standard being tested right now such as ERC-1450.
Elevated Returns is an New York-based asset management company laser-focused on offering extra value to its stakeholders.The firm acquires and manages assets across a range of service industries, including hospitality, real estate and a number of consumer brands.
Indiegogohosted this security token offering marketing activities. Set up in 2008, Indiegogo famous for help small innovative projects hold crowdfunding. Indiegogo also has an equity investing platform for traders wanting to invest in shares of start-ups on the platform. It partnered with equity crowdfunding service MicroVentures in November 2016 to help facilitate transactions for new firms seeking funding.
From Templum Market’s website, we can see they used the word Aspen Digital Tokenized Asset Offering (TAO) instead of STO, but we think they are the same thing. A TAO is a private placement offering allowing an issuer to raise capital through the sale of digital securities utilizing the blockchain. A TAO can utilized by an issuer regardless of their stage or sector. The underlying products could include things like Real Estate, Private Equity, Funds, Early Stage Companies, Growth Stage Companies, Special Purpose Vehicles etc.
We also did some non-formal interview with Aspencoin team, the whole funding process started from August 8th, 2018 and end at October 1st, 2018.
Aspen coin is being offered in compliance with Reg D 506(c).
Some highlights about Reg D 506(c):
● Technically be private placements, made only to “accredited” investor
● Could be advertised widely
● SEC requires issuers be responsible for an objective determination of an investor’s accredited status based on a facts and circumstances analysis that would take into account factors such as the nature of the purchase, the type of accreditation that a purchaser claims, the manner of the offering and the terms of the offering
● Eligible issuers: Both SET-registered and private companies can use exemption
● Issuer may rely on various methods to “verify” accredited status
● No dollar limit on offering size
● Disclosure driven by market demands and liability concerns
● Securities are “restricted”; cannot be freely resold
● Intermediaries must be registered broker-dealers
One very important aspect of doing STO under Reg D 506(c) is that only Accredited Investors could participate in the token offering. One principal purpose of the accredited investor concept is to identify persons who can bear the economic risk of investing in these unregistered securities.
The Criteria of Accredited Investor:
○ Any individual whose net worth, or joint net worth with that person’s spouse, at the time of his or her purchase of an Interest, exceeds US$1,000,000. As used herein, “net worth” means the excess of total assets at fair market value, including homes (but excluding the value of the undersigned’s primary residence), home furnishings and automobiles, over total liabilities.
○ Any individual who had an income in excess of US$200,000 in each of the two most recent years or joint income with that person’s spouse in excess of US$300,000 in each of those years and reasonably expects to reach the same income level in the current year.
○ Any entity in which all of the equity owners are Accredited Investors, as described above.
○ Any trust, with total assets in excess of US$5,000,000, not formed for the specific purpose of acquiring an Interest, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) under the U.S. Securities Act of 1933, as amended.
○ Any corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring an Interest, with total assets in excess of US$5,000,000.
The steps to participate Aspen Coin token offering:
- Register on Teplum markets — https://app.templummarkets.com/Authentication/LogIn
- Verify yourself as an accredited investor and pass KYC/AML process. This process need much more materials than participate an ICO before.
- After you passed the verification process, you are allow to participate the token offering. The minimum amount to invest is $10,000.
1.Comparison between REITs VS. Security Token:
From expense perspective, even though both Tokenized Asset Offering and publicly listed REITs allows investors to own a piece of an (high-quality) asset, publicly listed REITs are expensive to set up.
Furthermore, REITs are typically buy and hold vehicles, so most investors are shut out of development projects entirely unless they can meet minimums which are often on the order of $25k and higher. Stand on STO side, One day you might be able to buy $10 of a single commercial real estate asset like the Empire State Building, or invest $100 in the development of a LEED-certified housing project. Ideally, real estate focused token exchanges will increase liquidity for asset owners. Real estate appraisers will become more like equity analysts, because the market value of any building will be readily apparent if the token is publicly trading. Tokenization will also make taxation such as IRS 1031 exchanges easier.
