Steve Gatti is a partner in Clifford Chance's Financial Services Regulatory Group and head of the U.S. securities regulation practice. His practice concentrates on securities enforcement and counseling, with a focus on broker-dealer, investment management, and payment systems regulation, and issues unique to cross-border, multi-national financial services clients.
Steve represents U.S. and international financial institutions, including broker-dealers, banks, and investment advisers in regulatory, enforcement, fintech, cybersecurity, data privacy, and commercial matters. Steve represents institutions and individuals in examinations, investigations, and enforcement matters before the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the U.S. Commodity Futures Trading Commission (CFTC) and other self-regulatory organizations as well as state regulatory authorities.
Steve also has years of experience conducting internal investigations involving potential securities law violations and financial fraud, and in conducting internal compliance audits. Steve’s practice includes strategic counseling on financial markets and trading regulation, anti-money laundering compliance, investment management compliance, broker-dealer regulation, trading systems, distribution and marketing issues, new products, privacy, transactions in the financial institutions sector, and Dodd-Frank.
Jesse Overall is an associate in Clifford Chance's New York office and a member of the Capital Markets group. He focuses on a wide variety of complex financial transactions and regulation, reflecting his background as a former CFTC and SEC intern. He has extensive experience advising on U.S. regulation of digital assets such as virtual currency products and derivatives, and initial coin offerings. He has also helped asset managers set up private credit programs, and advised banks and sponsors in connection with complex structured debt and securitization transactions and regulation, banks and hedge funds on par and distressed syndicated loan trading, companies and financial institutions in negotiating OTC derivatives transactions, issuers and underwriters on public and private securities offerings, SEC filings, and corporate governance.
While in law school, Jesse served as a two-semester intern at the U.S. Commodity Futures Trading Commission (CFTC), in the Divisions of Swap Dealer and Intermediary Oversight (DSIO) and Enforcement, and as a two-semester intern at the U.S. Securities and Exchange Commission (SEC), in the Division of Corporation Finance and in the Office of International Affairs.
Clifford Chance is one of the world's elite law firms, with over 3,200 legal resources delivering innovative solutions to emerging fintech companies and leading financial institutions in the Americas, Europe, Asia Pacific, Africa and the Middle East.
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Hi, I’m Adam Chapnick.
And I’m Amy Wan. Coming up on today’s episode of Security Token Insight, we’ve got an expert interview with Steven Gatti and Jesse Overall from Clifford Chance and interviews with the panelists from our New York City meetup. That and more is coming up on this episode of Security Token Insight.
Now it’s time for your security token investing news. Our first story today comes out of Luxembourg where Black Manta Capital partners and Tokeny have announced a strategic partnership in building a multi-STO platform for the European market. The new platform will cater to both professional and retail investors and will include real estate projects, startups, and tokenized commodities and funds. By the way, Tokeny is a gold corporate member of the Security Token Academy. To learn more, go to our website securitytokenacademy.com, click on the Directory tab, and then select Corporate Member.
In other news, Morgan Creek Digital has raised $60 million of its $250 million goal for a second venture capital fund. The bulk of the raise comes from Fairfax County’s Virginia Police Officers Retirement System and Employees’ Retirement System. Morgan Creek’s second fund will focus on seed investments in traditional equity and fixed income portfolios.
And finally, Thomas Carter, the CEO of DealBox, announced a new startup called Digital Names. Digital Names wants to make it easier for investors to participate in the STO market by simplifying the process. The concept’s easy to understand. Each user will create a digital identity that links to their account information, which is in turn connected to their blockchain payment information. Users will then be able to send payments to each other’s digital identities instead of requiring lengthy combinations of letters and numbers. Carter likens this new method of payment to the creation of DNS for the early internet where users no longer needed to input numerical IP addresses.
The Security Token Academy is proud to present an expert interview with Steven Gatti and Jesse Overall from Clifford Chance. I sat down with them to discuss the legal and regulatory challenges around security tokens and more in this expert interview. Take a look.
Let’s talk a little institutional. Are you guys seeing that institutional investors are buying digital assets? What sort of legal or regulatory structuring considerations should institutional investors think about if they’re considering investing in the sector? What do you think, Steve?
