Carlos is an entrepreneur, investor and co-founder/CEO of Securitize Inc. Prior to Securitize, Carlos co-founded SPiCE VC, the first liquid, inclusive and transparent tokenized VC fund on the blockchain. Previously, he was the President and CEO of Telefonica R&D and CEO of New Business and Innovation at Telefonica Digital. He also co-founded and sits on the board of Wayra, one of the world’s largest corporate accelerators.
A self-described crypto-capitalist, he is the founder of Sling Ventures, an angel-investment fund co-invested by the European Invested Bank; a founder of Dubai Angel Investors; and a venture partner in THCAP VC. Carlos has also been a CTO, CEO and board member for multiple tech startups.
Securitize An end-to-end platform for issuers that are seeking to tokenize assets
While attending the University of Michigan, Jeremy founded the Blockchain Education Network (BEN), a global educational nonprofit. He then went on to cofound Augur, the decentralized prediction market platform., and led their ICO— the first ever on Ethereum and first "utility token". He most recently worked as an entrepreneur-in-residence and investor at Blockchain Capital, where he sourced over a half dozen investments and started a new company, SAAVHA, helped structure the firm's landmark security token ICO. Lastly, Gardner served as the founding editor-in-chief of Distributed Magazine. Lastly, Gardner also helped structure the firm’s landmark security token ICO.
Jeremy advises some of the top startups in the industry, and is often cited in the press surrounding blockchain technology.
Hey, everybody! It's me, Adam Chapnick, with the Security Token Academy where we explore all things related to the exciting new world of security tokens. Today we're covering the future of security tokens, so please stay tuned at the end of the show for a special announcement. You will not want to miss it. Okay, before we get started, we want to take a moment to thank the sponsors of today's expert interviews, verifyinvestor.com and Inventus Law, as always, we appreciate your support. Alright, I'm here in LA for today's show, now let's bring in today's guest, Carlos Domingo, CEO of Securitization, who joins us from San Francisco. Carlos, thanks so much for helping us out today!
Hi Adam, how are you doing? Thanks for the invite to the show.
Great, yeah, it's good to have you. So, let's start with regulations. There's been a lot of excitement around security tokens, obviously, lately. Do you view the US regulatory pressure on ICOs and utility tokens, do you think that's driving the move to regulated security tokens in the US?
I think yes and no, I think that the security tokens is a broader concept than just selling a utility token as a security. I think security tokens have broader applicability, and of course part of the market is moving to security tokens because they realize that the US regulator has basically said that all utility token ICOs are securities. But, I think the interesting thing that we're seeing is when they think about security tokens, they think about it differently, and try to create other models for fundraising securities that are not necessarily utility tokens but things like equity, revenue share dividends, etcetera, which then have a broader applicability than the world of utility tokens for, basically a way to run a decentralized protocol on the block chain.
Right, okay. So, beyond those regulatory pressures, to what degree do you think the benefits, like the efficiency, the speed, liquidity; what do you think that's going to drive ... Is that going to be part of the drive that makes companies use security tokens?
Yes, if you think about how traditionally private placement has happened in the US, it's all very manual, it's all not automated, it's not done in a global way if you want, it doesn't offer liquidity, obviously, it doesn't have any good secondary market trading. The settlement periods are long, and there's very low liquidity. But, that market is a huge market. Last year, in the US, according to a recent article from Wall Street Journal, there was 1.6 trillion dollars of private placements only in the US. We think worldwide, there's close to 3 trillion, and that's done in a very inefficient way, that the issuing of security token on the block chain can actually solve many of the problems.
It can actually create- facilitate a better capital information by running a worldwide process, it can automate and reduce the cost and the friction of dealing with a large cap table, potentially in many different countries, and it can also provide liquidity by integrating with all the upcoming security tokens changes. So, we think that that's going to be the main driver for people to move to security tokens from traditional private placement, and not just necessarily as a replacement for the guys doing utility tokens today do security tokens tomorrow.
