Robinhood, a US-only fintech company that makes it easy to invest in stocks and cryptos with a valuation of $5 billion, is to have some of its private shares tokenized by Swarm, a crypto start-up.
“Secondary equities transactions and refinancing of legal entities which hold private company equity are not new in the United States. What’s new here is the tokenization of these assets, and the doors opened by this innovation,” said Philipp Pieper, CEO of Swarm Fund, before adding:
“One of the key innovations of tokenization is that token owners can participate in the value creation of the very network they are part of. Swarm is bringing this paradigm shift to companies that are key players within this movement, but have yet to permit the network to participate.”
Swarm plans to tokenize the private shares of a number of other companies, including Coinbase and Ripple.
As we said at the time, the tokenization is through what they call an SRC20, which they describe as “asset backed tokens” which “live on a private blockchain, built on the Stellar protocol.”
“Like ERC20 tokens, a unique SRC20 token is created individually for each opportunity… all of which can be traded on the Swarm Network Exchange,” they say. The token exchange is not out.
The Robinhood tokenization prospectus says private shares are to be acquired from past employees or other investors to then be tokenized. We had an opportunity to ask a few questions, starting with legality. Pieper says:
“No change to existing processes for secondary equity transactions. The equity will be held by syndicate leads who tokenize an entity on Swarm. Their process for acquiring the equity, including ROFR and other required components, does not change. The shares themselves will not transfer.”
A Private Equity Rights of First Refusal Contract (ROFR) requires shareholders to first offer their shares to other shareholders, with the process here not changing as some considerable control appears to be maintained over the tokens. We asked whether any Robinhood private shares have been acquired, Pieper says:
“This is the prospecting phase. Once the $300k minimum is reached, the syndicate lead will acquire the equity.
Note that Syndicate leads are all established in secondary equity and venture capital, with existing relationships with former team members, brokers, and in most cases the companies themselves.”
There are restrictions to these tokens as you can’t just send them to anyone you like as you can with eth or other tokens. Pieper says:
“These are security tokens and bound by issue and transfer restrictions, but they will be tradeable on compliant exchanges.”
They says this is the first offering of its kind, with ownership seemingly not transferring as the Synidcate keeps legal ownership, while token holders presumably have beneficial ownership.
That makes the token more of a claim to the shares, rather than a share itself, with it all seemingly being a kind of a transitional hybrid merger of digital code with old fashioned paper shares.
It could, however, potentially increase liquidity as tokens can transfer more easily than paper, just as it could potentially allow for fractional ownership, with it all being a very incremental improvement over current brokers.