Well, look, there’s always initially the viability of the investment. Do you believe the investment is going to appreciate in value? Is it consistent with the investment objectives that you as an advisor have set out to your clients? Is it consistent with the risk profile? So the same considerations that an investment manager may bring to any asset they would also bring to a digital asset. Concerns about liquidity. Will I be able to get out of it? Concerns about volatility. Concerns about consistency or portfolio drift because of the swings in value of these assets.
So I think over time, as there’s a stabilization in the volatility within digital asset markets, whether it’s cryptocurrencies or security tokens or otherwise, you will see even greater acceptance that digital assets, security tokens are a viable component of a diversified asset allocation strategy.
Are you guys seeing right now that institutions are already in, or is that sort of in the future yet to be determined?
Recent statistics have been published about the number of investment managers who have created part of their ... a slice of their pie into digital assets. There are managers out there who are marketing crypto asset funds and are focusing on that area of the marketplace in terms of investments. There is some statistical information out there, I just don’t have it at the ready. But clearly, you’re seeing it.
And in fact, one example, Fidelity, I think about six months ago, five months ago, announced a component of their private wealth program that would be focused on digital assets. So that would be getting down into people whose money is managed by a Fidelity asset manager. So bringing even to the high net worth area managed access to digital assets.
Right. One of your areas in particular of expertise is real estate. So Jesse, how do you see the security token changing the real estate space?
We think that security tokens have the potential to be very transformative on real estate financing and investment. We worked on the pioneering transaction involving the tokenization of a minority interest in the St. Regis Aspen hotel in Colorado. And I think that that transaction illustrates kind of the potential that tokenization has to serve as a means of financing in a more efficient and streamlined way for fractions of single fee-simple real estate properties.
And so we think that tokenization will enable the financing and carving up of smaller stakes in an individual property and then the divvying up of those stakes among the security token holders proportionally in a way that is superior to existing methods of finance, which can be very complex and very paperwork intensive and full of friction and difficulty. So we think that there’s this great potential for security tokens to represent a new development in the financing of real estate particularly.
Well, again, we agree here at Security Token Academy. What other verticals do you see being prominent in the security token space? Are there any reactions you’ve seen from the corporate world, specifically around blockchain technology and security tokens? Jesse?
At its heart, blockchain and distributed ledger technology, these are really just ways to record information in a new way. And so there’s no really constraints on what the content that information should be. And so this is something that enables these technologies to be industry agnostic and to be applied to potentially every industry or ... The benefits are not confined to just, let’s say finance.
That being said, a lot of the activity that we’ve seen, and maybe it’s because the original digital asset, Bitcoin, is a payment mechanism, we’ve seen a lot of interest, and we’ve seen a lot of developing applications in the financial services industry. So, for instance, there have been attempts to apply the underlying technology to a variety of different financial instruments from originating loans, for instance, to securitizing the loans and issuing interests in pools of loans.
There’s also been interest in applying the technology to the derivatives market. And actually today, as this show’s being taped, the Commodity Futures Trading Commission, which is the US derivatives regulator, is holding a hearing on the potential applications of blockchain and distributed ledger technology among others to swaps market.
And so we think that financial service has been an area where there’s been a lot of interest in security tokens and in the underlying technology. But outside of financial services, a number of traditional technology providers — IBM, Microsoft, Amazon — all offer blockchain technology that the developers can build on. And so we think that the uptake as these infrastructural services are being provided by these technology providers, we think that the applications will become increasingly common across many different industries.
Got it. So what do you think are some of the biggest challenges that face clients who are looking to launch a security token? What do you think about that?
What they’re faced with right now is a regulatory framework that, again, is not designed to accommodate a digital asset in the sense that secondary markets have not yet developed to adequately, say, transfer or create liquidity once you’ve offered the token. I think we’ve moved to a good spot in terms of being able to engage in a a compliant offering, primary offering of a securities token. You can fit into that framework relatively easy. There are some limitations perhaps on marketing depending on what exemption or what route you take in terms of the offering registration requirements. But thereafter it’s liquidity with respect to that security. That creates issues because the process of transfer, the process of custody in terms of exchanging those assets has not fully developed yet. So that’s a real challenge for someone engaging in an offering.
