Security Token Academy encourages you to read our

The Advantages to Using
Security Tokens in the
Real Estate Industry

ICO Insight Top Section

 

Amy Wan

Founder & CEO of Sagewise
Host, Security Token Academy

Amy Wan is Founder & CEO of Sagewise, dispute resolution infrastructure for smart contracts. She chairs the EOS Alliance Dispute Resolution and Arbitration Working Group, and has authored the Bloomberg Law practice guide to ICOs and Lexis Nexus' Private Equity practice guide. Previously, she was a Partner at a boutique securities law firm and General Counsel at a real estate crowdfunding platform. Amy is also the founder and co-organizer of Legal Hackers LA, which programs around the intersection of law and technology; was named one of ten women to watch in legal technology by the American Bar Association Journal in 2014 and one of 18 millennials changing legaltech by law.com in 2018; and was nominated as a Finalist for the Corporate Counsel of the Year Award 2015 by LA Business Journal.

Amy has also worked in international regulatory and trade policy at the U.S. Department of Commerce, and was a Presidential Management Fellow at the U.S. Department of State and U.S. Department of Transportation. She holds an LL.M. in Public International Law from the London School of Economics and Political Science, a JD from the University of Southern California Gould School of Law, and a BA in Biological Sciences from the University of Southern California.

LinkedIn    |    Twitter    |    Medium    |    Company

 

Brad Greiwe

Co-Founder and Managing Partner at Fifth Wall

Brad Greiwe is a Co-Founder and Managing Partner at Fifth Wall, a venture fund focused on technology for the Built World backed by the largest owners & operators of real estate, hospitality, and retail environments in the world.

Prior to Fifth Wall, Brad was the Co-Founder and CTO of Invitation Homes (NYSE: INVH), the largest owner & operator of single family rental properties in the US backed by The Blackstone Group.

Brad started his career at UBS Investment Bank in the real estate, lodging & leisure group. He then worked in real estate private equity at Tishman Speyer and Starwood Capital. Brad is from Cincinnati, OH, lives in San Francisco, CA and graduated from Harvard University where he received his BA in economics.

LinkedIn    |    Twitter    |    Medium    |    Company

 

Andrew Jewett

Co-founder and CEO of Aperture

Andrew is a co-founder and CEO of Aperture, a vertically integrated technology and real estate investment company focused. Aperture is issuing Property Coin, the first security token backed by a professionally managed portfolio of fix and flip assets and loans. Andrew brings years of experience in the residential real estate space, both from an operator and a structured finance perspective and is focused on the implementation of best practices from the traditional real estate and structured finance world to the security token markets.

LinkedIn    |    Twitter    |    Company

 

Jason Myers

Partner, Clifford Chance

Jason Myers is a partner in Clifford Chance's capital markets practice focusing on public and private capital markets and other corporate finance and general corporate transactions in the real estate, hospitality and specialty finance sectors.

Jason has extensive experience advising public companies on securities compliance, corporate governance and other corporate advisory matters. He has advised sponsors, investment banks, REITs, specialty finance companies, and business development companies in their capital raising activities, including initial public offerings, follow-on equity and debt transactions, 144A offerings and other private placements and PIPEs, raising over US$6 billion in the past few years.

Jason has done extensive work in connection with REITs and privately held funds formed for the purpose of investing in real estate, including non-traded REITs. This work has included the formation and structuring of such entities, and the initial financing and investment in such entities.

LinkedIn    |    Twitter    |    Company

Clifford Chance is one of the world's elite law firms, with over 3,200 legal resources delivering innovative solutions to emerging fintech companies and leading financial institutions in the Americas, Europe, Asia Pacific, Africa and the Middle East.

 

Jonathan Weibrecht

Director of Real Estate Capital Markets at Harbor

As Director of Real Estate Capital Markets at Harbor, Jonathan oversees relationships with issuers, broker-dealers and distribution partners. His career includes over a decade in investment banking and investment management, most recently as Vice President at Moelis & Company, providing strategic advice to global Real Estate, Gaming, Lodging and Leisure companies. Prior to Moelis, he held related roles with Citi, Lehman Brothers and Merrill Lynch. He holds a degree in Economics from Washington University in St. Louis and an M.B.A. from the Stern School of Business at New York University.

