As founding CEO, Stein is leading Harbor's efforts to tokenize private securities and unlock access, value and liquidity for private investments such as commercial real estate, investment funds and more. He was previously general counsel and chief compliance officer at Zenefits, served as general counsel at OptumRx (a subsidiary of UnitedHealth Group), was an Assistant U.S. Attorney, a federal judicial clerk and an Intelligence Officer for the U.S. Army.
Harbor: the compliance platform for tokenizing private securities
Everybody, it’s me, Adam Chapnick, with the Security Token Academy. So today we are pleased to bring you a corporate member interview with none other than Harbor. Harbor’s a gold corporate member of the Security Token Academy. Harbor is an institutional grade digital securities platform for complying and fundraising, investor management, and liquidity, powered by blockchain technology. For investors, the Harbor platform enables online access to quality private investments with unique potential for enhance liquidity.
Today we are going to learn more about the company, their products, their team, and much more. And to do that we go to and where else? San Francisco where I’m joined by Josh Stein, the co-founder and CEO of Harbor. Hey Josh. It’s great speaking with you.
Hey Adam. Thanks for having me.
So can you tell us how Harbor was created and give the viewers maybe a little background on the company?
Sure. The idea for the company originally came from David Sax. He’s a long time successful entrepreneur in Silicon Valley. He’s one of the original PayPal founders. He was raising his first VC fund. He was enchanted with blockchain technology, and he wanted to tokenize the LP interest in the fund. He wanted to allow for some liquidity in that VC fund. And what he realized as he dug into it was that there was no compliant way to do so, to both issue the token and especially to control how it trades.
So using a traditional fund structure and you tokenized at that point, you’d run into compliance problems down the road. So he had an aha moment and he said, there’s a business here. And that’s when he reached out. Our co-founders, Bob Remeika, Arisa Amano, and then they reached out to me and we started Harbor.
Amazing. So there are a couple of terms that we throw around in this space. One is tokenization, the others securitization. They’re related of course, but can you maybe explain the difference for the viewers?
Sure. Securitization is an old process. It happens all the time today. A great example would be a mortgage back securities. So on mortgages alone, not a security, but people would take packages of mortgages. They put them together and they’d slice them up and sell those off. And those were securities. Those were bond-like securities. Equity in a company is securitization. So one person can own a company, a partnership could own a company, or you can sell off shares to a lot of people, and those are securities.
Tokenization refers to taking those securities and digitizing them using the blockchain. So I think the best mental model to use was the transition from snail mail to email. Used to be written communications. We typed out a letter, we pressed print, we threw in an envelope, we paid 50 cents, we waited three days.
Then I can remember when we started pressing send. The content, the communication’s the same. It’s in the English language. You’re saying the same thing. But because it’s in a digital format, that email is faster, cheaper and easier by orders of magnitude to send. Similarly, when we take securities, a stock, a bond, a share in a private REIT, an OP interest in a fund, and we quote unquote tokenize it when we digitize it. Now it becomes faster, cheaper and easier to issue that security, and more importantly becomes faster, cheaper and easier by orders of magnitude to trade that security to get secondary liquidity.
I love that. I have not heard anyone use the email to snail mail example. It’s so elegant. So good for you for coming up with that. I think we’re going to hear that often. So with this kind of new advent of this technology, what are the pros and cons of applying it across different asset classes?
Sure. I think there’s nothing but pros to applying it across different asset classes. I think adoption will vary over asset classes and the amount of benefits it brings is different. So tokenization and the use of software platforms to raise funds are about two things. One is you can increase access. You can syndicate more widely by using modern software platforms to onboard and vet the investor. You can, if you can draw the interest, you can efficiently process through a large number of investors. More importantly, you can provide liquidity. And liquidity is really the killer feature.
So if you look at asset classes where they consume a lot of capital, they’re sensitive to the cost of capital and they’re relatively indifferent to the identity of the investor, those are going to be the ones that maximize liquidity because they’re going to allow any legal invest around the world to invest into trade. Any incremental capital raising or lowering of the cost of raising capital is important to them. So in real estate, they have what’s called a capitalization rate. You could almost think of it like a yield rate or a dividend rate, similar. If you could take a five cap down to a 4 1/2 cap because you could raise capital for more people more efficiently and they valued that liquidity, that is tremendous for the real estate industry, which is incredibly sensitive to the cost of capital.
Yeah, amazing. Great examples. So we’ve seen a trend here about tokenization all over the place, but especially in the realm of startups. Where do you think that’s gone? What do you think about that?
