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Prime Trust CEO: The Industry
is Making Sense of Regulations

Expert Interview


 
Scott Purcell of Prime Trust

Scott Purcell

In 1987 Mr. Purcell founded Newport West Custodial Services, which he built to $1 billion AUM and sold to Commerce Bank of Newport Beach, where he then served as the bank’s Senior Vice President in charge of the trust department. He is the Founder and CEO of FundAmerica, a financial technology firm providing software and back office services to banks, trust companies, broker- dealers, investment advisers, securities exchanges, SEC registered transfer agents, and large issuers (primarily real estate companies). FundAmerica’s software enables escrow management, payment processing, PATRIOT Act compliant AML, transfer agent and broker-dealer compliance for professionals engaged in activities pursuant to Titles II, III and IV of the JOBS Act. He is a founding Board member of the Crowdfunding Intermediary Regulatory Association (CFIRA) and the author of the book “The Definitive Guide to Equity and Debt Crowdfunding” as well as the “Industry Best Practices for Funding Portals”. He is the author of “BD and Registered Portal Regulatory Mechanics” and has been an active editor and co-author of numerous other industry papers. He also started a fixed income trading firm, a clearing broker for institutional investors and published a book "The Guide to Fixed Income Investing". In 1994 he founded Epoch Networks, one of the world's first internet service providers and, as a Board member of the Commercial Internet eXchange often represented the nascent industry before Congress and the FCC. In 1999 he founded OnAir Networks and built the first music storage and streaming services for Sony and Universal. During this time, the Recording Industry Association of America retained him to advise them on internet technology issues and copyright matters and to represent the recording industry before Congress as their technical advocate for intellectual property rights.

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Prime Trust is a chartered Nevada trust company that as an SEC-Qualified Custodian provides custody of cash, tokens (aka “coins”), stocks, bonds, private business interests, and other assets. It also provides compliance and specialized services relating to funds processing, AML/KYC compliance, and transaction technology for the new digital economy. As a blockchain-driven trust company, its mission is to provide portals, platforms, brokers, real estate syndicators, and direct-issuers with best-in-class solutions to seamlessly meet the needs of their securities offerings and of exchanges and secondary markets. As a trust company, Prime Trust provides a wide array of account types, including simple custody, IRA’s, asset protection trusts, health savings accounts, and college savings solutions, all of which are designed to hold any asset class.

Transcript


 

Adam Chapnick:

Hi everybody, it's me again, Adam Chapnick with the Security Token Academy. We're here at Security Token Industry Launch Week and we are joined by none other than the CEO, founder and Chief Trust Officer of Prime Trust Mr. Scott Purcell, how're you doing?

Scott Purcell:

Good, great.

Adam Chapnick:

Nice to see you again.

Scott Purcell:

Awesome event, very happy to be here. It's been fantastic.

Adam Chapnick:

Yeah, I agree. It's been a hell of an event and it's great to have you. So you are kind of an OG here in this world.

Scott Purcell:

Yeah, in more ways than one.

Adam Chapnick:

Yeah, well let's keep it at that ... What I mean, just technology wise. So you have been a part of a lot of the technological guts of the equity crowdfunding industry and now of course we're in the crypto industry. How did that come to be and what was the transformation from equity crowdfunding it into crypto like and why?

Scott Purcell:

Well, in November of 2011 I read about what was then the entrepreneurs' access to capital act in the house of representatives and I said, "Oh my God, they're talking about letting people use the internet to raise capital for businesses. This could transform capital markets. I have to be part of this." And so I started putting the company together hoping it would actually become law and of course it then went into the Senate, became the jobs act and was signed. So when it was signed, then immediately after a group of us in the industry met at a Chinese restaurant in Palo Alto and formed SIFRA as the Industry Trade Association, and I was on the board of that. And so I built a company called FundAmerica. FundAmerica for a transaction technology compliance, escrow technology, broker dealer compliance technology, a variety of other things that we did.

Adam Chapnick:

And pretty much all of the portals had to use you. Everybody used you, it was great.

Scott Purcell:

We became the 800 pound gorilla of the crowdfunding space. But sadly that's like saying you're the 800 pound gorilla in a wading pool. It's like it sounds really impressive until it's not a very big pool. So it's something like 50 or 60% of all successful Reg As have used our services.

Adam Chapnick:

That's extraordinary.

