Darren Marble, CEO and founder of CrowdfundX, a firm that provides a modern spin on financial marketing for the new world of Fintech and online capital formation, recently commented on the trends and observations in the U.S. security token market.
In the write up, Marble made various interesting statements about the emerging security token market in the US. He differentiates STOs from the more generic initial coin offerings (ICOs) as STOs are clearly regulated security offerings in the US.
Marble pegged the number of active crypto hedge funds in the US at around 200 with some managing up to $1 billion in assets but the bulk of the activity is sub $25 million.
He sees an increasing number of traditional VCs entering (or considering) the market, with many being based in Silicon Valley.
As one would expect, issuers are using Reg D and Reg S (international investors) as the exemption of choice.
As for aspiring Reg A+ issuers, Marble slams the sectors. These issuers are “in over their heads and getting terrible advice from their counsel, which Marble stated, in his own opinion, that most or all will fail.”
Marble believes sophisticated issuers are structuring deals as preferred equity and than tokenize following the funding round. He says this appeals to smart money and simplifies the entire process. As for underwriters, they are coming but there remains a huge gap in the market.
CI decided to reach out to Marble to answer a few additional questions about his opinion on the security token market.
“There is a lack of underwriters in the STO space, not dissimilar to what we saw in the Reg A+ space. I think STOs will be even larger than Reg A+, as any company can run one – blockchain, non-blockchain, startup, and enterprise–and STOs encompass all JOBS Act exemptions, including both Reg D and Reg A+.”
“To my knowledge, no Reg A+ STO issuer has yet been qualified by the SEC. My sense is that the early batch of deals will be slow to receive SEC qualification,” said Marble. It is well known as soon as you mention token/ICO/blockchain the feds pump the breaks.
Marble believes the initial hype of blockchain has died down quite a bit but the tech remains promising.
“… many early adopters [are] delaying projects. One of the reasons for the slowdown is due to a lack of standards, meaning blockchain vendors like Microsoft and IBM, which currently own 50% of the market, don’t offer compatible software [yet]. Another reason is that most blockchains can’t handle high-volume throughput [transactions], which is a key requirement for large enterprise organizations.”
While cautious about the current status of enterprise blockchain development, Marble is extremely bullish on the growth of STOs.
“Security tokens are digital assets that are compliant with federal securities laws [and] run on the blockchain … STOs, offer a new, compliant way for companies to raise capital. The beauty of an STO is that any company can run one: a blockchain company, non-blockchain company, startup or enterprise.”
A key driver of this interest is, of course, liquidity. Marble stated that within the next six to twelve months security tokens will trade on Coinbase, tZero, OpenFinance Network and Templum.
I predict that NYSE, NASDAQ, and OTC Markets Group will eventually launch their security token exchanges. If they don't, they may become obsolete over timeClick To Tweet
“I predict that NYSE, NASDAQ, and OTC Markets Group will eventually launch their security token exchanges (in reverse order). If they don’t, they may become obsolete over time.”
As for recommendation for blockchain startups looking to raise funds through STOs, Darren advised:
The first resource a blockchain startup needs to plan an STO is a savvy securities attorney; someone who straddles traditional capital markets and crypto markets. You want a securities attorney who is actively structuring deals for other STO issuersClick To Tweet
“The first resource a blockchain startup needs to plan an STO is a savvy securities attorney; someone who straddles traditional capital markets and crypto markets. You want a securities attorney who is actively structuring deals for other STO issuers and has context for what deal structure, i.e., the economic interests offered to investors, is attracting capital,” said Marble. “I would generally recommend that STO issuers use the Reg D 506(c) securities exemption. Reg D has no cap on the raise, allows verified accredited investors to invest, and is fast, easy, and efficient, compared to Reg A+. Every STO that CrowdfundX has marketed (or is marketing) is using Reg D, and we are targeting the 200 crypto hedge funds in the U.S.”
He recommends that issuers do everything they can to secure a lead investors prior to a general solicitation.
“I know this is bit of a catch 22, but it’s really important not to promote the offer too widely prior a lead being attached the deal. A deal that is widely promoted without a lead may be perceived as low quality, struggling to generate interest, or both.”
Marble and his team at CrowdfundX have helped to multiple issuers raise funding, including medical-robotics maker Myomo (NYSE:MYO) and FAT Brands (NASDAQ:FAT), and more issuers are in the queue. CrowdfundX has also worked with KodakOne’s KodakCoin, which commenced its token offering this past May. Asked about KODAKCoin’s progress since its launch, Darren reported:
“KODAKCoin recently disclosed that they closed $10 million in funding in their initial pre-sale rounds; they are now live with their $1.00 round which is available to accredited investors. On the business side, KODAKCoin announced that they have agreed in principle to protect the professional and personal images of two-time Formula 1 World Champion and World Endurance Championship (WEC) driver, Fernando Alonso. And in June, they announced their partnership with Oak View Group (OVG) to bring the KODAKOne Platform and KODAKCoin Token to six OVG Arena Alliance venues, including four NBA teams and two NHL teams. It’s fair to say that this team has been successfully fundraising and executing on their business plan in parallel.”
While Marble is positive on STOs he says the more traditional Reg A+ crowdfunding market has stalled.
While the first batch of Reg A+ IPO issuers succeeded in raising capital, the fact that their stocks are trading down means investors are left holding the bag.Click To Tweet
“The two main issues are that all the Reg A+ IPOs are trading down, and the last Reg A+ IPO issuer, Longfin Corp., was charged with insider trading and securities fraud by the SEC, who froze $27 million of Longfin’s assets. (Ouch–this is a tough act to follow.) While the first batch of Reg A+ IPO issuers succeeded in raising capital, the fact that their stocks are trading down means investors are left holding the bag. I believe there are opportunities for improvement around Reg A+ pricing, valuation, and aftermarket support. I am hopeful we will see the first firm commitment underwriting of a Reg A+ IPO this year, as well as institutional placement.”