Alan Cohn counsels clients on a range of blockchain-related issues, from anti-money laundering and know-your-customer best practices for cryptocurrency companies to legal issues associated with novel uses of blockchain technology. He also advises clients on national security and emerging technology issues. Drawing on his experience at the Department of Homeland Security (DHS), Alan brings a unique perspective focusing on the intersection of cryptocurrency and blockchain technology with cybersecurity and cybercrime. He co-founded and now co-chairs Steptoe’s Blockchain and Digital Currency practice.
Jor is a pioneer in building out the ecosystem for digitizing and trading securities on the blockchain and other distributed ledger technologies. A corporate, finance, and securities attorney, he is most well-known for his expertise in alternative finance, including EB-5, venture capital, crowdfunding, and initial coin offerings (ICOs). He is a co-founder of VerifyInvestor.com, the dominant accredited investor verification service in the world and a founding shareholder of Homeier Law PC. He is an expert on attracting and verifying accredited investors. Within the crypto space, he's most passionate about securities regulations affecting tokens, identity for regulatory purposes vs privacy and anonymity, and cross-ledger or cross-chain technologies.
VerifyInvestor.com is the leading resource for verification of accredited investor status as required by federal laws.
Adam Ettinger joined Fisher Broyles LLP as a partner and co-chair of its Blockchain industry team. Previously, he was partner at Sheppard Mullin. His cross-disciplines in both intellectual property and corporate law allow him to leverage both practice areas when structuring transactions for his clients, including the use of joint ventures and strategic alliances in the financing, development, and licensing of technology.
Georgia P. Quinn is the co-founder and Chairwoman of the Advisory Board of iDisclose, a legal technology company focused on the disclosure and legal document needs of small business and startup entrepreneurs accessing capital. Quinn is also General Counsel of Coinlist, a financial services company focused on blockchain investments. Quinn was recognized in 2014 as a Top Female Attorney in New York City by Thomson-Reuters. In 2015, she was joined by other honored attorneys in a special section about “Super Lawyers” featured in the New York Times. She is on the advisory board for the American Banker Lending and Investing Conference and NextGeneration Startups, an online resource for young entrepreneurs. Wealthforge, an early entrant in the crowdfunding space, has called Quinn one of the top influencers in the private placement industry. Quinn is a senior contributor to Crowdfund Insider, an online crowdfunding publication.
Anthony J. Pompliano is Managing Partner at Full Tilt Capital, an early stage venture capital firm. Previously, he served as a Facebook Product Manager, worked on the growth team at Snapchat, founded his own startup, and was a sergeant in the Army.
Anil Advani is a startup lawyer with a focus on representing early stage start-up companies, negotiating angel and venture financings, customer and licensing transactions, as well as mergers and acquisitions. Over the last 16 years working at powerhouse law firms like Cooley, Godward, and Orrick Herrington, and now Inventus Law, Anil has represented over 2,000 startups and founders, and been involved in almost 300 financing and M&A transactions valued at over $2 billion in aggregate. Mr. Advani is licensed to practice law in California, New York and India, and has represented investors and Companies in investments, acquisitions, and strategic expansion.
Hey everybody, welcome to the Security Token Academy. It's me, your host, Adam Chapnick. Here at the Security Token Academy, we're going to be covering this new industry through a series of expert panels, round tables, interviews, and events. There is going to be a lot to learn, so please sign up on our website and subscribe to our YouTube channel. You can also follow us on social media, including on telegram, Facebook, Twitter, and of course Medium.
Now let's get into this exciting new world. First, okay. Why are security tokens important? Well, as the industry evolves, security tokens promise to increase liquidity of global assets, such as real estate, equity, and debt. But they also could be used in a new phase of crypto-based fundraising. And that is the subject of our expert panel discussion today. The potential evolution from ICOs to STOs, that is security token offerings.
We'll be joined by expert guests from Los Angeles, New York, Washington DC, and San Francisco, just a few. But first we here at the Security Token Academy would like to take a moment to thank the sponsors of today's show, including Polymath Network, verifyinvestor.com, and Inventus Law. Thank you very much for supporting all the work that we do here.
Now let's quickly review the 2017 growth in ICO based funding, and the corresponding 2017 growth of regulatory pressure. 2017 saw the explosion of ICOs, which raised about $5.6 billion. As you can see, infrastructure projects raised the most money, with over $837 million, while financial service projects came in second with $421 million. It is incredible how much money ICOs have been able to raise in the past year, but of course, as we say, more money, more problems. Let's see how the SEC regulators ramped up both their scrutiny and their enforcement on US ICOs in 2017.
Well, going back to July, the SEC comes out with the Dow report and rules that some ICOs are indeed securities and must follow specific laws. Then in November, the SEC urged investors to use caution regarding celebrity backed ICOs and warned celebrities about the need to disclose any compensation that may have been received for promoting ICOs. But it was in December 2017 that SEC actions and comments really ramped up with three important announcements.
First, they took emergency action to halt an ICO scam by a company that falsely promised a 13-fold profit in less than a month. Second, the chairman of the SEC, Jake Clayton, directed comment and caution to both main street, otherwise known as unaccredited investors, as well as to broker dealers, investment advisors, exchanges, lawyers, and accountants. And finally, a California-based company called Munchie halted their ICO due to SEC concerns that they were misleading investors with the promise of a guaranteed token price increase. Well to say that 2017 was a year full of ICO surprises would definitely be an understatement.
So let's introduce our participants for today. Here in beautiful Los Angeles, we have Adam Ettinger. Adam is a partner at Fisher Broyles LLP who represents leaders in block chain technology, digital currencies, as well as social gaming, mobile apps, and eCommerce.
Also joining us here in studio is Jor Law of verifyinvestor.com. Jor is a key figure in the security token industry. He's also a pioneer in building out the ecosystem for digitizing and trading securities on the block chain and other distributed ledger technologies.
And joining us live in Washington, DC, we have Alan Cohn. Alan is of counsel at Steptoe and Johnson LLP. Alan provides strategic advice and counsel to help communities with security, technology, innovation, and government, with a particular focus on block chain technology, cyber security, cryptocurrency, and crypto assets. Alan also serves as counsel to the block chain alliance, which helps to combat criminal activity on the block chain.
And just north of Silicon Valley, in San Francisco, we have Anil Advani, managing partner at Inventus Law. Inventus Law is a Silicon Valley law firm that helps early stage startups with fundraising. Inventus Law is helping many of its global technology clients undertake ICOs right now.
And last but certainly not least, please welcome friend of the show Georgia Quinn. Georgia serves as general counsel of Coin List. She's also the co-founder of I Disclose.
Welcome to everybody, and thank you for being part of the show today. So in this first segment, we are going to discuss the regulatory pressures on ICOs. Let's start with some of the major developments that have occurred in the first month of this year. So in February, the SEC suspends trading for three issuers claiming involvement in cryptocurrency and block chain technology. And on February 28th, the SEC issued subpoenas targeting dozens of cryptocurrency firms.
So Georgia, starting with you. What do you make of all these recent moves by the SEC?
Thanks, Adam. And thanks for having me.
You know, I don't think any of this should have come as a surprise. Frankly, for a lot of us that are in the industry, when we looked around and saw all of these offerings and activities that were taking place, we thought this is highly unregulated and people have got to start taking, appreciating the securities laws that are out there. Just because you call something a token or an ICO doesn't mean you can throw almost 100 years of legal precedent into the garbage. So I think that this is a necessary action. I feel very positive about it. I think it's going to really separate the bad actors from the good and allow those technologies that are really trying to make a difference and change the world to have the opportunity and kind of clear out that kind of seedy underbelly of the industry.
