Commercial real estate (CRE) remains one of the earliest and best asset categories to demonstrate the disruptive benefits of security tokens. One early leader in the CRE tokenization space is Harbor, a San Francisco-based tokenization platform.
Earlier this year, Harbor launched their new digital securities platform, aiming to change the way privately held securities like CRE are financed and traded. Harbor’s tokenization and issuance platform is unique in that it will be one of the first few security token platforms to ensure compliance with existing securities laws at issuance through the lifecycle of the security – even during secondary trading.
Harbor’s new platform also aims to seamlessly onboard new investors, provide investor access to future investment opportunities, and tie the securities compliance process for investors right into a seamless user experience – including identity verification, payments, and paperwork.
Security Token Academy, the leading educational platform for the security token industry, recently interviewed Harbor CEO and Co-Founder Joshua Stein. Here’s what Harbor’s CEO had to say about the company’s new platform release and compliance protocol:
“We’re launching version two of the platform. What we found was a real market demand for companies to engage with their investors. I mean, we think of it in terms of relationships, relationships matter. So, before this change — the Harbor platform, the Harbor brand was very prominent, and now we’ve changed it around so that you really see the issuer brands. You see the issuers color scheme, you see their brand front and center, and then you just see a little Harbor logo and powered by Harbor tag. It’s very clear that the investor is interacting directly with the company, and that that company is creating and deepening its relationship with the investors.
Then, we’ve also launched with this “trusted parties” feature that allows companies to have controlled liquidity, where it’s not just enforcing the rules around the security laws, but they can pick and choose a set group or types of groups of people to allow to trade. So, fans, customers, existing shareholders — they can have controlled liquidity.
We’ve also created a set of tools so that the company can administer their cap table, to make it very easy to get reporting and communicating with their investors. We’ll be rolling out additional features over time, like distribution and dividends, proxy statements. We can already allow for the distribution of investor materials. It’s a set of tools that are all around the company building, creating, building, and enhancing its relationship with its investors.”
Harbor Issuers: The Process
For issuers looking to understand more specific details about how the capital formation process might look, Joshua Stein detailed Harbor 2.0’s process using the NBA’s “Golden State Warriors” as an example issuer:
“You’re [participating] in a capital raise…let’s say we’re doing it for the Warriors [basketball team]. It would be warriors.harbor.com. You would see some information about the investment opportunity, a little bit about the Warriors, the background.
You’d click, you’d be invited to create an account, and it would still have the Warriors, still have the gold and blue — It would be all their branding. You would create a Harbor account, name, address, social, date of birth, couple of other pieces of information, copy your driver’s license. We do a first level KYC/AML check in two to three minutes, automated while you stare at your screen.
The next step is, if you need to be an accredited investor, you go through accreditation checks. You upload the documents to prove your assets or income, or you give us the name and email address of a proper third party that can attest to that credit status. Then, you sign an NDA. Then you go to the offering page, which is a more fulsome website that has more information on the offering. It’s got a copy of the private placement memorandum. It’s a really long formal legal document that has all the disclosures and financials. Usually, there’s also a copy of a marketing deck that’s sort of an executive summary, and then there’s also a subscription agreement, the legal doc. When the investor is ready, they sign the documents.
Then they go through a payment order flow. They can pay in dollars. They get wiring instructions to an escrow account. If they want to pay in cryptocurrency — they can pay in Bitcoin or Ether, and there’s a counterparty that provides a conversion service. You can think about it as though you’re paying in euros and yen. There’s a bank that’s providing currency conversion service. The issuer’s just getting dollars in that escrow account. When they’ve raised the minimum amount, the contingency in the fund raise, they break escrow. We announce the investors, “Congratulations, your investment’s been accepted.”
In the process so far, up until now, it’s a normal private capital raise, but in this case the Warriors, they can syndicate far more widely. They can take in far more investors than you ever could in a paper world, because we can efficiently, quickly, and cost-effectively push them through.
Now comes the crypto part. We create a wall with a qualified custodian. We create the security tokens. We engage a big four accounting firm to audit the KYC/AML, the accreditation, the financial flows, the documents, and we engage in education campaign with the investor. The investor has their account where they can see, “Hey, I own 10 shares in the Warriors.” They can see the copies of the documents they signed. They can see links to a Warriors investor portal. They can see links to the exchanges or OTC desk where this is trading. Then, they’re off to the races, and they can go trade when and how they want.
The Warriors can sit back, and relax, and know that every time that share goes to trade it pings Harbor, no matter where it trades it pings Harbor. Harbor checks the “who, what, and where” of the securities rules and the rules that the company is asked for. Every time, if all those rules check out, the trade goes through, no one knows Harbor was ever involved…you can trade 24/7, 365, around the globe, with near-instantaneous settlement and no counterparty risk.
If any of those things don’t check out, the rules can’t all be met. Harbor throws an error like an email message bouncing back. It’ll say, “Error. Would result in too many investors.” “Error. Would result in too few.” “Error. Buyer is not on the trusted parties list for this company.” That way, we’ve taken away the frictions of a paper world, and we’ve allowed people to trade freely to limits that they can under the prevailing market conditions.”
Tokenizing Real Estate
When asked about the pros of tokenization via blockchain, Harbor’s CEO told Security Token Academy that he believes the benefits will be positive for assets across the board—but some asset classes may benefit more than others. One of these asset classes is real estate:
“I think there’s nothing but pros to applying it across different asset classes. I think adoption will vary over asset classes and the amount of benefits it brings is different. So, tokenization and the use of software platforms to raise funds are about two things. One is you can increase access. You can syndicate more widely by using modern software platforms to onboard and vet the investor. You can, if you can draw the interest, efficiently process through a large number of investors. More importantly, you can provide liquidity. And liquidity is really the killer feature.
So, if you look at asset classes where they consume a lot of capital, they’re sensitive to the cost of capital and they’re relatively indifferent to the identity of the investor. Those are going to be the ones that maximize liquidity because they’re going to allow any legal investor around the world to invest and trade. Any incremental capital raising or lowering of the cost of raising capital is important to them. So, in real estate, they have what’s called a capitalization rate. You could almost think of it like a yield rate or a dividend rate. If you could take a five cap down to a 4 1/2 cap because you could raise capital for more people more efficiently and they valued that liquidity, that is tremendous for the real estate industry, which is incredibly sensitive to the cost of capital.”
Harbor is a Gold Corporate Member of the Security Token Academy.
Watch the full interview with Joshua Stein and Harbor.