Hey everybody, welcome it's me, Adam Chapnick. So the Security Token Academy will follow developments in the Security Token industry for enthusiasts, issuers, and investors. To do this, we're going to capture and showcase the voices, wisdom, and insights of Security Token experts, ranging from crypto enthusiasts to VCs to legal experts. But today, we have a very special interview with Genevieve Roch-Decter, the CEO of Grit Capital. Thank you so much for being here.
Yeah, thanks for having me.
This is exciting because you have a few things that are a little different going on with you then a lot of the people we have on the show. And we've had a lot of people on the show, but you are our first Canadian expert, right? So tell us a little bit, first, about you and Grit Capital. What is Grit Capital?
Okay, well, I don't know if I could qualify myself as an expert, but I'm definitely Canadian.
That's more of an expert than I am. So we're going to start there.
Okay, well, so Grit Capital is an advisory firm that I founded two years ago. And so we basically work with both private and public companies to help them meet investors and communicate their stories to an audience. And before that, I was a portfolio manager, so I've actually been investing and dealing in securities, if you will, for my entire adult career. And after doing that for nearly a decade, I decided, "How about helping companies as opposed to just investing in them." Because I think after meeting hundreds, if not thousands of companies, I had a little bit of an insight on kind of how to help them through their lifecycle. And about nine months ago, we got involved in the blockchain space in Canada, which at that point there were literally zero publicly listed companies.
Oh, nine months ago, wow, okay.
Yeah, so we came in it late to the sort of blockchain, crypto world but early, for sort of the Bay Street world, which is the Canadian equivalent of Wall Street because no one was talking about this stuff yet. And we saw a little nucleus of activity starting to grow. And we said, "We got to get involved here. There's something, and there's going to be opportunities. There's going to be capital raised. There's going to be investment opportunities and we want to be involved."
Got it, so Grit Capital itself who's involved, is it you, is it more than you and do you have a wheelhouse?
Yeah, so it's a wheelhouse. We have a house. It is myself and my business partner and she's also my best friend [Nicole Marshall 00:02:23]. And so is the two of us.
A lot of French names. That's very Canadian, I like that.
Yeah, and she spent the ... her career in investor relations, investment banking, and I spent it in portfolio management. So it's a good kind of perfect marriage for the two of us to get together. And we have a roster of clients. We've got 10 clients at the moment, not all in crypto, not on the blockchain. We do technologies, healthcare and in other sectors. And but most recently .... So the blockchain companies we've gotten involved with in Canada, the group that we've gotten involved with actually raise and have raised and I've been involved in the biggest deals.
So, for example, Galaxy Digital, which is Michael Novogratz company, which is about to go public on the venture, our clients helped engineer that deal, and actually sold their company to Michael Novogratz. And so our selves and our investors and our clients had done well being part of that company. And so that was one. Then Hut 8 Mining is another one that just went public on the venture.
Yeah, I met them in Balmy, Bahamas, yes, Nassau.
Yeah, so they ... Yeah, they basically took public [inaudible 00:03:36] North American assets, raised about 100 million in capital and then went public. So yeah, those have been the biggest deals. I think Galaxy Digital raised 350 million, Hut 8 a hundred, so that's half a billion dollars right there in capital. But that's equity, those are not ICOs. Nor STOs securities token offering.
Which we will get to shortly. We will talk about that in a second. Got it, okay, well so you were well-positioned. You're already in the thick of it, though, that's pretty exciting. Good for you, so what do you think about you said that's not ICOs, what do you think about this 2017 trend that just ... they basically could have been titled the year of ICO, what do you make of all that?
Yes, I guess it's been five billion or six billion in capital was raised last year. And I think the bulk of that was raised in the US or internationally as opposed to Canada, even though we are home to one of the most successful ICOs of all time, Ethereum and the Ethereum Network and the platform but we're always a little bit late to the game in Canada. And so I think the ICOs are going to continue but I think with the SEC coming out just recently and issuing dozens, if not hundreds of subpoenas to companies that run ICOs, I think the world is shifting towards the securities token offering. So STOs and if it walks like a duck and it talks like a duck. It's probably a duck, right?