LinkedIn    |    Twitter    |    Medium    |    Company

Harbor: the compliance platform for tokenizing private securities

Transcript


 

Amy Wan:

We have a very esteemed panel here. So, I want to give them a chance to quickly introduce themselves. So, if you can just go down the row, please state your name, the company you work for, and a one minute, about your background and what your company does.

Brad Greiwe:

Sure. So, Brad Greiwe. I’m the co-founder and managing partner of Fifth Wall. We’re a venture capital fund exclusively focused on investing in built world technologies. We do so with a unique strategy in mind. Our LPs are some of the largest real estate owner operators in the world. Our first fund was populated by LPs like; CBRE the largest commercial brokerage, EQR largest multifamily owner, Hines have the largest office developer, Macerich third largest shopping mall owner, Prologis largest industrial owner in the world, Host Hotels largest hospitality lead and so on and so forth. So, the strategy really is to work with those LPs to intimately understand their technology needs and priorities, and help them articulate those in the VC ecosystem.

We have 28 portfolio companies, including Harbor. We have, spent the last year and a half studying the Blockchain space, specifically focus on the advent of security tokens. I guess my role here today would be trying to give some context of how the real estate end users think about this technology, and some of the things that they’re doing to prepare for it. From a background perspective, I was an investment banker and real estate, private equity at Tishman Speyer and Starwood Capital. I also started a company called, Invitation Homes, which is now the largest owner of single family rental homes in the country. We own over 85,000 homes in 17 major markets across the US and now we’re publicly traded REITs with a $12 billion market cap. So have both technology and real estate experience, so hopefully can provide some additional insight to that.

Amy Wan:

Fantastic.

Andrew Jewett:

So, I’m Andrew Jewett. I’m the co-founder and CEO of a company called Aperture Real Estate. We are a distressed residential real estate investor across the United States, leveraging data and technology in ways to source, manage and dispose of assets. So think of it like a gigantic fix and flip platform across the country. But the reason why I’m up here is, because we also launched a security token backed by residential real estate called, Property Coin this year. And so, I think many claim to be the first, but I think we actually technically we’re the first one out there to issue a security token backed by residential real estate. And that market as we will probably discuss has been a challenging one for a whole host of reasons.

Yeah, so we’re generally using data and technology in ways that we haven’t seen the residential real estate market use before, and as Brad touched on them. They’ve invested heavily in this space and I think that that’s the next wave of going on in the real estate space is, how do we utilize technology? And how do we utilize Blockchain in your both issuance of securities to fund assets, but also the management of assets. So, we’re super excited about where this space is going and yeah, that’s my background.

Jason Myers:

So, I think all panels need a lawyer on it, that’s why I guess I’m here. Even though it’s not a regulatory or legal focused. My name’s Jason Myers and I’m a partner with Clifford Chance, which is an international law firm based in London. I’m housed in New York in for the last 18 years. I’ve been focusing on real estate capital markets, both public and traded companies with a focus on specialty finance and REITs. Now that people have been talking about the tokenization of real estate, certainly my practice and somebody, other parts have been focused on the Blockchain and tokenization, and working, and talking to some of our clients about, whether it makes sense for them to tokenize certain aspects of their business, or doing it in a portfolio context. So, I hope you enjoy the panel.

Jonathan Weibrecht:

All right. So, I’m Jonathan Weibrecht. I’m the director of real estate capital markets for Harbor. Harbor is as a platform that was set up about a year ago to help private companies issue a stock or issue LP interests, or whatever the relevant security may be, with a lot of the same sort of attributes around liquidity and around trading that public companies have. Just taking a step back, for me, I’m actually very much of old world real estate investment banker, until a few months ago. I was actually with Moelis & Company.

I signed on with Harbor, after they came to me and walked me through the implications for both the group of institutions that I had spent my … really most of my career covering and what that looked like in terms of a cost of capital in a liquidity potential. And then that ability through our Tech stack to match that up, with high net worth individuals, with family offices and with really anybody who’s writing checks that are smaller than the audience and the GICS of the world, and create a product that is much more better suited for their investment needs.

Amy Wan:

Fantastic. So let’s start at the very beginning. In the morning we had the folks who work in the real estate industry raised their hands and there’s actually quite a number of them in here, and I talked to a sponsor outside, and they’re like, “I don’t understand why I now have to add a token into my traditional real estate syndication offering.” So, Ken and … we’re just going to have a friendly chat. Anyone, feel free to chime in whenever you want, but why are we now applying Blockchain and or tokens to the real estate industry? What advantages are there?