Yeah, well we here, certainly agree with you, so that's super exciting. Alright, now what about Securitize? Walk me through how I ... let's say I'm a new issuer and I want to create Adam Coin, how do I use Securitize? Do I use your coin? Do I use your code to build my coin? What- How do I do that?
So first, we don't have a token for Securitize, we think that creating a utility token for a security issuance platform adds unnecessary friction and not necessarily adds any value. So, we've taken the decision to not to issue Securitize utility token to use the platform. We are a software service business, we enable and ensure to basically, within two weeks, get their own entire website with all the tools they need to manage the investors and manage the issuance process already ready there. So, basically people come there; investors can register, can pass KYC, can pass AML, can pass the process in a number of jurisdictions; major ones-primarily.
Can then submit payments, can sign subscription agreements online, can submit tokens to get their tokens there, etcetera. And that is what the investor sees. And then the other side of the business is what the issuer sees; so the issuer has basically all the admin tools to basically manage the process; know how many investments come on board, where they are in the process, how many have passed KYC or not, they fail, if they manually need to go on. They can know how many they've sent money by having them sign a subscription agreement, or how many they've sent money but haven't submitted a wallet. And then we have the token issuance power bid where we basically will create the security token that the customer is telling us, we'll do the smart contract and they'll have a console where they can actually manage all the process of how tokens are being issued. And to home on what are the lock-up periods depending on the regulatory framework; or depending on the country of the investor, et cetera.
And then finally, the most important thing that people tend to miss is that once you finish the issuance the job is not finished because you need to first manage. And in some cases you might have to do governance-implement governance too-so you might have to issue dividends and monitor that person to understand what is working or not working, etcetera. And you need to, basically, integrate with these changes to be able to make sure that all tokens, the security tokens, or one particular issuer are all within the regulatory framework of the countries where those investors are. And for that it requires a lot of work and integration with the changes; which we are now in the process of doing as well.
That is staggering, and the amount of work that you are putting into that! So, you're going to handle all of that, including, the compliance from country to country?
So, our platform is enabling a platform for the issuers. So, compliance at the end of the day depends on the issuer. What we do is, we provide a number of tools and a number of things built into the platform that enable them to basically manage the process.
Tremendous! Okay, so Carlos we like to ask about prediction here. So, people speculate about the use of security tokens compared to utility tokens, when do you think this brave new world of security tokens- the security tokens will be used more than utility tokens. When is that coming?
I think in terms of number of ICOs; if you look at the volume of ICOs vs. STOs, I think at the end of this year you'll probably have a good chunk of the ICOs that are security tokens, probably somewhere between 20-30%. I think there's been already, very large, utility token ICOs like Telegram that already will make it difficult for security tokens to bigger. But I think that 2019-
Is the year where I believe that we're going to see that the volume of issuance for security tokens is going to be much bigger for security tokens cause also, importantly, the second part of this year liquidity is coming to the market with all these changes that are coming life. And that's going to make people realize that this is a very good way of doing private placements or of tokenizing real world assets. And when that kind of dynamic happens in the market you will deficiently become much bigger than what you see today with utility tokens.
Right. So, how do you see that liquidity- you mentioned the liquidity that is coming this year; last year with all the ICOs that went live under Reg D the lock-ups are ending this year. Are you talking about some of that, or you look at that as a good thing as an exciting thing?
So, first the liquidity is not necessarily US only. So, so a lot of the Reg D offerings don't have the same restrictions when they do Reg S in other countries, in most countries there is no lock-up there for one year. So, I think you'll see that many recent issuance get liquidity-not from the U.S.- but from other countries. Of course, in the U.S. you don't have to wait one year for the lock-up period. We also working with Bank Corp. in creating the version of the Bank Corp. Protocol for security tokens which then investor is basically trading against the issuer. And in that case, there is no one year lock-up period for Americans because you are not trading it to another investor. So, I think that will help as well to bring some liquidity to market but certainly, as you will see, fifty to hundred of security tokens being issued and most of them will actually come to market with full liquidity next year.
