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Tokenizing equity in GCC early stage ventures

The greatest deterrent to venture investing as an asset class is an excruciatingly long investment holding period of five to seven years. Tokenization, a process of digitally representing assets including shares in a company by recording them on blockchain, intends to solve this problem thereby unlocking liquidity premium for early stage companies.

Whilst a complete data set on GCC early stage investment returns is not available, it is not unreasonable to surmise that early stage investors would ideally be looking to improve returns by hunting for opportunities with lower fees and a higher probability of early exits.  With Securities Token Offerings (STOs) becoming a reality in the GCC, investors would be able to gain access to a wider suite of deal flow, and save on fees. 

Regulators - Key players in the development of tokenized offerings

In the UAE, Abu Dhabi Global Markets (ADGM), has issued Guidance on Regulation of Digital Securities Activity in ADGM[1] confirming that digital assets with features and characteristics of a security are regarded as ‘Digital Securities’.  The Guidance is intended to assist entities seeking to utilise new technologies (such as Distributed Ledger Technology) for the purpose of expanding their activities from the more conventional securities to digital securities.

Additionally, the Central Bank of Bahrain issued ‘Equity Crowdfunding’ regulations in 2017, allowing the creation of platforms for early stage ventures in order to raise capital from investors.  It has further issued ‘Crypto Asset’ regulations that cover trading, dealing, advisory and portfolio management services in payment tokens, but not securities tokens.

Whilst the Dubai Financial Services Authority (DFSA) has also issued investment crowdfunding regulations, according to the 2018 DFSA annual report, the authority is considering its approach to the regulation of digital assets (including crypto-currencies and tokenised securities), with respect to trading, storage, and marketing of these instruments.  These regulations, when issued, will provide an impetus for issuances of STOs in, and from, the Dubai International Financial Centre.

Recently, the Securities and Commodities Authority (SCA) in the UAE posted draft regulations concerning crypto assets and requested feedback from participants in the ecosystem. The regulations will encompass all aspects of crypto asset industry ranging from token issuance requirements to trading and safekeeping practices.

 

Transparency, liquidity and access to deal flow – critical factors for investor community

MENA (Middle East and North Africa) has witnessed a Compounded Annual Growth Rate (CAGR) of 23% from 2013-2018 in the value of early stage technology deals, whilst the overall number of deals has shown only a CAGR of 9.5% over the same period[2].  In order to lend more thrust to this growth, the region needs platforms offering issuers, particularly in the pre-seed and seed stages, the ability to raise funds from a wide spectrum of investors reducing their fundraising cost and time, as well as providing deal flow to investors. 

Fund raising taking place through regulated platforms, such as equity crowdfunding portals, typically provide reasonably extensive disclosures (although not to the extent of IPO issuances).  Bahrain[3] for instance, has requirements of issuers to file an offering statement (containing the issuer’s business plan, management information, risk factors, and historical financial statements) with the crowdfunding operator. DFSA, on the other hand, casts the obligation on the crowdfunding platform to disclose information on the issuers clearly on their websites. With the quality of information available to the investment community continuously improving as a result of regulations, the GCC region is poised to witness a growth in early stage issuances.

Bahrain and UAE[4] have taken the lead in becoming the hub for cryptocurrencies and digital assets, hopefully paving the way for STO issuances and their listings on exchanges. The exchange infrastructure gradually being put in place, with regulations on digital assets expected to come soon, augurs well for tokenization of equities in the GCC, solving the liquidity problem of venture investors. Recently, a Bahrain-based cryptocurrency exchange, Rain, was announced to be the first fully regulated, onshore cryptocurrency exchange in MENA, having acquired the Crypto-Asset Module regulatory license from the Central Bank of Bahrain.  Similarly, ADGM granted in-principle approvals to crypto asset exchanges such as BitOasis, MidChains and Arabian Bourse.  

Tokenization of equities takes democratization of investments one step forward by providing the wider investor community a strong prospect of liquidity, unlocking significant value for entrepreneurs.  With regulators across the GCC working intensely in continuing to develop policies, it may not be too long before we witness digital shares of early stage ventures being traded.

 

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POSTED BY

Narayanan Ganapathy

Strategic Advisor

Impact Accelerate

A former investment banker with a vision to adapt to revolutionary changes taking place in Fintech, Narayanan himself is an avid follower of tokenisation.


A former investment banker with a vision to adapt to revolutionary changes taking place in Fintech, Narayanan himself is an avid follower of tokenisation.