Dave Hendricks is the CEO of Vertalo, a connections, compliance, and cap table company for digital asset issuance. Dave started his career at Arthur Andersen & Co. where he built securitization and remediation databases for real estate and other clients. After Arthur Andersen, Dave led tech teams at a JE Robert-Goldman Sachs joint venture than securitized real estate assets seized by the Resolution Trust Corporation. Before founding Vertalo SEZC parent company SeriesX in early 2017, Dave was the cofounding CFO, President, Treasurer, and Corporate Secretary of LiveIntent, a $100 million ARR people-based marketing firm headquartered in New York, where he led the company through 6 major fundraising events, culminating in the company’s latest $35 million Series D.
Vertalo is a liquidity enablement platform that was founded by a team that was frustrated with the difficulty of complying with and managing wallet and KYC data for its own security token holders. So we decided to build the system ourselves. Informed by our own experience, and by our team’s knowledge of securities law, Vertalo built a platform designed to take the pain out of managing a crypto cap table.
The Vertalo platform is designed to be used by issuance platforms, issuers, broker-dealers, ATS’s, exchanges and the market participants that integrate with and depend on them, like Custody platforms and KYC/AML providers. Vertalo’s easy to use system makes managing security token investor data easy, and helps security token investors access the liquidity providers that they need.
Hi, this is Amy Wan and I’m here with Dave Hendricks at Vertalo. Vertalo is a gold corporate member of the Security Token Academy. So welcome Dave.
Hey Amy, how are you? It’s good to see you.
I am good, yeah. Well it’s really great to see you too. I hear your company is doing a lot of fascinating things. So give us an update on what’s happening.
Well, you know, we’re here tonight in Los Angeles at the Ethos Society and we’re talking about simplifying and broadening access to digital assets and tokenization. So what we’ve been doing over the last, say three or four months is making things simpler, making things less expensive, broadening acceptance. So I think we’ll talk about this a little bit in this interview.
Yeah, well let’s go on that topic. What do you think right now are the challenges towards larger or more mainstream adoption of digital assets?
Well, first there’s the quality of the projects. Investors are always interested in investing in teams, technology, businesses that they believe in. So what we’ve seen early projects come out of the gates with maybe projects that weren’t fundable by venture capital, et cetera. So I think that’s one of the first of hurdles to adoption was just, was it investible? Some of the projects weren’t so great, but I don’t think that that’s the long-term problem. I think that’s going to get sorted out. The broker dealers that Vertalo works with, and we work primarily through broker dealers, are starting to increase the quality of the offerings, but the broker dealers have not been able to solve one thing and this is the thing that Vertalo’s really been working on and that is getting rid of the technological obstacles for mainstream adoption, specifically the wallet.
Probably the hardest thing for a regular retail investor, or even a family office is the notion of dealing with a crypto wallet. It’s just a hard thing. MetaMask is not easy.
Yeah. Yeah and it’s scary to do it too, right? If you do something wrong, then who knows where your assets are?
Right and so asking investors who already have to figure out whether a deal is worth investing in, having them also have to figure out how to custody their own tokens, how to bring a wallet to a transaction, that puts a hurdle up, which probably knocks 80% of the investors out. So that’s the first thing.
The second thing is that selling a token first, investing in a token is probably the first order problem. You’ve got a wallet, then a token, it may be little known, but some funds cannot invest in tokens, they actually have it in their bylaws. A lot of people don’t want to buy a token because they don’t know what to do with it. They don’t know how to operate a wallet, they don’t know how to buy a token. So saying that we’re selling a token is probably also a barrier to implementation to adopt-
It is off-putting. And so what Vertalo’s been working on is not only abstracting the wallet, but also abstracting the token. So we enable projects that want to issue a digital asset, to use our technology through a broker dealer or directly, to raise money without a wallet and invest in a real company with the potential and capability to tokenize later. So our technology enables any offerer to issue a token, even if they raised money five years ago.
They can upload their cap table into our system and with one button they can produce tokens to custodial wallets that the investor does not need to know how to use. If our business, if the thing that we’re in, is about expanding acceptance and adoption of digital assets, you actually have to hide some of the technology because that’s not what ... people are not ... If they’re interested in infrastructure investing, well yeah sure, Go invest in token companies. But people want to invest in the underlying asset. So how do you knock the barriers down to investing in those underlying assets? You’ve got to abstract wallets, meaning make it so that anyone can invest, they don’t have to use a wallet and then make it so they don’t have to worry about custody and the token themselves.
We were actually talking a little bit earlier about this, but another challenge is just even the cost of issuing a token, right? Can you talk about that?
Well, asking a project that’s trying to raise money to front you a hundred thousand bucks, or even $50,000 to build a token for an audience that is yet unknown, is probably also a problem that is getting in the way of adoption. So imagine you are a company with a groundbreaking idea and amazing team and you’ve got this huge market and you say, “Well of course we want to have a digital asset because we believe in self-sovereign ownership. We believe in direct listing,” which is what Vitalik enables, direct listing. If you want to issue one of those assets today, you’re being asked to front 50, or a hundred, or more thousand, to produce that token at the same time that you’re working on your product at the same time that you’re doing a roadshow or trying to raise money. It’s a lot of stuff for teams that aren’t necessarily big and it’s a lot for teams that may be cash strapped.
