Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Ken Nguyen: Republic – Bridging the Gap Between Investing and Startups

Episode Date: August 18, 2020

Republic is an investment platform that allows anyone pretty much anywhere in the world, of any income and net worth, to invest in some of the best private equity startups. It allows regular people, not just a few wealthy accredited investors, to invest in highly vetted private startups, with as little as $10 or as much as $100,000 per investment.In the past, accredited investors were the only ones allowed to invest in startups through equity-based incentives. However the JOBS Act of 2016 created an exemption under the federal securities laws so that crowdfunding can be used to offer and sell securities to the general public. Republic launched just after the JOBS Act was passed with a goal to create an investment platform which was truly accessible to everyone. This was around the time that companies began raising funds with ICOs, and Republic was among the first platforms to offer a framework for Security Token Offerings.Republic has recently innovated again with their Republic Note product. This is a profit sharing token which allows investors to receive dividends when companies who raise money on the platform make an exit. The tokens are issued by Republic which distributes a portion of the exit profits to investors in proportion to their holdings. This is a similar model to the Binance Token, which isn't surprising since Republic was the first portfolio company of Binance Labs. Ken Nguyen, Co-founder and CEO of Republic, explains the advantages of crowdfunding over traditional investing, the long term regulatory implications, and the opportunities this model opens up for startup funding.Topics covered in this episode:Ken’s background and his history with AngelListThe implications from the JOBS Act 2016Ken’s vision for Republic and making investment more accessible for more peopleOverview of the US Securities Law and investingThe interaction between Republic and cryptoThe types of start-ups and investors using RepublicThe importance of the community aspect within start-ups on RepublicThe Republic Note tokenRepublic Note’s Reg A offering and what the benefits of this will beWhere Republic Note can be tradedEpisode links: Republic websiteRepublic on MediumRepublic NoteWhen will the Republic Note’s Reg A offering be qualified?Republic TwitterKen Nguyen TwitterThis episode is hosted by Sebastien Couture & Brian Fabian Crain. Show notes and listening options: epicenter.tv/353

This is Epicenter, episode 353 with guest Ken Gwren. Hi, I'm Sebast Sequechio and you're listening to Epicenter, the podcast where we interview crypto founders, builders and thought leaders. On this show, we dive deep to learn how things work at a technical level and we fly high to understand visionary concepts and long-term trends. If you like Epicenter, the best way to support us is to leave a review on Apple Podcasts. If you're on a Mac or iOS device, the easiest way to do that is to go to epicenter. dot rocks slash Apple. We read every single review we receive and we love getting them.

Today, our guest is Ken Gwen. He's the co-founder and CEO of Republic. Republic is an investment platform that allows pretty much anyone, anywhere in the world, of any income or net worth to invest in private equity startups. Crowdfunding has been around for over a decade and most of you are certainly familiar with Kickstarter and Indiegogo. But since the Jobs Act of 2016, these platforms were able to offer equity to funders, albeit with certain restrictions, which is something that was previously impossible in the U.S. due to accredited investor rules. So Republic launched just after the Jobs Act was passed. And of course, this was around the same time that companies began raising funds with ICOs, and they were among the first platforms to offer a framework for security

token offerings. Well, with the ICO boom well behind us, Republic is innovating once again with their Republic Note product. This is a profit-sharing token which allows investors to receive dividends when companies who raise money on the platform make an exit. The tokens are issued by Republic, actually they're issued by a subsidiary, which distributes a portion of the exit profits to investors in proportion to their holdings. Of course, this is kind of similar to the Binance token model, which isn't surprising since Republic was the first portfolio company of Binance Labs. So what's interesting here is that this is almost as if Republic had gone public, just not on a regulated stock exchange. And so Brian and I spoke with Ken about the long-term regulatory implications for this model and the opportunities that it opens up for startup funding.

This was a really fascinating interview. Ken is inspiring and he shares his vision with a lot of clarity, so I really hope you enjoy this. A little bit of housekeeping before we go to the interview. About two months ago, we launched Epicenter Premium here the podcast. And sadly, we're going to be ending that today. And I'd like to share a little bit of the trajectory of how this came to be and why we're stopping this experiment. At Epicenter, we've been thinking about doing some form of premium content for over two years. And about a year ago, we did a small experiment with a handful of very close and loyal listeners to see if there was an interest for this. And that experiment didn't go so well after some time we realized. the content we were offering wasn't really that valuable to the people who had signed up for it.

So we sat on the idea for a while and in the wake of the COVID crisis as a lot of sponsors were backing out or there was reduced interest in terms of sponsorship deals. I felt that it was necessary to revive this idea to try to secure new forms of revenue for the show. And so we launched the premium product once again, but this time with the episode debrief as a sort of flagship thing that premium listeners would receive. And my assumptions about how this would go were totally off. Based on the previous experiment, I had anticipated that we would get at least a few dozen subscribers, which would have given us enough momentum to keep this thing going and to continue growing it. But that was far from being the case. Some of you did subscribe,

and I want to thank you for trusting us with this and supporting us. But unfortunately, there's just isn't enough momentum around this to keep it going. So the main takeaway here is that monetizing content is really hard. I look up to all these other shows who have built a business around monetizing their content and something that I truly like to emulate. But I think it takes a lot of work and it's something you have to start early. But I'm curious to know what it was about Epicenter Premium that wasn't particularly appealing. So if you have anything to share, you can reach me at Sebastianidepicenter.tv or on Twitter. So what about the episode debriefs?

What will we make of those? Well, we really like doing them, to be honest. Like, it's kind of fun after we just spent like over an hour with someone to chit chat amongst each other and share our own thoughts about the conversation and about the interview. And so I think we'll continue doing them whenever we feel we have something to share. And we'll put them out on the podcast for everyone to hear. And with that, here's our conversation with Ken Gwen. So we're here with Ken Gwen, the founder and CEO of Republic.

