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Security Token Insight: Expert Interview with Securities Attorney Marc Boiron

Expert Interview


 
Marc Boiron Attorney at FisherBroyles LLP

Marc Boiron

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.

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Transcript


 

Amy Wan:

Welcome to Security Token Insight, brought to you by the Security Token Academy. The Security Token industry is here and will provide a key foundation for the evolving financial internet.

Adam Chapnick:

The Security Token Academy provides insights about this new era for security token enthusiasts, investors, and issuers. The security token industry is here and you can get involved.

Hi, I’m Adam Chapnick.

Amy Wan:

And I’m Amy Wan. Thanks for joining us.

Coming up on today’s episode of Security Token Insight; in your security token investing news details on Prime Trust’s new strategic partnership plus we’ll speak with securities attorney Marc Boiron for the latest updates from the Security and Exchange Commission. We have highlights from the inaugural commercial real estate case study on the tokenization of the St. Regis Aspen Resort. That and much more is coming up on this episode of Security Token Insight.

Adam Chapnick:

Now it’s time for your security token investing news.

Security token trading platform tZERO has distributed it’s security token to investors. tZERO, a portfolio company of Overstock.com, concluded their 134 million dollar offering in August. Investors now have the option to either hold their tokens in a personal wallet or they can opt to create a brokerage account with tZERO’s partner Dinosaur Financial Group, with the first option requiring a two-step verification process. tZERO is a gold corporate member of the Security Token Academy. To learn more, visit our website and click on the directory tab and the corporate member homepage.

Our second story focuses on SharesPost, which is a leading provider of liquidity to the private growth asset class. SharesPost announced that their initial digital security token sale will be conducted by CityBlock Capital on the SharesPost platform. CityBlock also announced that it has chosen the SharesPost platform to provide secondary liquidity for its tokens. CityBlock’s digital tokens will represent ownership interest in CityBlock’s NYCQ blockchain infrastructure fund.

The fund is a venture capital fund which focuses solely on investing a company’s building blockchain based capital infrastructure. CityBlock plans to invest 90% of its capital in early stage firms, while the other 10% will be invested in late stage companies. Rob Nance, co-founder and managing partner of CityBlock Capital, told us “SharesPost is the industry leader in secondary market liquidity for privately held companies. Building on that experience they’ve created a robust infrastructure to facilitate both primary issuance and secondary market trading of tokenized securities. We are excited to partner with SharesPost to provide the investors of NYCQ an unparalleled user experience throughout the life cycle of the token.”

And finally Krypital Group has announced a new strategic partnership with Prime Trust. The two companies aim to utilize each other’s services. Krypital Group currently provides the ability to create and issue tokens while Prime Trust provides custody solutions for digital assets along with compliance services and fund processing. Prime Trust CEO Scott Purcell says the collaboration will continue to reduce market friction worldwide. Prime Trust is a gold token member of the Security Token Academy. To learn more, visit our website and click on the directory tab and the corporate member homepage.

Amy Wan:

The Security Token Academy held its fourth meet up here in Southern California on January 31st. It took place inside Maggiano’s at The Grove in Los Angeles. We had a packed house as security token enthusiasts from all over converged at the meet up. There was free food, drinks, networking, and more. I had the chance to catch up with Marc Boiron. Marc is a securities attorney and partner at FisherBroyles.

We discuss the latest rulings from the Securities and Exchange Commission and more in this expert interview. Take a look.

The first thing let’s talk about is news about off shore developments. Can you elaborate on that?

Marc Boiron:

Sure. So, one of the things that everybody’s going to remember is that offshore offerings were the hot thing, especially once the SEC started cracking on things. The thought was “Let’s just sell our securities offshore and then we’re going to be free,” and while there’s tons of issues under and that kind of stuff. One of the key questions that people didn’t talk about a lot was “Does the SEC even have jurisdiction to go after those?” And that always was two questions. One is “From a legal perspective do they have jurisdiction?” The other one’s “Practically speaking, can they go do it?”

