Dave Hendricks is the CEO of Vertalo, a connections, compliance, and cap table company for digital asset issuance. Dave started his career at Arthur Andersen & Co. where he built securitization and remediation databases for real estate and other clients. After Arthur Andersen, Dave led tech teams at a JE Robert-Goldman Sachs joint venture than securitized real estate assets seized by the Resolution Trust Corporation. Before founding Vertalo SEZC parent company SeriesX in early 2017, Dave was the cofounding CFO, President, Treasurer, and Corporate Secretary of LiveIntent, a $100 million ARR people-based marketing firm headquartered in New York, where he led the company through 6 major fundraising events, culminating in the company’s latest $35 million Series D.
Vertalo is a liquidity enablement platform that was founded by a team that was frustrated with the difficulty of complying with and managing wallet and KYC data for its own security token holders. So we decided to build the system ourselves. Informed by our own experience, and by our team’s knowledge of securities law, Vertalo built a platform designed to take the pain out of managing a crypto cap table.
The Vertalo platform is designed to be used by issuance platforms, issuers, broker-dealers, ATS’s, exchanges and the market participants that integrate with and depend on them, like Custody platforms and KYC/AML providers. Vertalo’s easy to use system makes managing security token investor data easy, and helps security token investors access the liquidity providers that they need.
Welcome to a special interview from the Security Token Academy. Hi, I’m Adam Chapnick. We here at the Security Token Academy are bringing you a special interview from our remote home studios. Today I’ll be speaking with Dave Hendricks, CEO and cofounder of Vertalo. Vertalo is a cross-chain platform for security token issuances that enables broker-dealers, issuers, and investors to visually manage portfolio data related to communications and compliance. Vertalo is also a Gold Corporate Member of the Security Token Academy.
I always like talking to Dave in particular because Dave is one of those guys who is a triple threat in our world of this little security token industry. You know, you’ve got the technical, you’ve got the entrepreneurial, and you’ve got the sort of compliant financial. And there are very few people who can easily walk among those three worlds, one of them is Dave Hendricks. So Dave, it’s great to talk to you. I’m glad to have you here. And I also didn’t mention you’re a family guy, big heart, and you got a good sense of humor. So you’re a what, a six-time threat?
Good to have you.
Well, thanks for having me on, Adam. I’m glad to see you’re well. You look great and it’s good to see you again. It’s been too long.
Likewise. Likewise. So obviously it’s a tough time for everybody, and specifically the financial markets also, because of the coronavirus. Are you seeing any way that it’s impacting the security token world in particular?
Well, I can’t see how it’s affecting the broader security token world. I can tell you that Vertalo specifically is busier than it’s ever been.
Yeah. So we’ve actually dramatically accelerated our growth in the last say, two months. Some of it was coincidental because of some new programs and new approaches that we launched, but I think that we’re all affected in this industry by a couple of things. You know, that we can’t meet up anymore. So we can’t go out to conferences, so we don’t get to meet people by serendipity anymore. That’s happened to us.
But I think we’ve also all been impacted by the way that business is changing rapidly. And one of those things, which is probably the main feature or benefit for security tokens, is liquidity. And there’s nothing like a market like today where the value of liquidity is brought into higher relief than it is right now.
Yeah, that’s a good point. And I know that’s one thing that you guys particularly address, so it’s appropriate you bring that up. You guys had a great big announcement recently. You talked about a license deal you had with Advantage Blockchain, which is a real estate focus team in Philly, and there was a little bit of a mention as well of your tie-in with tZERO. Can you tell us a little bit about why you teamed up with Advantage in Philly?
Yeah, so we noticed a ways back that there were some assets that worked really, really well for tokenization, or at least would work well for tokenization, and some assets that were not maybe as good to tokenize. Real estate, specifically private real estate funds and to some degree private REITs, are a huge asset class by themselves. Real estate is the biggest global asset class other than debt and it suffers from one thing, and that one thing is illiquidity.
It’s just really, really hard to buy and sell interests in real estate funds. It’s kind of a cottage industry. It’s very fragmented but everyone wants the same thing. A lot of that, that they want, is passive beta. They want to invest in something and get income. So as we started working over the last couple of years and looking at all kinds of different issuers to work with and assets that these issuers were working with, we really started thinking that real estate had such an acute problem with liquidity and it was so big and it was already funded that that would be the ideal kind of asset to work with.
If you’ve already formed a fund and it’s been around for a while, that fund could be brought into a platform such as Vertalo, an analog fund digitized, and then made more liquid using the kind of the features and benefits that come with digital asset tokenization.