And again, just going back to this not being a surprise, I think that the SEC has, and other regulatory agencies and bodies frankly, had been indicating that this was coming. So the recent wave of over 80 subpoenas that were recently dropped, again, just not a surprise.
Got it. And Anil, what do you think about that, are you-
Yeah, Adam, it's great to be here. And I understand Georgia's position. She was speaking like a true general counsel. And I appreciate that. I think before we get sort of lost in the terminologies and everything else, we should maybe step back and understand, evaluate really, what's happening around us, you know? This whole ICO industry itself is very nascent, it's less than 12 months old. So we're already talking about, in less than 12 months of activity, we're talking about subpoenas, 80 companies under subpoena by the SEC, five, six billion dollars of investments, ICO industry overtaking the 50, 60 year old venture capital industry.
Let's just step back. What's really happened is twofold, two different things. One is the technology, the creation and development of this technology called block chain. Which is really, as I and I think a lot of people call, the internet of our times, right? All the businesses, big, small, medium, they need to be on this block chain technology. So what's happened is as they've evolve in block chain, they saw this opportunity to raise money and issue "tokens."
Many of these are genuine businesses, so we have to be careful about distinguishing between scams and companies that have genuine sort of block chain enabled services that they can use to make it more efficient for their customers to access goods and services. So there's that. And companies need to evaluate whether they can use the block chain to either do that, to provide access to their customers, or perhaps raise capital in the form of security tokens more efficiently and in a more transparent manner.
So that's really what we need to evaluate. With all of that on the one hand, SEC regulations have, as Georgia said, 100 year old law, 70 or 80 years old, they need to evolve and sort of catch up with the technology. So I think there's a gap between what businesses want and technology allows them to do, and where the real regulations are. And because of that gap, we have confusion, and confusion results in sometimes people taking opportunities, other times doing the wrong things for good reasons. So we need to sort of make sure we don't get lost in the shuffle, really.
Got it. So you're seeing it as a little more of a natural course of evolution, is how we should look at this.
That's where we are. Very early stages, yes.
Yeah okay. So also in February senate held a hearing that discussed ICOs. SEC chairman Jake Clayton said, and this is kind of the middle of his quote, he said, "To the extent the digital assets like ICOs are securities, and I believe that every ICO I have seen is a security," and he went on to declare, I love this, "A note for professionals in these markets: those who engage in semantic gymnastics or elaborate structuring exercises in an effort to avoid having a coin be a security are squarely within the cross hairs of our enforcement division."
So I'm interested in what you guys have to say about this, the semantic gymnastics and whatnot. Starting with you here, Adam, what do you think about what Jake Clayton said?
Well I think, you know, this is, first of all, we've seen this before in other industries and at other times. There was a large amount of action related to what were called EB5 visas. A methodology by which people could actually obtain visas by taking and moving into investments in the United States. And at first the SEC does a lot of warnings, then it does a number of examples in terms of enforcement actions. But then it has a fair amount of time to wait before it can actually, I shouldn't say before, but before it necessarily has to bring the actions that it wants to bring. So we might see more actions. They can sit around and wait and see what's going to happen with the market.
Certainly what we see, I think, is an effort to cool the market and the SEC wanting, really imploring, professionals such as me and other attorneys in the area to try to do their best job that they can counseling the clients in a way that comports with the way that the SEC sees these transactions.
So Jor, what do you think about this? How does this land with you?
Yeah, I agree with Adam. I was very active in the EB5 industry back when I was on panels arguing with people, no no, these are securities. They're like no, they've never been securities, what are you talking about? It took a few years for the SEC to come out and start enforcing, like he said, they threw out some warning signs. Interestingly enough, there was focus target against attorneys in the space. There were a lot of attorneys, immigration attorneys in particular that the SEC targeted for enforcement action.
And the block chain space is very similar in the sense that, is it a security or not debate going on. And then further enforcement on fraud, and then you'll move into other areas as well. So I think in a block chain space, you're seeing warning shots being sent, messages being told, investigations and actions being taken, and they're going to focus more initially on securities. Are they securities or not, and then fraud, and then you'll start branching out into other areas as well, like broker dealer registration and things like that.
Yeah, Anil, you want to-
I was just going to say, here in Silicon Valley to be sure, we're also counseling our clients to take any issuance as a security. Consistent with where the SEC is, where the securities regulations are. As I was saying earlier, there is technology that will develop where it will be possible to create access to service and goods and products through block chain technology that will be the only utility. I don't believe there is such technology yet. I mean, the technology exists but I don't think there's an offering yet that qualifies as a completely 100% utilities token so far. So we're also advising all our clients to treat it as security for now. And then look at various exemptions on how they can insure those securities in the US.
Got it, perfect. So let's actually pivot and discuss a little bit how companies are able to use these exemptions, these mechanisms like Reg D, Reg A, Reg S. So Jor, your company, Verify Investor, you guys work with a lot of law firms. You verify accredited investors, so this gives you a unique perspective on the industry. To what degree do you think law firms started to regard more and more ICOs as needing to be compliant with security regulations?
I think it definitely started with the Dow report.
You had a, ICO space is interesting because when you look at what it is, and once everyone realizes that it's a securities, then really what it is, it's a global capital race. So the laws that support crowd funding, there's set of them, kind of like you discussed, over at the Reg D, Reg A, Reg S, and things like that. But primarily, Reg D, 506(c) has been the dominant version of crowd funding that's existed for years. And it's also the dominant version of crowd funding that exists for ICOs today. And the key element there of course is verification of accredited investors. So we've been fortunate enough to have done more verifications than I think anyone else has in this space, and we've gotten to see insights from both the investor side as well as the law firm side. And definitely the uptick of interest from law firms suggesting to clients, look at us for ICOs, has been phenomenal in the last few months.
That's great. So I just want to check in with Alan, let's see if we're able, how your audio's doing. But I wanted to hear, Alan, what are your thoughts on some of what we've been talking about?
I think you saw from the decentralized autonomous organization from the Dow lodge was the potential for how much money could be raised by pre-selling tokens at the front end of a development system. And that really kicked off what we see now, which is in one had, we have companies creating tokens that are meant to be used on platforms for some type of utility. And a large number of entities seeing tokens as a way to quickly capitalize their businesses or otherwise do fundraisers. And I think that's what's really gotten the SEC concerned, and rightfully so.
I think that there is a lot of activity in that space and some of the activity you mentioned at the beginning, fraud, material misrepresentation, the manner of sale of trying to sell these tokens in a way that promised returns, all of which are hazards to investors and require greater scrutiny.
Yeah, that's right. So let's listen to SEC chairman Clayton talk about ICOs from private and public market points of view.
Many ICOs are being conducted illegally. Their promoters and other participants are not following our securities laws. Some say this is because the law is not clear. I do not buy that for a moment. The analysis is simple: are you offering a security? If so, you have a choice: follow our private placement rules or conduct a public offering registered with the SEC.
Okay, so as we've just heard, Chairman Clayton differentiated between two types of offerings: private placements and public offerings. Okay, so Adam, for the viewers, can you explain, just for those out there who are not yet initiated, what is the difference between a private placement and a public offering?
Sure thing. And let me do this a little bit historically.
Terrible upset in public markets in 1929. And what we decided is, we said look-
If you're going to offer securities publicly, what we want you to do is we actually want you to prepare a document that discloses all the material facts about what you're doing. And you'll give it to the SEC. The SEC will review it. And then once the SEC approves, you can offer your shares publicly. That is the public offering, that is the IPO. It's the forced disclosure, at a certain level, so that common investors will at least have the information at hand that they should have to make a proper investment decision.
