Tokenizing Assets and Securities (STOs)

We are in the next financial services revolution. Digitization and Distributed Ledger Technology are combining to create new value and opportunities for a more efficient global marketplace for investment opportunities which will impact many sectors and market participants.

The ‘tokenization of securities’ is an important next step for the Token Economy and wider financial markets.

Using the technology...

  • To expand the options for designing and trading securities
  • Fractionalize and Tokenize a range of Assets
  • Building on the demand and interest shown from ICO phase 1
  • Using existing Securities Regulations
  • Creating new efficiencies (speed, cost) in the process

...to create new value and markets

  • Create new liquidity and ‘untrap’ value in a wide variety of existing assets
  • Aid the emergence of new asset classes
  • Enabling more types of investors to participate on a regulated basis
  • Coming Soon: the regulated exchanges to trade 24/7
What is tokenization when applied to assets and securities?

The tokenization of a security or asset, is a process to allow potentially faster, cheaper and more programmable formats of the underlying asset or instrument to be transferable between eligible parties within a ‘digital wrapper’. This could be a right to money, property or represent a physical asset like a building, art or jewelry. In an equity context, tokens can represent shares in a business. Security tokens may be programmable representations of financial instruments and can imitate the economic behavior of the underlying asset. They can also represent other forms of fractional ownership or rights to money arising from revenue or the sale of the asset. The tokens are fungible, and tradeable subject to compliance with applicable securities laws.

Why Tokenize?

Representing something with a token makes it easier to track ownership.

Benefits include:

  • Transparency

    Each token has a unique identifier and owner, which can be logged in a register which stores that investor information and all relevant transactions on the blockchain in a secure, tamper-proof manner.

  • Accuracy and Security

    Information is updated in real-time and immutably in a reliable and accessible way where the responsibility for the accuracy of information doesn’t rest with one party.

  • Efficiency and cost-effectiveness

    Faster, easier transfer of beneficial ownership, removing transactional friction. With fewer third party processes required, transaction fees and timelines are reduced.

  • Fractionalization

    While fractionalisation isn’t new as such, tokens do allow greater direct access by more investors to specific assets (e.g. a building) that was not previously possible outside an intermediary or costly and inflexible corporate structures.

  • Opportunity for higher value investor relations

    With data collected effectively and securely, you can be more informed to build higher value and more targeted investor communications.

  • Easier to leverage the equity

    Able to lend more easily against equity e.g. tokens transferred to lender or held in escrow pending repayment of loan.

  • Access to more potential liquidity

    Open Exchanges: Access to new liquidity/markets as the regulated security token exchanges come on-line in 2019; Closed Exchanges: Opportunity to create internally managed exchange/transfers.

  • Programmability

    Ability to add features to the token e.g. hold >X tokens to qualify for benefits/access rights (can tie it to a loyalty scheme) or a tenured voting programme i.e. the longer you hold the tokens, the more votes you get.

It still has to appeal as an Investment

Tokenization or ‘doing’ an STO does not turn an ugly duckling into a swan. Put another way, ‘tokenization’ in and of itself does not turn create substantial new value where none existed before.

Coordinated advice and services are needed

Undertaking an STO without legal, technology and investment advisors who are coordinated in the delivery of the process is unlikely to succeed. In short:

  • The asset and the terms on which the investment opportunity is offered, should first be attractive to the target eligible investors.
  • The issuer and its advisers must be confident that the rights it offers can be delivered and that the issue is in line with its business strategy.
  • Tokenizing debt, equity, or the sorts of rights normally associated with shares in a company or fund are regulated activities. Existing securities laws and those relating to collective investment schemes, alternative investment funds and more, may apply. Issuers must invest early in appropriate legal advice - in the jurisdiction of the issuing entity and from the perspective of where the offer is being promoted and for the types of investor targeted - accredited, institutional, retail and with respect to any exempt offerings or other routes to a legally compliant offering.
  • The technology and processes must then enshrine and facilitate consistently the rights, restrictions and parameters that apply to the underlying asset.
  • The processes associated with maintaining the digital asset, associated documentation and enabling transferability (peer-to-peer, OTC or Exchange) must be supported and managed.