And really excited to speak with you today, Ken's, about Republic and some of the super innovative things you guys are doing with crowdfunding and Republic Note in particular. So thanks so much for joining us. Brian, thank you so much for having me. Wonderful being here. For some people, probably haven't heard about Republic. but Republic is sort of connected with Angelist. And Angelus, of course, had a big impact on crowdfunding. I mean, there's also Coinlist, right, that has come out of that that we've had on the podcast before as well.

Can you speak a little bit about your background, your time at Angelist, and sort of how that evolved into starting Republic? I started out my career as a securities attorney in New York. And then over time went into asset management and back into academia. So back in 2013, I got a chance to get introduced to Naval and the Angelis team and became their general counsel. When they roll out this new investment product called syndication, right, that everyone knows about, but Angelis syndication is only available to millionaires or accredited investors. And then under President Obama, there's a change in U.S. law, and this is very relevant for blockchain later on as well.

that the change in the law allow for non-accredited, meaning anyone doesn't matter what what income or net worth, to invest in private securities. And that became fully legal in 2016. And that's when I left Angelis to launch Republic, but Angelis ended up invested in us. So they're a significant backer among many of the VCs. So that's the heritage between our two companies. Cool. And yeah, I think many people have heard of the, you know, the Jobs Act and that regulation. So tell us a little bit about like, what was that change that happened in 2016 and, you know, what was the opportunity that opened up back then?

If I may take a walk down memory lane or history lane and go a little bit far back, you know, the Great Depression in the United States back in the 1930s, like 80 years ago, after that, that, well, regulators in D.C. decided, hey, to avoid investor getting defrauded, no one can invest in private securities in a private company unless they're really rich. And if they're rich, we assume that they're sophisticated and can, you know, tolerate the loss of capital. So that went on for 80 years. And even though in the U.S. people spend like $80 billion a year in lottery ticket. And the same amount at the casino. And, you know, Yet you have to be a millionaire to invest in startup. It obviously stopped making sense a while back.

But it took the Obama administration and a change in the law for that to really now open the gateway so that anyone, if they go through a platform like Republic, can invest in early stage Google, early state Facebook or, you know, a restaurant even. And we're a little bit behind compared to our European counterparts, particularly. the UK and other countries in the EU that had allowed for demarcatized private investing years before the U.S. So what inspired you to start Republic? And was there anything that you saw during your time at Angel's, which convinced you that there was a problem worth solving here?

The problem worth solving, I think, goes a little bit back before my time at Angelis. So my family immigrated to the U.S. from Vietnam. we settled out in Palo Alto in the Bay Area. And just because you are right in the thick of innovation, and at the time, Amazon and Google were like new startups, and everyone wanted to invest, but like we weren't accredited. So we weren't able to invest. And, you know, even neighbors who were accredited, meaning millionaires, doctors, lawyers, they still couldn't invest either. So kind of like the teenage me was like, man, I wish I get to put a little bit of money into like Amazon on or Google early on, but couldn't. And I think it kind of like stayed with me. And, you know, I went on and

became a lawyer and worked in Wall Street and still couldn't invest privately. So that desire to make venture capital private investing more accessible, I think there's a little bit of a personal background behind that. And angel is it's just a model that when I knew about, I was like, wow, these guys are making it possible for my older siblings who are physically. and engineers to invest. That's really cool. And so that's why I joined Angelis back in 2013. That's only a glimmer of the possibility, though. What we do at Republic is kind of like the hope that even a single mom in Vietnam or Ecuador, one day can invest like $5 in a startup in Silicon Valley. And I think blockchain and ICO fulfill that ambition to some extent.

I agree with the fact that like blockchain goes towards that vision. I remember in the early days of this podcast when we used to kind of think about where tokenization would lead us. One of the things that would often come up is like any hot dog stand could basically tokenize his business. And with platforms like Republic, it sort of seems like that vision is slowly coming into fruition. So what is your vision for Republic? And what is the future hold in your view in terms of like you said, like anybody being able to invest $5 into business? The vision, and it's not my vision for Republic. I think that for the private markets overall, I really see entrepreneurship, as like a shared economy in this sense, that it doesn't take that many years ago,

that entrepreneurship only means two things. Either you're someone who's lucky enough to actually found a company and find your way to venture capitalists, or you're one of those venture capitalists that can invest. That's the sandbox of entrepreneurship. for people, aren't founders with access, and venture capitalists. I do think that entrepreneurship got to mean a whole lot more, given that it's going to define

how we live and work in the future. That means that everyone has a little bit of a stick in whatever it is that they believe in. It may be a restaurant, it may be a female founder, it may be a technology like blockchain. So the notion of Amazon, but for private investing,

meaning millions and millions of people thinking of making small investment in things they believe in as quickly and easily with as many as options as buying products on Amazon. And that's a shift in spending behavior in financial investment activities. But we think that within this decade, it will become a mainstream concept. And I'm hoping that it will become mainstream in a couple of years and not 10 years. How much of an impact you think U.S. securities regulation has had in delaying that from happening? The U.S. not had accredited investor rules. Do you think that this would have happened a long time ago?

Or there are other forces at play here like technology or just sort of general trends? It would be really difficult to predict that had U.S. securities law not have a restriction around accreditation. how things would mature because that parameter was put in place to protect investors 80 years ago, right? So but the thing is that with technological changes and social changes, the law changes most slowly. And so it takes a little bit of time for that regulatory framework to catch up and it is catching up. I think now the means for mass adoption of, private investing is here. It's just a little clumsy and it's going to get refined over time. But I do think very much that based on what we have currently and we have a very good public

private dialogue with state and federal government, I'm very confident that I don't see any major barrier that prevents adoption. The number one barrier that prevents adoption is that people's attention span nowadays about nine seconds. So it's really hard to get through the concept of anything complex, like private investing when people don't have that attention span. So inadvertently, COVID and the pandemic has been very helpful because people have a lot more time right at home to watch webinar. So, yeah, there's been a silver lining in terms of getting the message out. Thanks so much for explaining that. And it's a really cool. and clear reason you have.

