Marc Boiron is a partner in the Corporate, Technology, FinTech and Blockchain practice groups. Marc represents leaders in blockchain and other distributed ledger technologies and digital currencies that operate businesses abroad number of industries, including ad tech, ecommerce, energy, healthcare, mobile apps, music, payment systems, real estate, and video games..
Before joining FisherBroyles, in early 2017, Marc founded and led the Blockchain, Smart Contracts and Cryptocurrencies practice group of Rutan & Tucker, LLP. Combining Marc’s strong corporate and securities law background and his near obsession with blockchain technology, he built a practice advising companies on a breadth of issues, including ICOs, STOs, smart contracts, cryptocurrency funds, cryptocurrency exchanges, and other cryptocurrency laws. Marc also advised early stage companies in traditional and crowdfunding financings, using exemptions like Reg D, Reg A+ and Reg CF.
Marc was trained in Delaware law at Richards, Layton & Finger, one of the most recognized law firms in the country by other lawyers. He represented companies like Allergan, Dell, and General Electric in a broad range of transactions.
Mr. Boiron is often invited as a speaker on issues relating to blockchain technology, especially to educate on constant developments in blockchain and ICO regulations.
Henry is the Co-Founder of Digital Asset Advisors. Henry is also the Director of Origination and Investment for Slice. He has overseen more than $1 billion of investments across the real estate and technology sectors. He has also been investing in and advising blockchain startups since 2017. Now he uses his expertise at the intersection of blockchain, real estate, and finance to build Slice’s real estate investment platform.
Alon is Co-Founder of Crypto Invest Summit. He is an investor, speaker, host and leader of one of Southern California’s largest group of investors and entrepreneurs, 805 Startups, with a laser-focused eye on building and supporting startups and entrepreneurs..
A pioneer in the crowdfunding space, Alon had been involved in over $200 Million Dollars in online investment transactions. He has developed technology that powers websites and financial transactions for Fortune 500 companies and well-known foundations such as Coca-Cola, American Express, ATB Financial and Global Philanthropy Group. InvestedIn, Alon’s previous company, created a white label fundraising portal for individuals and businesses hoping to crowdfund ventures independently of major platforms. Later, his support of the JOBS Act, online media expertise and day-to-day interactions with venture funds, investors and financial professionals inspired him to create a solution to market hedge funds, real estate funds and venture funds to investors over the internet.
Before InvestedIn, Alon worked for entertainment tech giants such as Amazon, IMDb and MySpace where he managed customer experience, product development and support. InvestedIn was named “Best Marketplace Platform” by the Los Angeles Venture Association in 2013 and he was named to the Socaltech 50 for his work with InvestedIn. Alon is a thought leader on social enterprise, venture capital and crowdfunding, and has spoken at SXSW V2V, Kingonomics and many other conferences and been featured in prominent publications including Forbes, WSJ, Washington Post, TechCrunch and VentureBeat.
The theme for tonight’s discussion is security tokens in 2019 and beyond, right? So what I really want to touch upon tonight is what is the state of the industry? Where do we go from here? And I don’t want the high/low fluff, I want the nitty gritty. And I already warned you guys about this. So, before we start, maybe can you guys quickly just go down the row and give me 20 seconds about who you are, what you do?
All right, I’m Alon Goren. I know a lot of you guys here. This is a really great room. Thanks for having me at security token academy. They always put on amazing events and great content, so proud to be here. I’ve been in the space since before it was called security tokens. But what I do is I have a couple of events in town, CIS Security Token Summit, but what we really do is, we’re entrepreneurs ourselves. We’re launching companies in the space and helping very similar to your vision to elevate the whole industry.
Sure. I’m a partner at Fisher Broyles. I’m in a Blockchain practice. I’ve been practicing in the space for about two years. And pretty much all my clients are companies that are somehow implementing blocking technology or doing an STF.
My name is Henry Elder. I have been doing real estate my whole career, and previous to that was doing real estate for four generations before that, so it is truly in my blood. I never had a choice to do anything else. But in that thing, I sort of was baptized in the blockchain in late 2016, and by early 2018, was tokenizing one of the first commercial properties in the US, which was a deal in Chelsea, Manhattan, and have taken that knowledge and applied it across the security token space.
Fantastic. Okay. So, every year people are like “Ohh, this is the year of something”, right? So apparently this is supposed, 2019 is supposed to be the year of security tokens. Do you agree or disagree?
