Use Cases

Regulated Securities Offerings
Introduction

Securities offerings are now a common topic of conversation within the crypto space. This is in no small part owing to the litany of projects that raise money from investors, beginning in earnest during the 2017 boom all the way to today, without complying to local rules. Indeed, the main reason why crypto firms are now much more likely to eschew a public sale and raise money privately rather than publicly is as a result of several high profile controversies that saw companies being found in breach of securities regulations, thereafter incurring significant fines.

Steps have been made not just to ensure that crypto firms are compliant with securities regulations, but also to bring regulated securities more generally onto the blockchain. tZERO, owned by the retailer Overstock, is one such effort, boasting earlier this year of having transacted over 423,000 digital securities.

However, there remains several issues, most notably, adhering to compliance with globally diverse securities regulations and inefficiencies within the current securities issuance lifecycle. It is these prominent issues that AllianceBlock aims to solve.

Problem

1. Regulatory compliance

There are several issues that firms face in issuing a compliant securities offering. This includes clarifying what a security actually is — and if what the firm is issuing constitutes one. It also involves providing sufficient information to allow investors to make an informed decision while adhering to marketing rules. Generally, rules are stricter the more public and widespread the offering is. This is to protect retail investors; as the potentially apocryphal story goes, Joseph P. Kennedy pulled out of the stock market shortly before the 1929 crash because even the boy that shined his shoes had begun giving him market tips. He would later go on to become the inaugural Chairman of the newly created Security and Exchange Commission, introducing legislation including the Securities Exchange Act of 1934 to reassert investor faith in the markets. Complying with these regulations involves significant time and costs, including often bespoke legal advice. This is furthered by the range of regulations that each country has, and in the case of the United States, for example, compounded by state by state differences.

2. The elongated securities issuance lifecycle

The process of issuing a securities offering is not a short or simple one. Alongside compliance, it also involves a range of required actions ranging from documentation to due diligence checks, marketing, secondary trading and corporate actions. These all incur expenditure, either through direct resources or outsourcing.
Challenge

Providing a means for firms to issue compliant securities offerings that appropriate investors can participate in while simultaneously eliminating many of the inefficiencies that make the process both longer and more costly.

Solution

The AllianceBlock Protocol was created to be able to deal with complicated scenarios such as issuing a security.

The below outlines the typical process of issuing a security on the protocol:

While our whitepaper examines the full details of how the protocol works , in short, AllianceBlock helps to simplify each stage of this security issuance process.

Issuance

Instead of having to seek bespoke regulatory advice for each issuance, the issuer can undergo approval from regulators from within the protocol itself. They achieve this by creating a proposal that must adhere to the rules set within the smart contract by the regulatory authorities. The issuer can also set which countries are able to access the issuance. For example, if during an issuance, the regulatory service governing the ownership of the issued security has an embedded rule that citizens of country X cannot own these securities; all citizens of country X will be able to see but not access any of these securities. There will be multiple regulatory rules that will need to be activated to ensure compliance with the jurisdiction of the issuer and that of the investor. If the jurisdiction of the issuer has a digital Central Securities Depository (CSD) then the security will be issued within the digital CSD. The Asset Registry (the function in AllianceBlock that governs issuer-specific rules, counterparty eligibility and details on the digitized asset) stores all transactions relating to the newly issued security. If the jurisdiction does not have a digital CSD then AllianceBlock will enable a communication channel between the relevant parties and layers, including the traditional CSD, the digital custodian, the Asset Registry, the regulatory-compliance entities, the issuer and the investors. This means that the security is both appropriately registered and that it can be subsequently transferred between owners securely.

Whitelisting of potential subscribers and KYC

The Data Registry is the functionality within AllianceBlock containing encrypted information on users, including KYC status, legal documents, and compliance details. The validation of these details is done via consensus of a set of KYC providers who operate by fulfilling conditions and requirements set forth by regulators, financial institutions and other data processing agencies. This has benefits for both investors and institutions; for the investor, KYC does not have to be done each time for each firm, while issuers likewise do not have the same resource burden of having to perform a full KYC check each time. Financial institutions can, of course, invalidate both individuals and data processing agencies that do not conform to their internal requirements. They can do this through a ‘Do Not Comply’ list. Once onboarded, the issuer can verify the investor against the Cross-Border Regulatory Compliance Layer to ensure compliance with both the issuer and the investor’s jurisdictional regulations. Only once the CBRCL approves the investor will the requisite documents, including prospectuses and term sheets, be made available to the investor. By automating this process, both time and resources are saved.

Subscription

Once the proposal has been accepted and its records created in the Asset Registry and Shareholder Register, the eligible investors will be able to view the available investment opportunities on their devices and can proceed to the next steps via the app itself. The digitized securities’ ownership records and their corporate actionable items are then stored on the Data Registry.

Trading

The completion of a trade on an Alternate Trading Systems or Securities’ Trading Platforms will automatically change the ownership of the digitized security to the new owner and automatically update the shareholder register in the digital CSD. For traditional CSDs, we are partnering with various CSDs in order to seamlessly allow them to update their registers.

Corporate actions

Corporate actions processing has long been plagued by inefficiencies and has been written off as multiple complex processes that are unsystematic, abstruse and difficult to automate. One of the reasons has been the multitude of intermediaries sitting between an issuer and its investors. The AllianceBlock Protocol aims to create more standardized and automated corporate actions. These include dividend payments, coupon payments, withholding taxes, voting, stock split and stock buyback amongst others. To activate a corporate action such as a dividend distribution, the issuer sends the instruction via the app which performs a concurrence check with the CBRCL and the digitized securities environment. Once this has been approved, the digitized securities environment connects to the Shareholder Register and the Data Registry to enact the corporate actions by providing direct transfer of funds and/or instructions from the issuer to the investor and vice versa. The AllianceBlock Protocol ensures that, despite trustless networks and the litany of financial institutions in the fray, the corporate actions are straightforward encrypted private conversations or instructions between the issuers and their subscribers.
Conclusion

AllianceBlock solves some of the most pressing issues faced by securities issuers. It allows issuers to act in a compliant manner, according to rules set by regulators or vetting authorities, while also enabling them to save time and resources on inefficient processes that often frustrate both issuer and investor alike. Through this, the issuance lifecycle can be both shortened and made more rigorous to appease all parties.