Tokenizing Securities and SPiCE VC

Casey Sparks
Pink Sky Group
Published in
12 min readNov 27, 2018


Casey Sparks and Tim Alvarenga, November 27, 2018

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Note: This article initially omitted INX from the list of portfolio companies. This was an oversight and the article has been updated to reflect SPiCE VC’s portfolio at the initial publication date. We apologize for any confusion or concern caused by this mistake.

Security Tokens Have Started Trading

It has begun. After a year of waiting, and worrying that it may take even longer, the first compliant exchange of a security token between peers took place on a public blockchain last month. This exchange occurred on AirSwap on October 31, 2018, and was made possible by Securitize’s Digital Securities (DS) Protocol. SPiCE tokens were then listed on OpenFinance—which also supports the DS Protocol—on November 19, 2018, making it the first token listed on a centralized regulated security token exchange platform; trading of SPiCE token on OpenFinance commenced on November 28, 2018. While we are not investors in SPiCE, a moment this significant deserves deeper exploration. In this article we will cover the who, what, how and why of the SPiCE token as a case study of what one might expect of security tokens in the future.

First, it’s important to note the significance of the timing behind this event. Initial coin offerings raised over US$5 billion in 2017 as the frenzy to purchase new tokens reached a peak. Unfortunately, the majority of these offerings did not comply with securities legislation and several are now facing SEC action as a result. Airfox and Paragon learned this the hard way, as the SEC made examples of these high-profile ICOs last week; the reality is most of the utility tokens sold during the ICO craze were offered illegally. The questionable legality of 2017's utility token ICOs and the bear market that followed have caused many such tokens to lose over 90 percent of their value. While investors are still excited about the far-reaching social and technological implications of blockchain technology, participation in the 2017 ICO craze has left a bad taste in their mouths.

We at Pink Sky believe that security tokens will make the management of securities more efficient as they allow for fractional ownership of an asset, may provide greater access to liquidity, and can be encoded with ownership rights and privileges between the shareholder and issuer—possibly removing brokerage charges and commission fees. We are excited by the potential that tokenized securities have to reduce the slow, complicated, bureaucratic, and inefficient processes associated with the trade of traditional securities. Ultimately, this shift could make investing in securities increasingly accessible to the public and non-accredited investors.

That is why the cryptocurrency market has been anxiously anticipating this moment since the first STOs in late 2017. At the time, complying with the SEC’s guidelines was a daunting task. However, innovation has moved faster than anticipated and security tokens are a source of light in an otherwise dark bear market. The first steps towards an investible and liquid security token market have been taken and it’s important to discuss the significance of such an event as its future impact may be tantamount to the long-term success of the token offering. To do so, we’ve organized some of our thoughts on the SPiCE token as a case study to help the industry become better informed on security tokens and how they work

Some Context on the Security Token Market

With the recent growth of registered security tokens, token offerings are taking a more traditional approach to raising funds while platforms emerge that facilitate token sales in a compliant manner under the Securities Act of 1933 and the Jumpstart Our Business Startups Act of 2012, a law designed to stimulate funding and investment in small businesses and startups by allowing companies to utilize crowdfunding to issue securities. This shift is evidenced by the virtual abandonment of utility token models and initial coin offerings (ICOs) and the burgeoning of security token offerings (STOs).

While relatively few security tokens have launched to date, Pink Sky expects a large market to develop quickly as more projects develop compliant technology to deploy and trade them. Many cryptocurrency puritans may be reluctant to accept the tokenization of financial securities, but reduced volatility risk, reduced counterparty risk, and increased liquidity present an attractive market for both cryptocurrency investors and traditional investors alike.

Many enterprise companies are currently exploring practical blockchain applications for their industries. These companies will likely adapt distributed ledger technology to financial securities once compliant and efficient protocols become sufficiently developed. Today, we want to examine a project that we believe is ahead of the curve in these respects, SPiCE VC.

What is SPiCE VC?

SPiCE VC is the first fully tokenized venture capital firm and — through their own acclaim — the fourth security token ever to be issued. In order to create their token, members of SPiCE VC developed Securitize, the first platform established for issuing compliant security tokens. Following Blockchain Capital’s failure to launch an offering pursuant to regulations, and their subsequent reissuing of BCAP tokens on the Securitize platform, SPiCE VC issued an ERC-20 token that is a financial commitment to pay its holders the net revenues for all future investment exits executed by the firm, successfully raising US$15 million to date.

The SPiCE token offering was made available inside the United States to up to 99 accredited investors in reliance on Regulation D and outside of the United States to non-U.S. persons in reliance on Regulations S.


Tal Elyashiv, Managing Partner. CIO at Bank of America; CIO at Capital One; CTO & Head of New Businesses at 888; COO at BondDesk; Founder and CEO (Navion, Exactor, Yallo); Angel investor and board member (Humavox, 365Scores, Zoomd, Exactor, Jobookit, Mobilus, etc.)

