Investing in real estate can be intimidating, time-consuming, and most of all– expensive! While tokenization isn’t a new development in the blockchain, tokenizing real-world assets is more recent and has changed a lot about the way people invest their money. Tokenization of real estate assets has revolutionized investing in property, making it more accessible for people of all ages and socioeconomic classes. Plus, buying or selling digital shares in real estate increases liquidity and is great for diversifying an investment portfolio.
Tokenization of real estate assets has revolutionized the way we buy, sell, and invest in property.
While no investment opportunity comes completely risk-free, some prefer that real estate tokenization is more flexible and customizable in terms of the amount invested and for how long. We were joined by experts in the field Jenny Kassan, Business Attorney, and Daniel Fiske, Property Technology Innovations Manager, who shared what to look out for before jumping in.
The world of tokenizing real estate assets is still very new, meaning there isn’t a solid infrastructure in place with necessary regulations. Moreover, without a compliance structure in place, laws can vary, making international investing risky. The field is still developing which means there aren’t many experts to look to, nor a clear consensus on its secular growth.
Daniel shared with us some resources available to simplify and consolidate the process. Security Token Market and Security Token Advisors are two arms of the same company helping real estate owners and investors understand and benefit from tokenization. RedSwan is a marketplace for tokenized assets, and tZero is an alternative trading system that allows users to register their assets on the blockchain.
Another advantage of working on the blockchain is the transparency and security smart contracts provide. These automated contracts are encrypted, and since they’re digital, you don’t have to wait for or pay an intermediary to issue them. The tokenization of real estate has democratized investing in large properties/portfolios and put some of the power back in the people’s hands.
Listen to the full session above to hear more!
Serial Entrepreneur – EP61
Today. We’re going to be talking about tokenizing your real estate. Now let me tell you the shows that we’ve had on here have been just absolutely incredible.
And I’m very excited about today’s show because this is a new area for me. As the show likes to do, we like to take on new topics and really like to understand what are the opportunities that exist within the market and how can we benefit from that? Is our concept scalable? Does it have a moat?
Can it take advantage of a paradigm shift and quite frankly, Tokenizing real estate is something new and it is something that is growing and becoming much more popular. Last week, we talked about talk to the VC. We talked to Sheel Mohnot, and if you haven’t already done so you can check out that episode.
He we’d had a great talk about pre-seed funding, [00:01:00] uh, and working with venture capital. And you can do that by going to your favorite podcast network and typing in serial entrepreneur club 61 episode strong or after today, we’ll have 61 episodes. Uh, and, uh, I’m pretty excited about what we’ve accomplished so far and today’s topic.
We have two great speakers coming on today. We have Jenny Kassan who has got over 25 years of experience as an attorney. I’ve seen her show. She does a show every Wednesday at seven o’clock Eastern. And it’s all, uh, it’s all about Tuesday. Sorry, Tuesday, is it Tuesday? Sorry. Thank you. It’s all about how to raise money, um, through alternative methods and, you know, as entrepreneurs or startups, we don’t always have to give away everything to these VCs.
Then we have Daniel Fiske. Who’s, he’s a, I would say a little bit of a serial entrepreneur. I see you started [00:02:00] two, uh, startups, uh, prior to joining a, a, a large development company. And he’s also what I would consider an expert in tokenizing real estate, even though I know he’s relatively new to his career, so, you know, welcome Jenny and Daniel.
Uh, today Michele’s going to be our chief moderator. Um, but I just want to welcome you and, uh, let’s have some fun, happy to be here. Thank you for that. Thank you Daniel. Thank you, Jenny. So this is a fascinating subject to many of us, and I’m calling to hear a little bit, um, we actually run some Airbnbs.
So when we started thinking and learning about this topic, we thought, wow, there’s so many use cases possible for this. So we’re really interested to know, and we’re going to start at a little bit of a [00:03:00] higher level to set the groundworks for this discussion about tokenizing real estate. So Daniel, we’ll start with you first and go to you, Jenny, at a high level, like just kind of tell the members here on startup club.
What is tokenizing and specifically in the context of real estate.
Well at first, I want to say thank you to be here. And, uh, this is a very exciting topic. I’m obviously new. I know Colin stated I’m an expert. Maybe we can consider that due to the, you know, the early stage of all of this, but from just, you know, 30,000 degree view real estate tokenization at its very essence is, you know, we want to break it down.
It’s our security tool. It’s basically an investment contract that represents legal ownership of a physical or digital asset, like real estate. And this contract is in the form of a smart [00:04:00] contract. And I see a lot of you, you know, maybe, and then up to your crypto communities, um, and to what the smart contracts, it creates automation, automation in the backend, um, automation in, in terms of onboarding investors.
But so stay, stay little zoomed out tokenization is the process of converting an asset with a sort of digital wrapper. So it can be accessed via, you know, the blockchain. It’s a symbol of ownership and you own a token in the same way, you’d own, you know, a deed or a title to a house or a car. Um, with the D obviously being a piece of paper, it has, can have no value.
I mean, it symbolizes ownership and extending. So to extend this analogy a little bit. The house is registered with the government or private authority to show the chain of title. I confirm ownership, but once the asset is entered into the digital ledger, we say of the blockchain, both the asset and the ownership are permanently and immutably recorded.
So it’s like the title records at your local county recorder. [00:05:00] But instead of, you know, most of the handwritten books in the basement of a courthouse, this is open and available to be accessed worldwide. So just from that perspective, we can see the value created here due to the transparency. Um, and then the potential to digitize ownership of almost any asset we’ll create new ways to invest in institutional quality investments, you know, that were previously unavailable to the average person.
So in specific, you know, what we’re doing here is with specific to real estate and private equity real estate. It was only once easily accessible to, you know, the wealthy or those with connections. Um, and real estate is poised to be the biggest asset class to be tokenized on the blockchain, which is why we’re seeing it’s the largest, um, asset being tokenized on these various exchanges that, you know, we can talk about them a little bit.