I think, practically speaking, they’ve already proven that they can with one broker when they seized the domain name with the FBI. So, the other question is “From a legal perspective, could they?” And the background to that actually goes back a few years. There was legislation in the Dodd-Frank Act that actually addressed the fact that the SEC had very, very broad rights to actually go after anyone making a securities offering offshore. The Dodd-Frank Act essentially addressed that, but it was done at the same time as a Supreme Court offering. Literally a month apart.

Wording in the legislation was very strange. It was never clear whether they actually meant to address it and limit the SEC’s jurisdiction or not and essentially what we ended up seeing is about a couple years ago there was a case where a district court essentially decided that “Sure, the legislation didn’t directly address it, but the legislator meant to address it.” And now we’ve had an appeals court, just a couple days ago or a couple weeks ago, that have addressed it as well and that basically said “Yes, the Supreme Court was actually trying to go ahead and give the SEC some expansion of the SEC’s jurisdiction.”

Amy Wan:

So what does this mean for issuers?

Marc Boiron:

Bottom line, if you did an offshore offering and you thought the SEC wouldn’t have jurisdiction that’s not necessarily going to be the case.

Amy Wan:

And what is the basis for that line of thought?

Marc Boiron:

Really, it’s a question of “If this issuer didn’t really have anything to do with the US or its effect of what it did in the US wasn’t really substantial in any way, then why should the SEC have jurisdiction?”

Amy Wan:

Very interesting. So, the other big piece of news this week is that Kik came out and basically made a row in the community about the fact that they are fighting the SEC and in December they submitted a Wells submission and now they’re out in public talking about their exact line of reasoning and argumentation about why they’re not a security. Can you tell us more about that?

Marc Boiron:

Sure. So, this is what the Crypto Community has been waiting for. A company, that was capitalized with somewhere around 92, 93 million dollars in an ICO that is essentially saying “We’re not just going to take what the SEC tells us and settle with them. We’re going to go fight this,” And so the SEC sent them what’s referred to as a Wells notice that said “Hey, we’re going to give you a chance to explain to us why we shouldn’t bring an enforcement action against you.” And so in December, two big law firms submitted that to the SEC.

And then, as you said, the CEO decided to come out and say “Alright, here you go. Let’s make it public. We’re going to show you what we submitted because we’re ready to fight whether the SEC decides to take us up on this or not.” And their arguments come down to three things.

Number one; Kin, which is their token, is a currency, not a security. Now, the interesting thing about that; People always say a currency excluded from the definition of a security. Well, that exclusion is actually in the Securities Exchange Act, not in the Securities Act of 1933. And so the argument would be “Well, they excluded it from the Exchange Act. They never said anything about it in the ‘33 Act so they meant to exclude it from there as well, or it should be treated as excluded.”

Bottom line, if you’re looking through federal law how currency is defined, it’s usually limited to kind of fiat currencies backed by some kind of government. It’s not some currency that two people decide to invent and call a currency. I don’t think that argument is shot down easily but I’m not sure it’s necessarily going to go very far.

Then the next one is the argument that you would’ve expected. This was not an investment contract whatsoever. And the argument is Kik, which is essentially a messenger app, had a pretty robust community that had a point system before they ever even did an ICO. The problem was this point system was pretty limited in the way that it worked and so the idea was “If we can have, kind of, a more free-flowing crypto currency it’s going to help build a more robust community.” And so, they went ahead and did an ICO. They used a SAFT and then did a public sale afterwards.

The real question is going to be on that, two things. One; when you dig into the communications that they had with private issuers, what did they say? Pantera Capital investing. When they spoke to Pantera, or emailed Pantera, or sent text messages to people at Pantera, what did they say? The second thing is, and that goes to kind of the expectation of profit prong of the how we test, then the question is if you have the efforts of others prong. Maybe the question is “Well, were they sufficiently decentralized under the Hinman test?” Which was often mentioned in the Wells submission. Were they sufficiently decentralized?

Well there’s a problem there. One is, were they sufficiently decentralized at the time of their ICO? Vs. Are they sufficiently decentralized now? Which now, they have a pretty robust ecosystem with 30 kind of apps, my understanding is, built on top of it. I don’t know what their ecosystem was back then but that’s a big question.