Jonathan Weibrecht:

Yeah, sure. Listen, I think when you think about the real estate industry in the context of private securities, as opposed to what’s owned by the publicly traded REITs, there’s a whole bunch of controls that are put in place by the issuers of the real estate that basically keep you from being able to trade the securities. Effectively, whenever you buy a share of a non-traded REITs, or an LP interests in real estate, there’s some language at the bottom that says that this share is nontransferable. That’s there so that they don’t try to trip sets of rules around the composition of your cap table, and around the type of people that are in your cap table.

The opportunity with tokenization is in a world, if I take a little step back, if you buy a private security today, so you want to buy Airbnb on SharesPost, your settlement time is T plus 60 days. By using tokenization, we bring that settlement period down to call it T plus about four minutes. This allows us to reconcile a cap table, real time all the time, sold for all the rules that would otherwise be tripped. So that allows you to introduce meaningful liquidity into the space.

Andrew Jewett:

And I think access too, right? One of the things that we always like to say is, unless you’re a super large hedge fund, Private Equity Fund Pension Fund, you don’t have access, and specifically in our case, to a truly professional operator that manages single family housing across the country. It’s obviously different depending on the asset class. But one of the things that we try to sell is, hey, there’s access to this for the masses. We can get into accredited investors and the challenges around that, I’ll say. But there’s … if you think about it more holistically and, and, at a high level, there’s access to this type of asset that really hasn’t been there before.

One of the things we like to say is that, unless you’re a country club guy and have access to a local contractor, you’re not investing in fix and flip or single family rentals and you have no access to a professionally managed portfolio of those assets. In my mind it’s about giving access to people who otherwise might not have that access in a much more liquid and transparent manner.

Jason Myers:

Yeah. And I think that’s right. And I also think from a lawyer’s perspective in what we’ve seen over the last several years, I think it also comes down to monetization. The idea that, in the public, if you’re a private owner of real estate and you’re looking to monetize your portfolio or your business, and you want to do an IPO, the public markets have really just not been there other than if you’re Blackstone or you have a specialized of assets like storage assets, or farmland, or port for instance. Those are the some of the recent IPOS that have taken place in the real estate capital markets. I think if you’re looking to monetize a single asset, an office building, a trophy asset. It’s proven very challenging to do so in the public capital markets.

So, I think you’ve been seeing a shift into private capital raising alternatives and I think that tokenization of real estate can provide a way to monetize in the private capital markets that you couldn’t do in the public capital markets. For instance, if you’re a public REIT and part of your Business is development, oftentimes you don’t get the type of credit from Wall Street on that type of business. That could be something potentially that you could tokenize whether you’re public or private. So, I think there is different parts of the business that may make sense, make more sense in a private format and tokenization than you would ever be able to do in a public format.

Brad Greiwe:

And just to pile on, I mean, I think sort of the obvious themes that the real estate market’s looking for. It really centers around, I’d say capital formation, and then liquidity specific around sort of secondary’s. And I think there’s a lot of different nuance as to why those things are the case, whether it be more perfect match between buyer and seller sort of the bespoke nature of paper and securities and the inefficiency related to that. The contractual and regulatory compliance associated with those transactions, et cetera, et cetera.

I’d say from a more immediate term perspective. Again, taking the lens from how I’d say the institutional real estate markets, looking at it. Hines, for example, it doesn’t see a lot of inefficiency. And I’m not speaking for Hines, I’m just using them as an example. Doesn’t see a lot of inefficient trading a downtown office building at a four cap, they don’t have issue finding capital for that. There’s plenty of people who are willing to brokerage and facilitate their transactions.

Therefore, there doesn’t seem like there’s existential threat to the real … and there isn’t really to the real estate industry as it is today, especially now. So, there isn’t a lot of … I think there’s interest, but there isn’t this existential threat and slash or need to jump in the deep end. So, I think there’s a lot of interest around … less interest around, I’d say, the contracts of like a single asset ICO. Well, I think that’s interesting for them to experiment with, I think there’s a realization that gaining access to crypto wealth isn’t going to increase the value of your asset.