Um, and these tokens, you know, as I stated before they can, they convert direct on a ship of the asset or equity ownership of the company that owns the asset. Um, you know, you can also tokenize debt, you can [00:06:00] tokenize equity, um, and you can get very flexible within, I think that these are ways that there’s a lot of opportunity in the space.
So, um, I tried to, you know, just throw everything in there, a quick brief overview summary, and happy to dig into any aspect of that. So how does it differ from a REIT, a traditional REIT? Yeah. So a re you know, it does offer the, the ability for, you know, the public to be able to invest in private real estate, but the difference with a re.
You’re buying a share of a, essentially a fund that they choose, which investments or properties they’re investing in in this case, you know, you can specifically choose, I want this specific multifamily asset in Miami, Florida in this market. And not only that you have more control and you can also, you’re benefiting from cashflow.
So you own, let’s say we tokenize 20% of equity in a property and you buy tokens. You would say you own [00:07:00] 1% of that tokenized equity. You would then receive 1% of the disbursements on a monthly basis. Just like, you know, you’re an average owner. So you have that. And then also obviously the appreciation factor of the underlying real estate.
So those two, uh, income producing factors is really, really the difference between that. And the rate is your control over, over what your invest. But also just a quick question, Daniel, does that mean you’re tokenizing individual properties, not a portfolio of properties, is that correct? Correct. So you can tokenize a portfolio.
We’re seeing, you know, it’s more efficient and effective. Uh, it’s really tokenized each property at a time to give the investors, you know, their fair selection of what kind of properties they want to invest in whether they want to diversify into, you know, multifamily, retail, um, office. Um, so we, we actually were looking into tokenizing a portfolio, um, in New York and, and to actually chose to do it separately also because of the costs.
Um, [00:08:00] since it’s so new, um, you know, economies of scale, hasn’t grown as much and it still is a bit expensive. So we try to, you know, if it’s not a property worth over, I wanna say, you know, five to $10 million. Um, we, we, we rather keep it individual. There’s obviously ways to, which I can get into as well.
Let’s see 2, 5, 5 to 10 million doesn’t seem like a lot. And you know, how would you get liquidity for the coins that are trading on a $5 million deal? Is that possible? Or am I missing something? So the, you know, the big, the big point here, the big aspect of tokenization is really the liquidity. You know, that’s the main reason, um, why we want to tokenize because, you know, you can, there’s there’s platforms that, you know, fractualize ownership, there’s crowd street, there’s yield street.
Um, the real difference here is that you’re creating liquidity and block will blockchain enables [00:09:00] due to its immutable and transparent and. Traits is that you can trade and swap your ownership. Obviously, you know, there are barriers to this due to the early stage of an industry and there isn’t so much volume.
Um, and that’s kind of what, what we’re growing for and the main goal of a lot of these tokenization platforms, um, and, and technology partners is that we’re just trying to get more and more real estate sponsors, real estate developers investors into the space so that there is that volume to really benefit from what, what can be looking happening.
So just to extract a little bit of what you’re saying, you’re saying that two huge advantages, maybe three, if I understand you is one is, you know, the high degree of transparency because it’s on the [00:10:00] blockchain and because it’s a smart contract, Then I think I’m hearing the second one is, is which I think is fantastic and not to overstate a buzzword, but it’s the democratization of investing in these very large potentially I consider $5 million to be large.
I know it’s not for some people, but $5 million is large. Um, up to, you know, the sky’s the limit, obviously individual properties as well as portfolios. So that would be a second meaning anybody could do it depending on the cost of a token. Cause that could be small investments. And then I think I’m hearing Daniel and tell me if I’m wrong.
I think numbers are far so good. Yeah. And I think number three is there’s a high degree over investment and capital raising [00:11:00] strategies for both the buyer and the seller. So I’m wondering, is that correct? And are we missing anything? No. Yeah, that, that is totally correct. Um, and so w what these tokens are, so you have, you know, NFTs are ERC 27, 21.
Um, these security tokens, which are ERC 1400, um, are actually able to be controlled, so they are centralized, but they are still controlled by the sponsor. Um, so, you know, the security aspect is huge. Um, in any case, you know, if you get hacked in the, in the usual blockchain world, you know, your money’s gone lost forever.
Um, with ERC 1400 tokens, the sponsor’s actually able to, you know, erase or delete those original tokens and create new ones for the, for the investors. So in terms of the security app, That that is, uh, a game changer there. Um, and then really for, for sponsors, the, the automation and the ability to raise [00:12:00] liquidity through these tokens.
So let me give you an example for a property in New York, you know, it’s a cash line property. So in this case, it’s beneficial to create, you know, an, an equity to get there, or even a revenue sharing token. So what we would do is, is take 20% of the, of the property, um, and move it into an SPV, tokenize it.
And then with that liquidity that we just, you know, raise from the token sale, we could then pay off some debt, which then, you know, obviously eliminates a debt service. Uh, and so right there, you see a cost savings in a different manner. So it does, you know, the fact that you can raise that liquidity, you can then restore the property, you know, do some renovations, uh, pay off debt.
There’s a lot of ways that, you know, just the liquidity, um, obviously adds value to the property. And you can also buy the tokens back so that that’s also a very revolutionary aspect of this. The sponsor can relieve their position and then, you know, regain it right back in a [00:13:00] year or two’s time, depending on how they feel.
So the whole point of this is that it allows for sponsors to be very flexible in terms of the capital that they want to raise the equity they want to, um, give, give to potential investors. Um, and so that’s, that’s really another piece here. If that answer, if that answers your question. Yeah. I think that’s a great way to break it down.
Uh, and again, I’m not an expert. I’m just completely fascinated with the, this whole way of managing, investing, selling, and buying. But Jenny, I see you. Um, we’d love to hear you chime in, please. I have a question. Um, You haven’t mentioned the compliance part in terms of securities law, offering these investment opportunities, you know, broadly.
So I’m just curious how your, that part is dealt with. Yep. So for [00:14:00] these, uh, these first organization projects, we’re going through a red D 5 0 6 C. So that enables us to raise capital from accredited investors only. Um, so that this enables us to solicit and market the property. You know, we really want to get a movement around this, you know, show Miami.