Man, I think that 2019 is going to be the year that people realize it’s going to be a few years. I mean, you got to be realistic about it right? Security tokens are regulated. This is not something where you’re going to have the retail Marcet coming in with the whole pump and dump crazy hype stuff, you know? You need people who are building real solutions, who are building real products, and then you need institutional investors and traders and users to use those products. And those people don’t come flooding in. They dip a toe in, then they put their foot in. Then they step into the shallow end, before they really get into it. So, it’s going to take a few years for them to get comfortable with these tools and get comfortable with the fact that these things actually work.
Do you guys agree?
Yeah, I generally agree with that assessment. I think 2019 is going to be kind of the beginning of security tokens, and it literally has been kind of just the beginning of the actual distribution of security tokens. You know really what we’ve seen is everybody talks about the infrastructure being built and ready now. We have like the absolute basic necessities right now in terms of issuance platforms and, you know, exchanges or ATS’s being live, but we still have key pieces that aren’t going to work. Aubrey talked about there being liquidity, well, key pieces of things we need for liquidity are things like information. When was the last time people talked about how we’re going to get private company information so that private companies can actually be successfully trained, and they’re going to actually do liquidity in private companies? So, there’s all these kinds of issues that we need to figure out, and that’s why I think Henry kind of hit the nail on the head, is that we have, you know, a little bit of time to go until we really build it up, but this is definitely the beginning of something exciting.
One thousand percent agree. I mean, it’ll be looked at historically as maybe the birth of security tokens, but it’s not going to feel like we’re all going to get into these awesome deals and all these things are going to happen. It just not going to. Even the guys that are fully invested in it being crazy. I think on one of your videos, Carlos from Security said there is going to be 100 security tokens created in this year. A hundred isn’t a whole industry, isn’t that crazy if you, if as an attorney he had to say, “I get this piece of a slice of an industry as service providers, as whatever”. If you took a hundred and you took what portion of that goes to the service provider community that actually has to support this thing, there can’t be flourishing community with that kind of capital. So there’s going to have to be so much more. But historically, we’re all going to look like geniuses, hopefully, knock on wood, because we’re here now, and we’re doing something. It doesn’t necessarily mean that we’re all going to be billionaires, but we are pioneers.
But I hope so, I hope so. Um, you mentioned that Carlos said that maybe 2019 will see maybe 100 security tokens. What do you guys think about that? What kind of traction do you think we’re actually going to see given that the consensus is that it’s still going to be a couple more years?
What I’ll say, just to the one hundred. I’m saying a hundred probably of a certain quality, because I mean, if we look around this room there might be thirty of them, but let’s be honest, a lot of us are entrepreneurs in start-ups, how many entrepreneurs in start-ups have an idea that successfully raise their first round of funding? There’s a significant drop of just right there. And it takes a- and this is a hurdle that takes a lot of time and money and hiring the right attorneys, and hiring the right advisors, and the right, we’re talking about compliance now. You can’t just say you’re doing something and say it’s compliant, and it’s compliant because you said it was. You have to actually do filings and do things right, and make sure that you know, everything is verified and done correctly. There are going to be more than a hundred, but when we talk about real ones actually trading, maybe 100.
Yeah, no. I think it makes sense. Like a hundred that are going to be compliant with US securities laws. Which doesn’t mean that all the other ones aren’t going to be compliant. We have to remember just-the one thing that STO’s (security token offerings) are like ICO’s (initial coin offerings) is that it’s completely global. And there will be issuances outside of the US by non US companies. And those are going to be just as legitimate as the US ones potentially. There’s also going to be a lot of them that don’t recognize that US laws are more complex than laws in other jurisdictions at times or more strict, and they’re not going to comply with them. And if we add those in there, the ones that take it, you know, easy, or the infrastructure providers that say “hey, this is how you tokenize it, by coming and creating this asset on our decentralized STO (security token offering) platform”, we’re going to have hundreds and hundreds, and hundreds of them. But we’re probably gone be closer to a hundred that are actually regulated.
So, and I think it’s also a spectrum, right? So you and I were having a conversation before this, and you told me that some of your clients aren’t necessarily going out and doing an STO this year, but they are laying the groundwork so that maybe in a couple months, maybe in a couple years, they’re starting to eye it, you know, as far as corporate documents and their entire structure goes, but not necessarily go out and issue a token. Can you talk a little bit more about that?
