Securities Token Platforms
There is a lot of momentum behind securities token platforms: new players focusing exclusively on this space, established cryptocurrency exchanges that are moving to become SEC regulated, and also traditional exchanges that are moving into the cryptocurrency space. In the following, we are covering a few promising competitors in the first two categories.
Coinbase acquired three SEC-regulated entities, namely Keystone Capital Corp., Venovate Marketplace, Inc., and Digital Wealth LLC., which will enable it to provide secondary trading of security tokens, pending approval by federal authorities. The acquired entities between them, hold a range of federal licenses authorizing them to operate as broker-dealers (BD), registered investment advisors (RIA), and alternative trading systems (ATS).
Harbor has raised more than USD 40m to create a compliance protocol embedded in securities tokens. This includes a USD 28m strategic round in April led by Founders Fund and joined by Andreessen Horowitz, Pantera Capital, and more. With Harbor, a white list of eligible owners is established by an outside law firm that takes responsibility, and Harbor’s smart contracts refuse to process an illegal sale. Harbor effectively bakes securities law compliance like know-your-customer and anti-fraud/money-laundering into the tokens themselves so trades can happen instantaneously without legal assistance on every sale.
Neufund claims to let investors buy rights to a company that can be enforced through courts. All firms that use the Neufund platform will be well-established and have functioning business models, promising the dawn of “an era of legal and safe ICOs. However, Neufund’s business model hinges in part on the legal definition of the tokens it will issue. Neufund wants them to be categorized as an investment, but German financial regulator might well see them as securities. Neufund indicated it might emigrate to Malta in case of an adverse ruling.
Open Finance Network
The Open Finance Network is a protocol for the end to end processing of security token transaction. The initial focus of the platform has been the clearing and settlement process for security tokens acting as a broker between different market actors such as custodians, token issuers or transfer agents. The Open Finance Network has three main components: the ledger, the token and the adaptors. Those three components can be assembled in different ways to enable many relevant processes in security token transactions. The Open Finance Network contains a global registry of assets that are represented by security tokens as well as entities such as broker-dealers, transfer agents, custodians or escrow agents that can be used on different security token processes.
In February 2018, Polymath raised nearly USD 59m from accredited investors in a private token sale that was registered with the SEC. While a large part of the funds raised will go towards building their own securities token platform, more recently the company has also made headlines for trying to close a transaction to acquire a large stake in the Barbados Stock Exchange and working on a deal with the alternative trading system tZero. The Polymath model is similar to Harbor, in that it has built a system that makes a whitelist of accounts that have gone through the know-your-customer, anti-money laundering (KYC/AML) and investor accreditation checks that make them viable to trade with.
In June, Securitize announced the launch of the Digital Securities (DS) Protocol, an open source protocol built on Ethereum which will support third-party apps. The DS Protocol is designed to resolve liquidity and compliance issues facing issued security tokens for the entire token lifecycle, as they are traded on public and private exchanges. Originally developed for SPiCE VC’s ICO, the Securitize platform offers brands both the flexibility and robust back-end to manage all types of potential investors in a capital raise by the token issuer. With built-in KYC/AML, accreditation and high security standards including multiple audits for both the platform and the crypto wallets, Securitize is transforming the way funds and capital for companies and assets is raised and managed.
In June 2018, Sharespost closed a USD 15m Series C round led by LUN Partners and Kenetic Capital. The funding will be used to build out SharesPost’s Alternative Trading System (ATS) for private company shares and security tokens and to further expand its global reach into Asia. This was followed by an announcement of an investment by Huobi in August.
SharesPost is both a broker/dealer as well as a fund for private company stocks. As a broker, they will match buyers with sellers. Sellers are typically employees who acquired their stock through exercising employee stock option grants or early investors. They announced a secondary trading platform for securities tokens to launch during H2 2018. Sharespost is already a FINRA-registered broker-dealer (BD), SEC registered Alternative Trading System (ATS) and Registered Investment Advisor (RIA).
Templum has raised USD 12.7m for a secondary trading platform, USD 2.7m from a seed round in October 2017, and USD 10m from Japanese giant SBI Holdings in April 2018. In February 2018, Templum acquired Liquid Markets Group’s broker-dealer (BD) and alternative trading system (ATS) Liquid M Capital LLC.acquired broker/dealer.
TZero, Overstock.com’s blockchain subsidiary, raised USD 134m (compared to a USD 250m target) in an initial coin offering (ICO) that ended in early August 2018, and that was designed to comply with SEC requirements. tZero is an alternative trading system for securities issued on a blockchain that launched in 2015. The company plans to use the funds to finalize its blockchain alternative trading system (ATS) and build similar platforms in jurisdictions around the world.
Hong Kong-based GSR Capital had signed a repurchase agreement to acquire some tokens while investing in tZero equity of up to USD 270m at a post money valuation of USD 1.5bn.
tZero expects to be trading their own security token later in 2018, perhaps becoming the first regulated exchange in the US to offer securities on blockchain. The company also expects to start on-boarding outside issuers beginning in Q4.