There are four publicly known cases of digital securities offerings issued from Cayman Islands: ReitBZ, 22X Fund, BR11, and La Estancia Holdings. In this study, we will review the ReitBZ.
ReitBZ
Underlying Project
ReitBZ is an investment project into a distressed Brazilian real estate. The model is the following: proceeds of token sales are used to purchase distressed real estate pieces, which are then recovered and sold on a premium; 50% of the profits are distributed among tokenholders, and 50% are reinvested into purchasing new assets.
The project is launched by the biggest Brazilian investment bank BTG Pactual, which role in the project is finding and structuring deals. A separate subsidiary with significant traction, Enforce. is responsible for property management.
The distressed assets are purchased at a 30% to 60% discount on their fair market value, and regularization takes 10% to 20% of fair value throughout 18 months. The tokens could have been purchased for Ether or non-specified stablecoins, and the profits distributed in the form of airdrops of the same payment units.
The offering was intended to raise from $3 million to $15 million. The actual amount raised was $3.3 million. Although the offering reached the soft cap, it definitely did not fully realize its potential given the strong economics of the project and reputable partners. The most likely reasons for that are the legal structure that does not provide enough protection to investors and lack of investment in marketing.
The offering lasted two months: April and May of 2019.
Legal Structuring
The legal structure chosen for the offering is a Cayman Islands exempted foundation, in which tokenholders participate as beneficiaries. It is explicitly stated in the whitepaper that “The directors of the Issuer will, at all times, have sole discretion as to whether the profits generated by the Target Assets (including any capital gains and/or distributable rent) are to be partially or fully distributed to Tokenholders through Airdrops, reinvested or used for other purposes (including, but not limited to, satisfying liabilities, expenses, running costs and other fees)”. This means that investors have no control over the investment vehicle and cannot force it to pay dividends.
Such an instrument is not considered a security under the Cayman Islands and the EU legislation. Although this is not completely certain, and one of the risks stated is that the instrument is qualified as security.
The Cayman company does not invest in the property pieces directly but rather through an intermediary, the form and ownership of which is not specified.
The offering was not registered in any country under any regulation. Any investors except US and Brazil persons were eligible to invest. Although at the start of the offering the investment threshold was $10,00, it was later reduced to $500. The exclusion of the US investors was reasonable given that the offering was not registered in the US and the definition of the security under Howey test is quite broad and includes such instruments. The reason for the exclusion of Brazilian investors is less clear. The most likely one is the reduction of legal risk for the BTG Pactual main business on the local market.
Marketing Campaign
The two main reasons-to-believe (RTBs) of the ReitBZ offering were the reputation of BTG Pactual and the potential of the Brazilian real estate market. The campaign did not utilize emotional messages or a narrative, focusing solely on rational RTBs.
The two main channels of the offering website traffic were direct entrances and display ads (66.5% and 32.6% respectively for mobile users). It is curious that half of the traffic came from Brazil (49.84%), followed by France, Germany and the US each having circa 5% share. This may be due to the fact that BTG Pactual is well-known in Brazil, which caused the interest to its activity, or due to poor targeting of banner ads. The latter is further confirmed by the fact that many of the ads were targeted at keywords such as “btg” or “btg mining pool”.
The offering had relatively large media coverage. There are around 5,000 pages mentioning ReitBZ on the web, although some of them appeared after the offering was finished. Prior to the offering media activity was not very high, and rather focused on trusted media with a global reach, while in the period of the offering media campaign was focused on the low-cost niche crypto media.
The media activity has at least two mistakes that could have been fixed. One is that prior to the offering the activity should have been higher because prior to persuading potential clients they should be made aware of the offering, which is a separate task that is better performed prior to the offering. The second mistake is a strong focus on crypto investors, many of which are rather seeking speculative investments with outsized returns, instead of more conservative millennial investors that seek to diversify their portfolios with alternative assets. However, as such investors are more risk-averse, a legal structure that provides more protection to investors would be needed to facilitate their conversion.
Conclusions
ReitBZ offering was barely successful as it raised only a bit more than the soft cap, and $3 million do not allow for a significant activity on the real estate market. However, the underlying project is strong and able to generate interest from investors. Thus, the problem is in the execution, driven by the desire to minimize costs.
One of the biggest constraints is the offering structure that does not provide protection to investors. However, this problem may be mitigated by correct marketing messages that could, for example, emphasize the importance of the reputation of the bank that structures the offering and its long-term plans that create incentives to comply with obligations. The problem should have been acknowledged and addressed.
Furthermore, the marketing of the offering didn’t make enough use of the offering strong RTBs and targeted a narrow audience of crypto investors, while a larger campaign targeted at a more diverse pool of investors could have been more efficient.
The project was intended as a small case to test the market demand and nuances of conducting the offering. The lack of ambition was the main limitation because for the project of a larger scale bigger expenses on legal structuring, reporting, and marketing would be justified by higher potential returns. Probably, this is something executives of BTG Pactual understand as well, which is evident by the fact that they announced plans to tokenize $1 Billion worth of property. This one of the bigger cases that indicate the transition of the digital securities industry to serious checks, which is likely to happen in 2020–2021.
What Stobox Does?
Stobox is a provider of multiple professional and technology services related to securities operations with a strong focus on fundraising.
Stobox operates a technical platform for the management of a full lifecycle of digital securities, i.e. primary offering, secondary transfer, investor identity verification and risk assessment, shareholder register maintenance, dividends payment, processing of corporate actions, and corporate governance. The platform utilizes private ledger with banking-level security to provide resilient infrastructure with a certain legal status.
Stobox provides a range of legal management services to structure the offering of securities: the definition of the best-suited jurisdiction and corporate structure, formation of the corporate structure, preparation of the necessary documentation, including Prospectus or the offering memorandum. Stobox has a network of legal partners in multiple jurisdictions and conducts all the management and communication so that the client could have a single provider.
Stobox provides marketing strategy development and execution services in order to enhance the odds of the successful offering and optimize marketing budgets, which often constitute the largest cost of the offering. The marketing expertise is based on the analysis of multiple offerings of digital securities, which allows Stobox clients to avoid widespread mistakes.
Stobox Feasibility Assessment service provides a holistic view of the offering to see whether offering a suitable option for the given business on a given stage, what type of offering is the best fit for the business objectives, what marketing campaign would work best and how to manage potential risks.
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