That's definitely the SEC's opinion. And if that's their opinion that's our opinion. So great, so a lot of the talk about STOs, securities tokens, all of this came up somewhere where you and I saw each other a little while ago which is at PolyCon which was a conference put on by Polymath who is one of the first movers in this whole world. What do you make of that?
So yeah, our company, Grit capital had put on a conference circuit across Canada, back in October and November. And so we met Polymath through that conference circuit. So we had 30 to 40 companies across Canada, three cities 2,000 investors came out, and we met Polymath. And at that time, like I said, we were looking in helping companies that were into the equity space, and all that doing token offerings. So we met Polymath, and they actually introduced us to a whole new world, which is the crypto world, deep crypto, real crypto. And we got together, the two companies and decided why don't we introduce Bay Street and Wall Street to crypto? Because up until our conference, which just happened last month, most of the conferences have either been strictly crypto people going to them, or a few that have happened on Wall Street that have been equity conferences, or the ones we did, which would be equities in Canada.
But let's bring these two groups together and see what we can do and try and kind of grow up this space a little bit, institutionalize it, if you will. Because the people that we know and our clients their institutional portfolio managers, they manage hundreds if not billions of dollars. And most of them don't even own crypto yet, whether it's well Bitcoin or Ethereum, personally, let alone in their funds. So the idea was let's do this conference but yeah, I mean Polymath is in a sweet spot right now because they've realized that in the future is going to be having fully compliant offerings, not sort of what's been going on which is let's not basically talk to the regulators and raise capital on our own. That's not ... the regulators are there for a reason, they're there to protect not just the investors but the companies too with their disclosures.
For sure, that's the idea. And so you're talking about the gymnastics that the SEC was warning people against doing to make, try and keep into ... keep their definition as an utilities token to avoid the SEC sort of wrath but I think yeah, I think the future is here. You're saying if the future is securities token, it seems to be here but so, how does it work in Canada as compared to the US? You have experience, which makes you, in my view, you're an expert here. In terms of the Bay Street way of getting involved in some of these things is ... What's the equivalent in Canada to some of the SEC's views on these sorts of raises? Do they have similar rules to our rules that have to do with accredited investors and whatnot? How does that work?
Yeah, so I mean, I've just kind of gone down the rabbit hole here in the US and quickly got up to speed on what the sort of exemptive reliefs are for these issuers. So there's Reg D which is basically you can sell to investors as long as they're accredited.
So the Reg D is that's ... in Canada they call it reg D as well?
No, no, so that's here in the US-
Yeah, that's here.
And then you got Reg A which means you can sell to basically anyone ... anybody but you've got a 50 million hard cap. But my point is those are exemptive reliefs. Basically, you apply with the regulator to be able to do these things.
In Canada we have similar things, we have exemptive reliefs and a few companies in Canada have used these. TokenFunder got exemptive relief by the [OSC 00:08:36] to basically do an ICO, so they could raise capital from average people not just accredited investors. But they work through with the regulator's, paid lawyers, and were able to do this. If we're going to assume, going forward that all of these ICOs or STOs and their companies and their private companies, essentially, yeah, you need to have an offering memorandum. You need to apply for the exemptive release that you need. And you need to be selling these things through licensed parties, whether it's a broker dealer or in Canada, we have what it's called an exempt market dealer. So this is a firm that's regulated and they're registered with the regulatory bodies and they are able to sell securities to accredited investors.
So what about the mechanics in terms of an ICO, does that differ from country to country or is it fairly the same that we've got a pre-sale here, it ends up being a pre-sale is for accredited and then ostensibly, the public sale is for everyone but now it sort of seems like maybe it's not for everyone, it's also for accredited, does the differing regulations in Canada affect that at all or do you see it basically the same?