So we have been developing approaches since we started, and this was in early 2018, to make it so that any issuer could do a fundraise and then at the end of the fundraise, they could issue a token if they choose to do so. If they didn’t want to issue the token yet, our system allows them to kick that can down the road and in a year-
When they’re ready.
... when they’re ready, they can issue the token. The key thing is you understand this because you understand securities law that you’ve got this thing called Reg D and rule 1414, right?
Right, right, right.
So you can still do this and maintain compliance with the long hold period, the restriction period.
Right, I do want to return to your point about working with broker dealers in a second, but it just seems like you have a very different vision of the security token industry from a lot of the other players in the industry. So, then why are you working with broker dealers? What advantage does that bring to Vertalo? What advantage does that bring to the broker dealer?
I think that anyone who’s been selling anything, especially high ticket items that have long implementation cycles, understands that trying to diligence a client that you’re going to go start work for, is time consuming. It’s very, very difficult to figure out and discern which project is going to succeed in its fundraise. So rather than sign those projects up and then hope we’re going to get paid if they can raise money, we would rather take the diligence and have it be done properly by a broker dealer who legally can take 5%, 7%, 10% of the proceeds from the fundraise as their fee. Because they can get paid on a performance basis like that, which you can’t unless you’re a broker dealer, they can also afford to due diligence upfront. Broker dealers due diligence so they can figure out whether they’re the projects they choose can raise money. I want to benefit from that.
So Vertalo works with broker dealers, give our technology to broker dealers, they can white label our onboarding cap table and token distribution technology and use it for their fundraises. It produces a beautiful cap table at the end of the process we can syndicate broker dealers so that five of them, 10 of them can work on the same deal, all ending up in the same blockchain-enabled cap table.
Yeah, and by doing that, we move the risk away from us and we get the client when it’s more mature, meaning it is actually ... someone else has decided it can raise money. So we give the technology to broker dealers to enable them to bring clients to us. That way, we get real clients that are capable of paying because after you’ve done all the work, it’s opportunity costs, right?
I can only have so many two hour conversations, and to your question before here, I can’t tell if they’ve done their proper filings. I don’t know of whether their ... I don’t want to go through their PPM. That’s not my business.
Right, so leave that to the professionals?
Fantastic. You said that Vertalo started in early 2018, we’re now midway through 2019, so over the past year and a half, what is your opinion about where the security token industry is today? Where it’s going?
Well, I think that the future is extremely bright. In the last couple of days, we saw you now, and BlockStack, both get Reg A+ approvals.
Yes, that’s huge.
That’s really huge because what you’re seeing is SEC and FINRA saying, “Yes, digital assets are a thing and they’re a thing that we can approve.” So what you’ve seen recently is Andreessen Horowitz changing its entire firm to registered investment advisors and making investments in companies like Harbor, making investments in companies like Carta. Remember Andreessen Horowitz is the biggest crypto VC. These guys realize that there’s something big, there’s a mega trend happening. Circle, which is you know crypto fund company in Boston bought SeedInvest, which is a broker dealer. So I’m starting to see these patterns across acquisitions, re-hypothecations of venture funds, et cetera, where people are starting are going to get ready for this.
The amount of money that the big banks have spent that NASDAQ and NYFC through ICE have invested in this, all of these investments, all of these things point to a massive trend and that massive trend is this. The era of paper-based certificates which are owned by proxy is coming to an end. The era that we’re entering now is the era of direct ownership and direct listing. Direct ownership means I have a wallet, custodial wallet or self-sovereign wallet, where my ownership of my stock options, that company that I invested in, that’s all there and I can sell that under rules that are have been encoded in a digital asset token-
Smart contract, yeah.
... smart contract, and then you see things like Slack. Now, do you remember what happened ... what Slack did a couple of weeks ago?
No, they direct listed. They did not IPO.
They actually didn’t go ... What happens with an IPO is that an IPO, a company dilutes itself, it sells those diluted shares to an investment bank and then the investment bank gets to sell them in an offer.
Goes and sells ... Yeah.
But the employees and the early investors and the founders in an IPO are locked up for months. What Stewart Butterfield did in this Slack direct listing is they didn’t dilute. They sold employee shares, investor shares and founder shares-
... directly to the market.
Vertalo is developing direct listing technology. So you can take your company, bring its cap table into our system, produce a digital asset that represents the ownership, the real sovereign ownership of the asset, and then connect it to an exchange and sell it.
And get liquidity.
And get liquidity, because you’re not going to get liquidity ... People ask, and I know this question is going to come up like when liquidity, sir?
When liquidity? How do you expect to get liquidity from an early stage startup in the first year after it’s trading? That doesn’t happen in the thousands of VC deals that are done. I mean five to seven years is even early for liquidity. My company was founded two and a half years ago. I don’t ... I mean how much ... So expecting digital assets to have liquidity when the platforms for them have barely come online is nonsense. It’s like everyone ... they’re focused on it. Anyway, any digital asset which was issued a year ago is already more liquid than any venture capital investment made three years ago, just by virtue of it being a digital asset that you can trade.