These factors are beneficial to both issuers and investors. That’s why STO got lots of attention recently.
2. Information Disclosure: under Reg D 506(c), there’s no specific requirement on disclosure, which left it being completely driven by the market demand. As a result, investors may have limited information to properly judge the risk being associated. Companies will have flexibility for what kind of information they want to disclose to the public. Although the regulation is not specifically written down, from the Aspen team, we understand that companies still need to go through lots of back and forth discussion with SEC. Every change on the investor deck need to inform SEC. So STO process is still under strong regulation.
3.Voting right: Aspen token holders are not being entitled to voting right and thus have limited influence on company’s decision making and future strategies or even the dividend distribution policy. This might become normal for future STO, since from the company’s perspective, I can see the clear reason why companies choose to do so. Since generally companies do not want to give up the decision making rights to general token holders. STO will be a great way for companies raise fund and not dilute control of the company.
4.Unknown dividend distribution schedule: one argument that commonly brought up by the proponents of the Security Tokens is that security tokens are backed by actual assets and thus make them a safer means of an investment. With the underlying asset being a REIT, investors may even expect positive cash flows as 90% of the net taxable income are required to be distributed. However, the case might be less promising as it seems as the case in Aspen. First of all, the distribution schedule is yet to be determined. In addition, some concerns raised up by examining Aspen’s financial statement, which we find them through SEC public record:
As seen from the financial statement, Aspen just turned profitable in the year of 2017, mainly driven the increase in total hotel revenues. With the occupancy rate stays roughly the same, such increase was contributed by the raise in ADR (Average Daily Rate). However, even though St. Regis stays as an attractive and competitive resort in the area, the demand for hotels’ revenue flow was mainly driven by the local condition, and there’s no guarantee that the ADR will continue increase or even stay as the current price. With further development of the shared economy business model, the lodging industry will face a more competitive market in the future.
- As of early this year, there’s $119.4 million mortgage outstanding for St. Regis. The loan agreement may restrict its ability to make distributions to token holders or they may become the victims in the case of default
- Negative stockholders equity
5.Lock-up Period: The normal case is after you invested under Reg D 506(c) there is an one-year lock-up period. After that, you can start to trade your token through the listed registered exchanges. Non-accredited retail investors could participate trading after the lock-up period end.
We noticed there is a special exception for the lock-up period, it says there is an initial lock-up period for 3 months, then you can trade with other accredited investors under Exemption 4a7if the token could be listed on the registered exchange. Since right now there aren’t many secondary trading exchanges infrastructure available for security token trading, so how this rule works is still unclear.
6.Threshold to get in: STO issued under Reg D 506(c) is ONLYopen to accredited investors in the first year. We have listed the requirement above, its not easy to qualify as an accredited investor. Unlike ICO, there are many retail investors around the global participated. In STO case, Retail investors will have very limited access to those tokens at the beginning. We have heard some rumor says accredited investor qualification standard might be lower in future, but whether that will really happen is still unclear.
Aspen Coin is an early adopter of Real Estate tokenization. We are likely to see more STO cases emerging from the domain of Real Estate, as it is an industry well-suited for STO.On the other hand, after examining the case of Aspen coin some concerns should be raised.
For potential investors:
Even though STO will save a considerate amount for the company compared to going public IPO, with limited disclosure, uncertain dividend distribution schedule, high-bar to get in, and one-year lock-up period, it may not necessarily be a better investment venue for retail investors.
Through talking with team of Aspen, we are informed that the reasons they choose STO include like shorter time with easier procedures compared to IPO. Also based on the Criteria of Accredited Investor, the issuer can only have access to a smaller target group.
Notwithstanding, it is an industry at its early stages, and we are expecting more high quality asset backed project coming along with a more matured regulated system if security token would show up in mainstream.
In last week Los Angeles Start Engine Submit, the former US SEC Chairman, Christopher Cox may represent the regulator’s opinion. He says SEC support the efficiency gains of cryptocurrency and blockchain applications. Government will support the compliant STO and it is hoped that more custodians can provide easier admission for the institutional players.
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