You talked about, like, crypto also being one of the things that sort of enables that. What sort of your interaction been from the Republic side with crypto? I mean, initially it was started as, like, you know, not a crypto company, right? And the Jobs Act is, like, unrelated to crypto. And then I think over time, you've done more and more things with crypto. How have you sort of looked at crypto? Blockchain as a technology is many use cases and how I think it will become, it will prove to be the most important technology of our lifetime.

I think that many people have written dissertations and expounded on it. The two attributes about blockchain as a technology that's very relevant to what we do. But beyond that, I think it will change financial services and investment products as we know of it. Two attributes, one is automation. The other one is functionalizations. The ability to break any asset class or any share. down to smaller and smaller pieces and enabling people to transfer them and confirm settlement payment so seamlessly and at low cost, it naturally lends itself to a lot more people being able

to get into the sandbox by virtue of being able to invest small amount of money. So from real estate to art to private investing, I think this technology will underline all aspect of capital raising and investing in the future in a way that people probably wouldn't even need to know what it is, you know, in the way that you and I are using email now. But I can't tell you exactly how emailing actually works. It just does. And I think down the row, hopefully in a few years that founders, even for a food truck, would be raising on a blockchain leveraged basis, and they do not need to know what tokenization means. You started doing Republic crypto as well. like what was Republic crypto?

How did you sort of like move on from there in your thinking? You know for crowdfunding or crowd investing, as I call it, when we started out in 2016, it was, the vision is to be Amazon for private investing, but at the beginning it was really hard. These campaigns only raised like $50,000, $100,000. And then out of nowhere, this ICO boom, initial coin offering, In 2016, 2017, in many ways, those were like the validation case of what crowdfunding could be.

You have new projects raising $50 million, $20 million from individuals around the world on this notion of selling a coin, but that was basically crowdfunding, except that it was done in a non-compliant manner. These tokens, generally under U.S. law, are all deemed to be securities. But these ICOs didn't comply in any way with U.S. securities law, and that's why they were able to raise so much globally. So we saw that and we're like, hey, this is a validation for what crowd investing can be. But it's very clear that the blockchain industry needs a regulatory framework, a compliant way to do these things. And so we roll out and we will very instrumental in the first few compliant ICOs in the United States, FalkoC, Blockstack, etc. But when you apply securities parameters to ICOs, then naturally you saw the industry slowing down a little bit.

It became more difficult for founders to go through all of these steps. But in short, Republic since 2017, 2018, have been using the same legal framework that we had for traditional offering of private securities and apply it to digital securities. So essentially, make the whole notion of token offering more compliant and more accessible. So that's our edge in the space, which is a legal tool to have. help token projects be able to reach their community in a way that, you know, makes sense from the regulatory standpoint. So I'm curious about Republic's customer base or investor base.

And also on the other side, the startups that choose to raise on Republic. Can you talk a little bit about those two categories of people and what they have in common? So, you know, from the startup side, like, what are the typical kinds of startups that you see raising on Republic and who are the people who choose to invest in them? And allow me to just define what Republic does for the audience, perhaps, and in short, we're an investment platform that allows anyone, pretty much anywhere in the world, of any incoming net worth, to invest in some of the best startups and private equities that we curate. Now, what is the difference between or the advantage of crowd investing compared to traditional capital? There's a saying in Silicon Valley that capital is cheap and that with money, usually founders also look at the value ad, what comes with that money. In the case of a VC like Sequoia Capital and Drison Horowitz, it comes with advice and network of like, you know, be able to introduce you to the soft bank of the world.

When it comes to crowd investing, the unique value proposition here, is that when one of your customer invest even just $10 into your company, she's going to become a brand ambassador because it's so, you know, if you are a $100 investor in Sky Vodka, that's what you're going to be ordering for your friends. When you're out at a bar, that's what you're going to buy for New Year's, and you're going to tell everyone that, hey, I'm an investor in this vodka brand. That notion, that psychological attachment applies across the board.

particularly when these are some of the very first private investment that any person has ever made, given that this is so new. So that marketing and community engagement element is why crowd investing, crowdfunding, is truly suitable for any consumer-facing enterprise tech or non-tech all the way up until pre-IPO. To give you an example, Airbnb back right now, Airbnb's pre-IPO, and back about a year and half ago, they even asked the SEC for permission to give out a little bit of equity to those who list their properties on Airbnb so that people feel more engaged. They're going to list a little bit more. They're going to tell the neighbors to do so.

The SEC said, hey, no, we're not going to give you any special exemption. You've got to use the current law. And Republic now, we have a tool to enable them to do just that. But it comes to demonstrate the value of ownership and community ownership. So to answer your question, pretty much a company from pre-seed all the way to pre-IPO, as long as they have a community or have an interest in incentivizing a community, crowd investing, and at one point tokenization is, in my opinion, the most valuable marketing tool that they can do.

Community is a key factor here. So, for example, like if your SaaS startup building B2B tools, the community aspect there perhaps isn't so present, whereas, let's say, like a video game, you have a platform specific for video games where there's like a pretty big community aspect there, is one more suited than the other for public, would you say? Certainly.

if you fund raising from the crowd and from retail people, the more relatable, the business model or product, the more likely the people are going to understand and invest. That's said, though, a good 30% or more of the companies successfully raised on Republic at BDB or have a enterprise as customer model rather than a consumer-facing because there are investors, they're just looking at it straight up from an investment perspective. Like, is this company something that I think is going to make me a lot of money because I believe in the technology, even if they themselves are not users or potential users of that product or technology? But by and large, yes, consumer-facing businesses are most suitable for crowd investing. Let's talk a little bit about Republic Note. Tell us, what is Republic Note token is the very first of its kind.