A private placement says, you know what, listen. We don't want to offer our securities to everyone. And undertake that kind of-
Disclosure. Well, it's scrutiny but it's also just the expense and cost and maybe we just don't need to go public at this point.
So instead, what happened after the first securities laws were passed to say you have to make these disclosures, there were certain exemptions and exceptions. And there's one, well there's a number of private placements, where what I want to do is I want to sell shares of my company to a sophisticated investor and I don't want to do a general offering. I literally want to identify the investor and through a whole bunch of documents, sell those shares directly to that investor. That's what we generally think of as a private placement.
Got it, okay. That's super helpful, and now hopefully that brings everybody up to speed, where we can cook with some more gas. Hey Jor, in the category of private placements, these are offerings that obviously restrict participants to being accredited investors versus main street investors. Since your business verifies accredited investors, can you explain what this means?
Yeah. It's interesting because you know, in the private placement world, there's actually two types of private placements largely now. There's actually more, but the two main types of private placements are basically what the US calls 506(b), and that's a true private placement in the sense that you're generally soliciting, you're not generally advertising. You're going through a friend and family and relatively closed network and targeting only accredited investors. And there, you actually don't have to verify them. You do some diligence, determine that they're accredited investors, and then you trust that they are accredited investors.
Now, a few years ago, they allowed another form of people called 506(c). And there, it's still considered a private placement but you can actually generally solicit and advertise. And the key there was that you couldn't actually just trust an investor to tell you whether they were accredited. You'd have to look at evidence to prove that they actually were.
And now, what is an accredited investor, right? Typically it's a rich or sophisticated person or entity. So most people look at-
Well it can't be rich or sophisticated. It has to be rich and sophisticated. Still gotta be rich, right?
Well it depends, right? The idea is that for example, for individuals, generally people are accredited either if they have a high income or they have a high net worth. So those definitions have nothing to do with sophistication whatsoever. And then on the entities, usually they qualify either because they have $5 million or more in assets or if all of their equity owners are accredited investors. Again, no real sophistication requirements there.
So some of the categories do require sophistication. Many of them do not-
Yeah, it's funny-
And in a sense-
Yeah, go ahead.
Wealth is being used as a proxy for sophistication.
Exactly, wealth as a proxy for sophistication and the lack of any other appropriate one I suppose.
So okay, Anil, you're right in the center of Silicon Valley. And you've been working on a number of ICOs that are private placements. Can you explain exemptions like Reg D, A, S, or even CF? Probably not CF?
Every time I talk to a client or I hear about ICOs, I always urge everyone to sort of step back and say, you know, simplify things really. What we're doing is issuing securities, right? Assume that, and that process has been in place for 40, 50 years. Companies, private companies have raised capital by issuing securities for the last 50, 60 years, very successfully, within the framework of the current regulations and laws.
So if you look at, if you take that position, then really, Reg D offering is the best option for private companies. In the last few years also, with the crowd funding rules and the jobs act, we've also had some options of Reg CF and Reg A plus offerings. So some of our clients are beginning to ask, well, doing ICOs, and Georgia can perhaps talk about what CoinList is doing along those lines, on the platforms that allow for ICO offerings under Reg CF or Reg A plus. But until now, we're really taking the same approach we've taken the last 45, 50 years, which is to qualify these as private placements under Reg D.
Georgia, so what types of regulations has CoinList operated under?
Sure, so CoinList conducts all offerings under 506(c) as Jor mentioned, regulation D, private placement. And that is because we take the position that all of these offerings are indeed securities offerings, at least at the initial offering stage. And just one thing I'd like to point out about the kind of menu of potential exemptions that are out there, they all have their benefits and burdens. And so it's very important for each issuer to identify what exemption works best for them. So as we mentioned, there's regulation CF, that is capped at the amount that you can raise. And the types of, the amount that each investor can invest. There's 506(c), which has this accreditation threshold. There's regulation A, which brings a higher disclosure burden and qualification process. But there are several avenues out there, so it's really on the onus of the issuer and their counsel to determine which option suits that company and that issuer.
That's a good point.
I would just emphasize, it's not complicated. Those rules are fairly straightforward. They set up, if you work with your sophisticated, experienced counsel, you will find the right exemptions that apply for you.
Yes, make sure you listen to the lawyer-
Who tells you, a good lawyer, please. Okay, so some of these exemptions to accredited investors such as Reg D have a lockup period, for up to 12 months. So Adam, what is a lock up period?
Well generally when you use the term lockup, sometimes we actually mean something different-
Than what you're alluding to. Normally when you're dealing with Reg D, what you're issuing in the Silicon Valley model is restricted securities. And those are difficult to transfer within 12 months. And there's exemptions from the exemption, I guess, for non-public transfers and transfers between affiliates. But it does cause quite a bit of challenge if what you're doing is issuing things that you want to convert into tokens or that you want, that you're characterizing as securities and then want to use and your platform and what to be distributed further within a short amount of time.
So what you can do either contractually, if you do want to impose these sort of lockup periods because of the securities exemption that you're utilizing, one is you can do it by contract. Secondly, and we really haven't been able to do this until block chain technology, is if what you're doing is offering a security that is reflected as a block chain asset, you can actually code or restrict that block chain asset, which is really great, especially when you get into Reg S, because we all need more regs to try and remember.
Reg S has an interesting thing that, when as you sell your security, Reg S is for a US company doing sales abroad to non-US persons. And one interesting feature of Reg S is you're supposed to have some sort of mechanism to ensure that it doesn't come back in the next 12 months. Well the way this used to be handled is you would have somebody responsible for transferring the stock, and they would have an instruction, don't transfer this to any US person for the next 12 months. So that it goes to rest outside the United States and stays there. Well now the question becomes, this is the problem with new technology and old regs, what's the extent of the mechanism that we need to encode in the contract in order to make sure it doesn't come back, what to a US IP address, or do we need some level of verification on the US side? What do we need to do?
Right, well it's another one of the promises of this block chain coin technology, it's fun to watch this develop. So hey Georgia, we also want to note that in March, groups filed as an S1 with the SEC to do an ICO IPO. Georgia, what does this mean, and what's it's significance? What does that tell us?
Well unfortunately, I wish it were more significant. I actually am quite disappointed in the filing and the S1 that was actually submitted to the SEC. I think that inevitably, a public offering of an initial coin will be a very welcome event, and I'm just sorry that this is the one that had to go first. I find the filing to be completely deficient as far as the disclosure requirements and just the level of disclosure and frankly drafting. And so you know, I don't think this is helping us move forward, but I hope that it at least opens the door to allow other issuers to take a stab at this and hopefully make a better effort at it.
Got it, okay. So as we see, the SEC has been increasing the pressure in 2017 and now in 2018 for many, if not most, ICOs to be compliant with federal regulations for either private offerings or for public offerings. Now we'll get back to security tokens and the shifting trends from ICOs to STOs, but first, let me give you a few words about our Security Token Academy.
The Security Token Academy is a new online resource exploring the forthcoming security token industry. Today's expert panel is the first in our expert series, which will include future panel discussions, expert interviews, and a whole lot more. The next event in our expert series will take place in just a couple of weeks, on April 12, so stay tuned for more information. You can follow Security Token Academy on Medium, Telegram, Twitter, Facebook, and even on Meetup.com. And of course, please visit our website at securitytokenacademy.com. Signing up there is easy and gives you the ability to provide your comments and your questions on shows just like this.
So now, let's continue into the second part of our discussion, and this is an introduction to security tokens and STOs. So earlier, we talked about the government pressure to regulate ICOs. Now the transition to how security tokens may be not only a response to government pressure, but also a foundation for more effective fundraising and trading. And how security token may not only support the ICO oriented issuance of new securities, but also how they'll be able to tokenize the trillions of dollars of assets just out there in the world.
