Real Security Tokens are Here
By: James Belding
Tags: Bitcoin, Blockchain, Distributed Ledgers, Token, Security Token

The recent news of Exodus Movement, Inc. receiving notice that the Securities and Exchange Commission has qualified its offering of common stock under Regulation A+, is a very important milestone on the road towards distributed ledgers becoming the backbone of our global financial system, and transforming the financial risk of private securities.

A screenshot of the offering statement.

Key Details

Exodus Movement, Inc. is offering security tokens representing common stock (Class A) in exchange for up to US$75 million in cash at US$27.42/share. This is the first blockchain-based token to be issued using the Reg A+ exemption, and importantly, it means the SEC has approved of the method/concept. Retail investors are allowed to invest alongside accredited investors. The minimum investment is 1 share. A transfer agent, Securitize, is used to verify investor identities and link those identities to addresses that control the tokens. Their records are the source of truth, not the blockchain. However, the ‘Common Stock Tokens’ are created, held, distributed, maintained, and deleted by the transfer agent, therefore the transfer agent may use the blockchain as its source of truth. Smart contracts are used to enforce some of the compliance-related transfer restrictions. This should bring about significant efficiencies in the management of shareholders. The only accepted forms of cash are USDC, Bitcoin, and Ether. The shares on offer have effectively no voting rights. Exodus intends to make the shares available for secondary trading on any ATS, including ATS’s with automatic matching of buy and sell orders. tZero is mentioned by name as an ATS that they intend to make the shares available on for US residents. Arizona, Florida, and Texas are excluded from the offering, as are residents of those states, as well as residents outside of the United States. They also, “in conjunction”, intend to directly list the Class A common stock on the MERJ Exchange in the Republic of Seychelles. Trading of the Class A common stock on the MERJ Exchange will be limited to non-U.S. persons located outside of the U.S. At the time of writing, Exodus claims to have sold ~80% of the shares on offer. No restrictions have been placed on which distributed ledger/blockchain network the tokens can be recorded to. The shares will be viewable on the Exodus wallet. The technical details are not clear for the key management plans, at least long term.

My Take

This is a big moment for the digital assets/DLT/blockchain industry because it signals that the risks associated with the use of the technology for the recordkeeping functions associated with owning and trading digital security tokens have been considered, and that methods to manage those risks have been proposed and accepted by the SEC. I expect regulators around the world to be watching carefully, and I believe they will follow suit within the next few years.

This private placement can be thought of as a ‘mini-IPO’, but with significantly less friction and cost. The listing of unregistered security tokens on electronic exchanges, with automated matching of buy and sell orders, has the potential to increase liquidity and, therefore, reduce the liquidity risk/premiums of private securities…and maybe even significantly so. If this happens, then investment in private markets, and alternative investment products, may become even more attractive to investors. There may also be new opportunities to leverage software in the management of investment portfolios that can make capital allocation much more efficient.

This news is also very important for retail investors who, until now, have had fairly limited access to investing in the opportunities that have yielded the biggest returns over the last few decades. It will be interesting to see how the quality of the investment opportunities compare to traditional private placements, especially over time as the markets mature.

We, at Tokenized, are very excited by this development, and we would like to extend a huge congratulations to Exodus and Securitize for this impressive milestone.