Yeah. It comes down to what an STO fundamental is. One day we’ll get to a point where we’re doing STO (security token offering) with native, on-chain assets and, that’s going to be super exciting. But for now, almost all STOs (security token offering)s, even if they’re real estate STOs, are pretty much acuity being tokenized. An acuity being tokenized in a Delaware company, which most US companies are, is just moving the acuity and putting it on a Blockchain instead of on an electronic ledger. When you do that, there is no reason that you actually need to do that at launch. You don’t need a token at launch. All you need to do is actually issue the acuity and in two years, if you have documents that are properly drafted, then you can go ahead and tokenize it.
So, you’re going to have language in there that’s going to allow you to redeem stock, for example, in certain situations. Where you have a token holder that is on the OFAC Sanctions list, and you can’t actually distribute dividends to him. Or have him hold your stocks so maybe you’re actually going to redeem that stock for nothing. Or you’re going to go ahead and say “our stock ledger can live on a distributed ledger following the language from the Delaware corporation law.” Things of that nature, you build it all into the corporate document, so that when costs go down by fifty percent or eighty percent or ninety percent in two years, we simply say, “okay, now we’re going to go to that issuance platform, who was going to charge us a lot more before, now we’re actually going to tokenize our stock. Now we’ve got ten exchanges to trade it on, and we’re going to go trade it at that time.”.
I was finishing Marc’s sentences in my head, there. Because, when you were asking that question, I was thinking to myself, what is an STO? What is a security token offering? And I think that a lot of people right now look at it as I take an asset and I tokenize it and I sell the tokens. And I think that, that process is completely backwards, and frankly, this might not make me super popular, but I think that this is actually significantly slowing down the adoption of security tokens. Because, creating the token is not the most important part of the process. The most important part of the process is getting the deal funded. You need to find a lawyer, who knows what he’s doing, who can put it into your docs that you can tokenize. And then you go out, all of your traditional investors, and you say, “I have a great deal for you, come invest in it.” And the tokens are completely irrelevant at that point, because right now, explaining to someone what a tokenized investment is just an educational hurdle. An additional educational hurdle that you have to get over when you’re trying to sell your deal.
So what we would need right now are people who are willing to put that language into their documents, who are committed to the future potential of tokenizing an asset, but who don’t tokenize it right off the bat. Go raise the money. Because if you are-before you raise any money, and you’re looking at “alright I need to raise money now”, and a tokenization platform says “okay, cool, I’ll tokenize your fund, your asset, your whatever, and I’m going to charge you five thousand, ten thousand, whatever dollars a month, and take a percentage of your raise, and then we’ll go rise money.” That’s pretty tough, because at that point, you have zero dollars. But if you go raise all of your money and you have five million dollars in the bank, well now those fees don’t really look that tough anymore. And you don’t need to tokenize first in order to raise the money. You should be raising the money first, and then tokenizing.
You know what we should start saying? We should start saying, “we’re going to go sell the deals, and we’re going to let security token academy do the education.” And then in two years, when everyone’s educated, then we’ll give them tokens.
A hundred percent
Well there’s, and the education part is the crazy thing. You’re absolutely right, most of us or a lot of us came from the crowd funding space which is why we know way too much more than we ever want to know about the specific regulations around security tokens, right? None of us, well not none of us, but a lot of us are forgetting the lessons we learned in crowd funding. Which is, just slapping crowdfunding on a deal is not going to make an investor want it. It actually, if anything, can confuse them, can signal that this company couldn’t raise money any other way so they’re trying this new-fangled thing. And what-you either need to-tokens need to be an integral part of your company or reason why you’re doing it? Or, it should make the product better, maybe in the long-term, but you don’t have to lead with it. If you’re leading with it, then you’re probably not the greatest deal, because the deal, the company, or the piece of real estate, or whatever it is that you are tokenizing, should be what you lead with. If you don’t have a good deal, who’s going to invest in it? Regardless of if there’s tokens.
So, I do want to tackle this point about, how do we get these deals funded, right? And fundamentally, it’s a two-sided equation. One, you need something that is just a really good deal to begin with, without tokens, and two, you need by side demand, right? And so, how do we get those two pieces of the equation? Do we absolutely need the institutions? Can we do it without them? What’s going to bring us to that tipping point?