I would say they're ... those are probably the same because it doesn't really matter where this ICO is happening. It's more the definition of whether it is going to end up being a securities token, whether it's going to be categorized as a company, a private company but to date, there's been ICOs that have avoided the Canadian jurisdictions just like some in the US have avoided the US jurisdictions. [inaudible 00:10:16] is a great example of that. I think it's like the most successful ICO in history. They said, "We're not taking money from any US investors." They've raised I think over two billion dollars. In Canada, we had one called KiK. They did an ICO and they said, for whatever reason, I haven't gone down the rabbit hole into the details but they said, "We're not going to raise money from Canadian investors."
And I think they just went US and overseas. So there have been different cases one by one here but I think in the end, where this entire thing is going is yeah, everyone's going to need to work with their regulatory body and pay the money and pay the legal fees and raise money from the proper investors.
So that, obviously, is a good transition to what this whole security token thing is. So, for years that's how people have done fundraising is they work with the regulatory body and they get the money and they have an investor. Now we kind of have gone around the circle and come back home to that but what's the deal with these securities tokens? Why do they make it easier? Why is that ... Why wouldn't we just go back to raising money the old-fashioned way?
Because I think what this entire kind of blockchain crypto world has opened up is an international market, right? It's like online marketing for companies, very similar to kind of with Indiegogo and these crowdfunding sites have been trying to achieve for the selling of products and ideas. But we can still have both worlds. We can still have a world where you have a regulated token an STO, securities token offering and use the technology and the global communities to raise capital for those companies. And so I think it's this whole movement is been fantastic for that. One of the mechanisms that's been used by a lot of these ICOs is the air drop, right? So the air drop to basically distribute your tokens to a broader community, you give away tokens. I mean, I've never seen that on Wall Street. You don't give away shares in companies.
But I think that, that has just opened up a new world for all these companies and people can learn about companies online before actually even meeting the management teams. You can read their white papers or soon to be offering memorandums online and watch videos and learn about these companies without actually meeting them. So it's globalizing the investment community in a new way. Telegrams, another example of this, you've got these communities of sharing online. Sometimes they probably shouldn't be saying what they're saying in those communities, right? Asymmetry of information and that kind of thing.
But we're going to grow up where this is an industry in its infancy and we're at the awkward teenage stage, I guess.
Yeah, I think that's right. Okay, so securities tokens, so how is it that the actual mechanism of a token makes all of this more possible than it did before? Is there something different about a securities token that makes all of this compliant or is it just that people are compliant when they say they're going to use one of these?
People are compliant when they actually file the proper documentation with whether it's the OSC, the Ontario Securities Commission or the SEC. So it doesn't make ... it doesn't change kind of the validity of the business or the operating plan. It's just whether they're properly regulated and we have something in the US and use it in Canada too called the Howey Test, which is a test you don't want to pass, was the budding joke in crypto land. But essentially, yeah, if you're paying money to invest in a company and you expect a profit from that investment in some way, whether it's through dividends or earnings of that company going up or in the case of crypto, it's the value of that coin going up.
If that's the expectation, and you're investing in something where the capital is going to be used to create an operating team that's going to use their labor and their talent to create something, that's a security. I don't care what you call it. So yeah, I mean, the securities token ... What I'm excited about, though, down the road, I think the technology blockchain is phenomenal for security. So right now, if you were to do or make an analogous sort of metaphor, back in the day, we had flip phones, right?
So flip phones all they did, you could call somebody on it. And then we evolved to the smartphone world, where you've got iPhone with applications on top of it and they're smart. They can actually do things. So securities right now are just like a certificate, a piece of paper that you own in an account that it has rights associated with it. They know who owns that security and the dividends that are due but it can't really do much else. And so with a token, because you can program it, you're going to be able to kind of digitize all this information right into the token, whether it's going to be the KYC information, whether it's going to be when should these dividends get paid?