Yes, you may be able to fleece some of them, but that’s not a programmatic strategy. And again, you run into the issue if you do pursue that, as repeating the same mistakes as they think that the crowd funding innovation has attempted to overcome a better transaction platform, but ultimately resulting in a financing of last resort, where if you can’t get traditional financing, sometimes you go to a crowd funding site to try to gain financing there, which has issues around that.

I think the other thing that I think our institutional partners are looking for a way to leverage Blockchain in a more interesting fashion, it’s around assets that haven’t been traditionally valued, the way that they think they should. And I think there’s plenty of examples of real estate asset classes that don’t get, you could make the argument, don’t get the appropriate valuation in either private or public markets and figuring out ways to leverage Blockchain to unlock that value. I think is wildly interesting to them. I view that as that like 10X event where you can essentially open up new markets and/or new investment opportunities based on a technology that has existed in the past.

And I think some of our service providers are looking at the opportunity to use Blockchain to provide off chain support. I don’t think our investors overall view a world of pure decentralization. I think they definitely view it as somewhere in between. And they’re well suited to help facilitate that move and be an active participant in building those off chain capabilities to support the innovation occurring on the Blockchain, and I think that’s actually needed. Any success that’s going to occur in real estate tokenization is going to be in partnership and in collaboration with the institutional owners of real estate.

You cannot … and I hate to say this because Uber is an amazing company. You can’t Uber your way through the real estate industry. The capital markets are too well defined, there’s too much regulation and the incumbents are too large. So, I think if you can attract their participation and have them be a partner in helping facilitate this, I think really interesting things can occur, that’s not going to happen overnight. Most of them are looking at the space with interest. I would say without naming any names, you’d be surprised at the organizations that are looking at doing things here. So, I think there is … I’m very … I’m bullish on the potential, but we very much are in the very early innings of this and there’s a lot of learning’s that need to take place before you see widespread adoption.

Amy Wan:

Great. So, there is a ton to unpack in each of your statements. So, going back to the foundational side really quickly, I often find that when people talk about applying Blockchain to real estate or tokenizing real estate, there’s two separate concepts, right? There’s the first which is, actually tokenizing the real estate, which I call it more so, ‘tokenizing the deed,’ right? And then there is, tokenizing the real estate as in tokenizing the entity that holds the real estate. Are the two part and parcel? Are there differences? What are the implications of the differences? Are they used for different things?

Andrew Jewett:

I absolutely think they’re different. There’s completely separate motivations and use cases for it. I mean you think about we talked a little bit about settlement, but if you’re wanting to sell a specific property that’s much more about liquidity and who you’re able to transfer that property to. Versus in my end case, it’s more fun style, right? So, I’m giving people a vehicle by which they can invest alongside us. So it’s vastly different. But I think, well, if you look at it at its core, it’s about providing liquidity and it’s about providing access to assets that investors might not otherwise have.

Amy Wan:

How about in terms of when people are actually going about tokenizing real estate. What do you think are the asset classes or … what exactly are we tokenizing? And I think this question we have to divide into two phases, which is in the beginning right now, what makes sense to tokenize right now, versus what the future might be. Are we talking about is this going to be equity or debt, is it going to be large REITs and funds, versus single assets? What does it look like?

Andrew Jewett:

I think the answer is yes.

Amy Wan:

At everything?

Jason Myers:

Yeah, I agree.

Jonathan Weibrecht:

I mean there’s a time and place for all of the examples you just gave. I think today really where the value is created is in the pockets of the real estate industry where the publicly traded REITs are not particularly efficient. So, you think of the slice of the world where the green streets in the real estate analyst communities basically hate. That’s essentially everything out of gateway cities, right? So, you start to look at pockets like classy garden style apartment throws up great yields, it’s incredibly recession, resistant or extended stay lodging, same sort of aspect, right? But it’s not in the center of the bulls-eye for the analyst community.

I think you start to see a lot of interest there in a lot of value creation there and tokenization, and that’s a slice of the market we can actually see meaningful cap rate compression, because yields are actually high. I think the other side of the market today that you see a meaningful opportunity is in gateway cities in the market for passive equity interest, right? So you think a trophy office building in New York City, if you blow out of that as an owner of that building, you don’t get another crack at it for the next 40 years. So, we’re seeing a lot of demand from institutional issuers, to actually sell down those passive equity positions, because traditional pools of capital are just not interested in taking minority stakes by a merge.