It's a digital token. that pays our profit. So out of every single company that fundraised on Republic, we have a little bit of an upside interest in that company. When that company exits, meaning getting bought out, or, you know, goes public at a profit, that upside potential is realized in cash. A portion of that cash will be paid back out to denote holders.

In essence, as the Republic continues to grow and accumulate a larger and larger pool of upside interests in all of these portfolio companies, the note holders naturally share in our growth and success. And whenever a company exits, they're going to see something back. So we call it either a profit-sharing token or another version of that is a revenue-sharing token, but that notion of tokenizing ownership or tokenizing economic interests, I think we're the first, but definitely will not be the last. And we hope to see a lot more of these launching in the next year or two. I was reading through this and, you know, it's a very cool model. One question that kind of came up is, is Republic note basically something where you say like

all of the economic or the vast majority of the economic upside is sort of, you know, like captured in Republic note or versus, you know, saying like there is kind of like this independent business, you know, and it has equity and value in that. And then somebody goes to the note holder. And so you might have this kind of like tension between those two sides as well. The white paper describes in full because it is a rather complex model. But to give you an example, all of the companies that crowd fund or crowdfunded past, present and future, on Republic, that is republic.co.co.co. CO, a hundred percent of the upside potential that we have in those companies will eventually go back to the note holders. We do receive cash revenue from different

sources and that's how we run our business. But the retail, the Amazon for private investing model, those companies and the future revenue of that will go to the note holders. So it really is a way for a person by virtue of holding a single note, have an exposure to an evergreen pool of innovations and startups that go through the Republic ecosystem since 2016. So basically the model, right, there's like as a company, I want to go on Republic, and I'm going to raise, you know, a million dollars,

and I'm going to sell 10% of my company, that then there's some, equity that goes to you and some of the cash also goes to you and with the cash you kind of you know like funding your business and all and then all of that equity you know from all of the companies have gone through it and all of the future companies that all kind of goes in the pool whenever there's an exit right then from that exit that at once some threshold is reached that's then kind of dispersed as a dividend to all of the holders of the note exactly and we do anticipate that a good percentage of these companies were not

pan out, right? That's the nature of private investing, is that any single early stage company, the likelihood of them just not working out is exceedingly high. But here's a number game. So to give a very concrete example there, Brian, assuming that a company just close a million dollars on Republic, out of that, we hold a $20,000 worth of equity in that company. Say that companies currently value a $10 million, which is a typical. typical, you know, very early stage valuation for a tech company in Silicon Valley. Say five years down the road, they exit, they get bought out by Uber at $10 billion in valuation. That $20,000 will see a 1,000x markup. And that amount of money, just from one single company can be a very meaningful

distribution out to no holders. Now, it's impossible for that. for me to say which company in the portfolio has that potential. But here currently we have 200 plus companies that we have helped fundraise. And hopefully by this time next year, that number will be 500 or more. And so the longer someone holds onto the note token, the more likely that future dividend payment back to the note holders will at one point should exceed whatever it is that she or he spend to acquire that token. Just to understand the mechanics of the token sale here, can you understand how that went through? And also, the money that was raised in the token sale is that the money that you're then using to invest in those companies and not be the equity to redistribute to the token holders if there's not a side?

Sebastian, let me answer the second question first. No, the money that we raised from our token sale goes to operating and technical and, and operational infrastructure. The amount being invested basically comes from our growing community. And so Republic today has over nearly 800,000 users. Out of that, a percentage of active investors. The raise is simply for, you know, development and maintenance of the note token. We, the concept of this profit sharing token was, you know, came up in early 2018 and Binance, along with a number of a number of other VCs backed this concept, this development. In fact, we're one of the very first, not the very first portfolio company of Binance the Exchange.

So we fundraise privately in that round. Then earlier this year, we raised another round privately from strategic investors, less than 10 VCs. And then most recently, about a month ago, we did a public offering. That is, we took in money or investment from a government. accredited investor under something known as Regulation D. We also took in reservations and indications of interest from non-accredited investor and hold the allocation for them as we go through a regulatory process so that to make it possible, hopefully in a couple of months, to confirm and finalize the non-accredited investment as well. So the unique thing about the Republic Note token,

is that it will be fully accessible and held by accredited and non-accredited community members and new investors around the world. Up until now, as far as I know, all of the so-called digital securities or revenue-sharing securities have been sold or made available to millionaires only. And obviously, you can't really get mass adoption if that's the case. many people will not be that familiar with especially the next step reg a i think reg d most people are familiar with i think for reg a we've done a podcast with gabe shapiro as well where we talked about it but do you mind talking a little bit about like what does it look like when you've gone

to reg a and you know in what way is it different from let's say a public equity of something like apple today that's a great question uh brian and uh if i may answer this question obviously in the context of U.S. law and regulations. I mentioned a little bit ago that in order, it used to be that in order for non-accredited, non-millionaires to invest in a stock, that company used to have to be a public company going IPO. But ever since, in the past few years, there's other framework, regulatory frameworks that make that possible. So let me use just an analogy real quick. Let's say if going public, the cost of that is like buying a Ferrari. Once you go public, anyone can buy your tray similar to Apple or Google.

A RECD, which is only available to millionaires and institutional investors, is very easy to do. It's very quick and easy. Almost anyone can do it within a week from the regulatory standpoint. It's like a bicycle. Quick and fast, but, you know, very limited. Rec CF crowdfunding, which is what you know, we do at republic.com primarily, that anyone can spend about $5,000 in three weeks to launch a REC-CF campaign, but currently you can only raise up to a million dollars max from non-accredited

investors. But it's, you know, low-cost and relatively quick. There's only one other tier in between REC-CF and going IPO and that's RECA. And that's like buying a Honda Civic or like a Toyota, in that it takes about at least three to six months and about $300,000 or more in order to launch a reggae campaign. If you successfully get your application qualified by the SEC, then you can raise up to 50 million, five zeros, from accredited and non-accredited. So the threshold is a lot higher. It's just more expensive and takes the longer to go through that process. And the IPO process costs about two or three millions, up to $15 million to do an IPO.