The other challenge is do I really truly have a security? Or I may have a security at the time that I offer it, but over time my security token truly will be a token, a utility token that allows someone within the ecosystem that I’ve created to exchange that token for some other item of value. Similar to a ticket at an amusement park. So to use an example, if you want to do as a securities token offering to raise money to build your amusement park, and you go out and you sell these tokens and you take the capital and you build the amusement park. And those people have those tokens, and they’re going to be using them in your amusement park a year later. Well, if you successfully build the amusement park and the tokens are then used, are they still a security or am I just using it to get on a roller coaster?
We have the full interview with Steven Gatti and Jesse Overall on our website. Be sure to check it out. Clifford Chance is a gold corporate member of the Security Token Academy. To learn more, go to our website securitytokenacademy.com, click on the Directory tab, and then select Corporate Member.
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We also invite you to check out The Digital Wrapper on Medium. It’s our new behind-the-scenes series with the teams building out the security token industry. These are in-depth interviews covering a wide variety of topics. You can view these when you follow us on Medium. And you can find out more information on our website securitytokenacademy.com.
The Security Token Academy held another successful meetup, this time in New York City, and we want to thank everyone who attended. We had a big crowd inside the Sunset Terrace at Chelsea Piers. Security token experts and financial services professionals were on hand for an evening of informative discussions, networking, food, and drinks. I had the opportunity to speak to our panelists one-on-one to get their insights on the security token industry. Let’s first take a look at what Robin Sosnow, principal at Sosnow & Associates, had to say.
Interestingly, the questions that I receive from prospective clients and my current clients are very much in line in the security token context as they are in traditional capital raising scenarios. So for example, they call and they want to know which exemption should we be working with here, and they tell me a bit about their objectives. Sometimes they have investors in mind. Sometimes they’re hoping to bring retail investors into the deal. Sometimes they’re looking to generally solicit. So we go through the analysis of what their plans are or intended plans are and how the different securities exemptions would impact their overall strategy. What’s really exciting to me is that since the JOBS Act, these issuers can utilize both regulation crowd funding and Reg D simultaneously, which is great given that the total maximum offering limit in a Reg CF offering is just over a million dollars.
When we embark on an STO with a client, we initially do diligence on where the company is organized, whether it’s an LLC or a corporation, which jurisdiction they’re formed in. Delaware is certainly a very promising jurisdiction for companies that want to rely on distributed ledger technology for cap table management purposes due to the Delaware blockchain statute.
We get a lot of inquiries from offshore issuers who are looking to tap into the US market. From them, the questions are, do we need to incorporate inside of the US? Should we form a subsidiary there? Which securities exemptions are available to us? Thankfully, Reg A+ is available both to Canadians and to US organizations, whereas regulation crowdfunding is not. And of course, Reg D 506(b) or 506(c) is available to everyone who wants to capital raise inside the United States.
It’s interesting to hear that you say that there’s been an exodus based on what’s happened over the last few years. Specifically in the crowdfunding context, they released just recently, the SEC released that there’s actually been no instance of fraud among the issuers who have utilized the regulation crowdfunding exemption. So from my perspective, if you’re a retail investor, you’re not accredited, and you’re looking to get involved in a digital securities offering, going to a funding portal like Republic or like SeedInvest or StartEngine or MicroVentures and reviewing the offerings that they have on site would be likely a safer bet than some other off-platform activities.
Be sure to check out more interviews from our New York City meetup on our website securitytokenacademy.com. Click on the Interviews tab and select the video you’d like to watch.
I want to remind our viewers that if you have any questions about security tokens, be sure to email us, and we could answer them right here on a future episode of Security Token Insight. The address is [email protected]. Be sure to include your name with your question. One more time, the address is [email protected].
All right, that’s it for today’s episode. 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. And 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 tab and click Corporate Member. I’m Amy Wan.
And I’m Adam Chapnick. For everyone here at Security Token Academy, thanks so much for watching.
You want to learn more about our corporate members? Visit our website securitytokenacademy.com, click on the Directory tab, and select Corporate Member.
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