Category Archives: Equity Crowdfunding, Alternative Funding

Canada Update: Alberta Updates Crowdfunding Regulations but Where Does Canada Stand in the National Harmonization of Rules? What about Fintech Development?

Crowdfund Insider | | Oct 7, 2019

Canadian flag2Last week, the Alberta Securities Commission (ASC) adopted a “Blanket Order” for “Startup Crowdfunding Registration and Prospectus Exemptions.” In effect, the ASC was seeking to improve access to capital for smaller firms – a good thing- but the move also highlights the disparity between the provinces and a greater need for national harmonization of online capital formation rules. Financial services in Canada are all regulated at the provincial level thus there exists a degree of disparity regarding rules.

While a smaller country by population, Canada has consistently ranked high in entrepreneurship and innovation. According to a recent KPMG report, the Canadian Fintech ecosystem is thriving but, like any other country, more can be done.

Crowdfund Insider reached out to Denise Weeres, Director, New Economy at the ASC and Craig Asano, Executive Director and founder of the National Crowdfunding and Fintech Association of Canada (NCFA). The NCFA has long led the charge advocating on behalf of Canada’s emerging Fintech market and various securities crowdfunding platforms.

The New Economy Division of the ASC works closely with staff to coordinate efforts to facilitate capital-raising by new economy companies entering the capital market. The Division also strives to anticipate and act on issues and opportunities relating to emerging financial technologies (Fintech).

Our discussion with the two innovation proponents is shared below.


The ASC update to rules is in advance of national harmonization. Why update now?

Denise Weeres: It takes a while to get a national instrument in place.  We wanted to allow Alberta businesses and investors to be able to participate in this regime now.

What is the status of harmonization?

Denise Weeres: All of the CSA [Canadian Securities Administrators] jurisdictions are working cooperatively on the national instrument  – we are looking at harmonizing and exploring targeted amendments to improve upon the existing regime.

The maximum raise amount appears to be low in contrast to some other jurisdictions. Are there any expectations for this amount to be raised?

Denise Weeres: The maximum raise is consistent with the other participating CSA jurisdictions start-up crowdfunding regimes.

Start-up crowdfunding is intended for the very early-stage businesses.  It requires a very simple offering document – and significantly doesn’t require financial statements.

A funding portal that is not registered as a dealer can be used too.  The limits reflect the fact that investors likely won’t get all the information they would typically (both at the time of the offering and thereafter) and they may be using a funding portal that isn’t registered and wouldn’t get the protections associated with a registered dealer.

But start-up crowdfunding is not the only way to crowdfund in Canada.  It’s just one of a number of options available.

See:  Sep 22, 2019: NCFA Response to ASC Consultation Paper 11-701: Energizing Alberta’s Capital Market

For example, businesses can crowdfund through a registered dealer funding portal under the offering memorandum [OM] exemption where there is no limit at all on the maximum raise and much higher amounts for the amount that individual investors can invest;

  • $10K for anyone,
  • $30K for an “eligible investor” e.g., someone who had had and expects to have $75K net income or has $400K net assets
  • up to $100K for an eligible investor who also gets advice from a dealer that the investment is suitable for them and
  • no limit for accredited investors.

Under the offering memorandum exemption, the offering document has more detailed disclosure – more similar to the offering document used for U.S. crowdfunding – and like other jurisdictions, it involves a funding portal that is registered as a dealer.

In #Canada, businesses can crowdfund through a registered dealer funding portal under the offering memorandum (OM) exemption where there is no limit on the max raise & much higher amounts for the investors

Craig, how is the Canadian ecosystem evolving, in your opinion?

Craig Asano: The Fintech ecosystem in Canada is growing, albeit not fast enough!  ‘slow and steady’ compared to high competition, fast iterations and market depth of UK/US markets but Canadian tech is starting to attract the interest of US funds and international Fintech brands are taking notice too of which many are planning to include Canada in their rollout plans (ie Revolut).

New Fintech startups are launching all the time in a growing number of private and public incubators, accelerators, innovation hubs and grassroot event ecosystems that include a wide range of AI/data, Regtech (KYC, compliance automation), peer to peer debt/equity platforms, digital asset, crypto, DLT, NEO/challenger bank, Insurtech, personal finance, wealth management and alternative investing models.

Although the ecosystem is evolving the average consumer is conservative with lower Fintech awareness and adoption rates (similar to the US) than comparators in Europe and Asia.  Incumbents are strong and many Fintechs have partnered with institutions to tap capital resources, customers, data and global expansion infrastructure.  Canadian markets are smaller than the US and while it’s easy to launch it’s challenging to achieve sustainable business with significant compliance costs to operate across the country while acquiring customers not yet fully accustom to switching financial products.  There have been many successful fintech startups that are scaling from Lending Loop to Wealthsimple to Borrowell and FrontFundr who are all providing consumer-centric, simple to access, low cost, and tech-enabled financial products and services for new economy.

Open Banking is a juggernaut of an opportunity for data-driven Fintechs and consumers looking for choice, lower fees and innovative products but conversations are at a standstill until after the upcoming election.  The Ministry of Finance in Ottawa and appointed open banking advisory committee are no doubt watching the implementation challenges of PSD2 in Europe along with the progress being achieved in countries like Australia who are advancing national innovation initiatives like Open Banking ahead of Canada (and the US for what it’s worth).  Will these delays put Canada behind the eight-ball, or will we be able to catch-up quickly (leapfrog) and marry our robust tech sector with a historically strong banking system and begin to replace outdated infrastructure?

Specific to crowdfunding regulation in Canada, there’s still a long way to go to remain globally competitive in terms of caps, operating costs and the appropriate amount of regulation for the risk while making it feasible for licensed dealers and funding portals to have a sustainable practice.  The lack of harmonization and overly complex set of rules initially caused quite a backlash to the reputation of industry.

At present, there are far too few crowdfunding platforms and we need more operators to increase market volumes and reignite transactional interest among service providers, funding specialists, securities lawyers, and both retail and accredited investors.  Peer to peer lending is now proven and helping hundreds of companies’ access growth-orientated loans but needs its own set of proportionate regulation to level up further.  I look forward to next year to full harmonization which the CSA staff mentions will be out next year (ideally with the changes NCFA has been advocated for on behalf of industry for years).

Open Banking is a juggernaut of an opportunity for data-driven #Fintechs and consumers looking for choice, lower fees and innovative products 

How has NCFA’s collaboration with provincial regulators helped to move things along?

Craig Asano: We’ve developed a mutually beneficial relationship with regulators from the start which has been informative for both parties.  NCFA bridges the gap between stakeholder wants and needs and helps regulators better understand emerging innovations that are essential for Canada to remain competitive and current with the times.  The association polls its wide network of industry practitioners and aggregates feedback to regulators through comment letters, committee participation and bespoke submissions and calls.