And I think even further than that. I think it's going to open up the stock of, the equity Stock. So you could have different tokens to fund different parts of businesses and for different types of investors at different risk levels. And so I think it's going to make funding a much more powerful tool and make it more diversified across different types of investors.
I love that, can you say more about that? How might that, not to put you on the spot, but how might that work? If you had a token that could be divided up in the capital Stock?
Yeah, well, so I guess, you could ... let's use Reg A and reg D as an example of that. So for part of your equity Stock, maybe only part of it is available to-
Non-accredited or maybe you're launching a fundraising plan but you're trying to fundraise for real estate and maybe that will only be applicable or appealing to real estate investors. If you're building a new building or laboratory or whatever or if you're building a mine, maybe that's only appealing to mining investors. So you could actually diversify your fundraising across maybe sub sectors, sub investors. There's a lot in there-
That you could do with digital [crosstalk 00:16:31].
I love that explanation. I had not yet heard that as one of the use cases for a security service, that's great. So do you think that in the future what we're seeing now, and I think I know the answer but, that this ICO sort of nomenclature is just already sort of a dinosaur that's just still walking and waiting. The asteroid has already hit and the dinosaurs are just walking around waiting to die. And then-
It's just all going to be STO.
I think that's where it's going. I mean, there's a great quote I love to use about blockchain and crypto in general. And it's like, "All truth pass through three stages." So first its ridiculed so, crypto and blockchain we're made fun of by pretty much every kind of important person, whether it's-
The most famous case. And then it's violently opposed and I think we are at that violently opposed stage where the regulators are pushing back. The Tier one banks in the US are fearful. Bank of America just came out and said in their annual report that they're concerned about crypto currencies taking business away from them.
Yeah, risk factor, right?
Yeah, and investors are scared. There's been a bunch of scams. People have lost money. But one thing I should add on that, because ICO has got a bad rep because there have been scams. But scams exist wherever, in private businesses, scams are just ... their statistic. They're always going to happen. There's always going to be bad actors.
ICOs don't scam people, people scam people.
That's a good point. We've all been there.
Exactly and most businesses fail too. That's the other thing. So a lot of people are saying, "Oh, these ICOs don't have good business plans and they're not going to make it." And it's ... but that's the reality businesses, most of them don't make it.
That's so interesting you say that because a week or two ago, there was a stat that came out that said, "Studies have shown that 46% of ICOs fail." I was like, "46? That's great."
I don't know, those odds are better [crosstalk 00:18:26]-
That's fantastic, right? So, okay, good point. So here's ... get out your crystal ball now, the Grit Capital crystal ball and can you predict for us what you think the percent of US and Canadian ICOs will use or maybe they won't be called ICOs, what we would have called ICOs. By the end of this year, how's the percentage going to shake out between ICO versus what we're calling STO. What do you think it's going to be?
I mean, that's going to depend on how aggressively the SEC is going to make an example of someone and how high-profile that company is going to be. And that's going to scare everybody.
That will accelerate in STO.
Exactly, it'll all be STO. I think the 80/20 rule always applies to most things. So I think by the end of the year, probably 80% will be STO, 20% utility. And I think by the end of the year we're going to have exciting projects launched like the tZERO digital training platform, which wants to have securities tokens listed on it. They're building the Nasdaq of the security tokens world. And that's really exciting and they're fully ... Well, they're compliant with SEC rules according to their white paper and raising money from accredited investors. And I know this because I'm investing it in myself and had to go through the verify-
[AML 00:19:38], KYC, etc., etc., yeah.
Yeah and it's a lot, it's onerous. In Canada when you invest in a private company, you actually don't have to prove to them that you're an accredited investor, you fill out what's called a sub agreement and left part of the offering memorandum and you tick off a box and it says, "I'm an accredited investor because." You don't have to prove anything.