And then after that, it takes about a few million dollars a year to maintain. So obviously it's only suitable for like the biggest of corporations and there's no cap. Those are like the four tiers, basically. Cool. That was that was super clear explanation. Thanks. But in terms of this thing you receive, right, when you have done the reg A, like how does it behave differently in practice?

You know, how is the Republic node token, for example, going to be different from, you know, if Apple went to tokenize their shares? Yes, the question is about the distinction between RACA securities and like a public securities. Well, the two main is not so much distinction, but you should look at private securities or public securities token or non-token in the context of trading restrictions, what parameters, regulatory parameters that limit people's ability to buy and trade? Because if you can't really trade, then, you know, it loses that liquidity, that that appeal, right? So rec A securities is interesting in that the moment that is qualified, then it's immediately tradable, similar to an Apple stock

or a Google share. The question is, where can it be traded? So when a company like Apple or Google go public, they naturally get listed also on an exchange. And so people know exactly where to go to buy and sell. With reg A, whether it's a token or a non-token, a company like Republic, would make that initial offerings. And then we have to separately figure out secondary solutions for that. And so it's not as clean or not as so immediately, you know, self-explanatory like buying an Apple stock and knowing for sure that there will be a secondary market when you buy a reg A token or reg A security. You do have to question, where is this stock going to be traded? Right. I mean, I think that ties into, of course, you know,

great topic, which is the topic of security tokens. And One of the issues that security tokens so far seem to have had is exactly that, right? That there's like a lack of liquidity and, you know, basically, I think the few companies that have sort of tried that, you know, it has not had nearly the scale and success as the kind of ICO token. So how do you think that's going to play out with like liquidity and security tokens and like what's your sort of take in general on where we are with security tokens? And Brian, Sebastian, I think you both would agree that STO has been underperforming compared to the hype that it was getting a year or two ago. And there's a reason why there's been this slow maturation of security tokens overall twofold. One is that people haven't found a way into very recently to make it accessible. to non-millionaires. So you can't really have active trading if it's just 500 high net worth

individuals owning a bunch of tokens. You know, you can't really have an active market in that way. And now there is that legal framework. A republic is one. But, you know, before that block stack and props already used reggae to make their tokens available to the masses. The second, the reason behind that is due to the fact that there hasn't been a credible enough. And by credible enough, I mean a large, an enterprise or a business or a project with large enough of a user base. So the best that I have seen of securities token before 2020 were like tokenized real estate projects, but it's like a Class B real estate project in some random state. And again, only held by a few hundred millionaires. So, of course, without a community, without, you know, hundreds of

thousands or millions of participant in the ecosystem and without credible tokens, you couldn't have that adoption. A little bit self-serving on our end, but, you know, we have a very large user base. 800,000 is probably larger than most exchanges. And we've been around for four years with a business model that I think people understand. So we hope that the Republic Note token over the next six months will move the needle forward when it comes to STO adoption. But are there currently changes? Like, for example, where you can actually trade, let's say the Blockstack token or like when Reg A happens for Republic Note in the fall, where are we going to be able to trade the token? Yes. So legally, here in the U.S.,

There are already a few exchanges that have allegedly have their licenses to list and trade. And there are a few names, you know, open finance, I think shares post, and a few more. Now, they haven't had too many credible tokens or projects to trade, but we are working in dialogues with a number of them. And we do fully expect for the Republic Note token to be, to have secondary, liquidity by the end of the year. One of the questions we had was with regards to the payouts, and so the no token has a dividends feature, which you've explained earlier, where if there's an exit, then the no token

holders would receive a dividend. How does that work? In what form do they receive dividends? Is it cash, or is it some kind of stable coin? How does that work? Yes, the no token will be, you know, launching on the Algarand protocol. And when it comes to digital tokens, there are a couple attributes that make it very different than so-called utility token in that among other things, you got to control, know your customer, anti-money laundering, you know, accreditation verification. But also, if you're going to pay out profits or economic interests or dividends, you've got to be able to issue this payment through stable coin, right?

So there are a few chains that enable that. Stellar, Eos, Ethereum, and of course, Algarand. So Algaran is also a backer of the Republic Note token, but we, of course, will be planned to make the dividend payment through, you know, U.S. Tether, stablecoin back to the underlying note holders. Okay. So this requires that Algaran has some sort of stable coin launched on its platform.

Yes. Okay. So it's sort of dependent on that happening? Yeah, they already have, I mean, there are more than one options on the Al-Gran protocol currently. And I think Binance, we will be issuing a wrapped token on Binance chain, which currently doesn't accommodate securities token just yet, but will be, at least we hope that they will be very soon.

Cool. Which brings up the question about Al-Grand. So we recently had Al-Garan, the Al-Garend team on the show. And so I'm curious why you chose to build an Al-Gurand and what ways does it differentiate from building on Ethereum. I'm such a big fan of the Al-Gurand team for a number of reasons. I mean, technically, the founding team, the technical founders of Al-Gurand is, needless to say, like MIT professors,

some of like the most respected names in tech in the industry. But in short, compared to the alternatives, in our subject. assessment, it is stronger, faster, and definitely cheaper. So just those three elements alone would make Al-Garan a preferred protocol for us, but they also invested in Republic and the Republic token. So that alignment of interest, you know, really made it even easier for us to strike that partnership. Al-Garand is a new platform, sort of relative to Ethereum. What was like building the note token on Algarand? And can you talk a little bit about, I know that Algarand is sort of targeting, you know,

the security token market. Can you talk about some of the benefits of using Algarand from this perspective? Not only that Algaran is focusing on the security token market, they have like a specific commitment dedication to servicing financial product and investment sector. So out of that, even though they knew, they're very focused. And on the business side, they have in, for the past year or two, build relationship with traditional financial institutions in the U.S. and outside.