Um, I we’ve spoken to some PR partners and, you know, they’re obviously excited to, to, you know, the real deal and then various crypto newsletters that, that will push this out. So yeah, we’re going about this through a reg diva succeed, it’s an exemption. Um, but hopefully, you know, in the future we would like to do a reggae and reg guests to, you know, get international and unaccredited investors to have this opportunity.
Okay. And then also in terms of the secondary trading, you know, because when you do sell under reg D those are restricted security. So how are you, how, how are you dealing with that secondary market? So it’s like the side, you know, there are restrictions. And so there’s the 12 month grace period, um, that you’d have to hold the [00:15:00] securities for at least 12 months before you can trade them on a secondary marketplace.
Um, so for example, um, one of the art developments that we have that we’re looking to tokenize, this really works perfectly because what we can do is, you know, sell these equity tokens for the development. The construction period is larger than 12 months anyways. So unless the investor wants the trade.
Via peer to peer within the investors based already, which can be, is after 90 days, they would have to hold onto the asset anyway. So it kind of works out that once that development is fully developed and cashflow and, um, they will actually be able to sell their ownership in the property. So depending on, you know, obviously what kind of asset it is, a development, rather than a cashflow producing property, you want to, you want to pick and choose which exemptions you want.
Um, and also, you know, rather you choose to do a revenue token or an equity token, right? If you’re in the development, you’re not going to create a revenue token because [00:16:00] there’s no cash flow. So it’s, again, like I said before, you can be pretty flexible depending on the project. There’s various methodology to go about it.
And you know, the beautiful part about this, you know, they are securities and you can, you know, go through exemptions, um, set that, you know, it’s not an IPO in the sense that the sec is totally overlooking, you know, every move you make.
So Jenny, you know, obviously you’re an attorney and just for everybody here, you know, we’re not giving legal advice, we’re exploring, talking about the concepts and things that people are working through. So Jenny having said that, you know, what, what are your thoughts on that type of structure? Yeah, well, it is really unfortunate that we do live under a regime where.
Yes, it’s wonderful that we can be [00:17:00] publicly advertising an offering like this, but it does have to be limited to accredited investors, which it means that everyone has to have at least a million dollars in net worth not including their personal residence or 200,000 in annual income, or if it’s an entity 5 million in assets.
So it really restricts who can participate in this, um, which is unfortunate. Um, also another issue is that when you, you know, under this particular offering, it is restricted to accredited investors and the securities are also considered restricted securities. And so part of buying restricted securities means that you’re not supposed to be buying them with the intention to resell them.
And you have to make, um, you know, a representation to that effect. You know, if people are buying these with the goal of reselling them soon, you know, oh, in 90 days [00:18:00] or in one year, I’ll be able to resell this and trade it that could be seen as a violation of securities laws. So it is unfortunate that we are living under a regime that makes this so difficult.
Um, also, you know, Daniel mentioned reg a, which if you made this type of offering under regulation, a you could open it up to everyone. Um, but unfortunately doing a regulation, a offering is pretty onerous that you have to go through a lot of back and forth with the securities and exchange commission, also their state by state, uh, filings that have to be done.
So, you know, I just, I we’re, everyone’s so excited about what tokenizing and fractionalizing brings to the world of investing, but. We are living under a regime that was first put into law in the early 19 hundreds. So we, you know, we were having to deal with these [00:19:00] restrictions. Um, and so many, um, so many tokenized offerings these days are not in compliance with securities law, and there’s a lot of crackdowns happening.
The securities and exchange commission just hired 20 new people to enforce the securities law in the area of crypto. So that’s, you know, that’s my, sorry to put it down for on the conversation, but that’s kind of where my mind goes when we talk about this. So, Jenny, what if you did a reg CF, could that, um, would that work, uh, with this type of structure here?
Because I think you can do with the 5 million, can you do 5 million and then that would allow you to solicit securities to non sophisticated. What do you call them? Non sophisticated investors and accredited unaccredited. So with the regs, could you talk a little bit more about reg CF then? Sure. Yeah. So regulation, crowdfunding is something that it, um, when it became legal in 2016 [00:20:00] and it’s definitely not perfect, but it did add this new, uh, way that you can offer securities to the general public, both accredited and unaccredited.
So regardless of welfare income, anyone can invest. Um, you can raise up to 5 million that was just recently increased. It used to be 1.07 million. Now it’s up to 5 million. Um, it is still somewhat onerous to do. If you are raising more than 1.07 million, you have to have, um, audited financials, which can be expensive to get.
But yeah, no, reg CF, if you’re only raising up to 5 million, it is much, much easier than doing a regulation, a offering under regulation. A you can raise up to 75 million, but that can be pretty onerous. And then, oh, go. I was just gonna say, um, the, the initial offering is one thing and then the secondary trading is a whole other thing there’s compliance involved in [00:21:00] that, you know, can you actually host a platform where people are doing, um, secondary trading?
Do you need to be a licensed broker to host a platform like that? So, you know, the, the initial offering, there are some good options there. The secondary trading is a little harder in terms of being able to do that legally. Yeah. I was going to ask you Daniel reg CF is something your company looked at as well, or is it really just D yeah.
So reg CF due to the, you know, the small raise, it didn’t really benefit us as much. Um, so we, we will be doing Redknee fabulous. Succe um, just, you know, Johnny. Yeah, you’re definitely correct about, you know, obviously it’s unfortunate that the, the. The pieces that, you know, the sec puts puts in their way, um, for, you know, entrepreneurs to be able to revolutionize, but what we are seeing, I don’t know.
I don’t know if you’re familiar on anyone out there, this company T zero and there are various, um, you know, other [00:22:00] secondary exchange platforms, you know, have they have all the, their, their TA license and there are broker dealers and they, you know, are fully registered with sec FINRA approved. Um, they actually just got a minority investment from ice Intercontinental exchange, the parent company of the New York stock exchange.
So that, that was a big shift in the right direction. Actually, ISIS CSO, the chief strategic executive, um, executive actually became their CEO. Um, once we saw that obviously big movement for the industry, um, to see that, you know, a company like instant continental exchange, adding a security tokenize, um, an exchange onto under their own.