Yeah, I think that's the ... here ... they've got a 506(b) which you can do that 506(c), you can't do. I think people used to do B now they do C. So maybe in Canada they adhere more to the B version. So what about this ... the other promise of securities tokens, at least I've heard people talking about which is the securitization of all assets globally. How does that work or will that work, do you imagine?
Well, so I think CryptoKitties, to be honest, is probably a great example of this. I was talking recently with [Bill Tai 00:20:32], internationally renowned VC and he was wearing a CryptoKitties sweater and I asked him about it. I said, "Come on, these cats, people are paying hundreds of thousands for them. What? You're really into this thing?" And he said, "Well, it's the first example, basically, of a decentralized kind of marketplace, where people are willing to trade and invest in digital assets, essentially." And at one point, I think CryptoKitties was like a third of the Ethereum Networks processing in network capacity. So it's pretty important but yeah, the centralized marketplaces where own fractional ownerships and things whether it's real estate or commodities. I think that has validity just like the sharing economy did, right?
So I think like five or six years ago, or maybe I'm getting the numbers wrong, maybe it was 10 years ago, nobody would have thought we would have shared our condos or houses with strangers. And I don't ... I think people are kind of getting their heads around, okay, owning like a small slice of a hundred million dollar chateau or a 10 million dollar diamond or some vintage wine.
Yeah, there's all sorts of opportunities to diversify your assets and I think that's what the blockchain is going to bring that ability to the world.
Got it and so in general, is that sort of the concept that securities token can can provide this sort of carving up something that's giant and hard to wrap your arms around into sort of a more digestible slices? Is that for people to understand why this is significant? Is that an easy sort of summary of it?
Yeah, I mean, I think that's one of the values but that ... I think that's when you're talking more about like that the token itself and then the digital value of the token as opposed to whether it's ICO or STO. It's just having this technology that's decentralized not controlled by any one party that can present ownership in something. Another person that I spoke to recently, which is trying to use a blockchain to lift people out of poverty through the ascription of property rights. So there's a project that tZERO is actually involved in or sorry, not tZERO, overstock.com called De Soto. And so Hernando de Soto is a famous Peruvian economist and he helped lift thousands, if not tens of thousands of people out of property in South America through the description of property rights. If you own your home, you have financial backing, it puts you in a more comfortable position yada-yada-yada. There's lots of fall on from that.
And so they want to use that same concept but on the blockchain. So go over to third world countries overseas and use the blockchain because everyone has smartphones now and they can own something on their phone. They don't have to have a bank account.
Totally interesting. So what about liquidity? We hear that liquidity is also one of ... this is sort of when you try to explain like at the Thanksgiving table, that liquidity is one of the things that makes this whole new sort of regime interesting. How does that fit in as a benefit either of an ICO or just sort of in this new world with STOs?
And by liquidity you mean the training of the tokens?
Yeah, if I'm at an investor, and I get involved, why is what I have more liquid? Or why is that a benefit?
Well, so, I mean, it's liquid when it gets listed on an exchange. So until it gets listed on one of the kind of major exchanges out there, which I'm told is actually very hard to get on these exchanges-
Yeah, yeah, so you have to be on coin market cap to be able to be eligible to list on most of these exchanges. And so once they're on these exchanges, these tokens that have been air dropped and given away to a lot of people as well as the ones that were purchased in pre-sales, they hit in exchange just like a major stock market and you've got liquidity so you can sell you whether you want to go into another crypto: Bitcoin, Ethereum, and Altcoin. You can use shape-shifts, shape-shift it in any coin you want or you can go back to [Fiad 00:24:28]. So yeah, liquidity like in any financial market, is really important, Dampen Volatility, price discovery. I think one thing that the market doesn't eat is the ability for people to kind of take short positions on some of these things. I've actually been hanging out lately, coincidentally, with some of the major short sellers, globally.
