The United Arab Emirates is emerging as a global hotspot for security token sales, despite the lack of formal local regulations in the onshore market governing sales.

In March, SGH Global, a Jersey-based company whose assets include two gold and silver mines in Peru, announced a $100 million security token offering (STO) sale targeting investors in the UAE and wider Middle East. Abu Dhabi investors Blue Rock Capital and Blue Stone Capital representing Khalifa Hasan Ali Saleh Al Hammadi have signed intentions of $10 million each, the company said.

SGH is planning a public listing on the main market of the London Stock Exchange in 2020, and the current fund raising will be invested into SGH’s portfolio companies, including up to $10m for blockchain technology implementation, David Sumner, the chairman and CEO of SGH Global said in an interview in Dubai last week. Some of the proceeds will also be used to purchase a 40 percent stake in a listed UAE mineral water bottling company, said Sumner, which he declined to identify.

Sumner said that the initial reception has been positive. “Investors have liked the digital nature of the investment. It’s been a bit of a surprise. If we get this right, I think we will close the transaction out all in the private placement.”

Meanwhile, in the first quarter of this year, the UAE security token offering (STO) landscape attracted $67 million in investment, around 56 percent of the total funds raised worldwide by STOs, according to InWara, a crypto market intelligence platform. However, just two STOs were launched in the UAE in Q1, of the total of 47 STOs launched globally, according to the CEO of InWara, Nirmal Lekshminarayanan. He declined to identify the UAE-based companies.

When initial coin offerings (ICOs) and STOs are combined, one-fifth of all funds raised globally in Q1 2019 were raised by companies based in the UAE, Lekshminarayanan said.

Nevertheless, ICO and STO sales this year remain small compared with the massive sums raised in the first half of 2018, before a huge decline in the value of Bitcoin (the most prominent crypto asset) reduced investor confidence in the sector. Around $20bn was raised by ICOs and STOs in 2018, according to a March 2019 report from Strategy&.

The UAE’s Q1 activity remains “a far-cry from what 2018 was, with Cayman Islands, USA and the UK dominating the marketplace,” said Lekshminarayanan.

Investor perceptions of ICOs have also been tarnished by a widespread presence of scams and fraud: a July 2018 study by Statis Group estimated that 80 percent of all ICOs launched in 2017 were scams.

From his office in the Jumeirah Lakes Towers free zone, Sumner said he came to recognise the utility of security tokenisation only recently. “If you had asked me about ICOs or anything to do with cryptocurrencies before September last year, I just thought it was a scam, I didn’t get it, and I had a few people coming over this desk with prospectuses where they’ve had an ICO set up, and it just felt wrong that they were able to create currency not really based on too much,” he said.

But when he began researching security token offerings last year he was drawn to them because there was a regulatory environment, and – “most importantly” – the financial instrument was backed by something, he said.

“What I really like about STOs is that it is a new pool of capital, there are new millennial-type investors, new fintech funds that are just geared up to invest in this type of product,” said Sumner. “The one thing that we’ve noticed is that there does just not seem to be very many good quality products of scale that are out there.”

Like ICOs, but different

Security token offerings are similar to ICOs in form, but STOs offer a “more mature and regulated form”, according to Strategy&’s report. “Security tokens are asset-backed financial notes and are considered as legally binding blockchain-based investment contracts. They may provide various different financial rights to investors including dividends, shares and other financial instruments, depending on design,” said the report.

The main benefits for investors of security tokens include fractional ownership of companies, as well as the tokens being tradeable. Other benefits include lower related costs due to a removal of intermediaries from the value chain compared with traditional assets, faster settlement, immutable proof of ownership and programmability, according to Strategy&. Assets that can be tokenised include real estate, commodities, art and collectibles.

But it’s expected to be the financial markets where STOs will make the biggest impact. Speaking at the AIM Summit in Abu Dhabi last week, Patrick Lowry, the CEO and managing partner of Iconic Holding, a digital asset manager based in Frankfurt, Germany, predicted that STOs would eventually become a multi-trillion dollar market.

“Every single asset in the world, every financial instrument, can effectively be tokenised. It’s inevitable that everything will be tokenised. The new Googles and the new Amazons of the world will have a security token effectively as a form of their IPO that allows for people to participate in the growth of the top new companies on the emerging distributed internet.”

Still, for STOs to grow further, the emerging crypto finance market infrastructure needs to develop and professionalise, said the Strategy& report, which identified market data services, reliable ratings and quality research, STO exchanges and flexible custody solutions as “critical market infrastructure” which are not yet at the required level of quality.