So that focus and that enable them to do a number of things from both the security standpoint, the pricing standpoint, the speed of things that makes someone, that make them, highly attractive to someone like us, which operates entirely in the investment industry and aim to disrupt that space. Out of that focus, I think their ability to invest in building the ecosystem and supporting their project naturally is going to be a bit more helpful to people like Republic compared to something like Ethereum, which is far wider in its intention and in its role So in our case, the novelty of it is an easy tradeoff for the focus that the Al-Grant team, you know, had in mapping out their project. Yeah, really cool.

I'm curious, you mentioned KYC and anti-money laundering before. And of course, like one of the kind of question that comes out for me here is so you have this republic note token. You know, to what extent will it be possible to, you know, like, interming? integrated into like defy and different types of applications. I know there are some people who've done security tokens in Europe. And there it seems to have been the tendency that, you know, they'd have to do K. Y.C when selling the token, but afterwards it's kind of, there's no KYC needed. And I think even that dividends could be paid out to like, you know,

whoever holds the token at that point. What kind of ongoing restrictions will there be on the tokens? The Defy World is definitely operating in this gray area of the law. It doesn't matter which jurisdiction is in, whether it's with respect to U.S. laws or German laws or U.K. law. The Republic Note token is definitely not fully decentralized in that we plan out of necessity to be not in a gray area, but so clearly complying with U.S. securities law, first and foremost. So that requires us to take responsibility for making sure that know your customer, anti-money laundering, accreditation, jurisdictional barriers are like fully compliant with.

So they ease a heavy degree of centralization or like central monitoring. And so the network, you know, the different protocols that allow us for whitelisting features that from our perspective as the issuer, the entity that offers token, have the ability to maintain a white list to vet and to clear people not just during the primary offering, but thereafter when two parties are buying or trading selling tokens, that they have to clear through KYC and AML on our end. And not only that, we have the ability to freeze and burn tokens as well, insofar that a transaction turns out to not make meet the relevant countries, KYCAML standard. So we currently operate not in the same gray framework as many of the D-FI project,

but we obviously are keeping a close lens. And we intend to collaborate later on where relevant. But I think for D-FI trading, at one point, there got to be a clearer regulatory landscape. Because right now, I can't say, as a securities lawyer, that transaction being done, you know, the DeFi transactions are truly compliant just because there hasn't been a slapdown or smacked down by the SEC or various entities. It doesn't mean that there wouldn't be. So we're very cautious about the whole concept, truly decentralized finance for now. Probably good to be cautious in this regard. I want to come back to Defi in a little bit,

but first, I wanted to come back to a question that I wanted to ask earlier. which is about, we kind of touched on this a little bit, but Republic is currently addressing, I believe only the U.S. market, in fact, to be an investor, I think, for certain types of products that you offer. You also have to be U.S. citizen. What does you view on the EU market? And do you plan to start addressing, well, startups in the EU and also EU investors, as our listeners will know, EU securities regulations are often seen somewhat simpler and they're open to non-acredited investors, so there seems to be less red tape in the EU market. What's your general thoughts on that? As a crypto enthusiast, but even before that, I'm a firm believer in a

more global economy, and the whole promise of blockchain is to make the jurisdictional boundaries, you know, blurrier over time and then at one point removing them together. So whatever we do or have been doing it, Republic. There's always a long-term global ambition. So today, even though we only actively operate in the U.S., any investor outside of the U.S. that passively come to us to make an investment, generally we're open to them. But we at the same time have been working with partners

in different continents and countries to make sure that down the road and not too far out, maybe even in early 2020, that we can legally work with, you know, different jurisdictions. I'm going to pick the EU as an example. Back when the UK was still part of the EU, we struck a partnership with a platform comparable to a republic, but more established. They've been around for longer in the United Kingdom. And a debt does allow for non-accredited investors to invest, in private securities. Obviously, with Brexit, we now are eyeing other partners in perhaps Germany or friends. To make that possible, we have an informal partnership with a platform in Australia and are looking very actively at the Middle East as well as Asia. But surely, it's clumsy.

The good thing is that the U.S. securities legal framework is so strict that if you comply in the U.S. U.S. laws, you're like 90% in terms of compliance. In most other countries, you just need to find the right partners go through the right regulatory approval process, but the framework of KYC, of AML, accreditation of sophistication, you know, similar enough. So it's just a matter of time, Sebastian, when we make this much more actively possible globally. I'm personally looking forward to it. Thank you. You mentioned Binance before, and of course, the interesting thing about Binance was that, you know, we had people doing all these ICOs and then Binance came in.

They basically did, you know, an IPO. But for a private, a centralized company, of course, you know, over time, Binance became a bit more like, you know, decentralized and now, you know, it's a sort of hybrid thing. But, you know, what we saw in Binance was this just insane amount of growth. growth. And, you know, still, I think one of my favorite episodes we did on here was with CZ talking about like exactly that. And, you know, the Binance token played such a big, a big role in this. And now I think you're, you're basically doing something like quite similar. So I'm wondering, like, to what extent you see like Binance as like an inspiration, like what,

what are the biggest learnings for you from Binance? And, you know, what are some ways that maybe you're going to go a different path? I personally feel incredibly fortunate that we get to be part of like a couple powerful ecosystem angelis being one. That's, you know, when we started out with the investment. And when we got that backing from Binance Labs and then became a member of the Binance ecosystem, that's just another, you know, stroke of luck that not only gave us the capital, but really just the inspiration to, you know, to enter the space and to build and to do what we do.