Andrew Jewett:

And I think holistically, it’s the single largest asset class in the world. It just is. And so, there’s so many applications that there’s probably stuff we haven’t even thought about that tokenization is going to bring to real estate. But I just think that there’s so many untouched pockets and I think your point on getting outside of the traditional view of analysts or the large scale companies is where it’s going to have the most impact down the line. Not yet, but it’s coming.

Brad Greiwe:

I would caution the group to really think about their limitations of its application based on the current state of the market in the sense of … when Blockchain first became a thing in real estate, the initial revolution was going to occur in title, which seems obvious based on how inefficient title is. Invitation … Oh sorry. Fifth Wall, actually has an investment in a disruptive title company, but it’s premised on the application of data unique in interesting ways, but it doesn’t … right at this point have a Blockchain strategy. Why? The reason is because the Blockchain, while if you’re in a vacuum or in a black box, apply Blockchain to title it makes all the sense in the world. It is far more efficient. But to get every county, and every city, and every state across the entire US to buy into this new model is going to take years to do, even if it happens.

Andrew Jewett:

And lots of lawyers.

Brad Greiwe:

And lots and lots of lawyers. So-

Amy Wan:

Lawyers make all the money.

Brad Greiwe:

-we need to make sure that, whenever we think about that vacation, theoretically Blockchain can do a lot of interesting things, but there were limitations based on the unfortunate market that we live in today, and the restrictions that we have around data, and all these other things. So, there is a little bit of a caution, that sense of yes, this can be a really powerful tool, but there needs to be, I think a lot of thought that goes in around the what comes first and why. I think our funds initial interest in Harbor and why we made the investment, was Harbor was looking to solve what was a very clear roadblocks for institutional real estate owners, which was how do I make sure that I am compliant.

Because there’s nothing worse than I could ever do is promote this new technology, invite my investors to participate in it, and then have the SEC knocking on their doors. They need to make sure that this is very clearly SEC compliant, and checks all of the regulatory boxes and it has the same institutional and finish area approach to how they do their business currently. And that can’t happen without a Harbor protocol.

Amy Wan:

So, there’s … you bring up a good point, right? There’s a lot of excitement and hype in this space. You’re saying, there’s a word of caution, some limitations. Jason, are there any cautions or limitations, things that we should be thinking about on the regulatory or legal side? Everyone’s always talking about like, unbridled liquidity, it’s going to be great. Let’s all throw cash up in the air. Is that really going to be what it’s like?

Jason Myers:

Well, it’s interesting. I think we are very much in the early stages of where this could actually go. And I think at the end of the day it really does come down to whether people will trade in what you’re offering them. We are starting to see the ATS is being established and are there going to be market makers in the securities that you’re offering, whether it’s an out of a read or an LC, or whatever. But I think that’s really going to drive in whether this is all going to be successful or not.

And with some folks that we’re talking with, they are really approaching this as, and I think if you say it’s going to be on the Blockchain and it’ll be listed at one point in time in an ATS, I think there is some marketing pizazz to that. But at the end of the day, this isn’t how the offering really works is no different than the traditional format of a purely like a 506 Reg D Offering. You could also do it through Reg A Plus. But at least the clients that we’re working with and talking with, it’s thinking about structuring the real estate, whether it’s a blind pool or around an individual asset, or a portfolio. And in that case, whether you’re issuing common stock and potentially a digital format, or there’s some other interesting structures that we’ve been working with to execute a securities offering around real estate.

So, I think that when people think about tokenization and securities tokens, I think for those that are not very familiar with it, they may be like, “Oh, well that just adds a lot of complication.” But at the end of the day, from a securities’ perspective, I think we are taking the view that what we are offering is a security and you were doing it in a kind of traditional format. And some folks are, if they’re doing the private offering, they may actually say that we are not … this is not going to be tokenized out of the gate, but some date in the future it will be okay.

Amy Wan:

Interesting.

Brad Greiwe:

That’s a great point. There’s a lot of organizations that are structuring whatever that instrument is to be tokenized at some point in the future. Which is a good exercise, right? Because they have to ... They’re going through all that legal and regulatory compliance internally to ensure if and when they’re ready, that they have all those approvals and their organization is set up to help facilitate it. And when the market is ready, because again, like the Mark … There are pieces in place but they’re not all connected. We talked about there’s a new exchange, like all that stuff still needs to happen. So, we’re still waiting for those pieces to be connected.