Lowry agreed. “The technology right now isn’t there. The blockchain itself, or distributed ledger technology, isn’t fully scalable in its current iteration. Further, there are many custody solutions that do not work,” he said. “There are no real valuation tools for a lot of these assets in the space right now. This is just one piece of market infrastructure that we’re used to in traditional finance does not yet exist in crypto.”

Emerging regulations

The UAE doesn’t yet have onshore regulations governing sales of ICOs or STOs. However, last November, the Securities and Commodities Authority (SCA) said that it would release regulations governing ICOs in 2019. Nevertheless, there are regulatory frameworks in the Abu Dhabi Global Markets and Dubai International Financial Centre free zones.

SGH’s offering takes place across a web of countries. SGH Global is domiciled in Jersey, while an entity in Singapore, Sumner Global Singapore PTE Ltd, owns 425 million class B shares in SGH Global, or 49 percent of the company, and is regulated by the Monetary Authority of Singapore.

In turn, the Singapore entity has been tokenised, with 425 million SGHX tokens available. Nine per cent are reserved for pre-sale and for founders, while the remaining 387,500,000 tokens will be sold via private and public sales, though Sumner says that on current interest they may close out the entire transaction in private placement. The target exchange listing price is $0.32-$0.35 per SGHX token.

Tokens will be held by a custodian in Hong Kong, HEX Custody, and will be tradable on the London Derivative Exchange, an FCA-registered exchange based in the UK.

Katie Lenko Hiess, the chief operating officer at SGH, described this as “quite a complex regulatory framework,” but said that the company’s decision was based on choosing jurisdictions where regulations were already in place.

“It is coming to be a regulated space, but the regulations are still emerging, developing, and changing constantly, and everybody has got different levels,” said Hiess. “We’ve had to find a solution between various regulators, to make sure that we can offer a fully-compliant offering that is still appealing.”

In the UAE, the team is working exclusively on private placement, targeting professional, sophisticated or institutional investors. If they wanted to target retail investors here, or in any other jurisdiction, it would need to be via regulated brokers, said Hiess. “What we are doing at the moment is purely targeting private placement, so that is a very strictly-controlled offering,” he said.

Looking towards the IPO, the precise mechanism for token holders to participate is still not determined, as the regulators have told them a direct swap of tokens for shares is not possible, said Hiess.

“At the company’s discretion, we will find a mechanism that is good and proper, that the regulators are happy with, in order that token holders may also participate in the IPO,” said Sumner.

Token holders will, however, receive a 10 percent dividend per annum, to encourage them to hold the token for two years – this will be paid out in the form of additional SGHX tokens every quarter, said Sumner.

Gold exposure

While SGH is offering a blockchain-enabled financial instrument, the portfolio companies that make up its holding are relatively traditional, and Sumner was keen to stress the conservative ethos of the company. VI Mining, which has two gold and silver mines and a processing plant in Peru, is the biggest asset.

Other portfolio companies include a healthcare recruitment company, a building materials company, and two media companies. It also has an 8 percent interest in UAE Oil Services, a downstream oil company whose largest shareholder is Khalifa Al Hammadi.

SGH’s shareholdings in its companies range from 71.9 percent in the case of VI Mining and 86.3 percent in SG Recruitment, to less than 30 percent in others. Over time, SGH will continue to build its stakes, said Sumner.

The implied fair value of its total holdings is estimated at $123m, he said. Following the cash infusion from the STO and development of assets, it is targeting an IPO value of around $400m by the end of 2020, with the companies expected to be collectively generating around $30m in EBITDA by 2022, Sumner said.

Around half of the $100m raised will be deployed into the Peru operations - mainly the two gold mines that were acquired from operators who were running them inefficiently. The mines will be optimised and then operational next year, Sumner said. Given the size of the mines in terms of SGH’s portfolio, investors considering the token offering will need to believe in the gold story over the next 3-10 years, Sumner said. 

Another factor aiding investor confidence has been the strength of SGH’s board, Sumner added. Lord Chadlington, a prominent UK businessman and a donor and advisor to the Conservative Party, is a non-executive director. Meanwhile, Jide J. Zeitlin, formerly a partner at The Goldman Sachs Group and currently the chairman of luxury fashion brand Coach Inc’s holding company, Tapestry, is a board member and non-executive chairman of VI Mining. There is still one more board appointment to be made – a corporate lawyer from a prominent UK law firm, Sumner said.

“The credibility and the quality of our board has really made us stand out,” he said. “You’ve got people in there, certainly in our non-executive team, that are extremely reputationally sensitive. That is giving people quite a bit of comfort as well. You’ve got the chairman of Coach – why would he risk [his reputation] for a scam?”

(Reporting by Stian Overdahl; Editing by Michael Fahy)


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