We work with other agencies and encourage regulators to recognize a competitive perspective in their difficult role of regulating fair and efficient capital markets while protecting investors.  NCFA also gathers a significant amount of global market intel and research on how other jurisdictions are performing and shares with market participants and regulators alike in effort to bridge gaps and help stakeholders understand varied perspectives.  Regulators are regularly invited to NCFAs annual conferences where they participate to provide updates on emerging regulatory initiatives, challenges and concerns while providing education and resources for industry, companies and investors.

NCFA is appreciative of the challenge facing regulators and positions itself as an educational resource and network for the various provincial commissions to rely on at anytime.  While we advocate for specific asks on behalf of industry, we do so in ‘Canadian style’ which is a collaborative effort.

NCFA bridges the gap between stakeholder wants and needs and helps regulators better understand emerging innovations that are essential for Canada to remain competitive and current with the times #Fintech

What are your expectations for 2020?

Craig Asano: I expect to see more growth and investor appetite while regulators continue to reduce the burden which is overly burdensome now.  This means small wins for the industry but doubtful for large scale national initiatives like Open Banking to reach implementation by 2020.

Continue to the full article --> here

 


The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

NextSeed Merges with Collaboration Capital to Form Fintech Investment Bank

Crowdfund Insider | | Sep 25, 2019

nextseed and collaboration capital

Investment crowdfunding platform NextSeed has merged with Collaboration Capital in a move to create a leading “technology-driven impact investment firm open to everyone.” In effect, the NextSeed merger with Collaboration creates a Fintech forward digital investment bank.

NextSeed, a FINRA regulated funding portal that recently received its broker-dealer license, has long been a leader in providing debt-based capital to small businesses while providing access to an interesting asset class to smaller investors. Collaboration Capital is an SEC-registered investment advisor. According to the company’s LinkedIn page, Collaboration is an advisor to “forward-looking families” focusing on the ESG and impact investing sector.

The strategic merger expects to further expand the combine companies mission to “democratize finance.”

Both companies are based in Houston, Texas. NextSeed CEO and co-founder Youngro Lee will remain the CEO of NextSeed while becoming the CEO of the combined entity.

See:  Prominent Group of Fintech Leaders Send Letter to SEC Chair Jay Clayton Demanding an Increase in Regulation Crowdfunding to $20 Million

Lee, who previously specialized in international private equity at global law firms Cleary Gottlieb and Kirkland & Ellis, currently serves on the SEC Small Business Capital Formation Advisory Committee and also serves as the founding President of the Association of Online Investment
Platforms (AOIP).

Christopher Knapp, the founder and CEO of Collaboration, will remain as CEO of the firm.

Knapp previously co-founded and served as CEO of Chilton Capital Management after a long career at Brown Brothers Harriman & Co. He launched Collaboration Capital to build a new type of investment firm focused on impact/ESG investing for its clients.

Collaboration seeks to leverage traditional fundamental securities analysis that incorporates select ESG considerations to reduce the overall risk to investment portfolios, while developing portfolios consisting of companies that exhibit sustainable business practices.

According to a note from Nextseed, the combined firm also plans to launch a new asset management division to focus on:

  1. proprietary public ESG (environmental, social, governance) investment strategies developed by Collaboration Capital
    and
  2. city-focused private investment funds concentrating in community-driven real estate, startups
    and growth-oriented small businesses in select US metro areas.

While NextSeed has always catered to both accredited and non-accredited investors, the addition of the broker-dealer license has helped the platform to expand in other areas of the private markets.

See:  What does the future of banking look like, according to the experts?

Lee commented on the merger news stating he has spent the last few years tirelessly building the technology and infrastructure to empower small, local investments at scale while navigating the complex regulatory requirements to ensure compliance.

“Our mission at NextSeed has been to connect businesses and individuals to build vibrant communities,” said Lee. “Now, by combining with a respected investment adviser such as Collaboration Capital that also believes in the power of the capital markets to affect positive change, we are beyond excited to create an entirely new type of investment firm that is strategically positioned to serve the investors and entrepreneurs of the future.”

Continue to the full article --> here


The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

Sep 22, 2019: NCFA Response to ASC Consultation Paper 11-701: Energizing Alberta’s Capital Market

NCFA Canada | Sep 22, 2019

ASC_

NCFA is pleased that the Alberta government is undertaking this important initiative to the  benefit of all Albertans.  We acknowledge the substantial background information provided by 11-701.  This submission responds to the brainstorming headings pp. 24 – 31 and seeks to fill knowledge gaps with recent consultation data (mainly obtained in Edmonton) and pays specific attention to equity (investment) crowdfunding and peer lending in Alberta.

Download the Submission in PDF format --> Now

Key Takeaways

The NCFA recommends that the ASC undertake the following:

  • Review and publish a report that evaluates the effectiveness of Alberta’s investment crowdfunding and peer lending requirements compared to other jurisdictions in Canada and international competitors such as the UK, US and Australia, including a comparison of the relative cost of capital to other available financing options;
  • ASC to take a more active role as a resource for both early stage companies and investors including data collection, market analysis, and information sharing to ensure more fair and efficient capital market formation in Alberta;
  • Engage Innovate Edmonton and Platform Calgary following the detailed third-party study by Startup Genome to obtain detailed ecosystem benchmarking data for follow-on analysis of Alberta’s funding gaps;
  • Support the development of a tax relief program for investors to increase the volume of start-up risk capital allocated to non-traditional sectors (eg. financial technology) similar to the effective programs in the UK: SEIS[1] and EIS[2];
  • Work with other jurisdictions to harmonize the crowdfunding regime across Canada (CSA Staff Notice 45-324) with the goal of eliminating unjustified regulatory burden at the same time. We favour BC’s regime;
  • Modify existing requirements so that they are principles based and outcomes focused to enable businesses to comply in the way that best suits their operations – detailed or prescriptive controls should only be imposed when clearly justified;
  • Implement burden reduction amendments for crowdfunding (45-108):
    • Increase the 12 month issuer cap to $5 million or higher;
    • Increase the 12 month investor caps to $10k and allow accredited investors to fully participate;
  • Allow advertising and general solicitation on social media for all crowdfunding;
  • Allow fintech solutions to streamline KYC and suitability tests;
  • Startup crowdfunding business exemption (45-109) – remove lifetime cap of $1 million; or increase lifetime cap to minimum $5 million.