Scott Purcell:

Yeah, it is. And it's a multimillion dollar industry. It's not a multibillion dollar industry. It's just not that big a deal. Starting Prime Trust and going through charter as a financial institution which then acquired FundAmerica, so we leveraged all of our technology into what is becoming a financial services firm or a financial institution that is a foundation that other people can build their businesses on because they can use all of our APIs to trigger and call and manage all of the different financial services they need for Escrow, for custody, for compliance, AML, KYC, trustee of assets, handling custody accounts of different types of cash, stocks, bonds, Crypto for people both domestically and globally.

So it's allowed us to take the business to a different level and also start servicing the digital economy with the different Blockchains that are out. And so that's really exciting because it's a giant industry.

Adam Chapnick:

Yeah, absolutely. Okay. So for the uninitiated, can you walk us through how ... so there is a funding event, when does your firm get involved and how does it touch that process? And how many times? Because there'll be several.

Scott Purcell:

It could be several. They can use us for part or all, but if it's the full-

Adam Chapnick:

The full monty. Finish the full monty.

Scott Purcell:

Yeah. When somebody is about to raise capital for their business, they first work with their lawyers, they work with their accountants, they work with their marketing people, they get ready to go on the offering. They don't need to use our services, they don't need to pay us any money during that part. But then when they go live, they're probably going to use our technology for the investor transactions. And whether that's using us directly, which we don't really like or using going through one of our partners, which is what we prefer. That's like Start Engine and Republic and Polymath and Harbor and CoinList and all these different-

Adam Chapnick:

Just those?

Scott Purcell:

Yeah, and it's a lot more. Sorry, not meaning to leave anybody out.

Adam Chapnick:

No, but that's all of the players that we talk about all the time.

Scott Purcell:

Yeah, it's pretty much everybody uses our services. So anyhow, so we handle Escrow for the offering. We do all the accounting, we track all the investor funds. All the investor funds come to us. We process them by wire check, ACH, credit card, Bitcoin, Ethereum, Stellar, and we take all the customer deposits into escrow. If it comes in with crypto, we convert it into USD. Once the offering meets the minimum and AML clears all the investors and KYC and everything is buttoned up, we then release funds to the issuer. The issuer then delivers securities, whether it's stocks, bonds, or tokens to the investor. We may be holding those if they may have opened an account. A custodial account and IRA or HSA or an Asset Protection Trust, a college savings account, whatever. They've opened that with Prime Trust for the investor who then, so they deliver the securities into their account that we hold and it makes it very, very easy for them.

If it's a real estate deal and they're paying interest or they're paying shares of rents or a proceeds from a fix and flip or something like that, then it's easy for them to just send us the money one time and then we distributed into the customer accounts. So we make their life very, very easy. And then we also service a lot of stable coins. We're the third party trustee for the assets that stablecoins are being issued on.

Adam Chapnick:

Oh, wow. Now which stablecoin is that?

Scott Purcell:

Oh my God.

Adam Chapnick:

Oh many, okay.

Scott Purcell:

Yeah. There's TrueUSD. Great guys. Great Group of guys. It's Anchor Coin, it's CarbOn, it's Stably, NAS Coin.

Adam Chapnick:

A ton, wow.

Scott Purcell:

There's a lot.

Adam Chapnick:

That's fantastic.

Scott Purcell:

There's over a dozen, I think including what's in the pipeline. There's over two dozen.

Adam Chapnick:

Amazing. So once again, you've wheedled your way and there you go. Your underpinning the entire infrastructure of transactional-

Scott Purcell:

Or maintaining market integrity. That's really as a trust company, what we can do. By us being trustee for assets for stable clients or us being custodian of assets for funds or for individuals or institutional investors then and exchanges rating into our APIs. Then a lot can happen within our platform that just makes it easier for the market to build.

Adam Chapnick:

So since you have a truly unusual insight into the flow of activity, let's just say in the industry, what are you seeing as sort of a trend and from either side, either from the issuer side or from the investor side that's encouraging or discouraging?

Scott Purcell:

The most encouraging trend a year ago, well, more than a year ago now, a year and a half ago when people were coming to us and saying, "Gee, you should serve as ICOs and the digital economy and hold assets." And I would talk to people about what they were doing and it'd be like, okay, so you guys have filed under Reg B or Rec A or Reg C or F or Reg S Reg something. Yeah, exactly. They're like, oh, no, no. It's not as-

Adam Chapnick:

This isn't bad, this is different.