Um, so T zero is one of them. Um, there’s also INX, which is another. And so these, you know, specialize in secondary trading specifically for security tokens, and not sure, I’m not sure if we kind of explained clearly what the security token is, but for those who [00:23:00] don’t know, it’s the best, the way I like to use the analogy of it’s a mix of, you know, an, an IPO and an ICO, and that it’s an IPO, it enables you to essentially take your company or your real estate or whatever.
The other underlying asset is public, you know, without dealing with the scrutiny and the Overwatch of the sec. And then it’s, it’s an ICO in that it utilizes the blockchains, you know, technology and the transparency and its immutability. Um, but you know, it’s asset back. So it’s not, you know, a cryptocurrency that has a lot of fluff and a lot of times there’s no backing, no ask.
Underlying value. So with those mix of those two, we get a security token offering or an STO. And that’s what we’re, uh, what these tokens are representing. You know, I’m curious because you were talking about asset backed securities. Um, do, are folks also taking bank loans out on these projects or is it [00:24:00] all funded by the token?
Well, in terms of the developer, the sponsor, uh, you know, you can, you can use whatever portion of the equity, uh, to, to raise using tokens. Now we haven’t seen it used a lot more. So for debt, that’s kind of picking up, but in terms of. I’m not sure if you’re asking us, but in terms of using the tokens as collateral, there is a company out there that is very much looking into this and, and we’re seeing them make big moves that you can now collateralize your tokens, you know, given the fact that that they’re asset backed and, and, you know, they’re secured, they’re security tokens that so essentially creating like a double collateralization where you can take a loan off of the security token, you know, at the same time.
So for sponsors, this is going to be also very beneficial. Um, not only are you raising equity through the tokens, but then the tokens that you yourself own as the sponsor, you can then get a loan off of as well. So [00:25:00] just, just another, uh, benefit here. But yeah. Yeah, they essentially to answer your question.
It’s a mix, you know, you’re going to still get your, your basic loan from the bank. Um, this is more so used for equity Marceau than anything else, but, um, you know, I’m sure we will see the move and to all caps that.
Great. Yes, that was my question. Um, Jenny, um, w is there anything, um, you can add to this, you know, obviously I think this is right, it’s a very evolving area. Right. Um, and it sounds to me, as I understand, cause I understand very little here to be honest, is, is that the advent of these big endorsers, like just said in these platforms will help move it forward.
And, um, it sounds like these kinds of things are needed to, [00:26:00] um, comply with legal requirements and I’m just interested in your thoughts. On what are the kinds of steps that people should make sure they’re covering? If they’re even thinking of investing or, um, doing a tokenization? Yeah. So, I mean, it does sound like Daniel’s like very aware of all of the different legal issues, which is awesome.
And the sad thing though, is that so many people who are often offering tokenized, um, investment opportunities are trying to evade these rules. And so if you see, um, uh, an investment opportunity involving any kind of token crypto asset, it’s really important to make sure that you, um, do some due diligence to, and this is whether you’re offering the opportunity or thinking about investing in the opportunity.
You need to make sure that, that, that you do have a [00:27:00] securities lawyer on board, um, because if you either offer. Uh, an opportunity or invest in an opportunity that doesn’t do the compliance. There’s a really big risk associated with that. It can be shut down, it can be subject to a private lawsuit. Um, so it, you can really lose a lot of money if you don’t make sure that the things that you’re dealing with are, are compliant with securities law and don’t, you know, state and federal securities laws.
So like for example, with rule 5 0 6 C the nice thing about rule 5 0 60 is it allows you to, it’s a fairly new, um, exemption that came into effect under the jobs act of 2012. And as Daniel said, it allows you to publicly advertise, but you do have to make sure that all of the investors are accredited investors.
Um, and you, it doesn’t get you out of state filing. So if you have investors from 30 [00:28:00] states, you have to do filings in 30 states and pay fees in 30 states. So, um, it’s, that would be my, uh, caution it’s, you know, all of these types of, uh, tokenization and, you know, fractionalization is so exciting, but unfortunately we are dealing with, um, some very, very zealous regulators looking to crack down on things that aren’t done.
Right. And, you know, and I, I don’t want to make it sound like these are evil regulations or regulators. I mean, their intention is to protect investors, make sure investors get all the information that they need and, you know, before they make an investment. So, you know, there’s certainly good reasons for these regulations.
Unfortunate. Maybe, you know, if we were to draft them today instead of, you know, over a hundred years ago, maybe, um, they’d be a little bit better in terms of, you know, working well for our current situation, but, you know, they’re, well-intentioned regulations, there’s good reasons for them. And so just make sure there’s, you [00:29:00] know, there’s a securities lawyer involved before you get in and do anything in this arena.
And it’s interesting when we did.club, uh, Michele, Jeff and I, uh, we raised $7 million and we did a private placement memorandum and then the reg D filing. And I remember having to file an individual states as well. And I think we paid $17,500 to the lawyer who helped us with the private placement memorandum.
And it included a large number of risk factors that we basically looked at are the publicly traded companies in the space. And we, you know, we brought those over into the docu. Um, is that was about 10 years ago. Like, is it, you know, what is your sense of now the costs to do a filing like that? You know, it really depends.
Um, you know, it depends on what exemption you’re using. Um, you know, honestly, a private placement memorandum [00:30:00] isn’t required. Um, it’s a good idea to protect the issuer of the securities. Um, but you don’t have to do that. So, you know, there’s, so there’s many different ways to comply with these rules. If you are doing a 5 0 6 C offering, you don’t, like I said, you don’t have to do a private placement memorandum.
You do want to make sure everything is fully disclosed. Um, you want to make sure the legal documents in terms of what the investors are signing know. What is it that they’re getting, they’re usually signing some kind of a subscription agreement and there’s a document describing actually what they’re buying when they’re buying the securities.
Um, and then, uh, there’s a federal filing called a form D and then there’s the state filing. So the cost of what about risk factors? Do you have to put those in at all? It’s a good, it’s not legally required to share risk factors, but it’s a good idea because if anyone were to come back to you later and say, you [00:31:00] never told me that this could happen, then you could say, well, yes, we did.
