Taking the Gartner hype cycle chart which identifies how a typical new technology evolves over time and we now believe the digital securities space has moved into the “Slope of Enlightenment” stage. This is extremely important and positive for both issuers and investors.
A digital security offering (DSO) is a digital representation of an asset that happens to be a security, an investment contract, for which ownership is verified and recorded on distributed ledger technology. A distributed ledger is a consensus of replicated, shared, and synchronized digital data geographically spread across multiple sites or institutions, basically a database.
The speed of technology development is accelerating daily. The first wave of digital securities offerings (DSO) were mainly blockchain technology platforms of one flavour or another selling equity in their projects (at astronomical valuations) with the promise of a digital security offering DSO (mentioned on previous newsletters but posted again below) being sold as the main value proposition of the securities offering. Many projects should have just used the standard convertible note or SAFE funding structures, which are faster and lower cost today, but this will change soon too.
However, the most important element of any digital securities offering is the quality of the underlying security, and blockchain technology did not make the need for due diligence, picking the best teams, assessing the quality of assets etc just magically disappear.
The fundamental issues with the digital securities space to date include (but not limited to):
- The wrong type of securities being pushed to the wrong investor markets
- Underlying quality of securities being of low or limited value
- Technologist driven vs capital markets experience driven
- Misjudgment on technology capabilities vs legal reality
- Terminology confusion
- Regulatory uncertainty
For any security offering (DSOs included) to be investable, the quality of the underlying asset needs to be of real and clear value and if so, investors will invest. Whether you issue investors a digital share or a paper share won’t materially change their decision to invest, as long as they want to own a share of the asset in question. It is important to note most securities laws do not reference paper, so we do not need any new laws to see the digital securities industry grow, we have existing securities laws and it is not illegal to issue a digital security if you are doing it in a compliant manner following securities laws.
So Why the Slope of Enlightenment?
- So we started with the technology trigger which actually was blockchain and its use in crypto and ICO land
- The world got confused at the peak of inflated expectations because many thought you could apply the technology to securities investments and everything would immediately go ballistic …(like the price of BTC this week)
- Many early proponents (mainly from the technology side) then realised to deal in securities you need licenses and lawyers, and at that point we rode the trough of disillusionment down as project after project failed to raise any funds because they were mostly startups with complicated/weak/overvalued offerings OR tech people launching investment products they didn’t understand and that were not investable
- Which leads us to now, where we see more institutional quality DSO coming into the market, listed companies and banks working on their offerings, private banks/wealth managers starting to distribute, late stage (not seed round) offerings with established companies who have real revenue.
Amen, we have now reached the slope of enlightenment.