A few months ago, we started the Security Token Group to educate and exchange opinions on the regulations applicable to the issuance of securities tokens, also known as ICO 2.0.
For those who do not know, securities tokens are tokens issued under securities law and regulations.
On May 3, 2018, we hosted Ami Ben David, the founder of Spice VC, to discuss his view of the future of security tokens.
Spice VC is a “Liquid VC” fund that uses the Bancor protocol to offer immediate liquidity to investors. Spice was established in 2017 by Ami Ben David, Tal Elyashiv, and partners. In January 2018 Spice launched Securitize, a platform on blockchain to enable clients issue security token.
Adv. Ziv Keinan: Ami, Can you explain the reasons for establishing Spice VC? What are the problems that Spice is solving?
Ami Ben David: Sure. Spice VC originally started as just a VC fund, but at some point in the middle of last year, we became very excited with the idea of tokenization and the blockchain. However, almost nobody was doing it – everyone was trying to be not-a-security, yet as a fund, we could only be a security, so we started looking for ways to solve this conflict.
From that journey, and after many hours with lawyers, and bringing in a CTO from my previous company to develop a platform we actually became very deeply involved in everything around tokenization of securities, and effectively the whole fund is pointed at that now.
Adv. Ziv Keinan: In 2017, we saw a lot of ‘utility token’ issuance, but in 2018 it seems entrepreneurs are more careful. Do you think security tokens will replace utility?
Ami Ben David: I think these are two different use cases, with some overlap. The use case for security tokens is MUCH more extensive than the use case for utility token. It can become an infrastructure layer for “ownership” for massive otherwise illiquid markets. While utility tokens have a specific use case, which I think is valid for protocols and networks, etc. – so we’ve seen Telegram this year – that’s huge, and we’re seeing a lot of combination too – with a security token first, leading to a utility later on.
However, the momentum of security tokens in 2018 was delayed due to the drop in the crypto market in March.
Adv. Ziv Keinan: We would like to learn more about Spice VC, the kind of investments is Spice VC looking for?
Ami Ben David: Saw it’s coming. We see practically hundreds of projects, but the people that don’t have a 1000% clear winner, are kind of waiting for a little for things to stabilize.
Adv. Ziv Keinan: I saw that you launched 22X fund on Securitize. Can you explain what Securitize is and how it works?
Ami Ben David: Our motto is to “Tokenize the world,” and we mean it – we love tokenization infrastructure projects (this market needs all sorts of infrastructure plays that exist in the paper-based world), and we invest in tokenized projects, especially early on when we can contribute. Securitize is a portfolio company of SPICE VC. It’s a separate operating company with its own team etc., based in the Valley.
Adv. Ziv Keinan: How does it work? Can every venture apply?
Ami Ben David: They provide the infrastructure for launching any security token end-to-end, from the pre-pre-sale, all the way to dividend management to token holders and yet every venture can apply. Just go to securitize.io and apply or talk to me directly.
Adv. Ziv Keinan: What is the added value for security token over non-voting share, for example?
Ami Ben David: The pipeline is pretty long, so obviously Securitize is looking for the best projects. We see a few things:
1. The liquidity potential – I hope that spice tokens will already be trading on a regulated exchange in the near future.
2. The inclusivity – we see investors come in at lower tickets than were possible when there was zero liquidity, and also from all over the world.
3. The best deals we see now or security tokens that don’t offer just straight equity – these are the real game-changers. Tokens that offer partial equity and a rev share, a piece of topline revenues, a coupon token that is giving to the security token holders, etc.
Ziv Keinan: Thank you. I want to turn the discussion over to the rest of the group for other questions.
Oliver: Hey Ami, I’m Oliver from Standards.
Where can I find more information on the legal standing of security tokens issued by Securitize? As I understand, they can come in different flavors, including equity.
Ami Ben David: Hi Oliver, That’s correct. I’m not a lawyer, but I can give you the general guideline. We treat security tokens as a digital replacement of paper-based ownership documents, so whatever rules apply to the sale of the equity via signatures on a document apply to the security tokens.
From that guideline we go down and look at each offering – what are the legal requirements you would have to meet if you signed every investor on a document – and we replicate that in the security token.
The automation allows you to do smart things – like automate payments of dividends or give other benefits to token holders; These are the deals that I see get the best traction because they are backed not only by equity but also by a promise of payouts while you hold the equity.