I think tokenization is very interesting in the realm of startups. So we had the whole ICO craze where what was being tokenized was not equity. It was not a security. It was a payment type, a currency for a software application. So Filecoin’s a great example. It’s a wonderful software project. Filecoin is the way you paid for distributed file storage, a distributed or a blockchain version of Dropbox. People went and bought them. They evaluated like investments in companies. They were looking at the team, the technology, what they thought the adoption would get, but they were not buying equity in the team. The monetization was the hope that this coupon, this currency for use and the software would increase in value. I think today what starting to see and would Harbor is really starting to focus on is tokenization, equity, and startups.
So it’s very much a traditional stock. But by tokenizing it, by allowing for liquidity, that should attract more investors. Those starts can syndicate more widely, bring down the check size, attract more investors. Those investors value the liquidity. And so I think a lot of the aspects of ICOs that people liked, investing in startups, liquidity, low check size to get in, you can see with tokenized equity in companies, but we’ll be fully compliant. It’s treated like a security and companies like Harbor ensure that that tokenized security is compliant when it’s issued and compliant every time it trades everywhere.
Yeah, that’s exciting, I know for early stage companies, because they really don’t have a good way to keep a handle on their cap table. If people start selling their interests and they don’t adequately report back to the company that they’ve done it. That’s a really nice benefit that the technology offers. Is that right?
That is. And that’s what Harbor’s focused on. I think we sort of, what distinguishes Harbor or how our architecture and approach is a little bit different, is we track real world identity in real time. So that company always knows the identity of everyone on their cap table. We have a feature that allows them a fine grain control over that. Some people are wide open on liquidity. They’ll allow any legal buyer around the world, to buy in and out. But there are a lot of startups would that when you’re talking about equity in the company, they want to be able to control it. They want controlled liquidity and so Harbor has what’s called the trusted parties feature that allows companies to designate who can trade either by name or by rule sets and limit liquidity of that group.
So you could imagine a world in which a company tokenized equity and it would only be for their fans, say an east sports team, and they would allow their fans to buy an equity of the company and to trade. But people who were not fans, who weren’t season ticket holders, or who didn’t have a history with the team, could not buy. Or for example, a company wanted to incentivize its key partners. So it has partners it depends on to do better. We grant employees stock options all the time to make sure that employees are incentivized for the success of the company. Now because of the controls you can have, a company can sell or grant equity to partners of theirs, but they can control trading so that only partners can trade and the company always knows who owns what when.
Yeah. That’s great. That’s real new way of looking at a company’s equity as a deal making unit. It’s an interesting new world at that usher in. So you talked about sports teams, that’s a really interesting use case. What about real estate? I know you guys have been in that for ... I think that was one of your first areas that you were in, is that right?
Yeah, we like to say is we didn’t focus on real estate. Real estate initially focused on us.
I like that.
Yeah. I think the reason why, it’s just what I said before, real estate consumes a lot of capital, very sensitive to the cost of capital. Anything that makes fundraising faster, cheaper and easier. Particularly that allows liquidity later because real estate, private real estate, as an asset class has almost no liquidity, is very attractive. But it’s not just real estate that’s focused on us. So we’ve seen a real demand from companies, particularly startups to tokenize equity in the company. I think the sports one is a really interesting one because what you can also do is that when you track real world identity in real time and you can control it, you can now bundle in with that equity ownership, rights or perks that aren’t normally associated with owning a piece of stock.
So for example, if an east sports team tokenized some of their equity, they could allow any shareholder to also get a discount on tickets or to events, have special events to meet the athletes. They could get special rights to merchandise. If you think of a professional sports team, like say the Knicks tokenized a portion of their equity, they could say that shareholders in the Nicks get first dibs on season tickets, get to meet the players after the games a couple times a year.
So companies can take things that don’t cost them very much but are very valuable to fans and monetize that. And the fans are able to get access to things they couldn’t otherwise and actually own. They are no longer just fans, their stakeholders, their shareholders. So you’re really able to align interests and drive engagement between fans and a team or between partners and vendors in a company.
It’s a lot of the promises that we’ve heard really for years, going back to, you know, the Kickstarter and Indiegogo, the rewards based crowdfunding, the engagement of a community all the way through the equity crowdfunding and giving actual stake in the company that you have spent time supporting and loving. Then there’s an element of, you got the Green Bay packers, the community ownership. It’s kind of got the best of a lot of different flavors all baked into this. I think that’s really exciting.
