Why security tokens are categorically and absolutely not crypto tokens

Last week, Alphaville brought you the news that a failed initial coin offering (ICO) project called Sponsy was trying to flog itself on eBay.

In the story, we reported that part of what Sponsy was selling was a “full set of investment documents . . . designed and approved by investment bankers”. We also told you that when Alphaville asked Sponsy’s founder Ivan Komar about this investment bank, we were told that in fact this was a “law firm based in the UK” and then, on further questioning, actually “just some firm that was considering investing in crypto”.

The firm in question was Memorandum Capital, a Poland-based company that on LinkedIn lists its head office as a residential address in Manchester, along with 132 others companies. As one of you lot pointed out, these firms have a curiously high number of Polish names as directors.

Here’s Memorandum Capital's HQ (via Google Maps):

We looked up the company, and decided that it was neither an investment bank, nor a law firm (as Komar had in the end admitted), but instead, a company that helps other companies launch crypto tokens.

But it seems that Memorandum Capital was not happy with that characterisation. The company got in touch with a “request for corrections”, so we thought we’d respond to its main grievances here. To start with:

Memorandum Capital is categorically and absolutely not in business of “helping companies launch crypto tokens.”

This seemed to be the main issue, so we went straight back to the website to check we’d got this right. There, we found the following:

We provide full cycle support services for companies pursuing an STO.

It seemed the company's issue was our use of the phrase “crypto tokens”, and the connotations that term carries of Initial Coin Offerings (ICOs). Indeed, in a follow-up email from the company, we were told that “token launches in ICO is a phenomenon of the past, and we are not in that line of business”.

An STO, for those of you who don’t know, stands for a Security Token Offering. It is just like an ICO, but ever since the SEC starting clamping down on these, crypto-types have been trying to distance themselves from them, and have come up with all sorts of different ways to describe the practice.

A recent report from the FCA into so-called “cryptoassets” (a term we have some issues with), divided these into three categories: exchange tokens (the ones that pretend to be currencies, like bitcoin), “utility tokens” (the ones that tell that you'll actually be able to use to redeem with the company issuing them — a kind of digital coupon) and “security tokens”, which the FCA says are likely to fall within the parameter of regulators like themselves, and “provide rights such as ownership, repayment of a specific sum of money, or entitlement to a share in future profit”.

If a token passes the SEC's Howey Test, it is a security, and therefore needs to be registered and regulated as such, and subject to securities laws. There should not, therefore, be any kind of regulatory or legal arbitrage available for the issuers of such tokens to exploit.

So we can see why Memorandum Capital might have taken issue with us saying they help companies launch crypto tokens — even if co-founder Sergey Vostrikov calls it a “crypto investment boutique” on his LinkedIn — given that they only help companies launch one type of crypto tokens. They wouldn't want readers thinking that this was about trying to do anything that wasn't in strict compliance with regulations. Instead, under “Benefits of Security Token Offering”, the company says:

With less regulations (in comparison to IPO), STO becomes the easiest way to provide shareholders with liquidity of their assets.

They also point out some of the advantages of those famously compliant crypto exchanges:

Digital securities exchanges are investor friendly: accessing them is way easier than accessing traditional stock exchanges.

ICOs have been criticised for encouraging the kind of madness that allows people to raise millions of dollars in a matter of minutes. So we imagine that when Memorandum Capital praised its newly appointed executives for having overseen such mania, the company must just have wanted to make its new employees feel welcome (emphasis ours):

Two particular areas of growth we captured with these outstanding professionals, Dmitry and Marcello, are very important on the market: one is the latest development of STO-friendly environment in Malta, which is where we want to be, and another is the experience of being able to raise millions in a matter of minutes. Our clients and partners will ultimately benefit from these skillsets.

So we hold our hands up here. Of course security tokens aren't crypto tokens and of course Memorandum Capital is not about helping companies launch them.

Next was a complaint about Komar calling the company an investment bank, or a law firm:

At no time or place did Memorandum Capital ever state that it is an “investment bank, or a law firm.” The rationale of mentioning this is not clear: all it does is that it creates an impression that Memorandum Capital did or does present itself as an “investment bank, or a law firm” — which is factually wrong.

We felt the rationale of mentioning Komar's claim was self-evident, given that the whole article was about someone trying to flog something on eBay with some misleading assertions. But we thought we'd check to see where he could have got that idea from. We didn't find much.

Except this, on the Memorandum Capital website (emphasis ours):

We provide full cycle support services for companies pursuing an STO, including legal and fundraising, taking on the same role as investment banks play during an IPO.

And this, on the company's Facebook page (same same):

Mr Adam Major-Machnacki is an entrepreneur with significant experience, who will become a valuable asset in our endeavours to construct the first-ever crypto investment bank.

Oh and on its LinkedIn, Memorandum Capital lists its industry as “investment banking”.

So again, we hold our hands up. In no way has Memorandum Capital ever presented itself as anything akin to an investment bank or law firm. We’re not sure how Komar could have got in a muddle here.

Another complaint was the nature of Memorandum's dealings with Sponsy:

Memorandum Capital has no ties and is not associated in any way with the company you describe, one “Sponsy.”
Memorandum Capital has not conducted an audit, an appraisal or due diligence of said company “Sponsy.”

Memorandum said all they had done was a “Brief Assessment” of Sponsy, and that the communications was “very brief”.

So we went back to Komar, who told us that Memorandum had provided a “sophisticated, 7-pages long, deliberate analysis of our team, software, project, and business model” that had taken two weeks to carry out, and had included a SWOT analysis and market research. Komar also said there had been a category in the assessment called “Things to check during Deep Due Diligence”, which he felt had implied the initial assessment was doing some kind of “subtle due diligence”, as he put it.

An audit, according to the dictionary, is “an official inspection of an organisation's accounts, typically by an independent body”. Again, we can't understand why Komar could have imagined a “Brief Assessment” was anything of the kind, or how he could have thought any due diligence had been done.

The company's final request was:

In all fairness, we respectfully request that the name of our firm, Memorandum Capital, and any references be removed from the article.

We thought that instead of removing any references to Memorandum Capital it would be fairer to just respectfully write up a whole article about them.

To sum up: if someone ever tries to tell you that an STO is just a fancy name for an ICO, or that security tokens have anything to do with crypto tokens, or that the real benefit of “cryptoassets” is that they allow you to skirt regulation, or that it's strange to have 133 companies headquartered in a 2-up-2-down in Manchester, you just tell them to stop acting the fool.

Related links:
A failed ICO is trying to flog itself on eBay
— FT Alphaville
Buy SEC tokens! Now! — FT Alphaville
It might be a long wait for “the equivalent alternative to ICOs” — FT Alphaville
ICO regulator anger translator — FT Alphaville
Trouble in ICO paradise — FT Alphaville

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