But where digital assets are going to be really, really interesting is when mature companies, ones with cashflows and clients and product and management teams and partners and bankers and lawyers, they can take those old spreadsheets, those single entry ledgers that they keep in cap table systems and in Excel, put them on a platform like Vertalo, turn them into a digital asset and then list those on an exchange like tZERO or Liquid, or Bitsum.
And get their payday.
And get their payday because the investors and the team will actually own their shares and there’ll be in the form of digital asset that they will be able to sell. That’s where the magic is. It’s not in tokenizing early stage companies for 100,000 bucks. That’s not the revolution that I’m in. My revolution is I’m an entrepreneur. I have interest in five private companies. I can’t sell them because there’s no market for them because my ownership is on a spreadsheet somewhere. It’s not in my wallet, it’s not in my control. Direct ownership, direct listing. That’s how security tokens and digital assets are going to take off and hear me now, believe me later. That’s going to happen.
So you actually just came back from a whirlwind tour for weeks around the world, really. What’s the ecosystem of the international security token system look like?
I have never seen a city, a society who’s more crypto captivated than Korea, it’s amazing. The teams that I met in Korea, Block Crafters, Art Block, Ex Talk, Bitsum, so many others. I met with the, with the Korean NASDAQ, KOSDAQ, I met with Eugene Securities, On Wat Securities, all of these companies across the board from the smallest to the biggest, are all interested in digital assets. So we immediately started signing partnerships while we were there.
We already have clients that signed on since we were in Korea. We’re meeting with major investment banks, major law firms and going into LOIs with them because that society was really interested in crypto as a whole. It’s really interesting. Japan, Japan is ... We went from Korea to Tokyo. Tokyo is has a history now in the last several years, of being very crypto friendly, and so we met investors in projects and exchanges there that are now looking at coming into the States.
Here’s the interesting thing, both Korea and Japan, those folks, they want to work in our regulated environment. They actually see what we have is having regulatory clarity-
That’s really interesting.
... and so they’re looking to our market to provide normalcy and figure out how these things should work. So it was mind blowing and eye -opening and it was ... humbling’s the wrong word. Just, I was really excited to get to meet these people and see all these interesting projects and they really believe in it. The things they’re doing with real estate over there, the things they’re doing with fractionalizing art, all kinds of projects and really, really high quality.
It’s interesting that you make that comment because I remember in the early days in June, 2017 with the SEC came out and said, “Hey regular securities laws applies to all these ICOs and these token sales.” Everyone feared that that would stifle and freeze the American innovation in this industry and the rest of the world would take the lead and you’re saying, actually that was the right approach.
Mm-hmm (affirmative). I actually see that the laws give people commonality to understand how things work better than language do. We’re seeing American companies go there and we’re seeing Korean Japanese companies come here. What you can do with a smart contract is super interesting because you can encode it with geo-fencing or jurisdictional restrictions. You can also do interesting things by ... You know, the travel rule, which says, “Okay, if you go and you can only transact in certain countries and you have to show credentials.” Well the travel rule’s basically just a like a programming role for an API. So one of the exchanges, they’ve announced it, I think I can say, that Bitsum is coming over to the United States and they’re going to have operations in Korea, the United States and other places. What they’re going to do is when an investor goes to their site, they’re going to be able to route that customer to the appropriate country for trading whatever asset they want to trade. You can do that in like, 25 milliseconds.
So they’re going global, they’re not hidebound, it’s quite the opposite.
So then what are your industry predictions for the next 18 months, through 2020?
Well, I think that the cost of so-called tokenization is going to continue to decline. It has to. Tokenization as a core business is probably going to be given away soon.
We’re already working with parties that are getting very aggressive in this respect. They need other value-adds because there’s so much competition to create a smart contract, there’s just no reason why you need to spend $100,000 write a smart contract. I mean, maybe someone can explain that to me, but we built our own smart contracts and we know it doesn’t cost that. So I think that you’re going to see a very, very rapid decline in the cost of tokenization, that’s the first thing. You’re going to see, because of the SEC’s ruling last week, you’re going to see the nuance or the distinction between a broker dealer and custodian, that’s going to come into high relief and the capital requirements for broker dealers will get them kind of out of the custody business and so you’re going to see actually custodians, like Prime Trust, they’re going to move up. Broker dealers enabled by technology like my firms, are going to be able to get into the digital asset game. Then you’re going to see mature companies that are not big enough to IPO, use direct listing in order to get liquidity.
Like Slack, because unless you’re a $1 billion company, no investment bank wants to take you to IPO. If you’re under a hundred million, you can get acquired. If you’re over a billion, you can go public, in between a hundred million and a billion-
It’s a very tough space.
... there are tens of thousands of startups and really great companies in between a hundred million and a billion that cannot go public. Direct listing like Slack is the answer and Vertalo is going to enable direct listing for all companies that want to get liquidity for their real company using digital assets.
That is super fascinating. All right, fantastic. This is Amy Wan with Dave Hendricks, and thank you so much for watching.
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