I think it’s exactly right. You’re taking the best aspects of a variety of different innovations in finance and engaging people, and now you’re able to combine them all. And you’re able to combine them all in a way where the company, the issuer, can have really fine grained controls. So the way that Harbor works is essentially every time that security token that digitized share goes to trade, it pings Harbor. Harbor checks, the who, what, and where of the rules. So those are the rules around who the buyer and seller can be, what the trade or what the cap table is to look like, and where the trade can occur. So it may be that trusted parties white list where only certain people can trade. Or that has to be in a credit investor around who the buyer and seller are. What the cap table can be, is with private securities, there’s always rules around maximum number of investors or minimum number of investors or holding periods. You want to control for that.
Then a lot of companies want to be able to control where it trades. They want to choose, does it trade on an exchange and which one. Or does it trade in a dark pool or over the counter. Technologies like Harbor’s allows you not only issue those shares faster, cheaper and easier, but it unlocks liquidity. It takes away these barriers to trade, but to be done on automated algorithmic basis on the rules that that company sets.
Yeah. Amazing. So back to the real estate. You guys had your first security token offering. It was for something called The Hub at Columbia, which was a multimillion dollar mega dorm at a University of South Carolina. Is that right?
That’s correct. The first deal that was available. We’re really proud of our partnership with DRW and Convexity Properties. So Don Wilson owns Cumberland Trading. He was one of the first institutional players into trading of cryptocurrencies. He’s also got a private equity real estate arm. And so this kind of combines all of his different backgrounds. His long background is a foreign exchange trader, his background is an early cryptocurrency trader, and his background in private real estate. And the idea now is to tokenize a REIT that’s going to own a little bit less than half of luxury student housing outside of the South Carolina and to do a tokenized REIT so that you unlock liquidity, reduce all those barriers and frictions to trade. And this is an example of what we think is exciting, which is introducing liquidity to private commercial real estate, which is a completely illiquid class today unless you’re buying and selling entire buildings.
So let me ask a question about that. When you guys talk about the liquidity on that secondary trade, are you providing the marketplace for that? Or will your tokens live somewhere else?
So we’re not a marketplace or an exchange, we’re a compliance protocol. So we’re a software platform that onboards vets the investor, that coordinates the signing of documents and the flow of funds in and out of escrow for the issuer. But then we are also this compliance protocol that ties into the platform that controls then how it trades. So that way an issuer can allow this to trade on one exchange, multiple exchanges, peer to peer, wallet to wallet, or what you can think of as over the counter. Essentially what Harbor does is we centralize compliance control of that cap table and then we’re decentralized as to everything else. So that company and those investors can use any exchange, any wallet provider, any qualified custodian.
They can also use all these exciting technologies that allow you to very efficiently create levered longs and leverage shorts like DYDX that can allow you to create sort of micro ETF products called SET or that can get you efficient margin loans like maker Dow or things built on the Dharma Protocol. And so these are all ERC 20 standard tokens. They fit into the larger ecosystem with all these players. So essentially what Harbor does, is all the important compliance rules that you don’t want to mess up or you have to go public or you blow your tax treatment, we’ve centralized control of those for the company so that the company can control its cap table and can ensure compliance. And then we’re decentralized as to everything else. So Harbor is not the exchange of the marketplace, but we are plug and play with any exchange or marketplace that takes an ERC 20 standard token.
Yeah. It really empowers the owners to have a lot of options when it comes to that time. That’s really important. So you guys are in the headlines now, which is exciting. Can you tell us a little bit about the new digital securities platform?
Sure. So we’re launching a version two of the platform. What we found was a real market demand for companies to engage with their investors. I mean, we think of in terms of relationships. Relationships, matter. So before this change, the Harbor platform, the Harbor brand was very prominent. Now we’ve changed it around so that you really see the issuer brands. So you see the issuers color scheme. You see their brand front and center and then you just see a little Harbor logo and powered by Harbor tag. So it’s very clear that the investor is interacting directly with the company, and that that company is creating and deepening its relationship with the investors.
And then we’ve also launched with that, this trusted parties feature that allows companies to have controlled liquidity where it’s not just enforcing the rules around the securities laws, but they can pick and choose a set group or types of groups of people to allow to trade. So fans, customers, existing shareholders, they can have controlled liquidity. And then we’ve also created a set of tools so that the company can administer their cap table to make it very easy to get reporting and communication with their investors. We’ll be rolling out additional features over time, like distribution of dividends, proxy statements. We can already allow for the distribution of investor materials. So it’s a set of tools that are all around the company building, creating, building, and enhancing its relationship with its investors.