Scott Purcell:

Do people, are they buying your tokens with a hope to profit from them? Well, yeah, of course we're selling it at a discount and then it's going to go up and it's going to be…they were massively failing the Howey test, but also the Howey test is only partial. There are many other tools that the SEC users are making that determination. But this was so obvious and these people are technology guys that at the time had no comprehension of a no appreciation for securities regulations or banking regulations and so it was just easier to say, look, we're not going to be a party to this, we're not going to do it. Well, the SEC and FinCEN started coming out and going after some people, but also making a lot of statements about working with the market instead of just taking a hammer to it, helping it evolve. And at that point we said, okay, people are starting to get that this is a regulated industry. The things they're doing, they have to be cognizant of, be respectful of and be compliant with regulations. It's time for us to start getting in.

Adam Chapnick:

Got it. So do you see that's the encouraging trend as that people are kind of putting on their big boy pants.

Scott Purcell:

Yeah. They are.

Adam Chapnick:

They are willing play with the regulators.

Scott Purcell:

Yeah. They don't like it. You still get some purists shouting from the rooftops, but by large the industry has pivoted to understanding that this is regulated.

Adam Chapnick:

Do you think part of that is that the people who used to be the purest that you're talking about saying, no, I want my utility coin to be a utility coin. Are they doing double token issuances where they're saying, okay, we'll raise the money with a security, but we're also going to have a pure utility function, but it will be a separate coin that doesn't do anything but stay inside or no?

Scott Purcell:

It's hard to make a utility token. Other than a stable coin, a utility token ... Sure, we see people that are tokenizing store coupons. We see people that are tokenizing video game credits where you can get a better magical sword. Nobody is looking to profit from these. So those seem to me reasonably to be utility tokens. I tell people, I always check with their attorney, go your securities attorney, but that seems reasonable. That's utility token. But by and large, that's the exception, not the rule. Everybody's issuing security tokens.

Adam Chapnick:

Okay. Interesting. So are you seeing anything from your vantage point about who are the people or what kinds of projects, what verticals are choosing to go the security token route? Is there a trend or is it everybody?

Scott Purcell:

Real estate. Real estate's always been a big part of our business with the crowdfunding space, it's always been the majority of our business and now people are starting to tokenize real estate. Awesome. We still help with the initial raise as the Escrow agent, and then we act as the trustee of the real estate assets that are being tokenized. We hold them in trust for the benefit of the token holders. So it works very well for us and it works for the real estate people, but people are also tokenizing gold, diamonds, stocks and bonds, all kinds of things.

Adam Chapnick:

Hard assets. Is that more than-

Scott Purcell:

But also stocks and bonds. People are tokenizing shares of Apple, I mean whatever. I know somebody who's tokenizing Bitcoin because they want to put it on the Ethereum blockchain. So they're tokenizing tokens.

Adam Chapnick:

That's a new one. I like that. What do you see from the other side in terms of the investor profile? Is it institutional minor, institutional big, is it family office? Is it individuals? Is it mix?

Scott Purcell:

It's everything. You have institutions and family offices that are setting aside a pool of money just for investing in this space. It's a high risk part from their perspective. It's a very high risk part of their portfolio, but they are allocating pieces of their portfolio for securities tokens and for this industry.

Adam Chapnick:

Is that more than they were a year ago or?

Scott Purcell:

A year ago, it was almost zero.

Adam Chapnick:

Six months ago?

Scott Purcell:

Maybe they were buying Bitcoin, maybe they were buying Ethereum, but that's all the big players were buying.

Adam Chapnick:

Well, it's good to hear that it's the institutions are in already. That's great. So I'm looking at the Purcell crystal ball, as you gaze in and look ahead, say 18 months, where do you think the security token phenomenon will be? Who will be using it, who won't be? And how big it would be.

Scott Purcell:

Just more and more people come into it. This is going to evolve over the coming years. In the future, everything is tokenized because it's just such a convenient way of handling everything from securities to real estate to grocery coupons. But between now and then we have a growth curve that we're going to have to go through and it's going to take a little while. So 18 months from now it will be bigger than it is today, but it will be more diverse.

Adam Chapnick:

Got It. Great. Well, you heard it here first. Well, as always, great to talk to you. Hope you come back soon and often and we wish you all the luck at Prime Trust.

Scott Purcell:

Thanks, pleasure.