Their last argument was kind of amusing, but one that everybody was relying on at the time was “Let’s assume that you don’t agree with us that it’s a currency. Let’s assume that we sold an investment contract. Just take it easy on us because we did it better than the others.” That was literally the argument.

Amy Wan:

Is that really it? Oh my goodness. And how do you think the SEC’s going to react to that one?

Marc Boiron:

It’s what they’ve done so far. Not necessarily that thought. I mean, they took it easy on Paragon. They took it easy on Airfox. For something like Kik, I think they would have taken it on them easy. Now that they’ve gone and publicly said “We will defy you,” I don’t think it’s going to be that easy. Now the question’s whether it would be wise for the SEC to actually take this up. So, what’s going to happen is the SEC commissioners are going to vote on whether they actually bring an enforcement action. That could be an administrative proceeding or a court filing.

Realistically, this will be a close call. A court filing’s a little risky for them, right? They lose that, it doesn’t look so good. So, if they’re going to do something, it’s probably going to be some kind of administrative proceeding. Which still might not look good if they lose but it’s going to be quieter at least.

Amy Wan:

Very interesting. Well thank you so much for giving us the updates on the state of SEC and token law today.

Marc Boiron:

Always glad to do it.

Amy Wan:

To view the full interview with Marc, go to our website securitytokenacademy.com and click on the interviews tab.

Adam Chapnick:

In a first of its kind multi-city webinar on tokenization of commercial real estate, Crest, a project of the Security Token Academy, provided a detailed case study on the tokenization of the St. Regis Aspen Resort. Learn how the webinar explored the disruptive forces that are emerging in commercial real estate or CRE financing. Here are some of the highlights.

There’s a new type of disruption emerging in the area of CRE financing. It’s a way to raise money via a new solution which is compliant with US SEC regulations. It’s called tokenization and it is based on security tokens.

Jeffrey Davis:

We see today is we’re always searching new buyers out there. I mean, we can only trade back and forth to the same private equity groups that own hotels, buy and sell with each other, so many times. The biggest challenge for us is trying to open up new frontiers of capital out there. The idea that a traditional hotel owner, how are they going to react to new capital coming in and the ability to monetize their position, either a minority or majority position? I think the more investors we have, the more buyers we have, the more liquidity we have, I think that only drives the transactions market even further.

The end of the day, you sell a hotel asset and you can either own that asset for a long period of time or you sell that asset. The biggest and hardest thing in what we see in our business is how does an owner take advantage of monetizing, perhaps, a minority interest in the asset? Taking some of their chips off the table and delivering their asset from an equity risk perspective. And so, the opportunity to go out there and try and sell a half an asset, or a quarter of an asset, the market doesn’t really exist for that. So it’s pretty much a black and white situation.

And so what’s interesting about the tokenization model, and what we’ll be discussing today is how do you recreate the idea of investing in real estate without it being so black and white? How do you open up the investor universe, not just to private equity, to public REITs, to high net worth individuals, but can you open up investing in real estate, in hotels in particular, to other groups with money? Can it be an individual investor that can invest in real estate and say “I own a piece of an asset.”

Amy Wan:

This is a gorgeous property. Can you tell me a bit about it?

Heather Steenge-Hart:

I’d love to. We have 179 guest rooms, 30 suites. This is one of our 3 specialty suites. And then we also have 25 residences. 2 and 3 bedrooms. Which our fractional ownership house.

Amy Wan:

Fantastic.

Stephan De Baets:

We did a private placement. The technical name for the private placement is a Reg D 506(c). So, once you actually look at what it means, it means it’s a private placement to accredited investors. So you need to be a professional investor in order to enjoy the participation. We wanted to have a diversification of type of investor, so we have some professional ones, some real estate ones, some high net worth, and we also wanted to diversification from a geographical point of view because to make a market you need to have different people with different view on one particular product.