See:  [Survey Deadline Sep 20, 2019]: ASC consults on Energizing Alberta’s Capital Market

Benefits to Alberta will include:

  • Increased capital investment in the province and increased economic growth;
  • Increased investment options for investors that support small businesses across Alberta;
  • Reduced pressure on Albertan startups to raise capital from outside Alberta and Canada;
  • Crowdfunding sources remain in Canada;
  • More capital and improved access to capital specifically for small businesses, rural businesses, economically challenged sectors, and under-served groups (eg. women and Indigenous business owners);
  • More liquidity and transparency in the markets;
  • Improved probability of retaining high growth companies in Alberta; and
  • Accelerated commercialization of new products and services.

Crowdfunding helps to drive innovation, economic activity and job growth. It fills a critical early stage funding gap (‘valley of death’), enables more productive investment in venture markets, and strengthens early stage capital markets. Crowdlending also provides support to more mature companies looking to access capital that may fall outside the parameters of bank lending. And last, but not least, it helps to democratize investment by giving smaller investors direct access to the capital markets.

“Regulation may be the largest constraint to capital markets Fintech development in Canada, as we have not set out many of the same principles as in the U.S. and U.K.”[3]

This is not the time for Alberta to hold back.

Thank you for the opportunity to contribute comments.  NCFA would be happy to expand on any of the points raised in this submission.  We look forward to future developments.

See:  ‘We don’t have enough money’: Tech leaders debate constraints at Vancouver Startup Week

1.    Background and Context

Contrary to the intent of the crowdfunding exemption, Alberta’s crowdfunding requirements hinder access to capital for SMEs across many sectors. These requirements have restricted innovative opportunities for retail investors and our members feel the impact of this directly. The potential of opening up regulation is to significantly increase job creation and economic development, as experience in other jurisdictions shows. Alberta’s 417,000 small businesses would also benefit from the increased access to capital that crowdlending offers.  Canada has fallen behind international competitors like the UK and the US. Crowdfunding now provides the largest investment at the seed stage in the UK and peer-to-peer platforms now provide 15% of all new bank lending to small businesses.

2. Fintech and Crowdfunding are Being Held Back in Canada

Canada’s crowdfunding and fintech “ecosystem” should be competitive, be in line with global trends, and enable early stage entrepreneurs to access smaller amounts of capital at a reasonable cost. Unfortunately, it is not and does not. There is a ‘funding gap’ as smaller companies find it very challenging to raise debt or equity financing in Canada.

There is a 'valley of death' for start-ups at around the $250,000 level. Venture capital funding has increased, but VC dollars are mostly going to expanding firms. Angels are a lot less active than in the US and their investment amounts are lower. Banks generally steer clear of start-ups. This means fewer innovative start-ups, fewer opportunities for investors, lower economic growth and productivity and fewer jobs.

“Regulation may be the largest constraint to Fintech development in Canada, as we have not set out many of the same principles as in the U.S. and U.K.”[5]  The NCFA has conducted numerous stakeholder consultations which overwhelmingly tell us that regulatory requirements are overly prescriptive, complex and burdensome, disproportionately raising the costs of doing business for start-ups. Entrepreneurs are reluctant to start up in Canada due to high costs (relative to a small financing), along with concerns about ongoing regulatory burdens such as over-reaching and complex reporting requirements and compliance reviews.

Investors are inhibited by restrictions like caps on investment. Many talented entrepreneurs and investors move to (or invest in) overseas jurisdictions that better understand (and support) innovation and the economic potential of start-ups and SMEs.  If the NCFA recommendations were to be implemented, the experience of other jurisdictions makes clear that more capital would be raised, especially for under-serviced sectors (e.g. women and minority groups, including First Nations, and rural communities). Investors would have increased confidence and more freedom to invest as they choose – any increase in investor downside risks are anticipated to be low.

3. Alberta

The call for comments by the ASC is a leap towards positive change in the Albertan capital markets and crowdfunding landscape. While the in-depth background material supplied by the ASC in 11-701 clearly lays out the challenges for Albertan companies, there are updated consultative engagements with the entrepreneur communities in Edmonton and Calgary. These updated reports will be a useful addition to the ASC’s decision-making processes. They also provide excellent contacts for ASC’s engagement with Alberta’s major centers.

See:  ASC advances new capital-raising initiatives for start-up businesses

(a) Startup Genome Reports

In Edmonton, starting in May 2018, community meetings under the banner of the “Edmonton Innovation Ecosystem Community” engaged members of the innovation community.[6] To date, there have been 11 community consultations with key innovators on a near-monthly basis. The impetus for the first gatherings followed consultation with 50 entrepreneurs in Edmonton to gather their feedback on ecosystem performance. The EEDC engaged Startup Genome to begin measurement of the ecosystem performance. The Edmonton Report brought two key measurement instruments to the ecosystem, Global Market Reach (GMR) and Global Connectedness (GC).

startup genome edmonton report

Startup Genome Edmonton Ecosystem Assessment, May 2018

We ask that the ASC review the results of EEDC’s more detailed analysis of the ecosystem as part of their assessment of 11-701 responses. Notably, Edmonton lags behind its Canadian peers in attracting resources from within the country.  In addition, Edmonton ranked below what the report calls the Globalization Phase Average in Early Stage Funding per Startup, based on data from Crunchbase and Deal Room. The key actionable insights from this early analysis are that Edmonton should focus on increasing early stage funding by (1) widening the funnel and increasing startups with seed funding; (2) supporting the formation of more sources of capital (ie. Angel groups); and increasing access to Series A capital.  Calgary has also engaged Startup Genome for ecosystem benchmarking[7].

(b) Innovation Compass

Another work product from the EIEC meetings in Edmonton was the Innovation Compass report[8]. Due to perceived low numbers of early entrepreneur engagement, EEDC engaged ZGM Marketing to complete a third-party interview process with Edmonton Entrepreneurs to make recommendations that reflect the voice of Edmonton entrepreneurs. Engagement began in December 2018 and the final report was published June 20, 2019. The report provided community validated recommendations and directions for supporting the city’s tech innovation ecosystem. Among 14 recommendations and directions, the top recommendation was:

“Encourage pools of private investors from all sectors to move off the sidelines and start investing in local tech entrepreneurs.”

innovation compass edmonto recommendations

Highest priority recommendation from Edmonton innovation ecosystem community members in the YEG Innovation Compass Report.

(c) Edmonton Advisory Council on Startups (EACOS)

During the early meetings of the EIEC, it was recognized that a body completely separate from EEDC that reflected the voice of Edmonton entrepreneurs was needed. The Edmonton Advisory Council on Startups was formed with members representing all stages of entrepreneurship to ensure diversity. EACOS is comprised of 13 individuals representing students, seed, startups and scale-up stage companies, and investors. EACOS has published three position papers[9] aimed at increasing the size, throughput, energy, and success of the Edmonton startup community.   EACOS has identified a number of community priorities and access to capital is top of mind. EACOS has recommended:

“Intensified efforts to engage local investors into investing into local technology companies. Investors who have built capital through traditional means, like real estate and energy, need to be effectively engaged, educated, and presented with the portfolio opportunities of technology investments.”