So right now, everybody’s trying to create a primary insurance Marcet, right? They’re tokenizing first and then they’re going out and saying “buy my tokens,” as the primary first investors. And you have this whole educational heart on it. And you cannot tell any of them there’s any liquidity in secondary Marcets because the secondary Marcets don’t really exist. And so, what needs to happen is issuers to have a deal, fund the deal, and then twelve months from now, twenty-four months from now, tokenize the deal, and allow their LPs to put those tokens on a secondary Marcet. And create a liquid secondary Marcet in that way. Not a desperate, primary Marcet, where they’re like “please, dear God, fund my deal, I need the money,” it’s just an investor who says “hey I have tokens, let’s test this out. I’ll go see if I can sell them. I’ll go see if I can buy them.” Create an organic secondary Marcet, and if there’s an organic secondary Marcet, then that naturally breeds a primary Marcet. Because then you can go out to people and say “hey these are blockchain-based tokens and look there’s a secondary Marcet where you can get liquidity on them, and it already exists.
Well, there’s, actually, I watched all his videos on security token academy. A good friend of security token academy is a good friend of mine, David Weild, the former vice chairman of Nasdaq. And, he talks about, a lot on stage and in some of these videos, that the bond Marcet, what they realized in certain bonds is that bonds that take their distributions and their interests, and they calculate it monthly instead of quarterly, they trade at a premium. I don’t remember what the premium was, a few percent, but it’s significant. So, if you take the technology and the potential of the blockchain and being able to calculate things like interest, give distributions and actually share, especially in real estate, where you’re an expert in, imagine if people that owned real estate could get dividends daily or weekly or monthly versus quarterly or annually. That would probably make them trade at a premium and then you’d be using the space and using it for actual good and making the product better. Instead of confusing people the other way around.
One guy gets it.
The other interesting part is what are the securities that we should be selling? Because one thing that kind of crypto world, or maybe just Blockchain in general has brought about is kind of new creativity in a way that we’re structuring deals. My view, especially when it comes to early to mid-stage companies, investors are used to receiving stock, probably preferred stock, give them what they’re used to, especially in these early stages. What a lot of people are coming up with is really interesting things like, hey, let’s do a profit share, a revenue share, or on the real estate side, let’s have two tokens and let’s kind of split up the waterfall in a different way than we have historically. That is all stuff that I’m personally super passionate about and I’m really excited to see it happen, but we’re not ready for that yet. Right now, let’s give investors what they’re used to seeing-
Well you’re excited about it because Henry told us about it on the phone and explained every intimate detail. If everyone had a Henry to call we’d all be stoked.
But, I want to ask you this. All these new financial instruments and new distribution structures, is that going to be too confusing for investors? Cause they’re literally going to have to sit there, go through the paper work, and say “ah, okay, so, this is how this one works, versus okay, this is the standard distribution structure for a commercial real estate deal in the US.
Well I think there’s things that-there’s a certain level at which it’s going to get too complicated. I mean, there’s some things that certain people want to do that are super complicated. But if you tell an investor, “I’m just going to give you a percentage of revenue,” that’s pretty, actually that’s much simpler than anything you really see today. There’s a lot of reasons why that wouldn’t be interesting, there’s a lot of reasons why, if you just told me, I just want a revenue share that’s nice and simple, I’d say “hey are you going to give me a liquidation preference as well? Because we’re going to sell the company and I gave you ten million dollars for this right to tomorrows revenue, that doesn’t really help me.” So naturally, the instrument might not be as simple as just a revenue share, but the point is, you can get something different than people are offering today. Or, on the debt side, as an example, provide more distributions more quicker than you do usually.
You can even do interesting things like on the debt side, if you’ve a debt instrument that is now tokenized and you’re going to pay distributions, for example in a stable coin, well right now, you wait x period of time and then you get paid that distribution, you really don’t know if they have the capital to pay you. What about the days where the documents are basically going to say, oh and by the way, every day you’re going to set aside a certain amount of stable coins in this address, wallet address, that we can look at any point in time to know that you’re continually capitalizing it so that we know when you’re ever going to get behind on payments. And then that’s going to get paid out every three months, for example. So there’s really cool things like that that I think we can do that will actually be more transparent and more useful based on the type of security that you’re selling.
Very interesting. I do want to quickly touch on the technical infrastructure and the state of what that is today. Custodians, you know, there aren’t a lot of qualified custodians in the space, but there are some, right? And I know that the exchanges and the issuance protocols are just getting to that point where they’re solving a lot of the major issues. What do you think is the future of security tokens? Are these going to be self-custodial or are we going to be using custodians? Aside from the fact that it’s pretty much written into the regulations that we need custodians. But, what is the future of all of this?