Got it. How, for our viewers, is there a differentiation between a credited and unaccredited investor's ability to participate in the security token platforms in the market that's coming?
So, that depends on the jurisdiction where the investor is. Every country has different rules for who can invest and register security. Let's say a security has not been registered and it also depends on where the security is being registered or no. Because if you register securities you can then go to retail investors in the U.S. Most of the security and tokenizing they use Reg D, one of the exceptions, The Reg of 546B or 546C, and in that case you're only allowed to sell to a credited investor and not to retail investors. But I've seen some people already started doing a small race, racers using Reg CF, which allows you to raise up to one million dollars from retail investors.
I think soon we're going to see some people filing for Reg A+, which allows you up to $50 million, including also, retail investors. So, as the U.S. situation but if you look at Europe in Europe the regulation is different. Some countries you can actually bring a small part of retail investors for registered security and then these people they're like the crowd funding sites, they have licenses that actually allow them to bring millions of dollars from retail investors as well as unlimited from accredited investors. So, I think that yes, it depends on the country basically.
Right, that is super helpful. Okay, so it seems that security tokens can be used, generally speaking, there's two different types of activities. In some cases, you got the new and emerging companies that are going to be using the regulated security tokens to raise money; and in other cases people will be tokenizing the existing assets globally. There's real estate, there's all kinds of others- whether it's wine-you know, anything. Can you explain for the viewers the difference in these two applications of security tokens?
So yes, so one way of-so I think there's kind of three things if you want-one is, some utility tokens or some companies that are planning to buy utility tokens and they are legitimate, utility tokens, but of course the problem is the moment they sell utility tokens to investors they actually-the transaction is like selling security and they are turning the token into security and that means this is what the regulator has said in the U.S.. I think those guys will still continue doing the utility token but they will use a security token as a fundraising mechanism on the couple-the two-which I think is a very good method and one of our customers is already doing that.
Then you will see companies that were doing traditional private placements and this could be VC funds like we have Spice VC in our case that did it. Hedge funds or other type of businesses that maybe they have nothing to do with block chain but they choose a security token offering as a better way to do a private placement because of all the advantages that we have with cash, right? So, less friction, lower costs, better capital formation, liquidity, et cetera.
And in the third one are people that are basically going to try to provide liquidity to certain assets that are physical assets. By basically tokenizing and giving fractional ownership to investors against the asset and then there is where you're going to start seeing a lot of state. That's a no-brainer because it's a $250 trillion asset class in the world with many trillions of dollars of transactions happening every year. But that is traditionally difficult if you want to own a piece of a large building, an iconic building, or other things like that is not simple to do.
And then the other one that I think is very interesting is Art. Art as an asset class is a multi-trillion dollar asset class that has a very low trading volume, less than a hundred billion a year. And art, fine art especially, has been appreciating in value overtime much better than stocks or Fortune 500 or other things. So, I think that the fractional ownership that the security tokens bring to that space would actually be very interesting to allow people to invest in the asset class.
Yeah, absolutely! So, when it comes to your company at Securitize.io are you guys focused on one of these kinds of uses more than another? Or are you totally agnostic?
So, we are for a time being, agnostic. But I will say that at the moment where we're seeing the highest level of activity is in funds and in companies that are just necessarily small early stage to start-ups doing a small raise; but companies that are looking at either they're more matured hand in ongoing business and they're looking at a bigger raise, let's say $20 million and above. I think that's the large majority of our customers are there. Then we have start working a little bit with some real estate projects, we have a fund in New York that invests in Manhattan real estate that we're tokenizing. And I've just started working-I've been involved in one project related to art.
But the majority of our customers today come from either funds or the start-ups.