4. Comparison: British Columbia

BC and some other jurisdictions have less burdensome crowdfunding requirements[10] that allow small firms to raise up to $250,000 per offering (twice a year), with participation from other provinces. While still not ideal, these less burdensome exemptions have proven to be much more effective than MI 45-108 in Ontario.

For background on exemptions in Canada see: https://www.bcsc.bc.ca/Securities_Law/Policies/PolicyBCN/PDF/BCN_2018-01__February_14__2018/. (This BCSC Notice expresses well many of the points we raise in this submission)

5. Canada’s Uncompetitive Position

Canada has fallen behind international comparators such as the UK. In the UK,  crowdfunding platforms were involved in 24% of all equity deals in 2017, but with 30% of seed stage deals in 2017.[11]

To see the advantages of a uniform, cross-border, and flexible crowdfunding regime, one need look no further than Regulation D in the US. The following are quotes from the recent Crowdfunding Capital Advisers Report.[12]

“2018 saw triple digit growth in unique offerings, proceeds and investors. More importantly, start-ups are successfully using Regulation Crowdfunding to raise meaningful capital in a relatively short period of time and at costs that are less than a typical Regulation D offering.

“Unlike venture capital, where less than 6.5 percent of start-ups successfully raise funds, the success rate in Regulation Crowdfunding hovers around an impressive 60 percent. A key data point for industry followers is that the average raise ($270,996) helps start-ups hurdle the “valley of death” they often face after expending their internal or personal capital.

“Regulation Crowdfunding is proving to be a jobs engine (creating on average 2.9 jobs per issuer), economic generator (pumping over $289 million of revenues into local economies)... There is still a lot of room for growth with Regulation Crowdfunding offerings as they equate to only 1.2 percent of all Regulation D offerings and only 4 percent of all capital raised under Reg D.

“The fact that the velocity of capital into funded offerings continues to be steady without signs of abnormal activity or irrational investor behaviour is a healthy indicator. Meanwhile, the rapid increase in the number of offerings and investors proves there is continued appetite for Regulation Crowdfunding from both issuers seeking capital as well as investors looking to diversify. This is true across the [US].

“Regulation Crowdfunding is also proving efficient. If we compare the average days to close (113) in 2018 and average raise ($250,635) of a successful Regulation Crowdfunding campaign to a traditional Regulation D offering, Regulation Crowdfunding most likely represents the most efficient, cost effective way to raise capital for start-ups and SMEs.”

The type of (published) data collection and analysis provided by the above report is rare in Canada, which is another serious impediment to decision making in this area. To back its recommendations, NCFA (and others) must rely largely on anecdotal evidence from its members.

6. Canada’s Competition Bureau

As the Competition Bureau has pointed out[13], a more flexible approach to regulation and better government support would provide significant economic benefits by freeing entrepreneurship. It would also help to keep our entrepreneurs in Canada (along with the related jobs), boost GDP (especially by improving productivity), and encourage the commercialization of new products and services generally.  It is well-documented that overly complex, prescriptive regulation is a much higher burden for smaller firms and so is inherently anti-competitive.  For a disappointing progress report on the Bureau’s recommendations of Dec 2017.  See: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04392.html

7. ASC Brainstorming Ideas and Comments

(a) Information resource for Alberta start-ups and early stage businesses on capital raising options

  • Raising capital shouldn’t be a ‘black box’. Companies and investors would benefit if the ASC could:
    • provide a roadmap to the various financing options including use of exemptions, what typical companies (and investors) that qualify look like, average time to market, related costs and effort, and capital flows;
    • publish sample templates of the expected quality of good offering documents;
    • work with industry to develop a transparent resource database that is widely available.
  • Dovetailing with EACOS recommendations on entrepreneur preparedness, more information on successive financings would benefit the Alberta tech ecosystem. The ASC could consider hosting this data in an anonymized format so that Alberta startups could learn about their local comparables.

(b) Information resource for investors in Alberta

Some market participants have suggested there might be a role for the ASC in increasing investor understanding respecting the exempt market and considerations when investing in start-up and early stage businesses

  • The ASC assuming an educational role could only be beneficial to Albertan investors, especially those that are seeking to diversify outside of real estate or oil and gas. An equity crowdfunding or peer lending platform operating in Alberta could then easily point to this resource as a third party unbiased educational resource for investors.
  • In addition to local investors, ASC could work with economic development agencies to provide education on exempt market trends and developments to international investors and funds with a new focus on emerging technology as a means to diversify the Alberta economy.
  • Highlighting a range of companies by sector and capital raised in private markets would help investors understand high growth SME opportunities.

(c) Expanding the accredited investor exemption to include educated, experienced investors

What are the right combinations of education and experience? For the educational component, should we consider courses such as those offered through the CVCA Canadian Private Capital Investment School or the NACO Academy for those investing in private markets?

  • The accredited investor exemption if expanded to include educated and experienced investors would unlock latent capital in Alberta while increasing opportunities for qualifying investors and allow for greater portfolio diversification.
  • Any expansion of the accredited investor definition should aim to ensure that investors understand the risks involved with investing in private market securities such as reduced disclosure and lack of liquidity and provide education on the evolving trends of online financing such as peer lending, investment crowdfunding, and digital assets.
  • Education should be tendered and open to all private capital market training bodies, associations, licensed exempt market dealers, and investor-orientated groups and structured to be flexible and allow a wide range of participation to enable:
    • the right balance of training expertise and collaboration;
    • wide program accessibility;
    • current and relevant training content updated on an annual or periodic basis;
    • range of “textbook” and experiential training delivery;
    • certification and listing for public verification on an ASC database; and
    • capture of investor risk acknowledgement such as ability to withstand loss
  • The certificate of training could then be used by equity crowdfunding and lending exempt market dealers and portals to validate investor training in a streamlined manner (rather than have investors go through the same process with various dealers and portals time and time again).

Given that the policy rationale for the accredited investor exemption is ‘ability to withstand loss’, would it be appropriate to impose some limit on the amount that can be invested by an educated/experienced investor that is not otherwise an accredited investor e.g., the greater of $30,000 and 5% of their investment portfolio?

  • Accredited investor and qualifying experienced-educated investors should be allowed to fully participate without caps in investment crowdfunding and peer lending offerings.
  • Accredited investors should be encouraged to invest in or along-side a Start-up Business Exemption campaign. The participation of accredited investors at higher levels will provide non-accredited investors with added value as the investment group will perform greater due diligence than investors only investing the minimum threshold amount in a Start-Up Business Exemption offering.