You know, we did give you this list of risk factors. So Daniel, we have, uh, 74 straight 14 vacation rental properties. We want to tokenize it. Uh, how do we get started? Like what would be, I know you’re not in the business of doing that. You have your own. No, but let’s just, you know, take someone like us. Um, Well, what would we do first?
Like, I don’t even know what the first movement would it be to go to Jenny and get her to draft the documents, or would we go to a platform or is there a consultant? Like how, how did you get it started? Like, yeah. So there actually is a great company, uh, security token advisors, um, and they can out of Miami, uh, they’re actually the only company that does this right now, they specifically advise on tokenization projects.
Um, and you know, they have an entire legal team and, and yes, the first step would to, you know, approach a securities lawyer like Johnny, [00:32:00] um, to make sure you have all your ducks in a row, um, of course get the PPM and legal docs. But you know, the first step is, is to kind of discuss what, what you’re looking for.
Are you trying to. You know, an equity token, a revenue token, and they’ll kind of go through an entire questionnaire. Um, you then want to get your, your tech partner on board. Who’s going to actually digitize the tokens and put them on the blockchain. Um, so, so you definitely want to reach out to, you know, the parties involved that have the experience as a sponsor, as a developer.
Um, and you know, we went through that process for, you know, months before, you know, we, we still are in the process of discussing exactly how to go about it in terms of our different properties. Um, you know, cause as a manager of real estate, as well as the developer, there’s a lot of ways to go about this.
So in your case, I would approach, you know, sta security, token advisers, um, you know, get legal on board. [00:33:00] Go through, you know, what kind of regulation or exemptions you want to file? What, what fits best for that property that you’re trying to tokenize. And then what is, what are the actual traits of the token that you want to create?
You know, are you going to want to do, is it a cashflow producing asset? So in that case, you may want to do a revenue share token and give investors, you know, profit right off the top every month, as opposed to the bottom line NOI, or if it’s, you know, a development property or rental property that in the future, um, you know, you want, let’s say you want to put 10 more up in the future.
You can kind of give up an equity token a way. Uh, and so they can, you know, can be partners with you directly. So, you know, those are kind of basically the steps taken, um, figuring out the plan of action and then, you know, putting it all together. Uh, and obviously at the end, you want to do your marketing and your PR to really be able to sell these tokens.
Because, you know, I, I always tell people when I’m, when I’m pitching this and explaining the current. I don’t want to give [00:34:00] a false impression that, you know, you tokenize your asset and it’s just going to sell out because obviously we’re very in the early stage. So the real, the real benefit right now, meaning today is, is the liquidity aspect and the, the transferability.
Um, so, so you’re not going to, if you’re trying to use, utilize this for raising, raising capital, you know, don’t expect to just sell out or raise the full amount of capital right away. You know, obviously it takes time with any new technology for people to adopt it, but, you know, just in a general sense, the way the logistics of it and, and, you know, the, the technology, this is the leads for, for great innovations.
And, you know, in the future, once, once everyone’s realized, oh, this is a great technology to utilize, you know, hopefully that, that is the case. Um, but right now, yeah, we’re, we’re looking more, so we’re very focusing on marketing and, you know, getting the word out. Yeah. Are there other benefits the token holders can [00:35:00] receive?
For instance, if you’re a token holder of our vacation rental business, you, you could get 10% off any of the rentals or early booking you get to book before it goes, gets listed on Airbnb, is or other advantages of being broken older or is it just simply a financial arrangement? You, you hold a spot on.
So when I say you can be very flexible with it, you may not even want to give, you know, some cash flow to your token holders, um, depending on the business. And obviously you want to keep enough money to cover your expenses. So in that case, you can say, Hey, buy our token to our, you know, rent Airbnb rental property and get 10% off your next day or, you know, free meal here.
Kind of use it as a, as a package and get really, really creative with it. So that’s what we’re seeing. Um, you know, for tokenizing a potential, uh, development is, is that, you know, there’ll be a restaurant and, and, you know, we’ll give discounts [00:36:00] to that, um, and you know, sort of creating a community around it.
And we’re seeing that a lot in the web three space, especially, you know, with IFT projects, it’s all community based. And so tokens also give away to, you know, create a community, um, you know, around your Airbnb properties as well, and not allow for, you know, really anyone, obviously it’s not, you know, accredited investors depending on the exemptions that you filed to be partners and really feel a connection and have ownership with the, and if you do decide to offer tokens that.
I have really a financial benefit, like an investment benefit where it’s more just, you know, the right to get a discount or other perks. You may have a good argument that it’s not a security, which is nice because then you don’t have all these regulations. Yeah, no, definitely. Um, in our case, uh, we, we wanted mostly for us, you know, as developers, we [00:37:00] have, you know, our network of LPs and investors.
Um, we’re not more so using this tool as a means of raising capital, although, you know, that’s, that’s one of the big use cases, looking ahead, um, more so to just be able to say, Hey, we’re a private equity real estate firm. That’s enabling our investors, obviously within the means of, of the law. Um, of course, based on, you know, our securities attorney and our PPM that.
You know, you’re not locked into real this real estate investment for 3, 5, 7, 10 years, whatever it may be, that if you need need be you, you need to get out. You can, you know, there’s peer to peer trading. Like I stayed at AF after 90 days, and this is, you know, happening as we speak. Um, you know, if you go on to T zero, there there’s a company called market space capital.
They’re actually a development. Uh, the first tokenized development is on their trading. Um, so, so yeah, it’s very cool what we’re seeing right now and just to see the traction, the momentum [00:38:00] building, um, I’m curious to see, you know, where, where this goes, what kind of players are joining? Um, I know various larger fortune 500 companies, um, are looking into the space.
Donna really put out names, but, uh, we’re seeing some big players and taking more of an interest and looking to see how, how it can take.
You know, you mentioned one thing actually to the advantages. You said liquidity and transferability. So are you saying that you will have higher liquidity on these projects than if you were a typical read? Or are you saying as compared to putting a for sale sign on a property? Curious a little bit more about the liquidity assets, because that’s one of the things, you know, that I hear [00:39:00] people asking, like trying to, I think people are having a hard time still wrapping their head around why it’s better.