Yeah, I was down in a ROTH capital conference and there was a few of them there. And yeah, they can't really get involved in crypto yet because the mechanisms are not exactly there. There's some futures contracts that are available but you can't really borrow tokens right now and short sell them. It doesn't work like that. It doesn't in on Wall Street and Bay Street yet.
Yeah, not yet. And I know a ton of people, definitely, my parents vintage. Short that, shorted, it's all going down. So I think you're right on that but so how will investors ... So go ... moving on what we were just saying. In the future if investors do end up kind of moving into this everything is a securities token, why is that better for an investor?
As opposed to just traditional equity?
Well, what has been in the last 18 months, let's say. If we go from like you were saying, in the crystal ball, if we go 80% STO is that better for investors?
Yeah because I think ... So with being regulated means you have disclosures. So you have to disclose your financial statements. You have certain things that are required to be a public company that's regulated. And those are things that investors should be reading. They don't always read them but at least they are available. And so right now all you have are white papers, which some people compared to my high school scientific project.
Yeah, napkins, right?
Exactly and so let's have annual reports. Let's have quarterly reports. Let's have disclosures of insider ownership and insider trading and dispositions and that kind of thing. That transparency, that level of transparency is important. This ... some of its over the top and I think part of why I've been really attracted to the space is because of the communal and sharing aspect of the community members and there hasn't been a lot of that on Bay Street and Wall Street for a while because fees have been condensed and there's not a lot of abundance anymore in the traditional sense but in crypto, it's like a blooming community and there's enough to go around for everybody and people are wanting to share and joint venture and partner up. And so there's a lot more of a positive sort of flow to the whole thing.
Yeah, early days, the glow is still here.
So you mentioned Bay Street and Wall Street, how do you think these security tokens will impact Bay Street and Wall Street in the near term, even the mid term?
Well, the kind of ironic thing is and I'd like to say, this is back home, in Canada there's these investment boutiques like GMP Securities is a great example. They raised money for both Hut 8 Mining and Galaxy Digital like I was describing, almost half a billion dollars has been raised. If I was them and I am friends with the CEO of GMP Harris Fricker, I would be opening up STO advisory groups. Because if this is the way of the future and this is how capital is going to get raised, I would want to get up to learning speed on the technical. You're going to have to hire developers or outsource of development of the building these tokens and launching research on them and getting your institutional investors to open up wallets. So that they can actually buy these tokens. There's a whole ecosystem where the bridge is not there yet. We haven't bridged the gap. There are crypto funds out there that know how to open wallets and the custodial services and getting those because you need to have your tokens kept safely somewhere, which is a whole other-
Much more complicated than you think.
And also, as I'm only saying from experience but yeah, that's totally true. These are things that people forget to mention.
And yeah and I think that's going to be a big thing for 2018 is the custodial aspects because institutions and high net worth individuals that own funds, they want to know that if they're investing in those funds, there's insurance, they're with ... they're kept with, their stock is kept with reputable financial institutions. And that's custodial services. And at the moment, there isn't really insured custodial services out there. Most of these platforms, even Coinbase, they only insure a small portion of what they hold.
So yeah, I think you're probably going to see some big firms out there announce that they're getting in a custodial service space-
I love it.
And that will help. That'll be an on-ramp for volume and for more capital to flow.
Very insightful, okay, so since you're back in the crystal ball, any other things you're seeing? You got the custodial, you got 80% securities tokens, what else do you think you see in 2018 for this space?
For this space?
Or for Grit.
Oh, for Grit. That's a tough question. I think we've covered most of it off and usually with crypto and blockchain it's always the thing you don't think that's going happen, that's gonna happen. There's always a magic rabbit that comes out of the hat to surprise you. So, let's just stay tuned and see what happens and deal with the aftermath when it does.
Sounds fair, so Genevieve Roch-Decter:, CEO of Grit Capital, thanks so much for stopping by and talking to us.
Oh, thank you so much.
For the Security Token Academy, I'm Adam Chapnick, thanks for being with us.
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