(d) Addressing the compliance challenges associated with confirming accredited investor status

The central party could then confirm, through a unique investor identifier, to any business or dealer to whom the investor provided the unique identifier, that based on the information provided, the investor qualifies as an accredited investor, without the need for the investor to reveal all of their personal information.

  • This is a logical and reasonable solution that mirrors recreational licensing and even academic author identification systems (see Orcid ID).
  • Unique IDs could be used as part of a background check which will help reduce the number of days required to verify ID prior to being permitted to participate on equity crowdfunding or peer lending platforms.
  • There are numerous ‘regtech’ solutions now in the market that can be assessed by the ASC for potential use and deployment.
  • Any investor verification system should be neutral to avoid a single group monopolizing a provincial (or national)system.

(e) Registration exemption for finders

We are interested in feedback on a dealer registration exemption for sales to investors that are accredited investors who also meet certain education and/or experience criteria. We are interested in how such an exemption could be tailored to adequately protect investors but help address the issues associated with smaller financings that are not being serviced by registered dealers.

  • We agree that a registration exemption for qualified ‘finders’ would help expand the pool of investors and supply more capital to early stage companies.
  • Finders should be required to notify the ASC of their identity or could be required to associate with registered dealers or engaged by investment platforms.
  • Finders not associated with registered dealers could be required to report periodically on their investor prospecting activity using technology to streamline communications. This would not only provide employment opportunities for finders but also minimize unreported finder type activity that occurs anyway while increasing the transparency in the exempt market for smaller financings.

(f) Reducing compliance costs for registered dealers when dealing with accredited investors

This applies across the piece in the crowdfunding sector. Each requirement should be cost justified by regulators.

(g) Addressing other registered dealer compliance burdens

For crowdfunding related burden reduction examples we encourage the ASC to review NCFAs submission to the Ontario Securities Commission of March 1, 2019 – burden reduction.[14]

(h) Facilitating angel investment funds

Should we consider adviser registration exemptions where accredited investors have a limited amount of capital at risk?

  • Yes, especially if accredited investor status is expanded to include well educated and experienced investors. In this scenario, with small amounts of capital deployed and a demonstrated ability to withstand a specified loss, barriers to obtaining capital from multiple crowd sources would be reduced.

(i) Facilitating the development of a retail, publicly-traded fund focused on innovative businesses

  • We feel this is best answered by VCs and institutions.

(k) Facilitating a semi-public market that allows secondary retail trading by non-public companies

  • The illiquid nature of exempt market securities is often cited as a major concern of prospective investors so anything that assists secondary trading is welcomed.
  • A secondary market for exempt securities would also benefit early employees of start-up companies by allowing them to liquidate holdings pre-IPO and thus help early stage companies to offer creative compensation packages and attract a wider range of employees to help them grow.[15]
  • A semi-public market should be open to all types of exempt securities from crowdfunding to security tokens to allow fair and efficient markets to form.

(m) Fostering crowdlending and peer-to-peer lending

  • Peer-to-peer (P2P) lending is providing SMEs with financing in many jurisdictions, including the US, the UK, New Zealand and Australia, at rates which are considerably lower than those offered by competitors.
  • The popularity of P2P lending in the UK has increased exponentially in recent years, with nearly £10 billion being transferred through such platforms in the past ten years and approximately £1.2bn having been transferred through P2P platforms in the second quarter of 2019 alone.
  • The current securities regulatory regime in Canada imposes costs and burdens that create significant impediments to the success of any P2P platform and by extension the availability of financing to Canadian SMEs.
  • The current regime in Canada is not suited to allowing companies to raise debt financing as it treats them as issuers. The regulatory requirements for becoming an issuer are simply too burdensome for small loan sizes (for example a $50,000 loan).
  • The sheer magnitude of P2P lending and its positive impact on the economies of  advanced jurisdictions elsewhere suggests that it would be beneficial for Canadian SMEs if the regulators in Canada were to adopt a regime specific to P2P lending. A regime modeled on those successfully implemented in jurisdictions, like the UK, where P2P lending has been proven to provide much needed funding to SMEs while ensuring an appropriate level of protection for investors.

About the NCFA

The National Crowdfunding and Fintech Association of Canada (the Association) represents over 2,000 fintech SMEs and individual members that support financial and capital market innovation, small businesses and technology. We are pleased that the Alberta government is undertaking this important initiative to the benefit of all Albertans.  Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

 

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Regular investors are cut out of a major financial market and the SEC chief wants to change that

CNBC | Bob Pisani | Sep 10, 2019

SEC jay claytonKey Points

  • The head of the SEC says more needs to be done to make it easier for companies to go public.
  • Jay Clayton says his office is taking a “fresh look” at allowing Main Street investors access to the private capital markets.

The head of the SEC says more needs to be done to make it easier for companies to go public and that his office is taking a “fresh look” at allowing Main Street investors access to the private capital markets.

In a speech to the Economic Club of New York on Monday, SEC Chairman Jay Clayton said the lack of more IPOs and the inability of most of the Main Street investing public to access private markets was a “growing concern.”

Clayton addressed what he called the “two segments” in capital markets: the public markets, and private ones, including private equity and venture capital investments.

See:  The Solution To The Fintech IPO Shortage

“Twenty-five years ago, the public markets dominated the private markets in virtually every measure,” he said. “Today, in many measures, the private markets outpace the public markets, including in aggregate size.”

Clayton wants to make the public capital markets (IPOs) more attractive for companies, and expand opportunities for Main Street investors to participate in the private markets. The SEC, Clayton says, is making efforts to modernize financial disclosure rules and to recognize that one size does not fit all, permitting what he calls “scaled disclosures.”

He expressed concern that the Main Street investor for the most part does not have access to private markets, noting that the cost of including individual investors in private offerings is “high.”

Clayton said he wants to take a “fresh look” at initiatives to expand access to the private markets while at the same time providing “appropriate investor protections.”

Clayton addressed several other issues in his speech, in the follow-up Q & A, and in a separate interview on CNBC:

See: 

Bitcoin ETF

Clayton said that “progress has been made” on one of the SEC’s core concerns: how custody is handled. On another core concern — that most pricing of bitcoin occurs on foreign exchanges that are subject to manipulation, Clayton noted that those exchanges “do not provide the same level of protection as our U.S. equity market,” implying that manipulation of prices was still a major concern.