But I think making sure that the right participants have the interest and have done their homework, I think when that eventually does happen and it will, you’ll have active market participants that are willing and able to use those tools.

Amy Wan:

Do we also need to see standardization of the legal and the regulatory structures, and the frameworks just because in order to make everything super-efficient and scalable. So first it’s a transaction cost perspective, right? But secondly, I can’t really imagine you have all these real estate token listings on some sort of marketplace where ATS, but they’re all structured in different ways. That makes it incredibly hard to evaluate, right?

Andrew Jewett:

For sure. And I think you will start to see that, but the nature of the asset is it’s so different that … You look at the securitization markets, all transactions are different, every single one of them. So, it’s a function of the underlying asset. And then back to your previous question, I think everybody thought last year that just tons and tons of money was going to just be thrown at these coins and these real estate things, and these transactions, and the thing that I always said was you have to take the step back and make sure the deal’s a good deal too, right? Like the economics of it, the tokenomics of it have to make sense.

People always forget that, like it’s people’s job to invest money for other people. So the second that that goes out the window is when and I think we saw last year, is when you start to see the bubble happen. But I think it’s a good thing that we saw what happened with the cryptocurrency markets this year, last year because it’s allowed the real professionals to take a step back and say, “Let’s think about this. Let’s think about the application of Blockchain and security tokens for the future.”

And so back to this question, I think you’ll see a standardization, but I don’t think … And I think it’s almost impossible for every deal to be the same because it’s just every asset’s different. And when you’re talking about real estate, specifically single family homes, there’s nothing more different than one house versus the next, versus the other one, it’s just everything’s different. Every buyer’s motivation is different.

Jonathan Weibrecht:

I think Andrew made a really good point too about the merits of the underlying investment. If you tokenize something and it’s a lousy investment, it just becomes a slightly more liquid, lousy investment. Really what we’re doing with tokenization is we’re stripping away a piece of the risk. If you think about the chunk of illiquidity risk, we’re taking it from here to like maybe there, because people actually can transfer.

But it’s really in the way that we’re going to market at Harbor, it’s really about here is the value of the underlying investment. If you were going to buy this regular way on paper and you locked up for 10 years, does this make sense? Okay, great. Now pause, and we’ve got a vehicle where you can actually trade out of it 90 days or 365 days in.

Amy Wan:

We’ve talked on this panel about democratizing access to investment opportunities, especially white glove ones, and I think that’s the dream for all these real estate crowdfunding, real estate tokenization companies. And obviously there’s a great investor appetite I think but how about the sponsor appetite? Like have you guys been seeing a pipeline? Jonathan, do you want to start?

Jonathan Weibrecht:

Yeah. So our pipeline right now has been actually incredibly robust. I was brought on originally to really getting in front of the issuers and that’s actually hasn’t been a problem at all. People are coming to us with that with meaningful deal flow. But really from a pipeline perspective, what we’re seeing is really teaching. We’re seeing LPs, so we’re in the market with a couple of different funds that are raising LP equity. One of them is a leading private equity fund out in the West Coast. All of their LPs are made up of top that pension funds, names that you would know readily. And then the other piece that we’re seeing is a single asset deals, so single asset/small portfolio deals.

So we’re in the market with a couple of asset deals, one is going to be a privately, that’s a single family … I’m sorry, a student housing property with a great sponsor. One of the best sponsors in the space, actually. Another is a 10-31 exchange product that will be dropped into a DST. And it’d be really cool because you’d be able to flip out of your existing illiquid real estate investments into this product, and then you will be able to create an ecosystem where you can touch different 10-31 exchanges as interest rates change, and as you want to move into different pieces of property.

Amy Wan:

So, one question I have is how do we make sure that the industry does not become predatory towards the retail investors? I remember in 2017, I started seeing these real estate ICOs and I would look at what their version of the offering circulate. It’s the offering circular, was it a white paper. And it’d be all over the place. But if you looked at the fundamentals, the financials, the distributions to investors, for a lot of these deals it was actually the opposite of what they would normally get in any traditional offering. Right? And it was totally predatory. They were totally taking advantage of people who weren’t used to investing in real estate. How do we make sure that this is an industry of best practices?

