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The tokenized security game got much more interesting yesterday.
Swarm Fund, a Silicon Valley startup, announced they were tokenizing equity in Coinbase, Robinhood, Didi and Ripple via secondary transactions. Instead of celebrating the milestone moment, the crypto community & media erupted in negativity.
The companies immediately issued statements saying they didn’t know who Swarm Fund was and Coinbase even sent a cease-and-desist letter. The backlash was swift and strong but it illuminated something interesting - disruption is happening right in front of eyes.
So what is Swarm Fund doing exactly?
They have gone to individuals who own legal entities that hold shares in the companies mentioned & agreed to tokenize the equity in the legal entities. These can be venture capital funds or special purpose vehicles (SPVs). Swarm Fund is not tokenizing the actual equity in these companies, but rather the equity in legal entities that hold the equity. The key detail is that the original shares of Coinbase, Robinhood, Didi or Ripple never change hands so the company can’t exercise their Right of First Refusal rights, etc.
Here is an example:
Investor A previously invested in Robinhood and is holding the Robinhood equity in a LLC named “Robinhood Equity LLC.”
Investor A now agrees to tokenize Robinhood Equity LLC through Swarm Fund. Investor A is not tokenizing or touching the original shares from Robinhood.
Once tokenized, Investor A offers any accredited investor in the US, or any regulatory compliant investor abroad, to buy equity tokens in Robinhood Equity LLC (which owns the original shares in Robinhood).
Investor B comes along and buys the tokens for Robinhood Equity LLC.
Investor B now owns a piece of a legal entity that is holding equity in Robinhood, but the original shares from Robinhood never changed hands.
The Robinhood cap table still shows Robinhood Equity LLC as the owner of the shares and therefore Robinhood can’t exercise their ROFR.
This is a very common mechanism for secondary traders when dealing with late stage technology companies. It happens on a weekly basis and there are no tokens included.
In this case, the tokens merely make it a little easier for accredited US investors to buy equity in the legal entities holding the original shares, with the option of later listing the tokens for trading on a regulatory compliant exchange.
The negative backlash yesterday to a fairly well understood and popular process only shows what I have been saying for some time - the traditional financial markets are flat-footed right now and they are going to get blindsided by tokenized securities.
The walled gardens are coming down. The financial system is becoming more global. I couldn’t be more excited to watch this play out over the next few years.
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