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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Powering local regeneration through crowdfunded investment

Nesta UK | Rosalyn Old and Johnathan Bone | Sep 4, 2019

taking ownership – community empowerment through crowdfunded investmentEarlier in May 2019, Nesta commissioned a report called 'Taking Ownership:  Community Empowerment through Crowdfund Investments' that looked at how community-led projects have the power to transform local areas socially, economically and environmentally and how institutions such as local governments, municipal authorities and foundations, can help community-led initiatives by making the most of new investment crowdfunding models (eg community shares and bonds).

Key Findings

  • Investment crowdfunding has been used to fund a broad range of local assets, including but not limited to, saving local shops and pubs from closure, creating new community centres and art spaces, and expanding leisure facilities and infrastructure projects.
  • Potential opportunities in using investment crowdfunding for community-led initiatives include helping to fund projects that would otherwise struggle to access finance elsewhere, increasing the use of and volunteering for community initiatives, and strengthening local resilience and self-determination by bringing communities together to improve their area.
  • The main challenges for community organisations raising money in this way include gaining access to assets to buy or use on a temporary basis, transitioning from grassroots fundraising to implementing a project and avoiding negative impacts on diversity and inclusion.
  • Local government, city authorities and institutional funders have a crucial role to play in supporting community organisations to make the most of opportunities and overcome the challenges mentioned above by offering flexible funding options (including grants, bridging loans and co-investment), helping them access space by easing the asset-transfer process and supporting meanwhile use, developing active communities and their relationship with local and city government, and investing in skills and capacity building.

The study confirmed that these financial tools have the power to enable projects that wouldn’t otherwise be funded, provide longer-term financial sustainability and increase volunteering, the stories of community empowerment, self-determination and resilience are what really set these models apart. Despite the clear benefits of using these fundraising models for community projects, awareness of them and the types of projects they can be used for is relatively low, and case studies which others can be inspired and learn from are few and far between.

See:  Crowdfunding campaign raises $3 million to protect Princess Louisa Inlet property

Building on their report, they recently published 10 case studies from pubs and sport clubs to renewable energy and housing that have used crowdfunding investment models to create change locally.  While there are challenges associated with raising money in this way, communities across the UK are working (often with the support of institutions such as local authorities, trusts and foundations), to overcome these barriers.

Case studies

We hope these examples will encourage those of you involved in community organisations to try it out, learn from your peers and for institutions to take on a greater and more innovative supporting role in this sector.

1. Transformation under the motorway - Projekts MCR Skate Park

  • Location: Manchester, North West England
  • Community investment model(s) used: Community shares
  • Amount raised from community: £132,194
  • Number of community investors: 70


When you arrive at the site under Manchester’s inner ring road, Projekts MCR looks much like any other skatepark, but beyond the ramps, it also acts as a community centre for a whole range of local groups. They recently set out plans to expand the park further under the motorway, increasing ramp area as well as creating a community space and the city’s first skate cafe. They hope that these developments will increase revenue, ensuring the longer-term financial sustainability of the park. The overall project is set to cost £840,000 with £132,194 coming from community shares investors, alongside grant funding from Sport England, Co-operatives UK, The Community Shares Unit’s Booster Programme and The Veolia Environmental Trust.

Projekts community are committed to the success of the project, as they see the social benefits - providing children and adults opportunities to come together, learn, exercise and build confidence. They teach young people ways of working that would benefit any community; as the users physically move around the space they are constantly aware of those around them, learning to give space and work together to maximise everyone’s experience.

See:  Lending Loop Surpasses $50 million Milestone and helps thousands of Canadian Businesses and Investors

Over the last 14 years, Projekts has worked with over 20,000 people to develop their confidence and contribute to physical and social regeneration of the area through skatepark activities. Its community activities focus on underrepresented groups, such as classes for girls and women, with their participation up from 160 visits in 2012 to 3,755 in 2018.

They’ve also spruced up neighbouring outdoor space with a local group as one investor explains:

“The wasteland outside the park was re-used and planted. Projekts don’t have to do this - they’re not just a business, they go above and beyond what they have to do” - A Projekts MCR investor

Most of their 70 investors are users of the skatepark (or their parents) and alongside plans to offer investors 4 per cent interest each year after year 3, other rewards include branded t-shirts or a ramp named after them. Other investors include a local pizza restaurant which saw links to their brand image (their logo was designed by a skateboard company), and one of their biggest investors was an individual which the local council signposted Projekts to.

One investor shared their experience of feeling listened to as investors as well as customers. With the funding in place, the team are now looking for the best way to engage shareholders in their co-operative governance going forward.

“With community shares there is a benefit for the community and indirectly for the skatepark. They’re not just in it for the money, it’s about people supporting the project. Others fail - here it’s people that are making the difference” - A Projekts MCR investor

Overall, the community shares route has provided several advantages for Projekts: demonstration of community support, new co-op members and the peace of mind that comes with being financially more sustainable. However, they recognise the resources required to check the feasibility of a project and get the right skills in place to make it happen and would like to see more support to access people’s untapped potential and develop this with each project.

“How do you assess the value of a project to get the resources for it to go ahead? Spending time going to other projects can give a good gauge of what you need, but it shouldn’t just be down to the skills that you happen to have to start with” - John Haines, Managing Director, Projekts MCR

See:  Architecting a New World: Investment Crowdfunding and Digital Assets


2. Community-powered network - Broadband for the Rural North (B4RN)

  • Location: Lancashire, England
  • Financial models used: Community shares, bonds and loans
  • Amount raised from community: over £5 million
  • Number of community investors: over 2,300 shareholders

In 2013 the government committed to extend superfast broadband to 95 per cent of the UK by the end of 2017. But what about the remaining 5 per cent? Even before this commitment, a group of neighbours in rural Lancashire decided that if they wanted a good broadband network, they’d have to do it themselves. This led to the creation of Broadband for the Rural North or ‘B4RN’ who, after establishing that their project didn’t fit grant funding applications or bank finance criteria, decided to raise the money they needed from the communities they will serve. Since they opened their first community shares offer in 2011, they have gone on to raise over £5 million from local comm

Broadband for rural north UK

unities in shares, bonds and loans, allowing them to bring fast broadband to several previously underserved areas across the North West (alongside community investment they also received a business development loan from the Esmee Fairbairn Foundation, but notably B4RN has received no public funding). Alongside helping their community access fast broadband, community shares investors currently receive 5 per cent interest while those investing in the recent bond will receive 4.5 per cent a year (while both depend on the ongoing success of the business, the bond interest rate is set in advance, whereas the shares interest is determined annually by the directors).

B4RN’s model is based on rural communities taking responsibility for funding and building their own network as part of the wider B4RN scheme. The network is built by volunteers harnessing the skills, resources and knowledge within the community, and bringing them together around a shared aim. For example, local farmers and landowners support the project by digging trenches for the cables across their land in return for ‘shares for work’ - £1.50 per metre for the distances they’ve installed.