But to answer your question, Brian, I have no doubt that not just Binance, but other major players in the space are taking the notion of tokenized equities or securities token with renewed interest. And given that in the U.S. Republic is probably a leading, not the leading brand in the tokenization and STO space that, you know, we have been consulting with the Binance team on the roadmap for 2020 and how hopefully together we can be, you know, we can collaborate more meaningfully. I probably have a lot more details to share in the coming months on what that conversation or collaboration may look like. But I think, it should vote well for STO as an industry overall because right now there still hasn't been a major brand, a major player like the Binance of the world, making a statement saying that

now is the time that we see the riding on the wall and that we're willing to invest and go in and build this and hopefully we'll see that soon. So when you have STOs, you know, and let's turn out with, we've been able to invest and go in and public, you'll have maybe after the reg A, you'll have some, you know, tens of thousands, hopefully of, you know, sort of like of owners of this business in a way. How do you think that will change, how people, you know, build companies and run companies? The framework for tokenization will raise a number of issues that only over time can be fully square out. To give you an example, you raise an amazing point in that how would a founder having tokenized equity and ownership

and now have 50,000 investors? I mean, imagine the, if you just deal with 50 investors and the hassle that comes with that, how do you deal with 50,000 investors? What's the standard practice, the expectation, communication channel, forget about cap table and all of that. If something, if there's like something bad in the news, how do you make sure that people just don't lash out and like go crazy on telegram and Twitter? So all of these things are what we are validating and testing at Republic. And we hope to deliver options for people who come after us and look at us and our learning

and use it. So you asked earlier, Brian, what will we use the proceeds from our own token sale for? It's about portfolio management, about investor control. It's about laying out all the compliance as well as just accounting best practice for this. I have a little bit of a background corporate governance. I was a fellow at the Center for Corporate Governance at Stanford University about almost 10 years ago. And that, the issues that apply to a public company, oddly enough at a smaller scale, is very much relevant here. it's just how to make it feasible.

Because if you make it too complex, then it can't defeat the whole point of tokenizing, you know, simply and cheaply, right? So there's a balance somewhere that we're still working on. So before we wrap up, we wanted to talk a little bit about accredited investor status in the U.S. And I think it was Jim Bianco who came on the podcast recently who talked about the need for accredited investor status to change in order to kind of stimulate the. the economy in the wake of COVID. You mentioned earlier that the, this regulation is over 80 years old.

It is changing now with this, these different reg A, reg B, et cetera regimes. What other changes do you think can and should happen, which would be, you know, a welcome change to the accredited investor rules in the U.S.? And having spent a little bit of time in Europe and a sturdy law in England, I think there's a common generalization that Americans are less nuanced than our European counterparts. And it definitely is true when it comes to the notion of accreditation. We are the only country, as far as I know, developed, of the, you know, developed countries that defines accreditation straight up based on wealth in every single country in Europe. There's a sophistication, you know, definition. You know,

definition as well. So here's an example. Under U.S. law, the law actually assume that if you're an MBA grad from Harvard and an analyst at Goldman Sachs, since you just graduated with debt, you're not accredited, but that that person is less suitable to make investment decisions than someone who's 85 and has been a history teacher and just save over her life to just exceed the. that threshold, that person under U.S. law is suitable to make highly risky investments compared to a Goldman analyst. That clearly is not the case. I think there are learnings that U.S. legal system can borrow from, you know, other countries like Germany and the U.K. That's said, though, I think the current legal framework in the U.S. that enables non-accredited investor to

participate under rec CF and reg A, are adequate. Can things be better? Yes, but there's no question that now in 2020, pretty much everyone has the ability to participate in private investing. The issue is less regulatory and just awareness. And Sebastian, if I may share like a fun fact, this is a study from a major consulting firm in the U.S. that in 10 years, Fortune 500,000, companies in the year 2030, 75% of them have yet to exist today. So if you consider the fact that the vast majority of the companies that would dictate how one lived and works in the future, like in someone's head or someone's garage today, it definitely begs the question that why wouldn't you, if you can, even if you're a student

for a price of a pitcher of beer, not take an interest and have a stick, however small it may be, in whatever products or investment or storylines or founders that you believe is worth backing. It's kind of like voting. Are you just going to leave it to the big banks and the financial capitalist to dictate your future, or would you cast your vote in this case with a little bit of capital?

And so that notion of private investing, the ability to vote with your money, I think it's still unknown to 99% of the world accredited and non-accredited. So the biggest challenge and also the biggest potential is in exposure and getting the message out, which is why I'm so grateful for to be on programs, you know, like this that you guys have me on, more so than any tweaks that would come out of Washington, D.C. or, other federal agencies. Yeah, no, I mean, thanks so much for for this note and these comments.

And I think it's really amazing what you're working on. And I'm so excited to see, you know, see this kind of like developing, see your public note publicly traded and all of that process to happen. But I mean, I fully agree with having this idea that like democratizing access to this to like everyone in the world is amazing and super excited that you're working on this. Thank you so much, Brian. And thanks, Sebastian, for having me and for having our story. Thank you.

So we just wrapped up our interview with Ken Gwenne of Republic. And it was like, I thought it was a really kind of inspiring story and kind of a really interesting story about how he started Republic and his whole vision for, you know, how startup funding should, you know, move into this more like community, um, community based model. I'm curious what you thought of the interview. Yeah, I mean, I think they're doing really cool work. At one point, we were at course one. We were also kind of like looking a little bit into thinking, oh, could be issues in token. And actually at the time, we were like looking at it from a legal perspective too,

and I came across Republic Notice was like a year ago. And that was like, wow, this is a very, yeah, it's a very innovative and cool way of approaching it. And it's great that now, like, they've advanced so much and it's out. So, yeah, I'm very excited about it. And I think his vision of, like, actually making this something that, you know, is accessible to anyone in the world and you can invest as little as, you know, $5. Yeah, it's very inspiring. And I'm certainly very impressed with Republic.