Rockchain Security Token Solution

There is no ‘one size fits all’ yet and different standards and protocols are emerging in the market. We review each project on a bespoke basis and take a ‘top-down’ approach focusing on the practical needs for the issuer and pursuing the key benefits of tokenization, rather than forcing it into a particular protocol proposal.

We’ve created a general solution for permissioned tokens, including asset backed digital assets and securities.

Rockchain’s solution uses ERC20 compliant tokens in concert with a particular set-up of Multi-Sig wallets, that gives an authorized representative (Controller) full control over transferability, KYC/AML and any other obligations demanded by the legislation or agreements between the Issuer and Token Holders.

An authorized representative can for example be a Company Secretary or other authorised company officer, an appointed 3rd party Company Manager (regulated), or an appointed Law firm.

Goals:

  • Compliance with existing laws and regulations related to the transferability and disclosure requirements
  • Not tied to a particular Security Token standard/protocol proposal, but easily portable once one of these proposals becomes a relevant standard (e.g. of an exchange you want to list your token on)
  • Compatible with existing wallets and exchanges (ERC20 compliance)
  • Avoiding risk of using untested technology
  • Based on Ethereum, but portable to other underlying infrastructure should a different technology solution become more relevant

Rockchain’s service includes:

  • Configuration and deployment of the solution, consisting of Token & Multi-Sig Wallets development, deployment and if necessary - procurement of an independent Audit
  • Operational manuals for the Issuer, Controller and Token Holders
  • Training for the Issuer and Controller
  • Technical Support
  • Migration Services (in case there is a desire to port the solution to a particular protocol or new technology stack e.g. to obtain a listing on a regulated exchange that requires a particular standard or protocol)

Examples

  • Equity Token: Tokens that represent an equity position in an underlying asset. E.g. Tokenize the equity in your private company (pre-IPO growth) for existing shareholders and new shareholders as they buy in. Expand the liquidity for selling shareholders (Tokenization of illiquid assets may increase their market value). Open the investment space to additional classes of investors, with low entrance thresholds.
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  • Debt Token: Tokens that represent private debt to create broader and cheaper access to global pools of capital and for investors to access middle market investment opportunities. E.g. An established business wants to raise capital as a bond to fund expansion or development.

     

    Examples of enhancement concepts and additional programmability:

     

    Where relevant, such an offering could be aimed at a brand’s existing and loyal customer-base to create a loyalty bonding curve between customers who already love the product/service and who want to benefit from its ongoing economic success and will do more to encourage that success as super-affiliates when they also the tokens e.g. hospitality, brands.

     

    Enhanced Rights could be offered for token-holders at different levels e.g. all token-holders get benefits (discount on purchases, priority upgrade/access/reservation, partner products etc.) and if you hold more than X tokens you get super-benefits (which might include a higher return - coupon rate or share of dividends).

     

  • Property fractional ownership: Sell a building that has been or will be converted into apartments on a managed basis for fractional ownership with a modest minimum buy in enabling more people to participate in an asset that would not traditionally be available to them.

     

  • Employee incentives/rewards: These can be traded prior to an IPO or other liquidity event to create a new market when companies are staying private longer. E.g. Staff member A is awarded and vests tokens representing an equity interest and might want to sell these prior to a liquidity event to staff member B or, if permitted and where there is demand someone outside the organisation, at a discount to value to realise value now versus when the share value crystallises on a liquidity event.

     

  • Inheritance: Siblings inherit a high value piece of art that they don’t want to sell as it is an appreciating asset, but some of them want to release some of its value via a token sale and create ongoing transferability opportunities.

     

I want to tokenize - what’s next?

We can support the design and issue of a security token or asset-backed token offering working closely with your law firm, financial advisers and company managers/administrators. We will develop the token and associated smart contract and support the set up of the multisig wallets necessary to manage the tokens, however our role will extend beyond this to ensure a coordinated delivery and set up for your token.

 

In order to help us to evaluate your needs, please contact us using the contact form.

 

Pricing

We will work with your corporate finance and legal advisers to define any suitable solution.

 

Once we understand your needs and learn more about your project and the type of token you want, we can provide you with a cost-effective proposal and scope of work.