Interview with Massimo Butti on the tokenization of equity shares in a fully regulated DLT-based CSD, in partnership with F10 and Aequitec
In his role as Head of Equity at SDX, Massimo Butti is responsible for leading the Equity team in reinforcing the interaction and collaboration between equity investors and companies in the digital age. He is dedicated to achieving this through enhancement of the funding process for private companies and SMEs and improving the issuance, custody, and transfer of digital securities in SDX’s regulated CSD.
Hello Massimo! Why is this issuance a novelty for the industry, and what is the role of DLT and the innovation that it brings to the process?
The issuance is a novelty for the industry, as it’s the first time tokenized equity securities have been placed – as part of a private placement – into a regulated CSD. DLT provides the technology enablement for companies to issue tokenized intermediated equity securities in our system and for custodians to allocate the securities to their customers’ wallets with the SDX CSD.
What role did each of the involved parties – SDX, F10 and Aequitec – play in tokenizing these equity shares?
This transaction represents the first time we have put into practice the concept of orchestrating processes in an ecosystem for digital securities. Each party involved played a specific role in the lifecycle. F10 was the issuer – the company whose shares were issued in a digitized and tokenized form with SDX and placed into custody in our SDX DLT-based regulated CSD.
Aequitec provided digital shares registry and cap table services to F10 as the issuer and to the custodian of the shares. An issuer needs a system for maintaining records of the legal ownership of its shares, so the identity and positions of the individual investors in a company are recorded in a share registry and in what is known as a capitalization table (cap table). A share registry provides an individual record of the positions and the ownership of every individual investor in the individual class of shares. A cap table aggregates the information at security level and represents a complete picture of ownership of the company including any rights held by staff through incentive and retention schemes, owners of convertible bonds and warrants and their vesting schedules.
SDX orchestrated the process provided by the DLT-based CSD – a DLT system supporting the immediate settlement of transactions and providing an immutable record and audit trail. We provide a bridge for this information to flow through Aequitec to the issuer itself and also for this information to flow to the custodian – so we support the asset custody function performed by the Bank.
How do digital share registry companies support SMEs? What are the key benefits that this model can bring to issuers?
This model – in which a private company can issue tokenized shares and put them into custody on a DLT-based regulated CSD – brings several advantages. Firstly, we have record immutability, which is even more powerful when combined with the automated record update capability typical of DLT-based systems. So, every time a record is updated in the positions of the investors, or a company undergoes a a corporate action, for example – that information is conveyed automatically to all the wallets where positions are held in that particular share.
Secondly, in the long run, this will provide the issuer with greater efficiencies when it comes to a follow-on capital raise. When the issuer wants to do a follow-on raise and issue new shares, they can use the same template they used before. There is already an electronic record of the existing shares in the share registry and the cap table book. This information can be provided more easily to the issuer agents, the issuer’s corporate bankers and all the consultants involved in the issuance process, which creates more data transparency for prospective investors.
Finally, a tokenized issuance enables far greater automation of the administration of both the share issuance and the ongoing share management process. This leads to greater efficiencies and lower costs for private companies wishing to raise capital. Many of the required processes will be created at the outset of the initial issuance and then constantly reused through the different steps of the issuing company’s funding journey.
How can issuers and SMEs issue shares on the SDX central securities depositary? What are the practical steps they need to take to get started on this journey?
The first step for one of these companies is to contact one of our SDX members to act as an issuer agent and then to contact one of the providers of cap tables and share registries. The issuer agent will then undertake all the due diligence and KYC for the issuer and can then trigger the initiation of the private placement process with SDX. At the same time, the custodian banks with prospective investors involved in the capital raise will be informed of the issuance by the issuance agent and will prepare to receive the shares in custody
In Swiss law, what is the significance of the tokenized private shares being transferrable in the form of dematerialized intermediated securities on the SDX DLT-based CSD platform?
In our process, the shares are issued as intermediated uncertificated securities, which are then dematerialized into tokens. This means that the created tokens can have an ISIN code assigned to them so that any financial institution can access them through the existing banking and financial system. It also means that the tokenized shares can be used, for example, as collateral for loans and can be delivered through a CSD. In other words, these shares become part of the broader financial and banking system, albeit in a more automated fashion.
What are the benefits for investors of having their private shares tokenized in the SDX CSD?
Traditionally private placements, especially for early stage companies are complicated for the issuer but also present issues for the investors. Typically shares in private companies exist in paper format and held by individual shareholders in safekeeping or sometimes they are issued in dematerialized form and only exist as a record in a spreadsheet. Investors do not have any means to include these assets in their bank’s portfolios, consolidate risk and have a constant valuation. With the SDX issuance process custodian banks can update their clients’ portfolios automatically immediately after the private placement thus reflecting a complete view of their clients’ holdings. Investors can in turn see their private equity investments alongside all their other investments. We expect that as the market develops, banks and third parties’ companies will start to provide private company valuation services and improve transparency.
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