Jay Bernstein:

I think it was different and I think whenever something is different it requires a real pioneer to get the first transaction through to completion. In the past there’ve been some large examples. Rockefeller Center was at one point an example of a single asset REIT, but they’ve been very rare up to this point and it’s been difficult to convince institutional investors to come into this asset class. One of the other issues is that there’s a feeling of safety with diversity.

I think the modern REIT phenomenon that began, probably with the Kimco transaction, the early 1990’s, there was a thought about safety and conservatism was introduced into the REIT market place. We could imagine the tokenization process as a regular securities offering and, in fact, a highly efficient way to conduct a securities offering. But we also felt, and discussed with the management team at Elevated Returns the need to conduct the tokenization process in compliance with federal and states securities laws.

Henry Elder:

The same technology that allowed us to create these tokens with ERC-20, well we should be able to add additional software on top of that, that can make them automatically comply with those securities regulations and that allowed us to jump into the third wave, which we’re in right now, of securities tokens. And these are fully compliant, and they’re typically issued under a crowd funding exemption of some sort. As Stephan said earlier, they used REIT D, and that tends to be the most popular exemption that people are using.

Stephan De Baets:

The beauty with the security token, it exists on what we call a “Cap Table,” or if you want a Shareholders lease. So, if someone was to steal token, we would know that the current owner of the token is not supposed to own it and you can actually move the token back to the original owner. So it’s actually super safe. The other layer for the audit was what we called functionality and that is basically a third-party testing, back testing the contract itself to make sure that the contract is doing what the contract is supposed to do.

Henry Elder:

So if you want to liquidate your token they can find a buyer for you and they can do it rather immediately. And so that is primarily what most of the security token exchanges that people are talking about now are using in order to build an exchange to trade security tokens. However, tZERO recently joined up with BOX Digital to create a JV to pursue a national securities exchange to trade security tokens.

Adam Chapnick:

So this is really one of the holy grails of this whole conversation is that the key benefit of this security token world is this liquidity that may happen someday but without these guys kind of drumming it up. It’s that benefit is not there. So we need them.

Henry Elder:

Wave three is the security tokens. It’s the regulated space. It’s where investors can go and know that they are protected by all the investor regulations that the SEC has been enforcing for almost a century and that’s what we’re really focused on here.

Adam Chapnick:

So we’re really talking about 3 types of exchanges. It’s the traditional stock exchanges, we’ve got the new crypto currency exchanges, and then now these burgeoning security token exchanges.

Henry Elder:

Yeah, and we might start seeing the lines get blurred actually between the traditional stock exchanges and the security token exchanges. Especially because you have big market players like NASDAQ, who has basically said that they are totally committed to this blockchain security token ecosystem.

Adam Chapnick:

To watch the full webinar just go to Crest.io to register. Registration is free.

Amy Wan:

Back in October, the Security Token Academy held events around the nation to signal the kick-off of the security token industry. We held security token meet ups in Los Angeles and also in New York City. Attendees who purchased tickets to our two day cruise and conference in New York boarded the Spirit of New York yacht from Chelsea Harbor for an evening cruise along the Hudson River.

Adam Chapnick:

That was followed by the security token industry launch event inside the Conrad New York. Hundreds of people were in attendance as industry leaders rang the opening bell to signal the official kick-off to the security token industry. To view all of the videos from security token industry launch week go to our website securitytokenacademy.com and click on the events tab and select launch event video library. The best part? It’s free, and contains a wealth of information.

Amy Wan:

Alright, that’s it for today’s show. Be sure to follow us on Twitter, Facebook, Telegram, and Medium, and don’t forget to subscribe to our YouTube page so you don’t miss out on any of our videos and expert interviews. I’m Amy Wan.

Adam Chapnick:

And I’m Adam Chapnick, but before we go, a big thank you to our platinum corporate member Merrill Lynch and all of our gold corporate members as well. We invite you to learn more about our corporate members by clicking on the directory page on our website. For everyone here at Security Token Academy, thanks for watching.

The Security Token Academy is dedicated to covering and facilitating the evolution of the emerging security token industry. From interviews with leading experts, to highlights from security token events around the world, be sure to visit our website securitytokenacademy.com today to learn more.