Brad Greiwe:

Yeah, I mean, it’s a good question. When you think about the opportunity, real estate’s one of the largest, if not the largest wealth creator on earth, and to date it’s been hard to gain access to. Either you invest in a share of a REIT, which only has exposure to very specific sort of high profile markets, or you invest independently, which is only available to the select few. So, being able to democratize that access that Andrew alluded to, is an incredible idea, and is the aspirational nature, I think what this opportunity represents, which is I think why a lot of people are attracted to it.

But again, it’s why I think it’s so important to think about the implications of ensuring that this market evolves in the appropriate manner in that being able … Like having CBRE value and asset on a consistent basis to ensure that the value of that asset is being articulated appropriately and being traded appropriately. There are going to be a significant amount of service providers that help facilitate that. There’s a new company being formed right now called Framework, whose role is to solve that specific problem.

I think the idea that … and I know there’s a lot of theories that this decentralized world is going to change everything. Listen, I would love for that to be the case, but I just I don’t see that happening anytime soon. And I think the best way to realize a more responsible vision again, is to do so with the industry players that have been doing this professionally and as fiduciaries to institutional capital to be sort of lead the charge, because they’re in a much better position to take the hits if and when things don’t go as planned. And I think I would much rather, I don’t want to say experiment because that’s probably not the right word, but I would much rather have them be the water through the pipes first, before you start marketing this to the retail market.

And I think there’ll be responsible ways and organizations that help facilitate it to invite those retail participants into that ecosystem if and when it’s robust enough to service their needs and protect their interests. And that’s what’s in you can say what you want about help the industry exists today and how the government regulates it. But there are regulations to protect consumers and those are important regulations. And they need to be reflected in whatever the Blockchain evolves into.

Andrew Jewett:

I think it goes even a step further than having the CBREs and the JLLs do your BOV in other organizations check what you’re doing. For every deal that we’re bringing to market, we’re running in an institutional style bulk billed in advance of pushing it out to the general public. And, so if we start marketing a deal and the guys that are basically sitting in Brad’s circle say, “No, this makes no sense,” then we put the deal back on the shelf and we know that we overstepped.

Jonathan Weibrecht:

And I think there’s a pretty well-worn path already, right? There’s the SEC, there’s local state regulators, there’s this whole infrastructure that’s been used for however many years in the existing securities markets that is there for specifically that purpose. Right? And we got a call from the SEC looking for information on what we’re doing. I’m sure everybody who’s issued a token or an ICO has gotten the same call. And thankfully we spent the time, the effort and the money to do it the right way with a proper law firm. I didn’t mention it before, but my background is as an investment banker as well. So, it was like we knew that you don’t want to mess with the SEC. It’s like, you can’t Uber your way through the Sec, that that’s the government, you don’t want to mess with that.

So, I think there’s definitely going to be some shakeout of some of the stuff that happened in 2017, in early 2018 just with bad actors. But I do think it’s incumbent upon all of us to have the best practices and the best operators in the space really take a good hard look at what this means for the industry and only then will we be able to really grow this business.

Jason Myers:

And, and I think with any new market or anything new, you’re going to have bad actors that will overtime get weeded out. I mean, if you’re familiar with the public non-traded REITs space, when that first started and I was … I had represented a CBE Richard Ellis when they did their first one. Some of the stuff that I saw come through from a marketing perspective blew my mind and over time, a lot of regulation where everyone’s offering $10, an investor gets their customer accounts, it’s says $10 after three years and there’s no … they’re not the ducting a load. And obviously then with the passing of 1502 from FINRA, that kind of changed. The SEC then came in, said you need to provide better disclosure around distributions, how you’re paying them.

So I think over time and then lo and behold, look who’s entered the market. Blackstone Starwood. So, I think the bad actors will weed out. And I think the other thing about the tokenization concept is that at least some of the stuff that we’ve been working on, a lot of it is, again, people using 506(C), because you can use general advertising and solicitation. So that’s all geared towards credit investors. In other offerings like the public non-traded REITs, that’s not necessarily AIs. So I think, again, I think that what we’re talking about is not necessarily new. I think because it’s Blockchain, but I think again, over time, it could be very successful.

Amy Wan:

So, real estate has traditionally been one of those industries where it’s kind of like shadowy, kind of murky. There’s a lot of under the table transactions. People have looked at it and said, “Wow, there’s a lot of money laundering going on here.” Right? And so-

Brad Greiwe:

What kind of real estate did you buy?