Yeah. You know, a private equity deal. Uh, it’s more so, you know, to sell your actual, your position, you know, in private equity, you’re locked into deals for a lot of the times, you know, seven to 10 years of venture capital, you know, as well. Um, so this enables you to be able to liquidate your position and, and trade your position, transfer it, um, prior to the end of the project.
So we actually see this right now on securitized with a venture capital fund called spice VC, who has tokenized a VC. So, um, you know, we’re also seeing Liberty fund, which is a private equity real estate fund two is who has tokenized their funds. So you can actually buy a token of the fond as opposed to being locked into deals for 5, 7, 10 years.
So it’s yeah, it’s, it’s giving you the freedom [00:40:00] and the frictionless effort to really get in and be able to sell your position and deals where otherwise you would have been locked in for long periods of time. So I know this also goes into the, to the point where we need volume for this to really, really work and to come to fruition, um, to the point where we see it or where you can kind of treat real estate, um, you know, very general sense like a stock, um, where we’re just very easily tradable.
But let me ask you a question. How does an investor know that this isn’t just a swamp in the middle of Florida that you’re advertising instead of a, or it’s a class, a building, or B or C, like, how does it invest in are their rating services? Third-party independent rating services that come in and, and give you some type of validation.
Okay. Yeah. So, I mean, just like, you know, you live with any investment, you obviously have your legal documentation and, and everything. You need to make an informed investment decisions. So on our platform, um, [00:41:00] so red Swan is one of these companies and, you know, you would, you’re a real estate owner. You list on this market.
They then have your property and you have your, you know, your, your subscription docs, your PPN, you have, um, or a report maybe from CVRE, you know, who’s looked at the property and done an appraisal for you. So you do go to the, to the right third parties, kind of sure that, you know, you have all your documents and to allow your investors to make an informed decision.
Um, I mean, they can also, you know, head out to the property and check it out for themselves. But, um, yeah, you know, you know, just like an investor would make an investment on any of these fundraising platforms. Um, it’s the same type of type of situation, you know, you’re, you upload your deck, you upload images, you know, you’ve make your underwriting, maybe your model of the property, your projections, and why you project a certain IRR or equity return on the investment.
And, and yeah, I mean, obviously your investors can always can contact you as well. So we want to make it very, very easy for them to [00:42:00] access us. And what was the name of that platform? Red Swan. So they are a marketplace. I’m sorry. Red, red. Red is the color. Yeah. Red Swan. So they are one of the marketplaces.
There’s a couple out there, um, that focus specifically on tokenized properties. And so you can onboard, you know, so for you calling your Airbnb, you may want to onboard your properties to red Swan. They have, you know, a large following as well, so it may help to sell and yeah, they focus solely on tokenized real estate properties.
They’re located out of Houston, Texas.
This is great. All right. So. This is a lot of amazing information and let’s just do a quick reset of the room. We are here on serial entrepreneur club. [00:43:00] We are here every Friday at 2:00 PM Eastern. And we’re talking about the talk at topics like this tokenizing, your real estate, that appeal to serial entrepreneurs, trying to help serial entrepreneurs learn how to start and grow their business and then exit.
So. On that note, if you want to see any of our past episodes, which we have probably close to 200 now across the network, across the startup club network, you can go to www.startup.club, and you can also follow this show start-up club on any of the popular podcasts. So if you want to get alerts about cool subjects like this tokenizing real estate with Daniel and Jenny, um, join our email list and that way you’ll get notified.
And you’re welcome to join any of our sessions [00:44:00] on that note. We have a Miller up on the stage. Um, Amy Beller wanted to ask a question. It sounds like. So what is your question, please for Daniel or. Hi guys, this has been a great, great, great, uh, topic. And I heard Jenny speaking about, you know, some of the regulations or just some of the, um, laws or, you know, different things that we have in place now that may be an obstacle or a hindrance for tokenizing real estate.
Um, and so my question is what is the best, um, just based on her experience, uh, the best strategy or the best, I guess, um, way to do this and still be in compliance. Yes. Um, I mean, it really depends on what you’re trying to accomplish. Um, as we talked about. [00:45:00] Probably the easiest path is a rule 5 0 6 C offering.
But the downside of that is you do have to limit investors just to accredited investors and under rule 5 0 6 C, you are supposed to do some due diligence to make sure all of your investors are accredited. So it’s not just like the old style way of getting of saying, Hey, are you accredited? Yes. Okay, great.
You’re supposed to actually do a figure, you know, have some evidence that they actually are accredited. So, but that, you know, that process is there’s ways to do that. Um, that aren’t that onerous. Um, and then there’s the state filing. So even 5 0 6 C is not an onerous, but you know, it’s much easier than if you do want to open it up to the general public, then you could do a regulation, crowdfunding offering.
Which is a little bit more onerous or, you know, but you are limited to raising up to 5 million and then, you know, a third option could be a [00:46:00] regulation, a where you can raise up to 75 million, but that’s even more expensive and onerous. So it kind of just depends on, you know, what you’re wanting to accomplish, who you’re wanting to make the offering to another thing we haven’t talked about this, but, um, There is a federal exemption for intrastate offerings and real estate is often an asset that you might want to just offer to people in the same state where the real estate is.
And that gives you some more options, actually, because, um, if you can qualify for the federal interest state off offering exemption, which means that all of your investors are just in one state then, um, and there’s, you know, there’s, each state has different state rules about making securities offerings.
And some of them are quite easy. Like just as an example, you know, Georgia happens to have a crowdfund, an intrastate crowdfunding law that’s quite easy to do. So if you were [00:47:00] willing to keep your offering within a single state, you might have some more options that are much more flexible than trying to do a nationwide or multi-state offering.
Thanks a bunch. That was really good information.
Hey, Jenny. Um, another question for you. I mean, I just don’t see any way that would make sense not to do this without, you know, having an attorney. Um, obviously you presumably want someone who has done it before. What would you suggest to our members here? Like how would we go about finding somebody experience?