Got it. Okay, so what about in the people talk about the benefits of liquidity a lot. Do you have a sense of what the liquidity premium might be on a lot of these assets? Just that have never enjoyed liquidity before but well, you're sort of bringing it to them. How will that affect their value?
So, that's a very good question. We've been researching, actually just yesterday I got a new report from someone else, we've been researching this to try to understand it because, obviously, liquidity has a premium and that everyone agrees on that. But liquidity is not a black and white, right? So it's a continuum. So, either you have no liquidity let's say full liquidity like the U.S. dollar has and they're somewhere in between where you have more or less liquidity. So, I think that for assets that enjoy some liquidity but they're not super liquid, let's say real estate, they agree number in the industries around 20-30%. But if you move into assets that are extremely liquid-let's say an investment in a company, in a private company-I think those guys can enjoy a much higher liquidity premium because basically the liquidity they have close to zero. So real estate, obviously, is not super liquid but if you want to sell something, eventually you sell it, maybe you have to discount it a little bit 20-30% and then it gets done.
But for private investments or start-ups that typically is very difficult to sell something on the secondary market. So I think that the liquidity premium there will be higher.
Yeah, I can attest to that from experience. So okay, now about you! Can you fill in the history of how you started with this VC called Spice VC then evolved to Securitize.io which you're now in charge of?
So, we started last year working around April/May time frame with my partners Jaime and to build basically a venture capital fund to folks in these new emerging class of ICOs and block chain protocols and distributor apps, et cetera. We thought it was fascinating thing to do and we thought there was an opportunity because most of the traditional VCs were not focusing in that space. So we started building that. And then the first question come up, is like, well if we like tokens another company so much why not tokenizing our fund as well? Because then we can actually solve the number one problem of venture capital, which is the lack of liquidity, right? So venture capital is one of the most illiquid assets in the world. You basically put money for five years and it takes seven to ten years to basically get any returns. Basically also because the underlying asset is also very liquid. Which are stock tops.
So, then in May we saw that here in San Francisco a company, a venture capital called capital. They actually detokenize a fund that they raise $10 million and very similar idea. And they were the first guys doing the security token, so, this is great. This is exactly what we want to do. We want to do the same- the token in a different way so that the token actually holds the direct economic interests on the fund. But basically it was the same thing and obviously it became very clear to us why this is a security token. This is not a utility token, we cannot just sell it on an ice hill like other people are doing in the market because we will be doing something illegal.
So we went out and started talking to a bunch of companies that either were doing ICO platforms or they were signaling the market that they were interested in security tokens. The one I mentioned-specific companies-I can tell you we talked to a lot of the players that are in the market back then in major. And none of them actually either had a product like we envision or had any product at all or even a roadmap in some cases that could tell us when the product was going to be ready. So, my partners and I at the end of the day we are technical entrepreneurs; I build products all my life. So I figure Okay, this is something we can actually do for ourselves. Let's invest a little bit of money and go and build our own platform for Issuance of a security token for a Spice VC. So we hire a CTO, Shay, and then some engineers and start basically building our own platform.
And by the end of last year when we announced to the world that Spice VC was open for investment and that this is how actually invest and this is the platform where you come. And these are screen shots and a lot of people start contact me and say, "this is pretty cool. So who's in the platform for you guys?" I would like, "no one, it's our own platform. We just build it." I think at some point then we took the decision that this was going to become another business line so I brought on board my partners in Securitize; Jamie Finn and Tim Reynders, who were the first original investors in the Spice VC and then we kind of agreed to separate it into two business and have Spice VC running on its own without me and Tal living there. And myself with Tim and Jamie, leaving Securitize and basically creating the company.
Got it! Okay, so...Amazing! How do you see Securitize now working with these security token trading platforms, are you guys planning on being a training platform working with both?