Yeah. It's interesting how, you know, in the early days of, you know, Ethereum and even before Ethereum, when, you know, when we're talking about primarily about Bitcoin, how, you know, this idea of, you know, this idea of, you know, tokenizing any business or allowing anyone to invest in any business, you know, was kind of going around in the counterparty days, you'll remember. And this is kind of that coming to fruition, but it's, you know, I don't, I don't think that back then we envisioned that some kind of a centralized platform would be the issuer of these tokens. We kind of thought it would be more like on a decentralized flavor, at least for me. And, you know, it's kind of interesting that in the end, well, yeah, companies have to build this infrastructure and, you know, it's not necessarily some

DAP, you know, or some like DAO that's kind of leading the way on this, on this new model. Yeah, I mean, I think the regulatory issues are obviously there. And so from that perspective, it, you know, it kind of makes sense that, you know, that you have to do it maybe to a centralized platform with KOC and all of that. Of course, at the same time, and we didn't speak about that in the interview, we do have a lot of similar things happening. in the decentralized space, right, where you have, you know, all these, like, let's say, theorem defat protocols. There's also, like, tokenizing and, you know, people can earn tokens.

And, of course, you still have token sales of, like, various types happening or maybe people, like, privately raise and then list the projects on exchanges and, you know, people buy it. So I think there's still, like, many, many ways that projects are fundraising that, you know, maybe don't take this like direct security token path. And I don't think they're going to succeed in shutting those down. And of course, you know, the Binance, which being the best example of that, right? Binance, that has been some of the inspiration perhaps for a republic. But at the same time, I think it's really great that there is this, you know, kind of clear,

compliant path as well. And it seems like that path is becoming more viable and more accessible option. It's also interesting if you just look at the complexity. He did a great job of explaining the different regulatory regimes regimes in the U.S. But the level of complexity in U.S. securities regulation in order to do what here in Europe is fairly easy, I would say, like one wants to launch a security token, like, depending on your jurisdiction. I mean, I don't know if this is quite true. Like, you know, I mean, of course, complex issue, right? But like in Germany, for example, there is an active crowdfunding scene, but I think it's all dead-paced. So to have, like, equity crowdfunding is something that I think doesn't really exist in Germany.

So I think here as well, you know, there are some regulatory complexities that have kind of, like, made that impossible, or impossible, at least so hard that it hasn't been done yet. So I think those issues probably exist do in other places. Although I guess the UK that he mentioned is certainly one thing where you've seen, you know, equity crowdfunding for many years now. Yeah. I mean, it also exists here in France. For one to do a security token sale here in France, it's, I'd say, like, relatively easy.

There may be some legal costs associated to it. it and you do have to do a perspective and this sort of thing. But from an investor point of view, you know, the rules are much, much easier, like, across Europe. And, you know, I'd be curious to see, like, what, what they're going to do here and, like, how they'll deploy and the, you know, the types of products that they're going to be able to propose here in Europe, as opposed to the U.S., and if this will be different. I don't think they even need particular products, right? I mean, it is mentioned, right? Like, this is available right now, Republic for non-Americans as well.

I mean, maybe they will need different offerings. I guess they will need different offerings for the company side, right, to like cater to European startups. But I think European investors or like non-American investors, you know, they'll be able to use Republic as well. I mean, I think you have in any ways, you have this kind of unusual thing that, you know, the U.S. is willing to like go after. platforms outside of the U.S. that they think violate U.S. securities law, but other countries

don't tend to do that so much. Yeah, the distribution model. And when we're talking about this before the show, you mentioned something that we didn't really talk about on the show, which was that essentially by doing this no-token, Republic kind of went public. And I wanted you to elaborate a little bit on that. And from a sort of functional perspective, they did go public, but like from a regulatory perspective, they didn't. But like, what, what do you think that entails, like, for the way that startups, you know,

might try to raise funding in the future? Yeah, I mean, first of all, I guess the public thing is going to be more in the fall with the reg A, right, where it's really accessible to anyone. I guess, you know, it's cool that that's an option. Although, you know, the caveat is still what he mentioned, right, that there is, I think at the moment he said $2,000 to $300,000 in like legal costs.

and, you know, you still have this public reporting requirements. So there's still, you know, significant overhead, maybe around this reg A offering. But, you know, that's probably still a viable option for, you know, maybe startups at like a little bit later stage, you know, like a series B, series C, series D. So I think if those become more like publicly accessible by, you know, everyone, I think that's really amazing. And he's right what he's pointed out there. I think like having this ownership in, you know, the products you use and companies you hear about. Like that's something powerful that, like, builds communities.

And I think Binance with Binance coin is like the best example of that. So I think if that's accessible to like many more companies. And yeah, maybe the grocery store too and the restaurant and the bar. And that would be really cool. I mean, I would love to buy like some equity in like various. you know, businesses that actually use around here. I mean, just, you know, think about it. Like, imagine a world where this exists for Uber, for example.

And so you just, like, open up your Uber app and they're like, hey, do you want to invest in our next funding round? You can do it with your credit card and it takes, you know, a few minutes and there might be some KYC or there might be some kind of onboarding process. But, like, you know, you can do it in the time that it takes you to get to your destination kind of thing. Like, I think that would be immensely valuable to the company. but also like to the people investing in it and just the the reach that you know I think like for

for a company that's in a sort of series maybe series B, CED phase where they already have you potentially tens of thousands of users and already have that reach even things like social networks like a Snapchat or word the reach is even bigger like the potential here to create like this new type of public company with like secondary markets that isn't like you know the IPO at the IP at a level. I think it's like immensely fascinating. Yeah, cool. Well, thanks for doing this. Thank you for joining us on this week's episode. We release new episodes every week. You can find and subscribe to the show on iTunes, Spotify, YouTube, SoundCloud, or wherever you listen to podcasts. And if you have a Google home or Alexa device, you can tell it to listen to the latest episode

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