So I'd like to welcome Anthony Pompliano to the show, who joins us from New York. Anthony's a crypto capitalist focused on tokenizing the world. He ran product and growth teams at Facebook and Snap Chat, and he authored a guide to tokenized securities. He advises security token offerings and actively invests all across the ecosystem. Anthony, thanks for being here today.
Absolutely, thank you for having me.
Great to have you. So to begin the discussion, we have to talk about the terminology of tokens. So first I gotta get out of the way something that gets a little confusing. We're not talking about security tokens that are used to secure access to applications. Security tokens do apply to the cyber security world, but we're not talking about that kind of security token. People starting to ask about two types of tokens in the crypto world. There's utility and security tokens. And there are many articles starting to appear about these two types of tokens.
In February, the Swiss financial regulator FINMA issued ICO guidelines for three types of tokens: payment tokens, utility tokens, and asset tokens. The latter of which can be considered to be the same as what we call security tokens. They define these asset tokens as representing assets, such as participation in physical underlying companies, earning streams, or entitlements to dividends or interest payments.
So as we can see the types of tokens is getting a little confusing, and as we will soon see, there will also be different types of security tokens just to keep things lively. We know from our first segment that one driver toward security tokens has been federal regulators, such as the SEC. But how does someone know if a security token or an investment is a security? Well, the SEC went to the Supreme Court to define this issue.
Anil, can you tell us about what we call the Howie test and how that works?
Yeah, it's actually a pretty old test, 1946. And it really, I mean again, you have to apply common sense. If you are making investment and your expectation is to have the right profit or what we call a common enterprise, and that's from the efforts of third parties typically founders, management, then really you're investing in security and the companies that you're investing in is issuing a security and therefore it needs to be treated as a security under the securities act. That's really sort of the common sense that you would need to apply to any such offering.
Great, super helpful. So let's take a look at what two vendors are saying about security tokens. Polymath, they say simply calling your security a utility token doesn't mean it's not a security. So Alan, what do you think about that?
I think that's exactly right. I think that you really have to look at what the rights and the privileges and the obligations that are inherent in the token are, how it's being sold, and what it's being marketed for, not the way that it is characterized. You use the Swiss guidance as an example. The Swiss guidance, there's guidance from Gibraltar and also now from Singapore, that are beginning to flesh out what should these tokens mean. So I think you really have to look at, what is the token, what does it represent? Not just what is it called.
Yeah. Adam has something.
I'm just thinking, there could be a lot of confusion on this point because there are tokens that we are going to design, have been designed, that we think of as a traditional security. Otherwise, it gives you a right to either ownership in a company or ownership to profits. It is meant to be a participation in an enterprise run by somebody else. The Dow was one of these things. And there's no question whether or not it's a security, and I guess this is group number three on the Swiss list.
But what's happened is in many ways, because of concern for regulatory constraints and enforcement, people said you know what, let's not do that. Wherein also, because frankly it's hard to do. Let's just make it a payment, let's make it something else. And what's happened is now we're saying, because of the way that it's been offered, you are giving a reasonable expectation of profit based on the efforts of the common enterprise, of the business people that are going to be building out the platform as Munchie wanted to do.
And because of that, it's a security. Because of that it's an investment contract. But these are very different things.
And I think one interesting thing that we're starting to see happen is perhaps a movement back into the idea of, well as long as we're going to get regulated anyways as a security, maybe we can actually do what we wanted to do in the first place and really involve a community in both the technical operation of the platform and the proceeds of the platform.
To sort of socialize. I mean that was one of the great sort of promises of the Dow and other efforts like that. And it helps also to separate, in our minds, the difference between something that is engineered so that we participate in the corporation's efforts or the team's efforts in making a profit or whatever it's doing, versus something that says this is just another payment token. But because of the way that I'm pitching it to you, the SEC is going to consider it an investment contract and therefore enforce security.
Yeah, it's interesting, it's still shaking out, but there are this democratized access to participation, ironically almost becomes more possible now that everybody's sort of resigned themselves to compliance.
I think that's right.
His point is actually very important, because I think a lot of people are just looking at the tokens and deciding are these securities or utilities? I've never liked that distinction and I've always thought that they were separate terms. Does it have utility and is it also security? But the other thing his point is making is really that it's not just really the token that you're looking at. Sometimes it's the offering, right? If the offering itself is a securities offering, it doesn't matter if you're truly 100% utility, you're still making a securities offering.
Yeah, that's a good point. So Anthony, Securitize, who's another vendor, talks about how security tokens replace paper certificates with digital tokens on the block chain. Can you just help us understand that?
Yeah, so I think that most people who talk about security tokens come at it from a crypto perspective. So what they're trying to figure out is, how does the old world fit into this new world? And I question whether that's the right approach. So if you actually take the approach from traditional finance and say what we're doing is issuing securities, why do we need a token to do that? And the answer is, all of the financial transactions, so the investment, and then also the management of the cap table is done by the block chain. And so when we talk about these security tokens, the token doesn't really matter, right? The magic here is that the block chain is helping to consummate a financial transaction in a more efficient and lower cost way, and then on top of that, we can manage all of the post investment activities in governance via the block chain.
And so these tokens, if you will, are merely just digital shares and the same assets that we've been buying and selling for decades. And so I don't think that this is necessarily that revolutionary. It's much more evolutionary and is really an improvement on an old system.
Yeah, that's interesting. I like how you characterize that, that the block chain itself is sort of the advancement and otherwise it's sort of, I don't want to say business as usual, but it's familiar. So any other thoughts to add to either of these comments from Polymath and Securitize?
The big piece here is you've got to pay attention to who are the players in the ecosystem? So there's basically platforms, protocols, and the advisory services. So the platforms are people who can help you with the issuance process, right? So when I want to conduct an STO, I go to them, they help me create the token, and they actually help me do all the KYC AML of investors. And then they actually consummate the mechanism of issuing tokens in exchange for investment dollars.
The protocols are important because what they do is, the post issuance governance. So as people have already talked on this show about Reg D for example, it's very difficult to trade that within the first 12 months if you're a token holder. And so what these protocols do is they basically, in a more efficient manner, manage who's able to hold the token, who can transact with who, and even reject if a transaction is going to violate compliance.
And so when you look the the platforms and the protocols, those are really really important and because they're new, obviously, and you get the advisory services, and so I think there's an entire ecosystem being built here. But we need to be very clear that we are not going to just rip out the traditional finance markets and go build this decentralized world when it comes to security tokens. We're merely going to improve that finance and kind of traditional world. And kind of end up one that's not only more efficient but also less expensive to operate in.
Love it, okay. So as we examine the security token terminology, we're going to differentiate between the different types of tokens. So often, utility or payment tokens that have been used in the crypto world, that do not comply with security regulations. For our purposes today, we're going to use the term security token 1.0 to refer to those tokens that are security based on the Howie test. These security tokens would typically be using the regulation D, A, S, or CF rules or exemptions.
But in addition to regulatory pressure, there's a second driving force in the security token industry. That second force is desire for increased efficiency and liquidity, especially on a global basis. So as a result of the drive for efficiency and liquidity, you will see the emergence of a more advanced security token. We call it security token 2.0. that supports investor identity management via things like KYC and AML, which we'll learn more specifically about in a few minutes. We heard about it a little bit but we'll go into that.
Now, let's dig into these issues in more detail. So Jor, since you're Jor, why don't you give us the high level view of these three stages in token terminology. You're definitely embedded in this world.
