Yale Alumni Lead Way on Blockchain-based Private Placements
In a July 12 press release, Tritaurian Capital–led by Founder & CEO Bill Heyn, Managing Partner James Preissler, and Senior Advisor Ken Norensberg–announced that it believes itself to be the first non-ATS U.S. broker-dealer to receive approval for the sale of digital private placement securities using blockchain-based distributed ledger technology (DLT).
Tritaurian is a broker-dealer registered with the Securities and Exchange Commission (“SEC”), the Financial Industry Regulation Authority (“FINRA”), and the Securities Investor Protection Corporation (“SIPC”). Licensed in 28 U.S. states and territories, the firm specializes in private placement financing and mergers and acquisitions advisory.
CEO Bill Heyn and Managing Partner James Preissler met at Yale University in 1990 and were both members of the Delta Kappa Epsilon (DKE) fraternity. After working on various projects together for many years, Heyn and Preissler eventually joined forces at Tritaurian in 2007. The pair “founded Tritaurian to become compliant with FINRA when they moved into issuing securities.” At that point, the Tritaurian purchased the broker-dealer,” Mr. Heyn tells The Politic.
According to Comptroller’s Handbook (Section 411), a private placement refers to securities that are “offered only to sophisticated investors in a nonpublic manner.” The SEC has tightened regulatory oversight since the publishing of Comptroller’s Handbook, but the advantage of private placements follows:
“By using privately placed securities, the informed investor and issuer can tailor the securities offering, through negotiation, to meet the needs of both parties. The issuer also saves the costs incurred for securities registration and obtains access to alternative financing.”
When asked why Tritaurian “believes” itself to be the first non-ATS U.S. broker-dealer to receive said FINRA approval, Mr. Heyn commented that FINRA keeps these approvals private as a rule. “It’s a gray area with many restrictions,” Mr. Heyn relays to The Politic, “The news is pretty recent, and we hope we’re at the forefront.”
Despite FINRA’s non-disclosure practice, sources involved in the approval procedure give some glimpse of its challenges– and why Tritaurian’s license is newsworthy. A June 17 article from Coindesk states that “FINRA has sat for months on roughly 40 broker-dealer applications from companies dealing in crypto assets, denying them a broker-dealer license that would let these firms offer securities in the U.S.”
There is, however, some more general progress in the space among ATS broker-dealers. The same Coindesk article reports that OpenFinance, tZERO, SharesPost, and Templum Markets have each successfully conducted FINRA-approved initial security token transactions.
Several startups have also acquired or formed FINRA-licensed broker-dealer affiliates according to the Blockchain Law Guide: Coinbase (through its acquisition of Keystone Capital Corporation), Circle (through its acquisition of SI Securities, LLC and its SeedInvest affiliate), and StartEngine (through forming StartEngine Primary LLC to facilitate Regulation A offerings.
Why the scramble for digital private placements? For Mr. Heyn, the issue is more personal than the Comptroller Handbook would lead one to believe. Eighteen years ago, he left the traditional banking industry “to work more directly with smaller companies,” he tells The Politic. Mr. Heyn’s previous experiences include a cumulative seven years at Morgan Stanley, CIBC Capital Markets, J.P. Morgan, and Merrill Lynch.
Among other reasons, he made that transition because of his belief in financial inclusion. “We see Blockchain as a way to bring financial opportunity,” Mr. Heyn says to The Politic. “It’s a great way to include small private companies,” he continues.
On the other side of the equation are those who invest–or who want to invest–in private placements. Since many potential investors have traditionally been excluded from these markets, tokenizing assets makes them “more accessible and affordable” to non-institutional investors, according to Mr. Heyn. The blockchain technology also adds a new layer of transparency and liquidity to these assets.
In addition to financial inclusion for both private companies and ordinary Americans, blockchain-based, digital private placements might increase company-wide transparency and accountability. “Once assets are tokenized on the blockchain, for instance, the inherent transparency of the technology can reduce instances of fraud, money laundering, and other unwanted activities,” says Mr. Heyn. “Unlike with anonymous cash, crypto makes it possible for regulators to know when and where the money is being moved,” he adds.
“There is also a public benefit,” Mr. Heyn tells The Politic. “Investment banks certainly aren’t breaking any rules,” he says, “but they often do what’s best for their business, and they keep outsiders in the dark as to what that means. If the blockchain can shed some light on that process, it would be a benefit to the investing public.”
Further, increased tax accountability would be a major win for the IRS, which recently sent warning letters to cryptocurrency users who either failed to file taxes or misreported them, according to an August 14 article by Coindesk.
According to Mr. Heyn, the benefits of increased transparency extend beyond regulatory accountability, too. “Non-digital private placements are already legally traded pre-IPO,” but they are “significantly harder for FINRA to track” than their blockchain-based digital counterparts, he tells The Politic. Look no further than a piece published last year in The Wall Street Journal:
“In a review of more than a million regulatory records, the Journal identified over a hundred firms where 10% to 60% of the in-house brokers had three or more investor complaints, regulatory actions, criminal charges or other red flags on their records—significant outliers in the investment community.”
Mr. Heyn’s solution involves “coding info directly onto a securities token, that way you hardwire SEC compliance” for private placements. “When people buy or sell tokenized securities” from a broker-dealer, he continues, “each token goes into their digital wallet.” At that point, “we can code the tokens to provide information to the regulators, and anyone can easily go on the web and see that transactions have taken place on the blockchain.”
Mr. Preissler majored in History at Yale University. He is Founder of trade.io, serves as an Advisory Board Member of the Cryptocurrency & Blockchain Regulatory Taskforce, and is Managing Partner of Panthera Capital Group. He is also a Crypto & Blockchain Contributor at Forbes, having written 15 articles on the subject in the past year.
Mr. Heyn double majored in History and Political Science at Yale University. He is also CEO of trade.io, which offers a suite of financial services centered around blockchain investments.