So feel free to message me privately, and we can talk about your particular scenario.
Oliver: I will be sure to get in touch. Another question, is Spice VC currently invested in any projects beyond Securitize?
Ami Ben David: We did our first closing and issued the first tokens so we can start putting capital to work, that was ten days ago. We are now negotiating our first three deals beyond Securitize.
As I said, we are interested in early stage security-token projects – or any infrastructure play for tokenization.
Samuel Katz: Ami, I’m Sam Katz, a US Securities lawyer located in Israel. Given the holding period and limitations on transfer (and the number of holders) in the US, did you find that there was less interest in Spice VC from US investors?
Ami Ben David: Hi Sam, most of our investors are non-US. In the US, the limitation for a fund under Reg D is 99 accredited investors, which is a strong limit. For operating companies, it’s 1,999 accredited investors, and there are also other options. So as a fund, we are indeed at a disadvantage in the US in the first year.
Samuel Katz: Thanks. Are you finding that in general, other issuers of security tokens (such as operating companies) are looking outside the US?
You should look at US-based projects like t0 as an example, and I believe they are mostly the US.
Sam, actually most of the projects we see at Spice VC are US based. They know they have a one year lock, and that’s the legal status. It’s practically dozens of US projects, so I don’t think being US based is stopping them.
Noga: Hi. I am Noga from Greeneye. I am a bit new…so I wanted to clarify a bit more. Can we use the platform to produce a token for selling a share of a fund that is invested in public companies?
Ami Ben David: Hi Noga, If I understand you correctly, then yes, you can tokenize a fund regardless of what it invests in, as long as you meet the regulations for marketing, offering, selling and trading the tokens.
Noga: Does the fund have to be registered in a specific country?
Ami Ben David: You should look for a country to register that has these two characteristics:
1. They are friendly to blockchain-based ledgers – recognize a ledger entry as binding ownership (the SEC sees it in that way, but some countries have specific rules covering it).
2. Look for a country that’s friendly to international funds (no limitations on the number of investors, size of the investment, tax questions, etc.).
We chose Singapore, but that was six months ago. Things may have moved in other jurisdictions.
Oliver: Hey Ami, how do security tokens handle dilution through the issuance of new shares? Does an entire company have to be tokenized, or can the company be hybrid paper equity/token equity?
Ami Ben David: Oliver, the hybrid is possible. I’m working on a number of hybrid projects.
Rani: Hi Ami, Rani from Viewo. Besides the one year lock, how are the Americans on Spice VC handling the SEC? The one year lock is the easy part.
Ami Ben David: Hi Rani, we have the US investors go through KYC/AML and an accreditation process. They also sign a subscription agreement approved by a US lawyer. We can also offer them a custodian to hold the tokens for them. From that point of view, they do nothing the SEC has said anything bad about – the opposite; the SEC asks all tokens to be treated as securities, which is what we do.
Do you have any specific concern you refer to?
Adv. Ziv Keinan: I think liquidity is the concern most ICO’s have with respect to ST. This should be solved by the regulated exchanges.
Ami Ben David: Agreed. We also allow investors to sell the tokens back to the company – which from all we know, is allowed. That gives US investors some pressure valve for the first year.
Adv. Ziv Keinan: This is the way you use the Bancor Protocol, right?
Ami Ben David: Correct. It is still a work in progress because we have to support some regulation limitation in the Bancor Relay – but it’s coming live soon – I hope.
Rani: Basically, there are lots of Americans that are afraid to be related to ICOs, especially if it’s a security token and not followed by American regulation. I guess a custodian is the least risk for most Americans?
Ami Ben David: Rani, I agree there is a perception issue, but we see security token sales as a replacement for signing documents We have token sales where everything is done only in Fiat, and no crypto changes hand, and we comply with all US security laws and regulations. So there is a perception issue, but I believe once some big names projects will launch successfully and the SEC approves, the market will go into a faster gear.
Custodians solve the problem for institutional investors who can’t hold securities directly and don’t even know how to hold tokens. It’s a critical part of the market maturing.
Adv. Ziv Keinan: Thank you, Ami, for your answers to all of us, the information you provided has been truly educating.
Ami Ben David: Thanks for inviting me. I’ll stay in the group and will be happy to share any news or updates. I see Spice VC’s role as helping make this market happen – so feel free to talk to me directly with anything.