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Dilendorf & Khurdayan’s, Rika Khurdayan
Discusses the Tokenization of Cap Tables



Rika Khurdayan:

It’s been a difficult year, I think, for security token industry. There is a lot of interest and a lot of benefits to tokenization and issuing digital securities. I am a huge, huge fan. Yet we haven’t seen a lot of projects actually closing their rounds and reaching those hard caps or soft caps. There’s definitely a lot of interest. I feel like market is picking up. We have a few projects in the pipeline that are ready to launch in the next month or so, so that’s good news.

Definitely we need some more activity, I think, on the marketing, on the broker-dealer side. And FINRA started moving on those broker-dealer applications, so we think that’s going to boost the market quite a bit. Another trend that I’m seeing that’s very, very interesting, especially in terms of providing future liquidity for this market and for digital securities is that companies and funds actually tokenizing their existing cap tables and existing LP Interests and I find it very interesting.

Definitely very exciting to talk about tokenizing existing private securities and then put them on secondary market for trading. Surprisingly, what we’ve seen in the past three months is that the network and platform tokens are having some sort of a comeback. And well, we’ve been focusing on digital securities and we’ve been doing it for the past two years. That’s how we initially got into this space in 2017 at the height of ICO.

As we looked at this instruments, we said, “Well, they’re probably going to be traded as securities in US law,” so what we’ll do is we’ll work with issues on structuring it in a compliant way. And I’m a lawyer. I love digital securities. I understand these products. If we’re talking rising equity, if we’re talking rising income streams, if you’re talking rising LP interests, there’s a really clear and straightforward framework for doing that in the US. And then it’s projects like platform tokens and network tokens where you are now looking at hybrid instruments.

On one hand, these projects are raising funds. Where a security token, and they’re selling these instruments in securities. On the other hand, these are hybrid instruments, they’re not traditional securities. They’re meant to be used on the platform. They’re meant to be used to organize development teams to further develop the network.

What do you do with these hybrid instruments? Those are very complex projects to be honest, I love them. That’s when my nerd side kicks in. You really need to understand the technology, how the platform and the project is functioning. We haven’t seen many of those projects peaking interest from the investor’s side in 2018 and I see that trend is changing now.

We’ve seen quite a few of the network projects that we’re focusing on building the product and the network and really decentralized you know, products in the past year, year and a half, two years. They’re now picking up interest from the users and investors’ side. So this is going to be very interesting.

There are a lot of projects, very interesting projects that are raising funds from Asia that are hoping to raise funds in the US. And there are a lot of projects here in the US that are hoping to raise funds in Asia. And I think once we’ll figure out how to bridge these two markets and have a very good infrastructure in place, where we’re on the same page in terms of regulations, in terms of how regulators and governments treat these instruments and securities. In terms of broker dealer teams being able to work with these digital securities both here and in Asia. ATS and secondary trading platforms being available on both sides of the world. That’s what really will push the market forward.

Well there are a few things to keep in mind here, right? So one is obviously the promise of liquidity, right? And the fact that they can now give this option to the investors. Another thing is, the companies that are looking at tokenization of existing cap tables and products are larger companies or institutions that don’t necessarily need to raise money, but they do need to provide additional benefits to their existing clients. And that’s when tokenization comes in. And the more projects like that we’ll see, I think the more it will help develop and push the industry forward.

There are so many, I wouldn’t know where to start. So I have a few favorites. Obviously, the LP interest in private funds like venture funds, right? A highly liquid instrument, very hard and expensive to transfer. Very long exit. You’re looking at seven, ten years, right, to exit the position though. That’s very interesting for tokenization and that’s actually the project that we’ve seen being tokenized and those were one of the first projects that went on secondary market in the US, right?

On platforms like OpenFinance and Securitize has done a lot of those issuances and they’re really the pioneers, right, in this space. I’m also personally very excited about the private security space. If you look at private issuances in the US, I think in 2017 the Reg D placements were $1.8 trillion. That’s a huge market.

And those are securities issued in a traditional way, right? If you can potentially tokenize that space, those are highly liquid and obscure instrument. If you can add ease of transfer. Let’s not even talk about liquidity at this point, right? Because we’re a few years away, but ease of transfer is of cap table management, is of dividend distributions and transparency of ownership. That’s just an amazing product.