Tobin leads the institutional sales team. Prior to OFN, he worked in the Institutional Equities space for CLSA Americas and Sanford C. Bernstein & Co. While at CLSA, Tobin was responsible for the equity research sales effort for the US Midwest. Prior to that, he led US equity research sales in the London, UK office for Sanford C. Bernstein after covering institutional asset managers in Boston.
Hey, everybody. It’s me again, Adam Chapnick with the Security Token Academy. We’re here in L.A. at the CIS 2019 Conference, and I am joined by none other than Tobin McComas from OpenFinance. Thanks for being with us.
Adam, thank you for having me.
Those of us who are in the security token space every day, we know OpenFinance very well, but a lot of people who are just finding out about this space might not know about you. Why don’t you tell everybody what is OpenFinance, and how did it come to be?
Yeah, sure. Again, thanks for having me. In short, OpenFinance is a security token trading platform. We actually launched the platform live in November 2018, so the first compliant trading platform for tokenized securities. Really, OpenFinance was brought about to solve a real problem in private security space, and that is a lack of an efficient secondary market.
We’ve been working in the alternative asset space for the past four or five years as a secondary trading platform for unlisted and illiquid securities, like non-traded REITs, EB-5 visa assets, BDCs, hedge fund private, really esoteric, difficult to trade alternative assets.
The biggest challenge for us, in scaling that big, is settlement time. It’s a very paper-intensive, manual, redundant, inefficient, frustrating, really any negative word you could say, transfer process. When we talk to investors about these securities, that settlement time of six to eight weeks is a deal breaker. They just can’t have their capital tied up that long.
We started looking at blockchain a couple of years ago as a way to, basically, become a much more efficient clearing house mechanism to allow all the intermediaries that touch these types of securities to operate more efficiently.
Then 2017 happened, and we saw a massive amount of capital raised through the ICO format, and we had the foresight to see this was going to become a regulated space.
At the end of the day, these are Reg Ds, Reg Ss, Reg A+, Reg CF securities that we’ve been trading all day, every day, so a natural progression for us was to be a trading platform and settlement mechanism for these tokenized securities.
Got it. For those who don’t understand, why is it quicker to settle the way you do it now?
Yeah. It really comes down to the process. In public equities, you have, basically, the clearing house, DTCC, which sits in the middle and, basically, effectuates the T+2 transfer, so if you log into your Schwab account, you want to sell your Apple shares, two days later the shares go to the new buyer, and you get the money in your account.
In these private securities, that entity doesn’t exist, so it’s, literally, printing massive amounts of paper, stamping them with a medallion signature, signing them wet signature, mailing them to the custodian. Custodian does the same. Enters everything into their database, sends it back, and then we have to send it to the transfer agent. If somebody at the transfer agent’s on vacation ...
You got to wait.
You got a pile of paper just stacking up, so it’s just a very inefficient, redundant, and manual process that makes it really, really painful for the investors and, certainly, the sponsors and issuers of those securities.
Liquidity. Why is liquidity a challenge if we have this magic blockchain?
Yeah, so I think as we think about facilitating liquidity, it’s really a two-sided equation, right? You need the product or the securities, but you also need the investors. We’re starting to see really good signs of demand for tokenized securities. We’ve seen that since we launched in November.
With each new issuance that comes on board, we see a new group of investors who want to participate in that space. It really comes down to diversification, and the ability to own the types of assets and securities that people have never been able to own before. That’s what’s really exciting.
That’s one component of it. The other component is, again, on the buy side. As we prove out the concept that this works, and we can maintain books and records compliantly on chain, we think there’ll be more adoption from both institutional sponsors and issuers, but also institutional buyers, whether they be hedge funds or broker-dealer networks, etc.
What about the question of transparency? How does that figure in here?
It’s really, really important. One thing that we’re working on with the issuers on the platform today, and certainly issuers moving forward, is what level of information can you provide so that potential investors in a secondary market can do the work and the research on your offering to make sure it’s something they want to participate in.
Historically, there really hasn’t been much disclosure from issuers in private securities, and that’s part of the reason a lot of them have stayed private and elected not to go public, but we think that by holding issuers accountable for some disclosure, that will breed more interest and more demand on the buy side.
We’re having this conversations today and reception’s been really, really good from both current and prospective issuers.
Well, that’s refreshing to hear. I think ... You and I were talking, and do you feel that it’s going to take maybe a key player as an issuer who kind of sticks their neck out first and says, “You know, I raise my hand and volunteer some information,” that, traditionally, other people have been like, “Well, we don’t have to disclose it.” Once somebody of some note does that, is that going to force others to do the same, do you think?
Yeah. I think that kind of fits the bill across tokenization in general. That is, the more and more we can prove out the concept, which we feel we have done and continue to do, the more attractive this option becomes to larger and larger entities.
Today, we’re talking about 10, 20 million dollar private offerings, and as we get a few more of those, then we’re talking about 100 to 200 million dollar offerings, then it’s 500 million dollar offerings.
I think, along those same lines, the more that we can prove it out, the more disclosure there will be, because they’ll see this as a real avenue to provide that secondary liquidity to their investors that otherwise haven’t had it, and it becomes a real viable option to going public.
Not only that, but I wonder if there’s also, maybe, the promise of a liquidity premium that makes people a little less tight-lipped because they’ll get a boost in the value.
No doubt. The issuers certainly have a vested interest in their shares trading closer to the NAV on secondary market. We see that 30 to 50% spread, and, historically, you’ve seen that across all illiquid assets, so that’s a real key component to the conversations we’re having with issuers about tokenization, in general, and what that can do from the valuation standpoint.
Interesting. OpenFinance. You’re so new, and yet so important to the space already. What can we expect from you in the coming six months or nine months?
Yeah. The pipeline of listings looks really strong as we continue to partner with the issuance platforms, like Securitize and Polymath and Harbor, who are doing a lot of great work in the space as well. We continue to add to that pipeline and will be adding more and more listings to the platform throughout the balance of the year.
Then, like I said, the next progression for us is to get really much more institutional. We start talking to larger issuers, more traditional offerings, which we think is really attractive to investors, now, that historically might not have wanted to invest in one of these types of offerings because of the lack of liquidity. Now, we’re bringing this option that is much more attractive for the investor.
Yeah. I’m excited to be a part of it, and I love hearing about it, so thanks for joining us to tell everybody what’s going on with OpenFinance. We have to have you back.
Yeah. Great. Thank you so much. Really appreciate it.
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