Ami Ben David, Managing Partner. Founder and head of Product and Marketing at, Ki-Bi Mobile [IPO], AladdinSoft (product sold to NASDAQ: MGIC); Founder and CEO of WorkGroup; VP Investment, Magma Venture Fund; SVP Europe and Asia at Oberon media.

Carlos Domingo, Managing Partner. CEO of Telefonica R&D, New Business and Innovation Telefonica Digital, Extensis, Lizardtech and Celartem; Founder (Wayra, Sling Ventures, Dubai Angel Investors), venture partner at THCAP; Angel investor (Startupxplorer, Novicap, Blinkfire, Chicfy, Ulabox, etc.).


Brendan Eich. Inventor of JavaScript, co-founder of Mozilla, a pioneer of the open source movement, and founder and CEO of Brave.

Eyal Herzog. Co-founder and the architect of Bancor.

Loic Le Meur. Co-founder of Le-web and leading investor.

Nimrod Lehavi. Board Member of the Israeli Bitcoin Association.

Portfolio Companies

SPiCE VC focuses on investing and initiating projects in three categories for their short- and medium-term investments. These categories include tokenization ecosystems, such as Securitize and Slice; tokenized projects, such as RNDR; and core blockchain infrastructures, such as protocol and network projects.

This range of investment categories hedges against the highs and lows of the cryptocurrency market by addressing a variety of needs within the industry. By investing in companies that provide infrastructures, products, and protocols, SPiCE VC provides its investors with a liquid investment that has the potential to effectively service the coming security token market.

Securitize. The leading issuance and lifetime management company for security tokens, catering to large projects and providing a suite of services from the protocol level to the lifetime management of the tokens issued through the platform.

SAGA. A stable currency supported by institutional and banking partners.

Slice. A platform for the tokenization of real estate assets.

GraphPath. GraphPath is developing GraphOS, which aims to make A.I. knowledge graphs accessible through the Ethereum blockchain.

RNDR. A token-based rendering network which enables distributed GPU rendering via OctaneRender. RNDR is currently SPiCE VC’s only utility token investment.

RealOneX. An online exchange platform for real estate security tokens, offering liquid investment opportunities to both retail and institutional investors.

INX. A cryptocurrency and security token trading platform, built according to SEC, FINRA, and EU regulations.

Token Overview

The key innovation of the SPiCE token is that it is designed as a financial commitment to pay its holders the net revenues for all future investment exits executed by SPiCE VC. The SPiCE token acts as a digital security, guaranteeing that its holders receive a claim on the performance of the performance of the underlying portfolio. The fund is closed-ended; whenever a liquidity event occurs, all net proceeds are distributed among token holders on a pro rata basis. Individuals receive a percentage of every exit proportionate to the percentage of SPiCE tokens they possess. These proceeds and the appreciation of the token are reported in SPiCE’s quarterly Net Asset Value (NAV) reports.

Payments are distributed to investors through a buyback-and-burn token model. SPiCE VC claims that its token will become a freely exchangeable asset and ensure liquidity for its investors by being the first security token listed on OpenFinance; SPiCE tokens have been tradable on AirSwap since November, 2018, and will be available on tZERO in the near future according to managing partner and cofounder, Tal Elyashiv.

The maximum token supply could reach as high as 130 million if SPiCE’s hard cap of US$100 million is met. While Etherscan lists two SPiCE tokens — one with a circulating supply of 7,856,125.64 and another with 7,811,327 — neither of these figures is correct. In actuality, 12 million tokens were allocated in the first closing. Two separate SPiCE tokens are listed on Etherscan as a result of SPiCE upgrading its token to support Securitize’s Digital Securities (DS) Protocol, and the outdated tokens will be burned in the near future. Only 7,856,125.64 tokens appear in circulation as some investors chose not to receive their tokens until they have an account with a custodian; SPiCE VC claims they are keeping those tokens in a treasury and not deploying them to the blockchain until investors are ready.

The SPiCE token offering was made available inside the United States to up to 99 accredited investors in compliance with Regulation D and outside of the United States to non-U.S. persons in reliance on Regulations S. (Amin Ben-David, “We Have Lift-Off. SPiCE VC publishes its first quarterly NAV report and portfolio.Medium, 2018.)

Realization Events

When there is a realization event in the portfolio of investments held by SPiCE VC, there will be mandatory buyback of a portion of issued SPiCE tokens from all token holders. Tokens that are acquired by SPiCE VC through buybacks will be burned to ensure a stable NAV for the remaining tokens.

The means for determining the price per token in a realization buyback (other than the final realization buyback) is the average market price of the SPiCE token the day before the buyback notice is published across the three largest exchanges trading the SPiCE token by volume and through the NAV per SPiCE token. The repurchase price for final realization buyback is determined by the NAV per SPiCE token.