Yeah, yeah. You know, certainly, I think you had this ecosystem of tokens and then people were just issuing out tokens and conducting offerings, and for large part, everybody said they were unregulated, but really they were just regulated but there wasn't enforcement, right? So that falls into the non-compliant tokens.
And then when the Dow report came out and regulators around the world started saying well hold it, these are securities, we're going to regulate these, then you started having your first batch of ICOs and tokens out there that said okay, you know what, they are securities, we acknowledge that, we're going to try to comply with that.
And then almost just a step behind that, people started looking at, well what other regulations are there that affect us? And it turns out that a lot of people, a lot of regulators, focus on who are you selling these to? Are you selling them to people that you should be selling them to? And that's how identity and identity management had become so popular within the space and people are thinking about AML, KYC, you're also seeing a bunch of tokens out there that are trying to solve this identity problem.
Yeah, okay. So now we want to explore the world of the advanced security tokens, we're calling them 2.0, and their benefits. So again, just as a reminder, we're keeping our focus today on security tokens just for fundraising. In future expert panels from the Security Token Academy, we're going to explore another area, which is the tokenization of the trillions of dollars of global assets. And also two more items to address. First, many of these security tokens will be Reg D and for accredited investors only. And secondly, often these Reg D tokens won't be tradable for 12 months, as we mentioned.
So Anthony, can you help us understand the different stages of token activity? We've touched on it a little bit. But how the offering stage differs from the later trading stage?
Yeah, so the first thing we need to understand is, I only know of less than 10 of these that have actually been completed. So there's a lot of people talking right now about doing this, and frankly, it's more hype than substance. And I believe that will change over time. But we're talking about an industry that is at the very forefront of what it will become.
And so in that, today, what you would basically have is you've got a company, let's say, that wants to raise some funding. And what they will do is they will go out and they will get legal advice. They'll have some sort of technical component that actually creates the token. You can do an ERC20 token, an SRC20 token, our token, Polymath, et cetera.
And then what you do is you basically go around based on whatever regulatory compliant exemption you're going to use, and you can generally solicit to different groups of people $4 and in exchange what you tell them is that when you give me $1, I'll give you a token. And so that issuance period or piece of the process is incredibly difficult for most people to actually conduct, and so these platforms have started to pop up that are able to help them do that, so a company like Securitize, et cetera.
From there, once the issuance actually occurs and is done in a regulatory compliant way, there's still a burden on the issuer to try their best to ensure that all of the token holders remain compliant. And so that means that they can't go out and just start trading these peer to peer wallet transactions or anything like that. And so these protocols are able to make sure that the token remains regulatory compliant according to whatever exemption was used to fundraise. And so I think those are the two main components, right? You basically take a company that wants to fundraise and you go through an issuance period. And then you go through what I call a post-issuance governance period. And then you're off to the races.
Terrific, okay, that's super helpful. So Georgia and Anil, a big issue with security tokens is ultimately help fundraising on a global basis. So can you tell us more about this. Maybe Georgia, you want to start?
I would. But I'd like to touch on one point just very briefly about being off to the races after you have this compliance period where you hold the security for 12 months or whatever the relevant period is, because remember, we're still dealing with a security, and you can't actually just go and necessarily freely trade these securities any way you want either. I mean, each transaction is still required to find some sort of exemption. And so if you're conducting that on an exchange or some peer to peer wallet, whatever you want to call it, that's still likely going to be a securities exchange and need to be regulated either as a national securities exchange or as an ATS, alternative trading system. So I think this is kind of one of the components that people haven't really thought through 100% just yet, and a lot of that is because for most of these transactions, we're still in this holding period.
But now to move on to the international component, which I think is so important. And I think a lot of people similarly overlook this. While block chain is amazing in the ability to globalize these technologies and bring these new and wonderful products throughout the world in a very rapid way, again the securities laws haven't quite caught up to that. And so you know, we had some discussion earlier in our conversation about Regulation S, which is a US securities law that allows you to raise in a foreign jurisdiction without running afoul of US securities laws. It says nothing as to the securities laws in foreign jurisdictions. So to the extent you're offering these tokens or STOs or whatever terminology, again, we decide upon, in foreign jurisdictions, you still have to understand and take heed of those local laws.
And so I think a lot of people are just assuming that they can go and offer these things to what would be deemed unaccredited or retail investors in those jurisdictions, and really completely violating the local laws. And so that, I think, is going to have to be addressed, certainly now that we see foreign jurisdictions, I mean we talked about Switzerland and we've talked about reactions in South Korea and in Hong Kong. And so now that we're seeing these other jurisdictions start to take notice of what's going on, there's going to be a lot more thoughtfulness that will have to be put forward before conducting international offerings.
And that's perfect as a transition, because by the way, you can check out our global regulatory review to see how security regulations are evolving on a worldwide basis, and that's on our website.
So for each stage, and for all geographies, security tokens can provide benefits of efficiency, global viability, and improved liquidity. So now let's discuss how security tokens can improve efficiency, cost effectiveness, and also timeliness. So Adam, can you tell us about how the outdated manual processing, paper based documentation, works today in regard to raising money so that we can get a sense of just how much better this whole thing could be?
Sure. We are in a transition period where there have been a number of providers that have tried to automate some of the hardcore paperwork, because it is a very much paper based system, and it's meant to be. You know, these stock certificates are meant to be held by somebody who is supposed to be responsible for holding them. And they have stamps on the back that tell you whether or not they're being assigned or being restricted. And these legends are supposed to be paid attention to and referred to in the contracts. So really hasn't advanced, I don't think, except for very very recently, much, probably 150 years. And quite intentionally so.
Likewise, in terms of tracking who owns this stock, when somebody buys a share of stock, then we issue new stock certificates. These are printed, these are signed by two different offices of the company. There's a ledger, which very often is kept electronically in ways that previously didn't actually comply with Delaware law.
But nobody, just because you have to use something of the 21st century, people began to automate and automate. Finally, really in anticipation of block chain technology and the way that a lot of startup companies were going to utilize block chain technology to automate this process, but also large organizations like NASDAQ, early on in 2015 started building something called Link in order to manage the capital of large private companies. Delaware went back and looked at its laws and said wait a second, what might not comport with utilizing the block chain to register stock as really digital assets. And there were a number of amendments.
The difficulty today is, you'll lose stock certificates. People might say they have ownership and shares but they don't have the stock certificates or they have one that was voided but it's hard to tell. You have difficulties in that people might try to transfer their stock and there's nothing except a contract or maybe a legend on the back of a certificate to try and stop that. And at any given moment, we rely on Excel spreadsheets and written or electronic ledgers to try and figure out who's got what.
Block chain is a database technology that ultimately can easily take all that away.
Yeah, so Anthony, can you take what Adam just wowed us with and kind of explain how in the future the security tokens can reduce the cost speed of transactions? You've talked to him about some of the exciting ways. Is there anything you can do to flesh that out?
What he just described sounds insane to me, but that's another thing. And so I think that the big thing here is a lot of what he described can be managed via a smart contract, and so the protocol actually is able to govern all of the secondary transactions, who holds it, who can they sell to, when can they sell to, jurisdictional oversight, et cetera.
The second thing is, from the company perspective, doing all of the governance or kind of cap table management investor relations via the block chain. So this is a semi-automated process where it's not only more efficient, but it's just more transparent. So I'm able to see who's holding shares of my company, I'm able to see where are they, I've got a good indication of whether they're KYC AML-ed, and so from a company perspective, this is much better.