Amy Wan:

Well, because traditionally, this is one of those verticals are one of those areas where you don’t necessarily need to have AML/KYC, right? You can buy real estate with cash. And then I remember reading an article a couple of years ago, about … I think it was in the New York Times where the treasury department was like, “Okay, now we’re going to take a deeper dive, a deeper look. We’re going to start looking at all these shelves, of shelves of Shell companies in Manhattan and Miami.” Do you think the application of Blockchain technology to the real estate industry, whether with tokens or not, is going to make any sort of dent in terms of these sorts of issues?

Andrew Jewett:

Again, I think it goes back to it has to be best practices and making sure that you abide by the existing rules. I mean AML upfront is important, but AML on the back backend so that you don’t allow a token to be transferred to some Russian oligarch, who’s funneling money, or Al Qaeda, or Isis, or whatever, you name it. But it has to be a coordinated market effort by the players in the industry to make sure that you abide by the existing rules. So that just that instance doesn’t happen, right? I mean I can check AML/KYC on everybody who buys my token upfront, but the second it goes out into the market, I don’t know who that is and I might have a nefarious person on my cap table. So, how do I institute some of those restrictions on my token?

Right. Yeah, but my point is that each, each of these parties has to abide by the rule and make sure that we’re all working together to get to that point where it’s fully functional marketplace.

Jason Myers:

Harvard’s the entire value proposition is premised on solving just that, right?

Andrew Jewett:

This is exactly what we do, so nobody can transact, or basically the way our security, our token works and is actually not the security instance. What happens is when you go to trade in the secondary market and token points back to a white list of people that we have KYC/AML and if necessary, accredited. And if the person on the buy side of the trade is on that white list, the trade goes off and nobody actually knows we were involved. On the other hand, if for whatever reason Pablo Escobar is trying to buy on the other side, it stops the trade and says, “Sorry, this person has to get AML checked.”

Amy Wan:

Interesting. So Brad, you’re on the VC side, you see a lot of real estate tokenization companies every day, I’m sure. What is your investment parameters? Who are you watching nowadays and what do you want to see?

Brad Greiwe:

I think this category is one that are fun 10 … I think is more apt to go in earlier. Yeah, there aren’t a lot of … Most of our funds really focused on series A, B, and C. The reason being is that our fun strategy applies really well to companies that have demonstrably product market fit and are looking to expand across whether it be domestically or globally through our LP network. So that maturity helps. But I think obviously this industry is so early on that I think it’s incumbent on us to get in early and get our LPs on the field so they’d better understand how the industry’s evolving and how to participate.

We broke the industry up into, I think it’s component parts, which I didn’t want to give away because it’s the secret sauce, and I think we’re looking to place multiple bets across the board to help support all those different, like I said, all those different pieces of that ecosystem that I mentioned before that I think eventually will need to be tied together. So I think we’re looking for organizations that have … Again, most of this is going to be founder driven because it is that early. So I think really, really smart founders who understand the opportunity, but the limitations that the real estate industry provides and are willing to work in partnership to help develop better products.

And I think I’ve a shared view that there is going to be ... This isn’t going to go from … This isn’t going to be a hockey stick moment where all of a sudden every real estate asset traded on the Blockchain and that this is going to be a true partnership model where we’re going to have step function changes, and they have the organization and the patience to understand what those are and develop them accordingly. So, I think you’ll see us make bets in different parts of what we view to be the ecosystem of Blockchain as it relates to its to application to real estate, and hopefully bring our partners to bear to help hopefully accelerate those outcomes.

Amy Wan:

So that’s for your VC, are you seeing similar investment appetite with other VCs? Are they taking that space as well?

Brad Greiwe:

Oh yeah. I mean, you’re seeing dedicated funds being created out of some of the better VCs in the valley with the intent of placing large bets to help, again, support the growth of this ecosystem. Because this isn’t a question of if it’s just now to win. So a lot of groups are dedicating capital and resources specifically bet on the space. If not both real estate in other spaces within it, but I think real estate is definitely both from a security token perspective and Blockchain perspective, but more so just as a general category is on every VCs whiteboard underlined and circled. Because this is, as Andrew mentioned, this is the biggest industry on earth and the implications that Blockchain could have when disrupting real estate capital markets, which are bigger than the … The real estate capital markets in the U.S is bigger than the stock market. That is too big of an opportunity for VCs to pass up.

Amy Wan:

Fantastic. All right, well, thank you everyone. That was the real estate panel.