I’ll start by just saying the basics of what it is now, because you guys will probably have a lot to say of the technical detail of custodians, versus holding it yourself and, whatever that even means in security tokens versus what we’re used to in crypto. Right now, a security token, the way it really is, is it’s these tokens that are pointing at a traditional piece of paper, exactly what you guys are saying. Cause there’s not almost anything going on in that token, other than saying there’s a memorandum, that’s hopefully on the website so it’s transparent in some way, at this company that we’re pointing at, right? You look at blockchain capital, you look at Spice VC (venture capital), right? These are tokens that say you have one share in that piece of paper that’s the same piece of paper you would be offline if you’re just a normal fund.
So, if you think about it that way, there’s not much going on yet on the innovation side, and security tokens other than the fact that it’s on a token and that token means something on that piece of paper. But the future, I think will be where a lot of the regulations and a lot of the implementation of what’s going on in the-when it comes to distributing the things that you’re talking about will actually happen in the token. And they’ll know, for example, if Henry is sitting in another country and what his status is, if he’s allowed to even invest or buy this token. Right now it’s still up to the service providers to figure that out, it’s still up to open finance to basically verify that these two people can trade this token, and deal with it. But-
So, are you talking about building that into the protocol later itself?
I think that’s the future and I think that a lot of what’s going on, and I’m a bit biased cause of O’Nero, because I think that’s what we want to build and I can explain on, but for example, Omni from Spice VC, he’s sort of lately been famous for trolling this one company. I won’t name the company, but he created tokens for the Brooklyn Bridge, and then posted online “who wants to buy the Brooklyn Bridge from me?”
It’s crazy because they say they’re a compliant security token platform, but how do you even know that the piece of paper they’re pointing at is legitimate or not? If Blockchain capital, I don’t think they are this way, wanted to be - and I know we’re totally side tracking a bit -
I was like “custodian, custodians.”
It’s side tracker on side tracker crime here, but if Blockchain Capital wanted to be fraudulent or do something that was not above board, I don’t even know if it would be illegal, but if they change their memorandum, just like VCs sometimes do, they can send the letter to their LPs and make some changes and so somethings, in certain situations, but if they wanted to do that, there’s nothing that changes on the token side. So if you’re a token holder and you aren’t paying attention, then you wouldn’t know that the memorandum was changed on the website. I don’t even know if every single one of the security tokens even publicly shares their memorandum.
For shareholders today?
It’s the exact same thing. So it’s dealing with early stage companies all the time who don’t tell me half of what they do and then come to me and say “we just did this.”-
So that’s insanity that needs to be fixed with a Blockchain and the transparency-
That’s insanity needs to be fixed with humans, that’s like but, it’s just something that exists anyway. I don’t think, tokens or not, I think that’s an issue. I mean, on the custodian point-
-I think the - you know, I’m kind of split on this. So first of all, we had big progress today. It’s a Prime Trust saying “we’re not going to charge fees, any money on digital assets. That’s huge cause you don’t actually pay those fees with traditional security, so why would we be paying them with digital assets? So, A: that’s big news-
And it signifies that they’re recognizing that the risk of these assets is not significantly greater than traditional assets. There’s no more risk in a digital security token than there is in…
That’s true so what happens - I want to know-
To clarify, I do believe that what they’re doing custody for free is actual crypto, not national security tokens. Yes? Yes, okay.
Well that’s interesting, but that’s just a step in the next direction.
Yeah, it’s way more risky to do that than security tokens but-
That’s true because, that’s the thing is, I want to know from people technically, can someone steal a security token, if I have to do KYC (know your customer), if there is actual proof on the ledger that I’m the one that owns the security token. If you steal it out of my wallet, it’s not the same as a bitcoin address sending it to another bitcoin address to another bitcoin address that’s anonymous.
There’s no stealing security tokens.
It’s the ledger that conveys value, not the security token itself.
The ledger conveys ownership.
Okay, so if that was able to be hacked, then you could steal it. You’d have to base layer hacked to do something.
Yeah, arguably, but the question comes out to, actually do you need custodians in the context of security tokens at all? I mean, do you really need them? And right now, I think we need them. The law requires you to have them. The question is, in two years, do you - well that’s not fair - five years, when the SEC looks at this and goes, I actually really believe in security tokens the way they’re being managed, all of the infrastructure behind security tokens. We actually trusted that now. So now that we trusted that works, the question is, if somebody loses their tokens and they can just get it back, if that will actually happen, i.e. an investment company registered under the forty act that needs to have a qualified custodian, loses somebodies security, if they can just get it back, do we really need to have a custodian holding that security or not?
That is a fascinating question.
Alright. Well thank you so much to our panelists. They will be here, hanging around for a little bit.
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