You know, what, what would you tell us to look out for as good signs and as red flags?[00:48:00]
There are a lot of attorneys out there that will say that they know securities law, but they may not know all the different options. Um, so securities law, especially in the past, um, 10 years or,
and federal law. So you should give your attorney a little quiz to make sure they know w you know, what is rule 5 0 4? What is the intrastate exemption, or maybe you’re a nonprofit are, what are the special exemptions that might be available to me as a nonprofit? Um, I can recommend, I wrote a book. It came out a few years ago, but it is still pretty up to date.
Um, and we do have a website you can go to that has some updates on some changes to the law. Uh, if you buy the book, but, um, I have a whole chapter on all of the different. Options when it comes to securities law compliance. [00:49:00] Um, so you could check out my book and see what, what I’m talking about. You know, when I go through all the different options and quiz your attorney to see if they know about those things.
And if they, you know, I’ll, you’ll sometimes you’ll have an attorney say, so for example, I really like rule 5 0 4. This is a kind of a niche exemption that a lot of attorneys will tell you, oh, I don’t use rule 5 0 4 cause blah, blah, blah, blah, blah. But really it’s because they really don’t know anything about it.
Um, so watch out for attorneys that try to be very blustery about how smart they are and, you know, try to dissuade you from using creative strategies when really they’re just covering up their lack of knowledge. Very well, can we get the name of that book? Um, especially for the podcast listeners as well.
Yes. Thank you calling. Yeah. So I wrote a book called raise capital on your own terms, how to fund your business without selling your soul. And it’s [00:50:00] published by Barrett Kohler. If you ha, I know people are still buying it on Amazon, it’s a little bit old. So if you have trouble finding it, you can go to the publisher’s website, Barrett, Kohler.
Yeah. And we’ll be sure to put that down as a resource. You know, we here at our businesses are always looking for good resources like that. So thank you for writing it and sharing it. Thank you for letting me spread the word. You bet. Um, Daniel, I’m going to put you on the spot a little bit here, Daniel, you know, we’ve talked a lot about the pro.
What are the cons, like you’re, you’re deep in this and you’re very passionate about it, but could you tell us what some of the possible cons are? I think by understanding that we’re just more informed. Yeah, no, of course actually, uh, in, in my deck, uh, that I’ve put out, I have a whole thing of just a risk associated, you know, with any investment, you obviously [00:51:00] want to look at that asset then quickly before I forget, too, I can also share, um, you know, list of resources that I’ve gotten from our secondary.
Platform partners have also law firms that are specializing in blockchain and tokenization and specific that I’m happy to share as well. Um, so the risk risk associated here, you know, I’d say there’s big three. Um, the first one would be adaptability and, you know, just a limited practice based evidence.
You know, this is very new. There aren’t a lot of sponsors and developers and real estate managers that have done. So, so there’s no particular consensus regarding the, you know, the speculative growth of the industry. You know, according to security, token market who I spoke about earlier, the market cap for STOs right now is around 1.2 billion, uh, with around 50 billion in that primary Prius issuance market phase, or they haven’t come out to secondary trading.
So while some people may think this is the large number, [00:52:00] um, in, in the grand scheme of things is actually tiny compared to the size of the private investment world. There’s a lot waiting to be actively trading the secondary market, but adaptability, the second would be a lack of infrastructure. You know, pioneers in this space are, are tokenizing real estate right now, but there is a lack of, you know, working systems for tokenization on the market and, and various partners, you know, just for us to find our appropriate partners, that when we had to go through, you know, a lot of digging, you know, one party does, you know, your marketing and has a marketplace, but they don’t have a TA license or one, you know, is fully registered with SCC, but they don’t, they don’t mark it or have an entire marketplace for you to, to, um, solicit your, so some, you know, you have to find that that infrastructure, the partner that really has all your needs that, um, that you’re looking for and that’s, that’s been kind of difficult.
Um, and then the third item. Like I’ve been talking about is the [00:53:00] liquidity and the volume. So, you know, given the early stage of these STL CloudForms investor pools may not suffice for, for the capital raise and needed for some of these projects and the liquidity needs of investors. So, you know, like I said before, I don’t want real estate sponsors to try to use tokenization as a means to raise $20 million and realize, oh, you know, I haven’t raised the 20 million yet.
Um, you know, it doesn’t happen overnight. You do need to do, you know, a good amount of marketing and get the word out there. You know, obviously in the sense that you’re able to market, you know, given you do choose the right regulation or exemptions. Um, so I’d say those are the big three, you know, adaptability, uh, the lack of infrastructure and then the liquidity, um, you know, hopefully as this progresses, we see those kind of diminish more and more.
So how small can you go? Can you go with a $500,000? Vacation rental. Could you actually go that small? Have you seen any deals that small? [00:54:00] I’m just curious, like, uh, I haven’t, I haven’t seen any deals that small, but you know, it would make sense, you know, the cost to tokenize, I approximate the pre issuance phase would cost around, you know, 30 to 45, 50 grand, you know, to digitized, you know, legal costs included, um, the actual digitization and putting the, you know, your ownership on the blockchain.
Doesn’t really cost a lot of money. It’s a smart contract, which is not the most complicated thing. Um, it’s more so the legal and, you know, the due diligence that, that costs that definitely takes a penny out of your pocket. Um, so that, that would be the biggest piece in, and you know, of course with economies of scale, you know, I talked to a developer who have actually tokenized one of their developments and they said they approximate their expenses to drop by 40% for the next tokenization project.
Just, you know, The learnings that they’ve gained from, from the primary one and, and, you know, they have their PPM in place already, obviously you’d need to tweak [00:55:00] it to your specific property. Um, but yeah, that, that, that would be my answer, you know, you can, it just hasn’t been done in, in that variety or so we can dev happy to look into it further with you and see if it’s just curious, but, uh, you know, so it sounds like it’s $50,000.
You’re looking at likely a, at least a three to $5 million, you know, sort of entry point. Otherwise it’s probably better to go through private markets, be my guests. Now, how do you get the buyers for these coins? Like who buys them? Like, is it, is it your, is it your soliciting on LinkedIn, uh, contacts or are you, uh, are you actually using a platform and they would find the buyer.