No, we're not planning for the time being, probably never, to be a trading platform. I think that primary issuance, enabling primary issuance, facilitating primary issuance, this is where we want to focus. I think that there's plenty of business there. I think that If a primary issuer becomes a trading platform it's going to be in competition with it's partners. So we don't want to do it at the moment. We are talking to pretty much everyone that has already announced that they're going to do a trading platform for security tokens and trying to make sure we have an understanding of what are the listing requirements, so we can make sure the customers will be listed there. We also integrate at the protocol level to make sure that the tokens that we issue on primary issuance they are tradable on the secondary market on their platforms.
Great! Well, thanks so much for joining us today Carlos! Best of luck with all of your ventures!
Okay, thank you very much.
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Recently, Security Token Academy caught up with Jeremy Gardner from Awesome Ventures; we talked to him about the significance about security tokens and here's what he had to say.
In terms of what's going on, there's a lot of regulatory uncertainty, that is becoming a little more clear. And here everyone is talking about ICO 2.0, the security tokens, STOs. Do you think all of that is significant? And if so, how?
Oh, absolutely. So, I helped create the very first utility token number. But I helped them create the very first security token ever. So, I've been down both those roads
Which was the first security token?
The B-Cap token. And that represented a limited partner interest in a venture capital fund. And you know, looking back on those two experiences with Alger we effectively opened Pandora's box to all these, just, pretty much undiluted capital raisings that were effectively just unregistered securities offerings. The vast majority of ICOs that have occurred to this state, especially in the past two years, egregious securities violations, horrible ideas that don't provide any utility and that kind of dwells with me. But security tokens are really very similar to traditional equity but they're more liquid; they're more tradable, and in theory if we can work with law makers in a constructive manner, what we can do actually create an incredible way for boot strapping network effects. So, if you think about if you were an early user of Facebook or Twitter, what if for positive participation in the network, you earned small Facebook or Twitter tokens. That represents a small ownership share in the company, as the company grow and increased in value and eventually went public you actually saw the upside of your participation in these networks. Any product where you're not paying for it, you are the product.
But there's a way to flip that script that to only make it both the product and the consumer can both be gaining value from their usage. Right now it's just a one way street.
Looking ahead a year, not too far, do you think that there's going to be just sort of a dropping of the utility token because of what the SCC is doing? Is everything going to be security or no?
It's not because of the SCC is doing. I mean partly the idea of being able to raise tens of millions or hundreds of millions of dollars. And being able to cash out instantly is amazing. But I mean, I was never supportive of that but security tokens just make more sense for 99.5% of the teams that have done an ICO or considering doing one, trying to force utility onto a product that doesn't need this. But a security token makes a bunch of sense. The thing two years the security tokens will be the largest crypto asset in the world. And possibly, within a decade will be the largest asset class in the world because enabled the world to become the stock market. You can tokenize anything that has value and scarcity. And that's- there's a tremendous amount of potential that exists when you have this kind of decentralized mechanism for representing value.
Right, a lot of people are excited about the tokenization of gold or assets that nobody usually thinks about as fractional.
Intellectual property. If it is valued and scarce in the real world, in theory, you can tokenize it.
Okay, now for our big announcement! We are excited to let you know that Steven Mckeon has been named chief strategy advisor of the Security Token Academy. Mckeon is a finance professor at the Run Quest College of Business at the University of Oregon with prior experience including a venture capital backed internet start-up. And co-founding a commercial driven software company. As an expert in Crypto-Assets and Security Insurance he's appeared on CNBC and his work has been sited outlets including the Wall street Journal, The Financial Times, and Forbes. So welcome Steven, we're proud to have you as part of our team. Before we wrap today's show we want to give one more shout out to our sponsors! Verifyinvestors.com and Inventus Law, thanks again for tuning in to our view. And as a reminder, you can keep up with the Security Token Academy on Telegram, Twitter, Facebook, Medium, and Meetup.com and by subscribing to our YouTube Channel. You can also sign up on our website at securitytokenacademy.com for updates on new videos and events! That's it for today for Security Token Academy, I'm Adam Chapnick.
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