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