Peter Gaffney from the Security Token Group (STG), which is focused on the emerging blockchain-based security token space, notes that the significantly outsized return potential of angel investing, venture capital, and private equity are “well-known” in the finance industry.
Gaffney explains that traditionally, direct access to early-stage investing at “significant magnitudes” was mainly reserved for ultra-high net worth individuals or UHNWIs (with a net worth of at least $30 million). These investment opportunities had also been limited to individuals, family offices, dedicated funds, etc. — “pretty much entities that can foot the bill,” Gaffney added.
But with the recent legislative updates, access to the early-stage startup ecosystem is becoming a lot more widely-accessible, Gaffney confirmed. He also mentioned that companies dedicated to “sculpting the future of capital markets” like Security Token Group and Vertalo “played a key role in opening the legislators’ eyes to the paradigm shift happening within this realm.”
Gaffney writes in a blog post that if you have not been staying up-to-date with regulatory changes and the ongoing progress, then you may want to look into the amended Accredited Investor and Crowdfunding guidelines to get a better idea of the evolving landscape.
While sharing key industry developments, Gaffney notes that Blockchain Capital has emerged as an established tokenized VC fund that’s now been around since 2013.
He adds that “much like any VC fund, the firm has access to direct investments in early-stage startups.” He also noted that the initial fundraising was carried out through a Security Token Offering (STO), so tokenholders “gain a right to fund distributions over the years and have the ability to trade their ownerships on secondary markets.”
“One of Blockchain Capital’s venture investments is Coinbase, which is now set to IPO at an estimated $100 billion. How many other investment vehicles provide the opportunity for ordinary retail investors to have early ownership in an 11-figure valuation?”
He also mentioned that Blockchain Capital’s investment in Coinbase may serve as an example of the potential of tokenized investment funds for “non-traditional VCs and early-stage investors, and does not imply that all tokenized investment funds will capture investments of equivalent returns and results.” He clarified that “past performance is not indicative of future results.” BCAP “just so happens to be one of the most recent examples of a tokenized VC fund that has an impending portfolio company IPO,” Gaffney added.
While sharing some value adds, he noted that fund managers (token issuers) have the “ability to close funds more quickly than the traditional fund formation structure.” He also mentioned that these new technologies provide “access to a large pool of smaller Limited Partners (LP’s), which may offer more flexibility and authority over investment decisions than a structure with only few high-ticket LPs.”
He pointed out that it’s also possible to “raise add-on rounds just as seamlessly as the initial raise via security token offerings, all while having a more concrete ‘feel’ of the market through secondary trading prices of the VC’s token.”
Meanwhile, the investors (tokenholders) are able to gain access to investment opportunities “in one of the most historically lucrative asset classes.” Additionally, they can “get exposure with a small sum of capital (i.e. whatever the price of a fund’s security token is) which makes the process less daunting and more feasible.”
Investors may also add to or decrease their investments in “real-time, as the token trades in secondary markets,” Gaffney noted. He also mentioned that there are “further opportunities for arbitrage as the token’s trading price can be compared to the book value of the fund, and decisions can be made accordingly.”
As of March 15, 2021, the US Securities and Exchange Commission (SEC) officially raised the Regulation CF (Crowdfunding) limits from $1.07 million to $5 million, and Regulation A+ from $50 million to $75 million, Gaffney confirmed.
“These amendments are pretty clear indicators of the shifting investment landscape, especially in the private sector. Crowdfunding platforms like SeedInvest and Wefunder are strong current beneficiaries of this progress, but there exists a deeper root that stands to benefit even more heavily — Private Investment Funds and Special Purpose Vehicles through security token capabilities.”
“One of the pinnacles of blockchain technology is its ability to transact, verify, and store data of all sorts. This extends to handling capital investments, monitoring cap tables and ownership verifications, managing distributions and dividends, and end-to-end compliance requisites.”
He added that smaller-level investors who might have the right experience and abilities to raise their own funds are usually deterred because of the amount of time and monetary expenses involved with these initiatives. He also noted that where these fund managers might be spending almost all their time with research and due diligence on prospective investments (and working with portfolio firms like with current investments), their attention is “dragged” into issues that are not related to the actual investment process itself.
According to Gaffney, this leads to hiring more team members to take care of these duties, or “spreading oneself too thin trying to manage the entire operation.” He points out that “either way, the current ‘process’ certainly has its fair share of misallocation of resources and could be improved.”
“Make no mistake, these updated fundraising guidelines are not excuses for everybody to pop up with their own investment funds, collect capital through a digital raise, and start throwing darts at every SaaS company they see. There will still be a diligence process both on the aspiring investment manager’s side and from the prospective investors’ side. Integrating blockchain technology and security tokens can simply ease the pain points associated with raising and managing funds, with the overall goal of improving the operations for every party involved.”