2019 Starts With a New First: A Digital Warrant Offering
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2019 is expected to be the “Year of the Security Tokens,” and one company has already hit the ground running. SEFToken Inc., started the new year by announcing a new form of tokenized instrument – a “covered warrant.”
A covered warrant is an instrument, similar to an option, that gives the holder the right to buy or sell the underlying security at a certain price, up until a predetermined date.
In a press release issued earlier today, SEFtoken said that the new covered warrant tokens, to be issued via the Securitize platform on the Ethereum blockchain, will be convertible into equity in Mercari, a licenced exchange based in Australia. The company says that the new structure will pave the way for asset owners around the world to issue US-compliant digital securities.
“The use of the covered warrant structure in the digitized security token era of 2019 introduces a critical structural enhancement to the industry overall and we are pleased to be able to grant potential investors with actual asset ownership,” said SEFtoken director Brian Price, in a statement. “Through our SEFtoken structure, we are committed to providing investors with what they are demanding, namely transparent and compliant ownership of a credible asset.”
The use of covered warrants allow the issuance and sale of digital securities in situations where they would not otherwise be compliant with regulations— for example, by issuing warrants in the US backed by shares in an Australian corporation. As SEFToken explains in its white paper:
This model has been developed instead of a more straightforward securities token offering (STO) where the underlying asset is tokenized. A STO for an already incorporated company would not be regulatory compliant across both jurisdictions since most exchanges (crypto or otherwise) do not have the infrastructure to maintain shareholder registry and trade tokens using dApps or “smart contracts” and DLT, as yet.
“Under current [Australian] legislation the shares themselves cannot be issued in a digital form,” Price said. “Hence the tokenisation of the warrant.” By using equity shares to back the warrant tokens, investors have the same economic interest as if they actually owned Mercari equity, and they could easily exercise their rights to take actual ownership of the shares.
SEFtoken is seeking to raise between US $31 million and $125 million, in an SEC-compliant offering that is exempt from registration under regulations D and S. The offering is available to accredited investors in the United States, or to other investors abroad. If successful, the offering will distribute nearly half of the underlying security to token holders. “If the offering hard cap is met, that ownership means SEFtoken holders will own 47 percent of the underlying asset and as a block will become the largest shareholder of the asset,” Price said.
The digital warrant offering is the latest instance of using smart contracts for complex financial instruments. While Security Token Offerings have been widely hailed as the blockchain’s saving grace, the complexities of international investment laws have made cross-border security offerings into little more than a pipe dream.
By integrating Australian and US securities laws through smart contracts, says Securitize’s CEO Carlos Domingo, “innovative structures like these help showcase blockchain technology’s potential to unlock illiquid assets in a compliant way for asset holders.”
The author is invested in digital assets, including Ethereum, which is mentioned in this article.