And then from the regulatory compliance perspective, the idea that the regulators basically have to go on a fishing expedition to track a lot of this stuff down is gonna be something of the past. I think that people are really going to be shocked by how much more the technology is to the regulators as well when they can look into a public ledger and see who owns what assets.
And so when you look at the three players here, the companies, the investors, and the regulators, when you provide value to all three of them, this isn't a thing of are we going to use block chain to govern investments in these securities? It's just a matter of how quickly is this going to happen and at what point, if at any, do the regulators mandate that we have to use the block chain to do this because it actually ends up being more beneficial for them as well?
Yeah, that's a great point, that it benefits all three parties. And I think people are still wrapping their heads around the fact that that likely is true.
So now let's discuss global raises that require KYC base investor identification. We've talked about KYC and AML. Alan, can you help us understand this area of investor identity management and what is KYC?
Sure. So KYC is know your customer. And I think it goes back to something that Jor said earlier, the distinction between some of these categories. Let's think about that. If you're doing a sale to friends and family, you know who that is. You know who these people are, you know something about their background. When you start to go beyond that, you don't necessarily know who you're dealing with. And there are laws that apply to financial institutions of all types, and that includes issuers and also brokers and dealers of different types of securities, which is to make sure that you are not unwittingly being used as a vehicle for money-laundering, for terrorism finance, that individuals who are on denied party lists for sanctions compliance are not able to purchase or transact securities that you're selling.
And so it's important that when you sell or you trade securities, really of any type, you need to do these types of due diligence checks on who's purchasing them. And what block chain technology gives us the potential to do is to integrate those processes into the way that individuals access platforms, for purchasing security tokens, and for the issuers and sellers and platforms to be able to keep and reference an immutable record of who is transacting on their platform and what checks have been done to make sure that these are not criminals, that these are not individuals engaged in money laundering, that these are not individuals funding terrorist organizations. They're not individuals who are under different sanctioned regimes, people who financial institutions are not permitted to engage with.
Got it, so-
You really have two basic-
Oh sorry, Alan, go ahead.
Two basic levels of responsibility. One is that anybody who's engaging in a transaction, at least kind of know your customer. If you're a financial institution, a broker dealer, a money services business which is how many cryptocurrency exchanges operate, or a national trading system or alternative trading system, you have a heightened obligation to conduct due diligence on who you're doing business with. But that's what this KYC AML issue is. Do you know who your customer is? And have you taken the steps to ensure that you're complying with anti-money laundering requirements as well as counter terrorism finance and sanctions compliance.
Got it. Okay great. So Jor, so the ability to process KYC and AML on a global basis can be very complicated, given all the different changing regulations across the world. So give us a basic understanding of how KYC could be improved using these security tokens.
It's actually difficult right now. The process of AML KYC and block chain don't really mix well. Right now, they're two separate things. And one day, in the future, when identity is being managed by tokens on a block chain, maybe that gets a little bit easier. But practically speaking right now, what happens is really AML KYC is largely done off chain and then brought on chain by someone else and integrated into an offering. So if you're doing a security token offering, you're doing AML KYC, you're actually doing that separately, or someone else has done that separately and then brought it onto the chain for you. And that's really difficult because I think what people don't realize is how manually intensive AML KYC is right now.
In certain countries like the US, the database sets are pretty good. The tracking of people by address or social security numbers et cetera is pretty good. But internationally, it's very difficult, like the data sets are not complete, and also there's different rules. A lot of people talk about AML KYC with the US laws in mind, but another country may have its own set of KYC and AML type of laws. So that's been really difficult now for anyone that's ever gone through the AML KYC process. What they'll know is that there's a certain number of investors that they'll throw into the software that does this. So they'll first have to consult an attorney to come up with a policy. What is the policy that they are going to follow?
Then you're going to have to embed technology to run that policy against, and then what they'll find out is that there's a certain number of yeses, a certain number of nos, and a whole lot of maybes. And that process is entirely manual so far. If it all moves to block chain in the future, that could all be automated, be much easier to track.
Wow, okay. I actually didn't realize it was that manual and complex. Okay, so that's sort of in process, still to come, we'll wait and see how that goes. There's definitely something to fix there.
There's definitely something to fix there.
And it's been made more difficult because so many of the investors in this area are investing by using cryptocurrency, which it's one thing if you're a company and you get a bank wire, you have a rough idea who that bank is, who that wire's from, who the account belongs to. But suddenly a cryptocurrency transfer from an anonymous wallet, at least anonymous to us, maybe there's some government agency that might know, but certainly it's anonymous to the company except for the fact that somebody's saying that they vouch for it, becomes more serious and more susceptible to somebody, maybe on the o fact list, god forbid, or just a bad actor that you don't want involved in your financing.
Yeah, it's a great point, wow. It's a whole area that I didn't realize just how ponderous it is.
So now let's go to the big benefit. There's liquidity. So Georgia and Anil, first, just for our viewers, what does liquidity mean? What does it mean, and why is that important? Let's start with you, Georgia.
Sure. Liquidity is, again simple terms, means the ability to raise capital or be able to sell, transfer your asset for cash, in exchange for cash.
Right, so why is that important to people looking to fund their companies, to invest in companies?
All right, so liquidity is important as a secondary benefit in that you want to allow investors, once they've made an investment decision, to not be stuck forever. So usually with a private company, you don't really have an opportunity. Once you've made that investment, you're kind of in it for whatever the time horizon of that company is, until they have some sort of exit event. Well what tokens have allowed, because there is a transferability, I don't want to say necessarily a liquidity yet, and I don't want to say that all of these transactions being conducted in a legal way. But just technically, there is a transferability amongst them because of the underlying technology that has allowed this secondary market to develop and allow for people who made an initial investment to then resell those tokens, either at a loss or a profit, depending on the performance of those tokens.
Now this probably sounds a lot like the stock market, doesn't it? Which is, you know, the very crux of the issue. And that's why a lot of these exchanges that have cropped up are probably not operating in a 100% legal or compliant manner and so there's going to be a lot more scrutiny in this area. But that does not change the fact that liquidity is a huge issue and if we can find a way, and I think there are a lot of solutions, as I mentioned earlier, having an ATS or another form of regulated exchange, would provide a real opportunity to protect investors and give them the proper disclosures that they need, but also provide this liquidity so that people aren't having to hold these investments for an indefinite period of time.
And again, I would just wrap that up by saying that in the general sense, any asset that's liquid would generally have a higher value because of the attribute relating to the liquidity on the one hand, so it's more attractive for investors to buy into.
It also on the other hand allows a larger number of players to become shareholders or get value in the asset because it's not liquid or on an exchange or broadly available for investments.
Great. Anthony, so you look at the world through an investment lens. For the new issuances or security token offerings that we're discussing, have they covered it? Is liquidity significant in any other way, or they covered it?
No, I really can't hear them so I'm just going to assume that they've got a good handle on it.
I'll add one thing-
There's the other side of it. Investors love liquidity, absolutely. And I think what they say was right. While liquidity, if you have more liquidity, the investment itself might be more valuable, you're going to be more likely to invest in it, thinking maybe you can get out of it. There's the other side of it, which is the company may not want their investors to have that level of liquidity because they want price support over time, or they want the dedication of that investor saying this is one of my investments and I am inside this investment. And the ability to flip it swiftly, especially if there's no control over that, you could get a dumping situation which could hurt your overall reputation and your pricing.
The price, for sure. So Jor, is there a way that security token 2.0 can help liquidity?
