How I bought my first Security Token
During the last few weeks I purchased my first Security Tokens.
I will show you how I did it by walking you through the process, explaining the registration & trading path that led to my first purchase. Furthermore, I will show you who is eligible to buy and sell Security Tokens.
As OpenFinance Network (OFN) is the first fully regulated U.S. Alternative Trading System (ATS) which enables the trading of Security Tokens, I used their service to carry out my mission. However, the basic steps and requirements will most likely be similar for all future trading platforms that will offer Security Tokens.
Let’s get started
As I am writing this piece, you can buy and sell four different Security Tokens on OpenFinance. The platform launched its live trading on 13 December 2018, with its first tradable Security Token being Blockchain Capital (BCAP), the first tokenized venture capital fund. BCAP conducted its initial STO (back then known as ICO) as early as in April 2017 — being fully compliant with US securities regulation. On 19 November 2018, another Security Token named SPiCE VC got listed on OFN. On 29 January 2019, LDC Crypto, which is a subsidiary of Lottery.com, joined the platform. As the latest Security Token, 22xFund got listed on 20 February 2019.
Step 1 — Sign up & Connect your Meta Mask Account
Your first step will be to sign up with your Email address and your legal name. After this is done, OFN will send you an Email so you can start to “Create your Investor Passport”.
The Investor Passport is needed to verify your identity, provide the status of your accreditation, and perform the required KYC and AML checks. It basically embodies all those properties in one, and therefore, once completed, showing your Investor Passport allows you to invest based on your eligibility.
Before you can start providing the necessary information for setting up your Investor Passport, you need a MetaMask account that can be connected to the Passport. This is needed so once a trade is settled, your purchased Security Tokens can directly be transferred to your Ethereum address and be stored on the Ethereum blockchain. This procedure guarantees that only you as the owner will have access to your Security Tokens, NOT the OpenFinance Network. MetaMask, a tool that interacts with the Ethereum blockchain is serving as the bridge between your OFN account/your browser and the Ethereum blockchain. Once you connected one MetaMask account with your Investor Passport, the associated account can not be changed. For more details, OFN also provides a video explaining the setup process.
Step 2 — Setting up your Investor Passport
In order to set up your Investor Passport, OFN will ask you to provide personal & contact information and to upload documents showing your proof of residency and verifying your identity (I took my passport and bank statement). To understand what type of investor you are, they will ask you to provide information about your financial status, requesting data on your net worth, annual income, years of your investing experience etc.
On the OFN’s platform, accredited and non-accredited investors from the U.S. and abroad can buy and sell Security Tokens. Therefore, you have to state which group you belong to. If you are an accredited investor, you will be asked to provide relevant documents. For the last step, you have to sign the Terms & Conditions. After submitting the information, OFN will review your account and most likely (if everything is correct) approve it within 1–3 weeks. For me it took 3 weeks over Christmas.
Step 3 — Start Trading
After your account has been approved, there is one final step you have to do before you can make your first purchase: Funding your OFN Trading Wallet.
The Trading Wallet is kept in US dollars and will serve as your funding and receiving account for all transactions made on the platform. You can fund it by transferring ETH to it or doing a wire transfer by adding a bank account. I did it via my MetaMask account and deposited 0.5 ETH.
Finally, the shopping can begin.
As you can see, I purchased 1 SPICE VC Token for 1.34$. OFN charged me $2 cents for the transaction. Usually it will be 1.5% per trade.
Once you click “Place Buy Order”, the OFN Alternative Trading System (ATS) will now do an off-chain matching, looking for a potential counterparty willing to sell for the price I have offered. Once found, the actual settlement is done p2p on-chain and completed within seconds. On the screenshot I took on Etherscan (see below), you can see the transfer of the SPICE VC Token from the sellers Ethereum address (0x17) to mine (0x39…).
It worked, the transfer is completed!
After my first purchase I have bought a few more Security Tokens to try it out. You can see the total amount of tokens on the screenshot below to the left.
By using the Ethereum blockchain, not only can you reconstruct all of your conducted transactions, but so can the issuer. As your Ethereum address is tied up with your investor passport, it becomes much easier for the issuer (e.g. SPICE VC) to get an overview of their investors and to track all transaction. Also, due to the DS Protocol of Securitize.io, which is ERC20 compatible, the issuer can track investor limits in real time and automatically enforce compliance rules, therefore gaining control over the number of people holding their securities.
This is very important as there are strict rules applying for the trading on secondary markets. For example, in the case of SPICE, (done under the SEC exemption called Reg. D, see the filing here) not more than 2,000 accredited individuals (including max. 500 non-accredited persons) are allowed to hold the issuer’s securities*. By using blockchain technology, smart contracts make sure that this is number is not exceeded.
These are just two great examples of the advantages Security Tokens can deliver.
If you are curious, you can see the number of addresses that are holding SPICE VC tokens, BCAP tokens, LDC Crypto and 22x Fund on Etherscan:
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*it is a bit more complex than this, if you wanna go into the rabbit whole click here