Spectacular. All right. So how do you feel about walking us through the dashboard from where you’re sitting?
Sure. Why don’t I try walking you through the lifecycle of a security token?
Ooh, even better. Let’s do that.
And then walk you through how the dashboard works at the end.
I think that’ll make sense. So what happens is if you’re doing a capital raise, the primary capital raise, there’s a marketing website. With this new platform, it’ll be, let’s say we’re doing it for the Knicks. Not that we haven’t talked to the Knicks, but love the basketball team. Let’s see we’re doing the Knicks. So it would be Knicks or let’s do the Warriors. It’d be warriors.harbor.com. You would see some information about the investment opportunity, a little bit about the Warriors, the background. Are you interested? You’d click. You’d be invited to create an account. We’d still have the Warriors, still have the gold and blue. It would be all their branding.
So you would create a Harbor account name, address, social, date of birth, couple of other pieces of information, a copy of your driver’s license. We do a first level KYC AML check in two to three minutes automated while you stare at your screen. The next step is, if you need to be a credit investor, you go through accreditation checks. You upload the documents to prove your assets or income, or you give us the name and email address of a proper third party that can attest to that credit status. Then you sign an NDA. Then you go to the offering page, which is more a fulsome website that has more information on the offering. It’s got a copy of the private placement memorandum, it’s a really long formal legal document that has all the disclosures and financials. Usually there’s also a copy of a marketing deck that’s sort of an executive summary and then there’s also a subscription agreement, the legal doc.
When the investors ready, they sign the documents. Then they go through a payment order flow. They can pay in dollars. They get wiring instructions to an escrow account. They want to pay in cryptocurrency, they can pay in Bitcoin or Ether. And there’s a counterparty that provides a conversion service. You can think about it as though you’re paying in Euros and Yen and there’s a bank that’s providing a currency conversion service. The issuer is just getting dollars in that escrow account. When they’ve raised the minimum amount, the contingency in the fundraise, they break escrow and we announce to the investors, congratulations, your investment’s been accepted. So in the process so far, up until now, it’s a normal private capital raise, but in this case, the Warriors, they can syndicate far more widely. They can take in far more investors than you ever could in a paper world because we can efficiently, quickly, and cost effectively push them through.
So now comes the crypto part. We create a wall with a qualified custodian. We create the security tokens. We engage a big four accounting firm to audit the KYC AML, the accreditation, and the financial flows, the documents. We engage in education campaign with the investor. The investor has their account where they can see, hey, I own 10 shares in the Warriors. They can see the copies of the documents they signed, they can see links to a Warriors investor portal. They can see links to the exchanges or OTC desks, where this is trading. Then they’re off to the races and they can go trade when and how they want. And the Warriors can sit back and relax and know that every time that share goes to trade it pings Harbor no matter where it trades, it pings Harbor. Harbor checks of the who, what, and where of the securities rules and the rules that that company has asked for.
And every time, if all those rules check out, the trade goes through, no one knows Harbor was ever involved. And the wonders of the blockchain are you can trade 24/7/365 around the globe with near instantaneous settlement, no counterparty risk. But any of those things don’t check out, the rules can’t all be met. Harbor throws an error and like an email message bouncing back and will say, “Error would result in too many investors. Error would result in too few. Error, buyer is not on the trusted parties list for this company.” And so that way, we’ve taken away the frictions of a paper world and we’ve allowed people to trade freely to the limits that they can under the prevailing market conditions.
That is a great explanation for people who would want to understand the real world way this would happen. So as a little bit of inside baseball, or maybe I should say inside basketball for what you were saying, this is what we would call, I think, and correct me if I’m wrong, it’s a Reg-D 506-C because of the way you described this. Now are you guys contemplating going into the general public with maybe a Reg A+ or something like that? Is that possible or is there a reason why that’s not possible?
No, it is possible. We can support multiple different kinds of issuances. We think Reg D is the primary one used today in the paper world. We think that’s going to be the primary one for tokenized securities. But I think you will see Reg-A in time. Those require SEC approval, so those are going to have a longer lead time. You’re going to see, I think, crowd funding ones. There, it becomes tough because you can only raise a little bit over a million dollars in crowd funding. So I think as the ecosystem develops and the automated tools get better and better, it will become more and more economic to use crowd funding opportunities. Then I think eventually you’re going to see tokenized IPOs.