Yeah, there’s something ... I know, I feel like now all I’m doing is like blowing smoke for you. But something that I admire about how Vertalo has quickly iterated under your leadership is that you’re looking at where the friction is in the adoption; real-world people. And you’re seeing something that we, in kind of the space have been talking about first was, “Oh boy, people are going to be able to issue on tokens,” and, “Yay.” But nobody kind of got it and there’s all kinds of user friction. And what you’re talking about now is really getting to the crux of it and it’s kind of what I was talking about, about entrepreneurship.
It’s seeing that the user has this need and this pain point and you’re going right to it. And so it’s that liquidity pain point that you guys are addressing. There’s all these moms and pops and wealthy folk who have these pieces of assets that they wish, especially now they’re like, “God, if I could just get another 100K, it would be quite nice. If I can just get 50K, but I can’t sell a piece of my thing.” I think it’s brilliant that you guys are in the space applying the technology to that pain point, so bravo.
Well, let me tell you about how you can do that.
You getting to that liquidity requires simplicity up front. So starting two years ago we started simplifying UX and UI. The first thing that we did was we started working on simplifying wallets. And so a year ago we made it so that you didn’t need to know how to use a wallet. So we developed keyless custodial wallet so that investors wouldn’t have to figure out how to use MetaMasks for wallets. And for the issuers, we figured out how to tokenize at extremely low cost and high speed. So they didn’t have to understand about tokenization and just knock down the cost. We abstracted tokens.
Sorry to interrupt, but I think I actually saw you tokenize in real time at a conference onstage. To just put a point on that, yeah.
Yeah, and so none of these small mom-and-pop, some of which are running $100 million real estate funds, or the investors in those funds want to bother with that nerd stuff. It’s too complicated. It’s just friction. They want to get right to the benefits. And so what we’ve done is we’ve sought to remove friction so that you can put a high relief on the outcome, the benefits, the results. And that’s helped us because these folks are ... They don’t want to become experts in another industry, they want to just be good at what they do.
Yeah. And I mean, as I was saying, that’s half of business is figuring out not just, I have a better thing, but how do the people that need to use it want it? And how do you have to explain it so that they get it? And that’s a bloody battle to get that solved. And you guys are doing it. So how does the tZERO component fit in?
Well, tZERO is a regulated ATS. And so what Vertalo does is we’re a data management platform. We’re a digital transfer agent that manages data on behalf of issuers and investors. And so that is where a real estate asset lives. It’s the cap table, it’s the list of owners, it’s the cap stack. In order for that asset to be liquid, it needs to connect to two parties. One of those parties is an ATS, what some folks might refer to as an exchange. And if you can’t connect to an ATS, facilitate, you’ll pass the data to an ATS, enable the order matching at the ATS, and then update the ledger of holders, then you can’t actually get liquidity. I mean, certainly you can try to do OTC trades but really, security tokens are meant for programmatic trading, programmatic restriction. And so you want to list on a tZERO or on an OFN in order for these issuers and their investors to have a marketplace to get liquidity. So we connect to them via APIs and then they, the investors, go there and they buy or sell and then we update the ledger on our platform.
Yeah, that’s really important and it ties into the next part of your announcement, which I think is interesting. But again, maybe not always absorbable by the rank and file, which is, you’ve made a conscious decision to work with Tezos. And now, it doesn’t mean that’s to the exclusion of Ethereum. I think, right? You’re using both.
Yeah, we work with both.
So for the average guy who just has heard, “Oh, Bitcoin, that’s blockchain, right?” And then, “Okay, well now Ethereum. Ooh, there’s smart contracts, I think I get that.” But what’s the relative merit of one to another, like an Ethereum to a Tezos or a Stellar? What made you make a decision that way?
Yeah, so we started looking at Tezos a long time ago. The governance system in Tezos is very interesting. It’s a really, truly decentralized protocol. It’s not controlled by say, a studio in Brooklyn. It’s really a decentralized community that is building standards around asset tokenization. So the Tezos has funded a number of organizations, made grants around the world. And they made a grant to a group called TQ Tezos in New York. And TQ Tezos, which you should talk to Chris Lawlor there, they’ve been building a specific smart contract structures and protocols. The one that they have released, and you can read about this on Medium, is FA2. And FA2 is a financial asset, kind of a smart contract structure.
When we first started getting involved at Tezos, we compared our smart contracts like, “You show me yours, I’ll show you mine.” We found a very, very deep philosophical agreement on the way that these should be structured. We didn’t find the same necessarily with some of the ERC variants, like 1404, et cetera. A lot of those were solving problems which we don’t think exist in insecurity tokens. Like listing on multiple exchanges and overloading a token with compliance for jurisdictions that it will never trade in. So we like a skinnier, more elegant smart contract architecture that has low costs for trading. And people don’t realize that the way that your smart contract is structured can cost you a lot of money when you actually go and trade it.