A little bit, not terribly much yet. It's kind of a one in a series of steps that will get you there. Securities 2.0 as we've defined it essentially is a securities compliant token that has identity management on it. So what they've done is they've tokenized some sort of security interests and then they have, they know who has bought it. So that information is building blocks of conducting successful initial issuance where you know who has them, and that sets off a good framework for, in the future, when you're trying to development secondary markets, you already know who holds them, who can transfer them, what restrictions there are, that's all being built with securities 2.0 and you'll need to go to 3.0, 4.0, 5.0 to kind of realize the final dream.
Perfect. So let's talk briefly about how security tokens can work from a technology point of view. So first we had the basic block chain, that enabled payments and bitcoin. Then we had the second type of block chain, with smart contracts, that was largely developed by Etherium, often utilizing Etherium's ERC20 token. Now, the promise of security tokens are being built on top of a smart contract based block chain, which enables KYC identification, efficiency, and liquidity.
So Jor, take us a little deeper into how you see the security token 2.0 actually implementing the KYC, AML, and other functions. Are you familiar on the way that that could happen? We talked about how it's not here yet.
It's not here yet. So basically, people are doing one of two or three things. Either they're just doing it and then they're separately off line doing an AML KYC, approving the person, and then distributing tokens. Or they're working with a provider such as Civic or someone else, who has done that already as a package service to someone else, so that if you kind of, you know, invest in offering and your credentials are approved by Civic, then you're trusting Civic to have already done that for you.
We're kind of in this area where just about some people are releasing opportunities for some people to just go onto a network where they'll have AML KYC providers that you can select from. You'll have securities offerings you can select from. And that's kind of the next step. The next step that everyone really wants to do is to be able to say that, to be able to share information. So if someone's already been AML KYC, that one place, can that be used somewhere else? And right now, I think the answer leans more toward no, but hopefully in the future people will figure out a way where they'll trust a source enough that once one person is verified at one place, it's kind of reusable everywhere else.
We should add, these identity systems are actually being developed for entirely different reasons. In other words, in a lot of countries, how wonderful you think our DMV is, it's probably a lot better in terms of registering identity and keeping track of that in an authenticated way than a lot of other countries have in developing areas. So that a lot of people are developing block chain implementations in order to actually develop identity systems. Really poor jurisdictions that then the same technology, the same approach can be used for KYC and AML.
Yeah, it could plug right in. Okay, so we've talked about the possible evolution from ICO to STO. They're security token offerings. But let's see what vendors are saying about this. So Securitized said, "Security tokens power the next wave of ICOs." And Polymath says, "ICOs are the past" and that security token offerings are the future. STOs are going to replace ICOs.
Georgia, what do you think about that?
So I don't really care what you call it, but deeming these to be securities offerings and underlying securities definitely seems like the way to go. And so I'm glad that people are on board, and I'm happy to support whatever terminology you want to use.
Okay. Anthony? What about you?
Yeah, the whole idea of tokens, merely, it's a digital share. So I don't think that this is anything that is revolutionary. It's just a natural evolution that should be welcomed by everyone because it makes a more efficient financial system, democratizes access, and frankly the people who think it's not going to happen are the people who right now are benefiting the most from the walled garden. And so those people get upset or try to fight it, they're going to be the ones that history are unkind to, so that's fine.
I love it. The winds of change are in the air, beware.
So okay, now it's time for predictions. Panelists, take out your crystal balls. We want to ask if you think that this terminology will be a thing of the past this year, and when? Now I know Georgia doesn't care, so I'm going to go to Anil, what do you think? When will we no longer use the term ICO anymore?
I think it's going to be around until, and it really depends on where the SEC comes out, right? The reason we are talking about ICOs of the past and STOs is because of the current SEC action. But SEC needs to, it's an agency that also has a political component to it. They need to support capital raising and growth of small technology companies. So they will come up with clear regulations and there will be offerings that will allow for a small, mid-sized companies to raise large amounts of capital using the same traditional ICO methods. Again, whether you call it STO or ICO, again, I don't think I would care necessarily, because it will have to be done within the framework of the regulations, so I don't think the terminology will necessarily go away. It will evolve into an STO or something else that is more compliant in all respects within what SEC allows it to do.
And Anthony, I assume that you also are terminology agnostic? What do you think about the term ICO for this year? Gone?
Yeah, I really don't care what terms were use. I do know that the ICO term is incredibly toxic, both among investors, issuers, and obviously regulators are looking into this. And so again, I just keep going back to this idea of it's business as usual, we're just using digital shares and it's not really anything that's revolutionary.
Yeah, I love where you come from on that. Alan, what do you think? In 2018, the ICO idea terminology? Don't care? Care?
No, well I actually think that the terminology is likely to evolve, but not the underlying issue. And I think the Swiss guidance is a good reference point. I think that you're going to have asset tokens. I think you're going to have utility tokens, tokens that fall outside of securities laws, and they're going to get some definition around them, state of Wyoming actually just passed legislation creating some definition around it. And I think you are going to have security token offerings and I think that's going to be a big area of growth. Because I think we've seen in any of these areas, wherever you can get regulatory certainty and clarity, and wherever you can get the technology to match up with the regulatory regime, you really unleash a lot of innovation and a lot of the potential that's sitting within the technology that I think everybody's discussed.
It's a good point. And last but not least here in California studio, LA, Adam and Jor, what do you guys think, in your crystal ball?
In terms of the terminology, I really don't care. People are calling it STO, PTO, private token offering, et cetera. You know, to me it's just, the definition doesn't matter quite as much, you know. At some point, the industry, someone will coin a term that everybody likes and maybe we'll use that.
I care because I spent a lot of time in conversations trying to figure out what it is we're trying to talk about. One is, it's going to be interesting to see with Reg A plus, which we haven't talked a lot about, but it's an ability to raise up to $50 million through a crowd funding that looks a lot like an IPO, but isn't quite an IPO.
And there's a huge bank of companies trying to do token sales through Reg A. If the SEC actually allows those companies to use the term ICO with reference to their Reg A plus, I think the ICO brand of offer may have a resurgence, at least in nomenclature.
But it's, and I think we do want to be careful about how we call these things, especially because we still have the difficulty of companies that actually in operation are going to need to release tokens or utilize tokens or sell tokens because these tokens are being used as part of its platform. And they're not trying to sell an investment and they're not trying to find investors. But they are a block chain based company and they need a way to talk about it that doesn't implicate everything else that we've been talking about today.
Got it. Okay, awesome. So Anthony, can you tell us a little bit about the liquid benefits of the security token?
Yeah, so you know, look. Every single asset in the world that's illiquid, it's about $700 trillion worth, that's going to get tokenized, is now going to be brought into a liquid market. And that market is a global marketplace that has a lot more access for a wide population of the world. And so I always hear the argument, well why doesn't somebody just buy a public equity on the New York Stock Exchange or buy into a publicly traded rete if they want real estate? And the truth is that it's incredibly difficult for somebody, say in China, India, Russia, South America, et cetera, to do that. Because you need a bank account and all of these things.
And so now what we're going to go to is a place where, if you have a smart phone, you can now participate in the global financial system and not only does that help the investor, but from an issue or an asset owner perspective, there's now going to be this large pool of capital that's going to come online that previously wasn't there. And so when you look at kind of asset prices, for example, any time that you start to widen the pool of capital that is available, there's someone who's always willing to take a lower return profile. And so my guess here is that we're going to see a great re-pricing of assets. Any asset that's not exposed to a global free market is not correctly priced. It's mispriced in some way. So it could be overpriced, under priced, but it's just mispriced.
And so as we bring these illiquid assets to the liquid markets, I wouldn't be surprised if we see asset prices that are 2-3X higher than they are today in the private markets.