See:  Cities using Crowdfunding for Community Projects

The farmers know the best place for the cables on their land, and have an inherent interest in the project succeeding, because it gives them a reliable internet connection too. This means that B4RN are able to install fast broadband to areas in which it would not be feasible for private companies, who do not have this access or local knowledge and so would have to dig up roads at great expense. Further support comes from places of worship and village halls are given access to the network for free if they host a connection point (schools are also charged a low rate with the small schools getting free connections too).

“We wonder if the bigger benefits are the community ties we leave behind after it is built, the legacy of people talking to each other.” - Barry Forde, Chief Executive, Broadband for the Rural North Ltd. (B4RN)

The first laying of cables started in 2012 and a few months later B4RN won the The Internet Services Providers' Association’s ‘Internet Hero’ award. By June 2017 they had connected more than 3,270 properties to fast and affordable broadband and are now present in Lancashire, Cumbria, Yorkshire, Norfolk and Suffolk, demonstrating what empowered communities are able to achieve. Currently over 6000 customers are benefitting from one of the fastest connections in the world.

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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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The Rise of Vietnam – the new Asian Innovation hub

Daily Fintech | Arunkumar Krishnakumar | Sep 6, 2019

Fintech in VietnamPoor existing banking infrastructure? No major Unicorns from the local ecosystem? – No problem.

The rise of Vietnam as an innovation/Fintech hotbed is a fascinating trend. A tech savvy population, supportive government regulations, and high smartphone penetration – a great combo that has done wonders to several countries across the world.

Vietnam ranks third in South East Asia for the most populated country. It has been growing phenomenally over the past few years. In 2018, it saw GDP grow by 7.08%. The growth in the country has been praised by the president of the World Economic Forum Borge Brende. Vietnam’s economic reforms have helped reduce debt and lay a strong foundation for public finance.

So why are they special and what has triggered this new boom in the economy and investments going in for innovation? These statistics will shed light on the opportunity and growth.

  • 100 Million population
  • 84% Smartphone Adoption in Tier 1 cities, and 71% in Tier 2 cities
  • 40% Unbanked, and set to go down to 30% by 2020
  • Second Fastest growing Data analytics market in the world (CAGR 19.4%)
  • 161% growth in digital wallets in 2018
  • $70 Billion Mobile Payments by 2025 expected
  • Reforms to reduce cash transactions to 10%
  • 30% to shop online by 2020
  • 2019 startup investment to top $800 Million vs 2018 number of $444 Million
  • 3000 startups in the country – from 400 in 2012.

Amongst South East Asian innovation hubs, Vietnam has attracted about 17% of the startup investments. It ranks third behind Indonesia at 48% and Singapore at 25%.

See:  Singapore topples United States as world’s most competitive economy

Just to compare Vietnam to hubs like Singapore feels unfair to me. Singapore is arguably the most matured Fintech hub in Asia. To get anywhere close to Singapore in terms of investments is an amazing achievement for any Asian country.

The Vietnamese government have been very supportive of innovation in the country. As a result there are several startups in Fintech, Blockchain, Sharing Economy and other themes. A map of Vietnam’s Fintech startups should show the breadth of coverage across different clusters within Fintech.

The government have been smart with their regulatory stance. They haven’t banned crypto currencies yet. Investors in Vietnam lost close to $650 Million in the ICO scam. The Government has since then stopped with warning investors about the risks of cryptos, but largely taken a neutral stand and not banned exchanges and crypto businesses. With a clampdown on cryptos in other Asian economies, this is viewed as an opportunistic stance by the government.

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The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Your Complete Guide to Security Token Exchanges

Neufund blog | Alex Molé | July 31, 2019

token up neufundWelcome to the second edition of Token Up, where we analyze the emerging security token ecosystem, without the bullshit.

As you may recall, we spoke last time about the big picture: what security tokens are, the benefits they offer today’s outdated system, why you should care, and what the market opportunity looks like. Today, we’ll talk about a topic that’s been getting a lot of attention lately: security token exchanges. It seems with every week that passes, a new security token exchange is born. As liquidity remains one of the biggest roadblocks to widespread adoption of security tokens, this is both a welcome and important development for our emerging industry.

So what do we mean when we talk about liquidity, you might ask? Well in this case, liquidity refers to the relative ease and stability with which an asset (or token) can be bought and sold on the market.  Today, the security token market is characterized by an almost complete lack of liquidity, because there are few regulated security token exchanges currently in operation.  Just because a company decides to tokenize its shares doesn’t mean that anyone can trade those shares just yet. Don’t get me wrong ﹣ issuance is a critical piece of the puzzle, but in order for our burgeoning ecosystem to flourish the exchanges are a must. This is really important to understand, because liquidity is often stated as one of the biggest benefits that security tokens will offer vs. traditional securities. The key here is the future tense. While there are a lot of important advantages that security tokens offer on their own (many of which I discuss in my last post), liquidity is one that will only materialize when the forces within the ecosystem are working together﹣ startups, corporates, traditional stock exchanges and yes, regulators.

See:  Investors, ‘starved for returns,’ flood private markets in search of high-growth opportunities

The good news is that these forces are already hard at work. And there have been quite a number of developments this year that are worth mentioning. Perhaps what has struck me the most is the diversity of actors within the space. Not only are we seeing hopeful new entrants emerge or mammoth stock exchanges begin to adapt; we’re also seeing large corporates who most wouldn’t associate with either securities or tokens get in on the action, as well as established crypto exchanges seeking to incorporate new revenue opportunities as they target additional growth.

Best of all, there isn’t just one jurisdiction that’s leading the way ﹣in fact, while there have undoubtedly been a number of developments in the United States, I would argue that some of the most exciting progress is coming from Europe. This is thanks to a more stable regulatory climate, and perhaps a sense that tokenized assets represent a major opportunity for Europe to even the capital markets playing field once and for all.

The ensuing guide covers the following exchanges: Gibraltar Stock Exchange, OpenFinance Network, tZERO, Templum, SharesPost, Coinbase, Australian Securities Exchange (ASX), SIX Swiss Exchange, London Stock Exchange, and the Malta Stock Exchange.

So let’s take a look at what’s going on.

Gibraltar Stock Exchange

Gibraltar made headlines in October 2017 when GSX Group Limited, owner of the Gibraltar Stock Exchange, announced at the Hong Kong FinTech Summit the creation of a new subsidiary, the Gibraltar Blockchain Exchange (GBX). The GBX would aim to “create a new standard of excellence” by allowing only vetted, high-quality listings to be offered through its planned global, regulated marketplace for utility token sales. This feels like ages ago in crypto time: ICOs reigned supreme, and almost nobody was talking about security tokens or STOs, let alone setting up exchanges to trade them.