Portion of SPiCE Tokens to be Repurchased = Net Realization Proceeds / (Repurchase Price / Issued SPiCE Tokens)

Business Model

While all future sales of SPiCE tokens will be conducted privately and no participant will be able to purchase SPiCE tokens below the main sale offering price, SPiCE VC is still in the early stages of developing the portfolio that will constitute their seven-year fund. SPiCE has demonstrated that the diversity of their portfolio effectively hedges against the volatility of the cryptocurrency market and is confident that the SPiCE token will benefit from being on the forefront of the security token market.

SPiCE VC states that general partners “will not be taking any carry from exits until 100 [percent] of the original money raised in the STO has been returned to token holders, after which they will be taking 15 [percent] of the net proceedings [sic].” Once the realized buybacks have returned the amount raised in the offering to SPiCE token holders, SPiCE VC will distribute 85 percent of all proceeds from realization events to token holders and 15 percent to the SPiCE manager and general partner (GP). It is important to note that, while the general partners’ compensation for the second private closing will be a 15 percent carry, they were also be granted an additional 7.5 percent in tokens.

The SPiCE fund manager and GP will be paid by SPiCE VC and SPiCE Investments LP respectively an amount equal to 2.5 percent of the total proceeds of the offering per annum. The GP’s fees will be paid quarterly in advance.

Bancor Token Reserve

SPiCE has partnered with Bancor to create a reserve of SPiCE tokens. The reserve will use the Bancor protocol but the SPiCE token will not be openly traded on the Bancor network; the only way to access this reserve will be through completing KYC and AML accreditation through SPiCE VC. According to SPiCE’s current documentation, the firm will hold up to five percent of its capital to use BNT as a connector token in the SPiCE token’s smart contract. This will provide SPiCE token holders some liquidity by allowing them to convert their SPiCE tokens to BNT or ETH. Token holders will not be exchanging tokens with one another and will exchange tokens directly with the reserve and therefore the fund.

Bancor’s algorithm adjusts the price of each conversion and allows the fund to offer additional liquidity to its investors. This solution will be available even in the US — where trading securities is limited due to investment lockups — because investors will receive liquidity directly from the fund via the reserve.

Digital Securities Protocol

The SPiCE token complies with Securitize’s DS Protocol, as do all tokens issued by Securitize. The DS Protocol is a digital ownership architecture that is designed to ensure the compliance of tokenized securities with the functionality of the Ethereum blockchain.

The DS Protocol addresses compliance through three elements: tokens, decentralized applications, and services. These elements operate in conjunction to ensure that the sale, custody, and transfer of tokenized securities issued by Securitize (DS tokens) remain compliant with U.S. securities law. Investors undergo Know-Your-Customer (KYC) and Anti-money Laundering (AML) checks, and their information is stored in an on-chain registry which contains — among other data points — a list of accredited investors and their associated wallet addresses. This registry is referenced each time an exchange of security tokens is attempted. Functionally, this enforces legally mandated KYC, AML, and custody compliance, and prevents the non-compliant exchange of tokenized securities.

The Future

Security tokens are exciting. They represent a transition in the market which has the potential to retain many of the benefits of ICOs while adding investor protections and the quantifiable values associated with traditional securities. The SEC’s recent penalties for violations of securities law, the sheer number of scams that permeated the ICO market, and infighting within different communities after large financial losses only expedite this transition. Security token offerings (STOs) are quickly gaining traction in the cryptocurrency and finance technology markets. Security tokens, and the larger trend of tokenizing assets, provide broader rights to investors for the underlying assets in a manner that is compliant with regulation. We believe that many of the problems and controversies that surrounded ICOs will naturally resolve as this shift occurs.

Important Disclaimer:

Information is Opinion and Provided “AS IS.” The information provided herein is the opinion of Pink Sky Group. Certain information has been provided to Pink Sky Group by SPiCE VC and other third parties. Pink Sky Group has relied on information provided to it by such parties that it has not independently verified. Pink Sky Group cannot guarantee the accuracy of any such information and does not represent that such information is accurate or complete.
All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. Pink Sky Group is under no obligation to revise or update any statements herein for any reason or to notify you of any such change, revision or update.

Information does not Constitute Investment, Tax, Estate Planning or other Professional Advice. Information on this page should not be construed as investment, tax, estate planning or other professional advice. Pink Sky Group is not acting as an investment or other professional adviser or otherwise making any recommendation as to any investor’s decision to invest in any security, industry, strategy or other financial instrument. Users should consult their own professional advisers regarding their own specific investment, legal or tax situation before making any investment, engaging in any tax or estate planning strategy or otherwise acting on any information provided herein.

Forward Looking Statements. This post contains forward looking statements based on Pink Sky Group’s expectations and beliefs. Those statements are sometimes indicated by words such as “expects,” “believes,” “will” and similar expressions. Any statements that refer to expectations, beliefs or characterizations of future events or circumstances, including any underlying assumptions, are forward looking statements. Such statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Actual events or circumstances could differ materially and adversely from those expressed or implied in any forward looking statements as a result of various factors.

Disclosure: Pink Sky Capital is an investor in Securitize, one of the portfolio companies of SPiCE VC.