And it’d be difficult to implement on exchanges and ATSs.
Yeah, how does that manifest, the cost difference in a smart contract?
Ah, it manifests in the gas costs, which then are usually paid by the person trading it. So some smart contracts that had been created and used for security tokens can cost 50, 60, $70 per contract to trade. That’s a lot more expensive than trading on E-Trade. And they’re very difficult to configure for different ATSs and so we developed over two years ago, a very simple standard with Deloitte called the VEE token. And so we now natively write the Vertalo VEE token standard for every issuance, and we basically do that for free. And so we basically create free security tokens if you launch on our platform. And the VEE token is written natively Tezos and it works very nicely. And so we’re working with tZERO and other parties, all who are on the Tezos bandwagon. Of course, we still support Ethereum but Tezos is really, really focused. The community really likes this asset class.
I love it. Now as a user of the Vertalo, if it’s your ecosystem, I as a real estate investor or issuer, it’s not necessary that I even know too much about the ins and outs of the merits of Tezos versus Ethereum. I just need to know that I can get liquidity, it’s going to take this long, and how much it costs. Is that right?
You do the hard work of understanding.
Yeah, logging into Vertalo is the same thing as logging into say, Coinbase or something like that. It’s just, here’s your email address and, or your Google G Suite ID, and so we have a very, very high secure environment. But we know that normals don’t want to login to a token, they don’t want to use MetaMask, and so you just login to the system. And the difference between our system and maybe some other systems is that if you’re an investor in multiple security tokens, et cetera, you can see all the ones that you own in our system and then you can click from our system to the ATS that each of those are trading on. And we’re trying to make things simple. And so the focus is not on the technology, rather the focus is on the asset and then also ultimately the liquidity of that asset. And these are assets which weren’t previously tradable, so that’s why you use this technology for them.
Yeah. It’s thrilling as a real estate investor to even have the idea of liquidity.
So there was some talk about something called your Sandbox.
Give us an idea of what that is and why it’s important.
Yeah, so about three or four weeks ago, we put a little announcement in our newsletter. We’ve got a pretty good newsletter and we love our readers. We have 6,000 subscribers and about 35 or 40% of them open it on any given week. About several weeks ago, we made one announcement that we were launching a Sandbox program. And the Sandbox program is a four to six week, structured curriculum that enables issuers or ecosystem participants, custodians, ATSs, exchanges, KYC AML, capital advisors, broker-dealers to get onto the Vertalo system, go through a structured course, and at the end, basically get a diploma like, “I know how to work Vertalo.” What they can do is they can get on and they can fully model a tokenization and basically do a dry run on anything they want at no cost.
We want them to get a sense for, what does a system like this look like? How does it operate? And so for issuers and then for licensees, those who want to license our platform and then do issuances, they can get a sense for what that feels like for them. And for the exchanges and the custodians, you want to see AML and accreditation partners, they can get a sense for what it takes to integrate with us. And since we very quietly, and we still haven’t announced it publicly, we will this week, we’ve got 30 companies that have signed up around the world to join us and we have a waiting room now. So we’re about to announce the first 10 because we can only take on so many at a time because it’s labor intensive for us and it’s free for them.
But what we get out of this ... Look, Adam, this is not entirely altruistic. Not only is it a sales funnel for us, but in order to join the program, you have to give us feedback. And that’s how we improve the product.
And so we’ve got all these different types of users of a platform such as ours from around the world, different asset classes, different viewpoints, all helping us make the system better.
That’s terrific. So what else can we expect from Vertalo now that you’ve kind of ramped up so quickly in this environment? What’s coming in the second half of 2020?
We’ll announce Vertalo Real Estate, which is a division which is directly dedicated to real estate alone. And we’ve got a president for that and we’ve got a team for that already that we’ve been onboarding for a little while, and we’re going to announce all that. And we’ve got a tremendous pipeline of real estate properties, which some of which was hinted at in our recent story in CoinDesk and we have to announce like that.
Yeah, good stuff. We have a lot of ... we’re really, really busy. I think that we’ll probably have to double our team in the next two to three months.
Fantastic. Well, Dave Hendrick, CEO and cofounder of Vertalo, thanks so much for chatting with me today.
We always wish you and the whole team at Vertalo all the best of luck, even more now in this crazy time.
Well, thanks for having me on. And if you’re interested in learning more, www.vertalo.com.
You can find even more information on Vertalo by going to our website securitytokenacademy.com, click the MEMBERSHIP tab, and select CORPORATE member. For everyone here at Security Token Academy, I’m Adam Chapnick. Thanks so much to Dave. Thanks to you for watching, and stay sanitized.
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