See: 

Around the same time as the GBX announcement, the GSX Group confirmed that it was also planning to revamp the Gibraltar Stock Exchange (GSX), which it owns, to become the world’s first regulated exchange for listing and trading security tokens. Though the news flew under the radar when it was announced, this was and is a very big deal. According to their white paper, GSX aimed to list tokenized securities by Q3 of this year, with trading of such security tokens to be enabled by Q4. It now appears, however, that this was wishful thinking: we learned recently that GSX will officially seek regulatory approval from the Gibraltar Financial Services Commission (GFSC) to list and trade security tokens, kicking off the process in Q1 of next year. While it seems that GSX will not make their original timeline, the overall point remains. The recognition of security tokens by an EU-licensed exchange is a major milestone for the entire blockchain community and one that we continue to watch closely.

OpenFinance Network

A number of interesting security token projects have begun to take shape in the United States despite the uncertain regulatory climate. One early-stage project that we’ve been following closely is OpenFinance Network (OFN), which claims to be the first US based regulated security token trading platform. Here’s what you need to know: OFN is a trading, clearing and settlement platform for alternative assets which combines a centralized matching system with a decentralized p2p settlement process. The platform went ‘live’ at the end of June after undergoing a few months of beta testing from early investors and partners. Well, sort of. On their Telegram channel the administrators clarified a major caveat: trading itself isn’t yet live. So, for now, all you can really do is register and complete KYC. You’d think they could just say that instead of making me sift through hundreds of messages on Telegram…

Even when trading functionality is live, the only token that users will be able to trade, at least initially, is SpiCE VC (a tokenized VC fund). Beyond that, the team has said that they expect Blockchain Capital (aka BCAP; another tokenized fund) to eventually trade on the platform, but haven’t given any concrete timelines. To be sure, the team is hard at work and has inked some notable partnerships (Polymath, Republic). They’ve also announced a listing pipeline of at least 130 security tokens with a combined market cap of more than $6B, but again there has been no indication when all of those tokens will actually be tradeable.

See:  UK Financial Conduct Authority Provides Final Guidance on Cryptoassets: Better Defines Utility Tokens

A few more important points: While non-accredited investors can create an account on OFN, they won’t actually be able to trade anything until Reg A or Reg CF tokens are issued. As a quick refresher, Reg A and Reg CF are regulations related to private capital raising that were introduced by the JOBS Act in 2015 (more detailed explanation here). At this time, OFN has neither issued nor announced any Reg A or Reg CF tokens. The platform also requires the use of MetaMask, a popular browser wallet and interface, but which does not offer the level of security that many users demand.

tZERO

Another interesting project coming out of the U.S., which has garnered far more attention than OFN due to the size of its parent (Overstock), is tZERO. To be sure, not all the headlines have been good: tZERO’s STO got off to the worst kind of start when it was announced first that the SEC was conducting an investigation of the company, followed by the filing of a class action lawsuit the next month. Legal issues aside, tZERO’s platform has the potential to be a major player in security token trading due to its current operational capacity, access to fresh capital and ambitious plans. Here’s what you need to know:

tZERO owns two SEC registered and FINRA Member broker-dealers: SpeedRoute LLC, a routing and execution firm, and PRO Securities LLC, an Alternative Trading System (ATS). The platform (demo here) consists of brokerage services, stock inventory management systems, smart order routing and 24-hour trading. Today, you can only trade traditional equities but development of a security token trading system is underway. Their infrastructure is impressive: the platform currently processes 15–18 million in traditional equity orders per day, and the company claims it is equipped to handle over 100 million orders per day.

In May, tZERO announced their intent to form a joint venture with BOX Holdings in which both companies committed to form an exchange for companies to list and investors to publicly trade security tokens. tZERO will put up the cash and the tech, while BOX will offer people and regulatory expertise. In June, both parties announced they had finalized the deal. The deal is of course subject to regulatory approval from the SEC, which is no guarantee. Assuming they get the green light, the venture will operate as part of BOX Options Exchange, which is an existing registered securities exchange in the U.S.

See:  Work underway, Regulatory Approaches and Potential Gaps (Financial Stability Board update)

A few days later, tZERO announced that GSR Capital, a Hong Kong private equity firm, would purchase $160 million in tZERO Security Tokens pursuant to the Simple Agreement for Future Equity (SAFE). In total, tZERO has raised $168 million in the form of SAFEs. Proceeds from the STO (which is still ongoing) will be used, among other things, to finance the partnership with BOX.

Templum

As we continue our America tour, I want to discuss Templum next. Templum, through its subsidiary Templum Markets LLC, is a platform for primary issuance and secondary trading of tokenized assets. Templum has decided the world needs one more three letter acronym (TLA), so instead of sticking with the term STO, they use Tokenized Asset Offering instead (TAO for short)﹣cool.

In February, Templum acquired Liquid M Capital, giving them access to an ATS and thus enabling a secondary market. With the ATS, Templum can offer liquidity for securities they tokenize and remain compliant with US security regulations. Having flown under the radar for quite some time, Templum attracted headlines in April when it raised $10 million from Japan’s SBI Group to finance the development of their trading platform and a planned expansion across Asia.

The platform appears to be live, but in terms of listings it looks pretty sparse. From their website, BanQu looks like the only company to conduct a TAO so far and BCAP appears to be the only secondary trade to have been completed. Like all U.S. companies trying to get in on the security token action, however, trading availability will be limited to accredited investors only assuming the TAOs are structured to comply with Reg-D (like the BanQu TAO).

One last thing: Templum recently partnered with CUSIP Global Services to bring standardized identification numbers to security tokens. For now, only tokens listed on Templum Markets will get the honor, but I can see this becoming standard practice across the industry. I love it when companies focus on the bigger picture, helping to advance the ecosystem at large. We are all in this together, after all.

SharesPost

I like to think of SharesPost as the hip grandpa. Founded in 2009, SharesPost essentially launched the industry for online private equity secondaries. The company now boasts a user base of over 50,000 accredited investors and has facilitated more than $4 billion of transactions in the shares of more than 200 technology companies.

Recognizing the massive opportunity that security tokens pose, SharesPost announced in May that it was revamping its existing ATS to facilitate secondary trading of security tokens﹣turns out you can teach an old dog new tricks. Then, in late June the company announced it has closed a $15 million Series C round led by LUN Partners and Kenetic Capital in order to further build out their ATS and expand into Asia. According to SharesPost’s CEO, the strategy is to create a unified, global marketplace for both traditional and tokenized securities of private companies.

If all goes as planned, SharesPost will launch the new trading platform sometime during 2H 2018.

Continue to the full article --> here


The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter