Swarm Fund Looks To Create Managed Tokenized Entities

FinTech, Innovation, Investing, Regulation | August 22, 2018 By:

Swarm Fund is a blockchain for private equity. It recently initiated pre-funding of the Robinhood Equity Token (RHET) on the platform, allowing accredited investors to reserve a stake in a fund created for the purpose of holding equity in Robinhood.

Once the minimum funding goal is reached, a syndicate manager will form an entity using Swarm, acquire equity through established relationships with former employees and other equity holders, and convert committed funds into RHET equity tokens.

“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. “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 provides blockchain-based infrastructure for the tokenization of assets. Each tokenized asset is represented by a unique security token, created using the SRC20 standard. For individual company equity tokens coming to Swarm, an entity is created for the specific purpose of holding this equity. The ownership of this entity is tokenized for investors to access. Their token holdings represent fractional ownership of that entity, which in turn holds equity in a given company.

The SWM token itself is used for gas, governance, and incentives on Swarm, much like how ETH serves as gas for applications running on ethereum.

 Timo Lehes of Swarm Fund talked with Block Tribune about the process.

BLOCK TRIBUNE: So someone that has an idea for a company and wants to set it up through your system, what’s the procedure for that? Tell me a little bit about that.

TIMO LEHES: Yeah. So the starting point today is something we call tokenize.Swarm.fund. So it’s basically an onboarding process that we implemented through an online form. So they go to tokenize.Swarm.fund and then we will ask them a number of questions regarding the entity that they’re trying to tokenize. So that would be anything from whether it’s a fund, and if it’s a fund then what type of strategy, if there’s track record, what kind of sector they are targeting and who the individuals are that are involved, amount of capital that they’re looking through raise and so forth.

BLOCK TRIBUNE: Okay. So basically you can come to your platform with just an idea and then try to implement it through the platform?

TIMO LEHES: Yeah. So, so far we have been focusing on funds and the specifically fund managers that have historical track record or they have done something within the strategy that they’re trying to tokenize before. So, which means that if someone shows up with a completely new idea and they have zero history within that project or segments, then it’s unlikely that that would today, make it onto the platform. So that’s the status as of today when we came out of the gate and started focusing on funds. Now, going forward that’s going to change. So we’re looking at opening up the process a little bit more, but that’s not yet.

BLOCK TRIBUNE: If you’re launching an initial coin offering, the standard procedure is that whoever initiates the coin offering keeps 10% to 15% of the coins and then the rest would go to investors and the general public. Is that the strategy here or no?

TIMO LEHES: Oh, no. Because that would look more like an investment banking model where you would have, let’s say, a syndicate leader that had some fee structure, which is more on a kind of structured on a transactional basis. So if that was to happen, then it’s not something that would be built into the Swarm economic model as part of our gas system or gas payment system, but it would actually be something that’s built into the description of the investment opportunity itself. So for example, in a similar way to let’s say an AngelList or some other syndication platform, that syndicate manager would have to say, “Whatever capital that’s raised through this channel, I will keep 10% of that.” So that would be part of that individual syndicate definition, not part of what Swarm does.

BLOCK TRIBUNE: I see, okay. Are the tokens that are issued white labeled, or can they use their own brand name?

TIMO LEHES: No, so they are labeled individually for each investment opportunity on Swarm. So if you take the distress real state token that’s on Swarm today that has its own name and then the Robin Hood token that we just launched yesterday, that it has its own name. So each of the tokens that are representing underlying securities and fractional ownership of underlying securities, they have their own names. So they’re all individually security tokens.

BLOCK TRIBUNE: There are a number of platforms out there that are trying to do this sort of tokenization model. What’s your advantage in your system and how are you better than the others?

TIMO LEHES: Most of the platforms that we’ve seen have a more traditional kind of either developer model or investment banking model, which means that they are charging the client for, and this is when you’re talking about tens of thousands of dollars in many cases, or basically a safe process of a security token. So what that entails is that they would check for KYC/AML information for the investors that are coming in and also depending on jurisdiction, they would also check for accreditation information and then as a result of having run that process for the client, they might end up creating a security token contract end of the day. So that process as a commercial offering is something that we have seen that’s being offered at a very high premium in the market today. So with Swarm, we’re a nonprofit organization similar to ethereum, where if you issue a token on ethereum, it doesn’t really cost you anything more than the whatever the gas cost is for running that token contract on the ethereum network.  

So we took the same basic principle and said if somebody’s creating a token on Swarm, we’re not going to charge a high upfront fee for the creation of that token, but there will be an economic model which is based on gas through which people pay for the continuous operation of that token on the Swarm network. So we just have a very different economic model and we think that in order for a somebody that’s charging a high premium upfront to compete with a nonprofit that’s basically all based on a block mining model or a  block processing model which is as efficient as possible from a cost perspective, we don’t see how those organizations will be able to compete with this nonprofit organization that’s Swarm is in the long term.

BLOCK TRIBUNE: Okay. How will governance work?  Will there be one person in charge that reports to the board?  

TIMO LEHES: Yeah. So for each individual investment opportunity, there’s a syndicate manager or we call the person that’s responsible for the legal entity that’s doing the tokenization. So that in our parlor it’s called a syndicate manager and that individual is taking responsibility for making sure that the legal contract and the legal connection between the FPV that’s issuing tokens on Swarm and the underlying asset, that that legal contract is in order. So that person’s responsibility is to make sure that there’s a legal connection on fractional ownership between the token holders and the underlying assets. Then when it comes to governance, then the token holders have a mechanism by which they can both pull decisions with regards to the assets. So let’s say the syndicates manager proposes, we are considering to liquidate the assets or half of our assets and then they put that up for votes, then the governance works as such that the token holders will use their wallets and the number of tokens that they have for that specific investment opportunity, they can use to vote for whatever decision that comes up for votes.

So if it’s a vote for liquidation of assets then the token holders of that individual token will be able to vote for or against that decision, and so we built that governance module and that’s functioning as of today.

BLOCK TRIBUNE: Running something as a business, there’s probably hundreds of decisions that have to be made each day. Is that going to require going to this board every time a decision needs to be made?

TIMO LEHES: No. So typically anything that’s at least on the fund side of things, these decisions are actually quite rare. So most of the ongoing decisions are handled by the syndicate manager and whoever the manager is of the underlying asset itself. So if it’s a property fund, there’s already a professional organization managing that property fund. So they would be taking all those decisions that are necessary on a kind of an ongoing operational basis. So it’s only when something has to be passed up to the investors such as a special consent for a particular type of decision or things that goes slightly outside of what is considered normal or ongoing business, so to speak, that’s the only time when you would have to go to the token holders to say, “We would want you to vote for this.” So we don’t see, we don’t foresee high frequency in that process.

BLOCK TRIBUNE: The syndicate manager, is there any other compensation beyond that 1% fee?

TIMO LEHES: No, not unless they define something by themselves, which is, with regards to the 10% discussion we just had before, if they create some other construct by themselves that is accepted by the investors, then it’s up to them, not through Swarm.

BLOCK TRIBUNE: What’s the profile look like of an ideal syndicate manager?

TIMO LEHES: Well, on the front side, the ideal profile is somebody that’s been running two, three, four funds for several years and has a track record and a identifiable return level that can be shown to investors and that there’s a solid strategy going forward for that same fund management team and ideally they would also have a majority or a large part of their capital already allocated from previous investors such that once they come to tokenize, one of the limited partnership position, so one of their investor position, that’s only a fraction of the capital that’s actually going into the fund. That’s really the ideal profile.

BLOCK TRIBUNE: Okay. Those are my questions. Anything you want to tell me about the project that I didn’t ask you about?

TIMO LEHES: Yeah, I think, if you think about security tokens and where that market is going now, when we have let’s say some solutions in place on the issuing side, I think on the subsequent trading side we’re doing work around standardizing how that trading is going to happen with regards to transfer restrictions and the feasibility of transferring private securities. So, we have created a protocol that’s called the market access protocol, which basically verifies who is allowed to buy and sell the securities and to whom and that’s done in a way that maintains privacy as well.  

So I think that’s the thing that we see at the next major problem to solve, is the interoperability between the issuers and the exchanges. So that’s something we’re working on and have a solution towards. So I think that’s the only thing I would want to mention in addition to your questions.