Very interesting. Okay. So as we look at 2018 being the birth of the security token industry, let's summarize. Some of the key takeaways are, first, moving forward, most US crypto based offerings will probably use Reg D, and that means for credited investors only, not for main street investors. Second, there are two drivers for the use of security tokens. Increasing regulatory pressures and a desire for improved efficiency and liquidity. And third, the benefits of security tokens will be both at the offering stage, STOs, and at the trading stage as a security token trading exchange develops. And last, the scope of the security token applications include much more than the crypto based offerings. Remember, 2017, worldwide ICO raises were only about $5.6 billion and there will be a future tokenization of the multi trillion dollars of assets globally. A topic that we'll be covering in our panel discussion coming in April from the Security Token Academy, don't miss it.
We have a viewer question, which comes to us from Brian G. Brian asks, "What solutions are available for the problem of how a real-world asset, like a stock, a partnership interest, a bond, a piece of real estate, is linked to a token holder in a manner recognized by the law? How are custodians to be used? Can a smart contract itself be the beneficiary of a trust? How would the custodian satisfy itself as to the owner?"
Okay, panel. It's a varsity question.
I'd love to-
All right, Adam.
Toss that to Washington DC.
All right, Alan? You've been nominated.
Wow. Well there's a lot to unpack there so I'll talk about a few things and then others can either completely disagree or cover some others.
On the custodian issue, what's interesting about the block chain is of course you don't need a custodian. Block chain protocol itself creates a ledger that is that kind of master accounting of who holds what, where, and when. And so one of the questions I think for the industry is how are these functions that we think about in traditional offerings, how will that evolve in this kind of block chain tokenized world?
In terms of other features, what you'll see I think, and we've talked about it in the panel already, you can, because of the programming language, you can program tokens essentially to perform a number of different functions autonomously. Jor has been appropriately cautious about where we are in the development cycle of, and maturity, of that technology. But ultimately the token will be block chain protocol and the token itself will be able to address several of those issues. And some of them will not be necessary simply because of the way, or will be addressed by the technology itself.
Cool. Okay. Adam, you had something you wanted-
Yeah, I'm sorry for laughing, it was just, you know, that question-
It's just such a fun question.
Well it's also described, I don't know, half of my day for the last five months or something like that. It depends, the funny thing is, it's absolutely correct that it's this great technology for actually ensuring custodianship, with multi sync technology, you can also redefine who can be a custodian, at least technologically, instead of it just being one person, have it being a group of people with different rights and responsibilities. And that can all get encoded before the asset gets transferred. Or to make sure that it just stays secure where it is.
Unfortunately, custodial laws having to do with different assets and different businesses is not at that place. So you have rules and regulations around stock certificates, you have rules and regulations against, I'm sorry, around hedge funds, that apply to hedge funds. You have all sorts of different custodian requirements and we're grappling with that, because it almost seems absurd to create, in a human dimension, something that is already available on the technological dimension. But companies are doing it. I have a client that bought a bank, I have a client that has bought a trust. There's all these different efforts to actually make sure that we are comporting to really early 20th century notions of custodianship in order to make sure that we're doing the right business when it comes to being a broker dealer or being a hedge fund manager or being a gold, someone who's holding gold for somebody else.
So I wish I had an easy answer. It would take a long time and nobody's really fully answered it yet.
Yeah, all right. I think that's pretty good. So finally, today, I'm going to let each of our guests give a last word on the security tokens. And we're going to start in New York with Anthony.
It's really simple, we're going to go tokenize the world.
Amen, baby. All right, Alan, you're up next.
You know, I think what's great about the security token concept and the concept of the security token offering is that any time we've seen, in this area, regulatory certainty, how are regulators going to treat particular ways that the technology works, where there's clarity, where people can develop against rules, we've seen just an explosion of innovation. I think that we're going to see that here as we see regulators become comfortable with technology that's emerging, with platforms that are developing, and as the technology matures to take them on.
All right. Anil and Georgia, last words?
Yeah, I would say, lawyers have traditionally worried about outsourcing in the last 20, 30 years, as taking over the jobs and until recently, robots taking over the jobs. I would say block chain is actually the one technology that can effectively take over a lawyer's job, at least the administrative part of what we do. And across the US, there are hundreds of thousands of associates and paralegals whose job is really administrative, but we bill a lot of time. And as a lawyer, I would also like to get to a point where we can do all of that efficiently and for a small firm like us, we can compete with bigger firms with more resources using that technology. So I'm certainly looking forward to the development of the security tokens.
Looking forward to the development to obviate lawyers.
That's not the fun part of practicing law anyway, so we don't want to do that.
My thoughts are just, I'm really excited about this time. I feel that we are entering a new era. I'm really actually glad for the SEC's attention to these matters. And I think it can only be a positive. I think that the legitimate companies that are out there that have, that are employing this new technology and bringing it online need to be rewarded, and I think we've kind of cleared the way to allow that to happen. I think that the whole atmosphere had gotten very clogged with just, sorry, but a lot of bad actors. And I think that we're kind of having this cleansing period. And we'll start again. And you know look, mistakes will be made. But I think just to make sure that we are thoughtfully moving through this process is a really good place to be.
Love it. And back here in the studio, anything you want to add, Jor?
No, I think that it's clear that block chain technology or decentralized ledger technology has certain benefits for securities laws and securities in general. So it's not surprising if almost all of it moves toward that space. Certainly further technological developments will have to be made, a lot of thinking's going to have to go into it. And prices are going to have to come down significantly. But I think that will all play out over the next two years.
So one is, I really echo the sentiment about lawyers and, at least for us, how we can go forward as individuals. I'm now with a firm, Fisher Broyles, that has 200 partners. We don't have associates because for 17 years we've been packing in technology to try to do as much as possible so that we can avoid a lot of the drudgery, I guess, for our clients, which is pretty interesting. And it's one of the reasons why we are so behind block chain and block chain companies. The less we can do, the better. So that's one, and I'm-
I think that's the first time I've ever heard a lawyer say that.
Then you've known me, I'm at a firm too where, god knows, I always love my associates, wonderful people who make life possible.
So the other piece of it though is with all this regulation, with all the turmoil with the bad actors, with everything else, I'm just hoping that as an international interest group, we don't lose sight of the great promise that we saw through bitcoin and Etherium and such, which is open source projects that want to attract a huge base, an international base, an immediately huge base of top flight engineers, programmers, marketers, you name it, in order to develop applications and that can really change things. And do it so rapidly. This is a crowd funding methodology as well as a way to get interested parties together on it, unlike anything. Nothing even close to anything we've ever seen before. I mean Kickstarter seemed like it was groundbreaking.
Or IndieGoGo. And this is that, not just on steroids, but steroids and a few other things. And it can be in a very positive way. And I think that everybody here that we've been talking to today, and I've been so happy to share this time with, we're all involved in really trying to enable the promise of that. And that's what I'm excited about.
Amen. I like it. I'm in the tent.
So that was quite a discussion today. We invite you to visit our website, securitytokenacademy.com. And our social media channels. Our next event, don't forget, will be on April 12 at 12:00pm Pacific Time, where we'll be speaking with Joe Cammarotta who's the president of T Zero, and Trevor Kavurko, the CEO of Polymath. More heavy hitters coming your way. We will dive further into the security token discussion while talking about the tokenization of global assets. You don't want to miss it. So don't. And make sure to subscribe on YouTube to stay up to date on all the latest Security Token Academy videos.
I'd like to thank our guests for joining us today. From New York, we had Anthony Pampliano. In DC, Alan Cohn. And Anil Advani and Georgia Quinn in San Francisco. And here in studio, Jor Law and Adam Ettinger. For everyone here at Security Token Academy, I'm Adam Chapnick. Thank you so much and we will see you next time.
Thank you Adam.
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