The first step was business as usual for a blockchain startup: issue an initial coin offering. But the next steps for U.K.-based Globacap will take it into unchartered territory, as it looks to open capital markets to assets or companies previously unable to issue securities.
Globacap issued tokens conferring equity ownership in its company. It did so within the auspices of the U.K.’s Financial Conduct Authority, issuing equity tokens from the regulator’s sandbox. It did not disclose the amount raised or the percentage of ownership sold.
The next step is to do the same for other companies – with three such clients in the pipeline for transactions in Q1 of 2019, says Myles Milston, the startup’s CEO and co-founder.
Moreover, it intends to continue doing so outside of the FCA sandbox, as a fully authorized market participant, starting in Gibraltar.
“Temporary authorization [within the sandbox] as a securities arranger and custodian for specific, pre-approved transactions…is the quickest route to market,” Milston said. The company’s own capital raise served as its first proof of concept.
“We are preparing to facilitate capital raises and tokenization of other companies’ shares,” he said.
What blockchain brings
Globacap is using distributed-ledger technology to help tokenize assets in private markets – either for privately held companies looking to avoid the costs of the traditional IPO process, or for assets such as real estate, infrastructure or private-equity funds. In doing so it is expanding the definition of securities underwriting and listings, including depository receipts (secondary-market listings).
Milston and co-founder Alexander Green set up Globacap in 2017. Milston has 17 years of experience in financial markets, including quant research at Macquarie and structured-bond issuance at Morgan Stanley. Green has 18 years in equity research and equity sales, notably for emerging-market companies, at J.P. Morgan and Citi.
“What can blockchain bring to finance?” he said, recalling their view that the origination, structuring and distribution of big IPOs can be done better.
Their argument: ICOs bring down the cost of secondary market access and bring new sources of liquidity, allowing smaller businesses to access capital markets and reducing risks for investors around lock-ins, corporate actions and other functions.
The partners expect tokenization of securities issuance to benefit large companies, not just smaller businesses, citing the example of Spotify’s decision to list directly on the NYSE, without the costs of a bank-led bookbuild or roadshow.
Blockchain’s compression of clearing and settlement should, in theory, eliminate plenty of legal and banking fees in the IPO process.
Redefining ‘private’ markets
But in the near term, the opportunity is with smaller companies and with private assets – which is already plenty: Milston says 2017 saw $1.3 trillion of private-market capital raising across infrastructure, project finance, private equity and real estate. These can be opened to investors without forcing the assets onto a stock exchange.
Institutional investors with private-market mandates are already co-investing with family offices or other managers to share risks and expand liquidity. “But it’s an administrative nightmare,” he said. “Our platform is like crowdsourcing for institutional investors.”
The other benefit to doing this via blockchain is operational efficiency: for private assets or fiddly ones like unsecuritized loans, the secondary market is slow and cumbersome, but tokenization could remove the paperwork and enable instant price discovery. “There will be a radical shift in the concept of what’s a ‘private’ market,” Milston said.
A related benefit, in theory, is to enable smaller companies to immediately list on multiple venues. Today, a depository receipt is the main structure for getting a stock to trade on a second market, but it’s an expensive process that limits this option to only the biggest companies. DRs, moreover, are derivatives, whereas tokenized securities would represent the equity itself.
To effect third-party tokenized securities, Globacap is now in the process of becoming a member of the Gibraltar Stock Exchange. (Not to be confused with Gibraltar Blockchain Exchange – Globacap’s goal is to issue securities in tokenized form, so it wants to be regulated on a traditional stock exchange. GBX is positioning itself as more of a haven for utility tokens.)
Beyond that, Globacap expects to use European “SME growth markets” as listing venues. The E.U.’s Mifid-2 directive introduced this as a new category of market, meant to facilitate access to capital for companies with a market cap below €200 million – so long as more than half the companies on the market stay below that size, all of them can continue to operate as private companies, avoiding the sort of reporting requirements of public entities, but with tradable securities and voting rights for investors.
“We’re in talks with asset managers with private-asset mandates that want to tokenize those to enable co-investments,” Milston said.
To realize these bigger goals, Milston says it will probably require having a large-country central bank issue a digital version of its fiat currency. Investors and issuers will insist on this for security purposes as the tradeoff for trusting the tech to handle clearing and settlement. “We’ll need to see British pounds or euros in digital form, issued by their central bank,” he said.