Yep. So like I stated, one of the, one of our partners is security, token markets. They, you know, they have their security token advisory arm, and then they have their security token market. So they’re a great tool to utilize. Cause you know, you [00:56:00] go to them as a sponsor, a real estate owner, and they bring you from, you know, teaching you, educating you on the topic, making sure, you know, you, you have all your ducks in a row and then they bring you into their marketing department where they actually market your project for you.
And you know, it’s just, you know, the same way as any real estate development, would it be. PR and making, making sure you get into, you know, real deal or, you know, various crypto newsletters, even though, you know, it’s funny, this isn’t cryptocurrency, you know, you’re just utilizing blockchain technology. And a lot of times people say, oh, this is crypto.
It’s a, it’s a security, it’s a totally different asset. You know, it’s a secure, it’s a security token offering. Um, so utilizing blockchain technology. So it’s funny, they do, they are very, you know, crypto lovers out of two levers are more open to this just because of the blockchain aspect. But, you know, we’re seeing just various, you know, real estate investors that are looking to explore an asset class or, you know, the, [00:57:00] obviously the liquidity factor here, um, the possibility for the transferability of it.
Well, it’s a good, good point. Is it like if, if, uh, if we tokenized our vacation rental business, And we made a hundred thousand dollars in profit. We wanted to distribute that profit. Do we need to go buy Bitcoin stable going? Or like, how do we distribute the cash through the blockchain? Yeah, that’s a great question.
So actually, you know how we’re doing it? Um, it’s all dollars yet. So it’s really up to the investor. They can be paid in Ethereum and this is all can be built into the smart contract. And, you know, as the sponsor, you can really choose how you wanna, you know, help your investors. You can pay them through theory on Bitcoin or dollars, you know, we’re, we’re doing it mostly, I’d say 99% of it.
Maybe we have one investor who would want it in a cryptocurrency, but yeah, these are, you know, your normal day to day investors, um, that are just looking to get [00:58:00] into real estate investments. And, you know, obviously that the various perks that come with with it, you know, the blockchain technology and we don’t really touch.
A little bit on the sponsor’s end, but the efficiencies that the blockchain creates in terms of management of the cap table and your KYC, AML documents, obviously ensuring that your investors are accredited, um, as well as subscription docs. So all of that is automated on the backend due to, you know, the smart contracts which are code.
Well, I don’t know about you, Michele, but I’m going to go back and listen to this whole episode over again. Cause I think I learned so much today and we covered so much ground and thank you very much, Daniel and Jenny for spending the hour with us and helping us sort of unpack this one. It does sound like it’s very early on.
And you know, when you, when you have a, a paradigm shift like this, the opportunity, there are many in many different industries and [00:59:00] you know, that’s what this show, show’s all about trying to capitalize on that opportunity. Uh, any last words, uh, Daniel or Jenny before we close it out here, start with you, Daniel.
Yeah. I just want to thank you. Calling Jeff and Michele and the team for bringing me on, as you said, you know, we are in the early stages of this, so it may sound, you know, intimidating and scary and pretty complicated, but, uh, you know, I’ve, I’ve only been really in this for six months, obviously, crypto for a longer time, and I’m trying to understand blockchain technologies and how it can benefit society.
But, um, you know, I’m a strong believer, obviously in the blockchain, creating efficiencies and real estate and specific, and, you know, looking forward to you guys, um, hopefully being able to tokenize your Airbnb Lyft to help out that and, you know, wishing everyone a great weekend. And thank you again. Thank you, you know, for, for [01:00:00] me know, Uh, this is exciting.
Like I could go on with this conversation for a long time, and I hope that both of you can come back very soon, but I find this extremely exciting because I believe that this kind of technologies, you know, the coins and the, you know, blockchain and everything else, you know, we would need these types of, um, use cases where it really can drive efficiency and better, you know, let’s just say the life and investment power of people.
So it’s really exciting to hear these very clean, um, interesting cases that are emerging. So on that note, Jenny, any parting words of advice for us, please? Yeah. Well, thank you so much for inviting me. And I always hate to be the wet blanket talking about compliance, but I think we, you know, looking at the bigger picture, [01:01:00] the securities laws have such a huge effect on the distribution of wealth in our country.
We’re watching as, um, you know, wealthy people are getting wealthier and wealthier and then the middle class is thinking down. And so as much as the topic of securities law can seem very dry. Um, I hope people will get educated about it and get involved in advocacy because, um, ultimately it would be nice if it would be, if it could be easier for people who are not super wealthy and kind of in the, in the know and part of the, um, you know, the, the elite to know about all these things, uh, could, could make investments and, and, you know, be more creative with how they’re deploying their capital and diversifying their portfolios.
So I hope people will. You know, try to get educated on the securities laws and get involved in the advocacy around making that more, um, democratized for, for all of us to be able to get involved.[01:02:00]
Yeah. I want to just remind everyone calling. You said you want to listen again, and I agree a hundred percent. This was like a masterclass in, in a very exciting, very sort of groundbreaking new topic. So I want to remind everyone that we do record this show, and if you go to startup.club, the website for startup club, you can listen to a recording of this show in many other shows and sign up for our mailing list.
And we also have replaced turned on. So you’ll be able to find the recording of this show here on clubhouse at startup club or in Michele or Collin or my profiles. So definitely listen again and take copious notes. This has been quite an education. Thank you. Yeah. And I know when we do the blog, Daniel and Jenny, we’ll grab some, some information from you as well.
That we can put on the blog to make it easy for people to access the resources you talked about. Well, again, what a great show. We’re going to jump from this topic to next Friday, two o’clock Eastern. We’re going to the web three, uh, another paradigm shift. What is the [01:03:00] web three? Well, we actually have Jared, he’s a popular speaker here on clubhouse, and he’s going to be sharing with us what the future of web three is all about.
So looking forward to having that topic next week and seeing all of you here on a serial entrepreneur club. Thank you very much. Bye for now. Thank you. Thank you.