Yeah, absolutely. I’m still excited by the examples you were giving earlier about how companies can take all of the hard work they did in building an audience or building a customer base, and if their B to C and then also attaching rights to the tokens. If so, I might own a little sliver of the company, but I also can, like you were saying, get backstage passes or meet somebody or get a better deal or get product first. That feels a lot like it could be a Reg-A. It just seems like the possibilities, there’s so many exciting use cases that’ll come around the bend. But you guys are teed up nicely to just kind of take all comers.
Yeah, we think it’s exciting. We’ve talked to several professional sports teams. We’ve talked to a number of other companies that are very interested in incentivizing their partners or incentivizing their customers. I think what the key technology for us that was demanded of us and, and delivering on is that trusted parties lists, that ability to control and have controlled liquidity. Because if you remember, this is all new for the industry today. When you buy a Reg-D security, they almost never trade. So the idea of liquidity is exciting, it’s attractive, but it also is a little bit scary. So the ability to do that on a controlled basis, that you can have fine grained, dynamic control over time, I think gives a lot of comfort to people and it opens up possibilities that they wouldn’t be able to do otherwise.
Absolutely. No doubt. I mean that is a real world problem solved. That’s exciting. We meet people all the time, and we have these events in New York, here, L.A., all over the place. People are all talking about, “I’m thinking about doing an STO for this, that the other thing.” Now as a platform, what should companies be looking for if they’re considering doing an STL?
I think a couple of things. I think overall they should evaluate three domains of expertise. Obviously the technology. That companies should have a really good tech stack and a good tech team. Capital markets expertise. This is after all a tool that has direct applicability of the capital markets, and I think you want to see people with a good capital markets expertise. You want to see some reformed investment bankers or traders or other folks with good capital markets expertise. This isn’t just true of platforms is true of exchanges or custodians or others.
Then finally I think you want to see a legal regulatory expertise. Do they have compliance people on staff? Do they have long term, high level experience? Do they have good legal in house staff or outside counsel? I think when I evaluate companies and services in the space, I think who’s going to be successful and who do we want to partner with? We want to find people that have really good technology, that have a deep capital markets expertise, and they’re really aware and cognizant and take seriously the complexities and the legal regulatory issues around the securities field.
I love it. Okay. That’s easy to remember. There’s tech, capital markets, and legal. Even I can hold onto that. So tell us about you guys, your team at Harbor, where you’re located and what should we know about you?
Sure. We’re located in Jackson Square. It’s one of the historic districts in San Francisco, right near the financial district. We have a small satellite office in New York with four folks, primarily capital markets people. We’re a team that’s very tech heavy with some of the great leading engineers from leading companies around Silicon Valley. We also have some great capital markets folks, some great compliance and legal folks on staff. We’ve been at it for a little bit over a year.
Love it. Well, before we wrap, what can you tell us about your roadmap and any goals coming up?
Sure. So in terms of additional offerings that we’re going to be providing the tech platform for, we’ve got a number of interesting things in the pipeline. We have some startup companies, both blockchain startups and other startups that I think some of them are going to be wide open. Any investor can buy and sell. Some of them are going to be these controlled liquidity trusted partners program. Some of them you’re going to see some VC funds, some of them are name brand funds that are going to be creating tokenized funds that are pitched to smaller investors. So normally the check size to a large VC fund is anywhere from five to 15 million minimum check size. You’re going to see some tokenized funds with these same premiere VCs that have large institutional funds that are going to have much smaller check sizes in the six figures to get into. Not your average person on the street, but democratizing access beyond just the institutions and providing some liquidity.
We also have some VC funds coming up where these are younger sets of folks, great track records, and they’re going to be offering tokenize VC funds at a lower check size designed to appeal to a broader group of people. Then we’ve got some more real estate deals in the pipeline that we’re really excited about, both tokenized funds and tokenized REITs at the single building level.
Amazing. Well, I hope you’re drinking plenty of coffee over there because you’ve got your work cut out for.
Yes we do.
That’s exciting. Well, Josh Stein, CEO, co-founder of Harbor, thanks so much for joining us today. We wish you and everybody at Harbor all of the best of luck.
Great. Thanks so much.
Harbor’s that gold corporate member of Security Token Academy. To learn more, go to our website securitytokenacademy.com and click on the directory tab, and of course the corporate member homepage. For everyone here at the Security Token Academy. I’m Adam Chapnick.
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