It was considered an astronomical undertaking, but during the 2017 ICO boom, I knew that it was high time for a major shift to take place in capital markets: The regulation of blockchain assets under the Securities Act.
ICO’s at that time were considered relatively new to financial markets, but since they weren’t IPO’s, they weren’t much different from typical crowdfunding efforts – aside from the funds being raised in cryptocurrency of course. ICO’s didn’t require lawyers, bankers, or regulatory approval. If anything, having a whitepaper and a small team of developers was sufficient. Meanwhile, company financials would remain private, raising numerous red flags for investors. There were plenty of cases where ICO issuers capitalized on the lack of controls and disclosure requirements by treating their token holders in an opaque manner.
The need for regulation
While INX Limited was still merely a concept, I approached my lawyer, Mark Selinger of McDermott Will & Emery, and discussed the need to regulate digital assets, due to the unsettling nature of many of these ICO’s. I told him, “Hey look, a bunch of these guys are going to get in trouble. Most of them are going to be gone. I want to do this the right way, because at the end of the day in order for institutional investors and other more typical investors to get really involved in this space, this is going to need to evolve into a registered, regulated product.”
Sure enough, many of the ICO’s from that time did turn out to be deceptive, and many did indeed run into trouble. As stated in Forbes, if an investor purchased the top ten ICOs of 2017 during the token sale, they would have fared well through the middle of October 2018. A $100,000 investment would have been worth $160,936, compared with $113,722 for the S&P 500. However, six of the ten would have had negative returns since their ICO, with one mysteriously vanishing. Obviously in hindsight, investors were better off investing their $100,000 into Bitcoin, which would have yielded $264,417 in 2018. Retail investors that ended up purchasing ICOs after the coins began trading on leading exchanges most likely ended up in the worst position, according to Ernst & Young. That’s because of the 141 largest ICOs in 2017, 86 percent ended up trading below their listing price, and 30 percent ended up losing almost all their value.
My lawyer and I had a call with the staff from the SEC towards the end of 2017, and we were told that in terms of the creation of new regulations to deal with tokens, it would be a long and drawn-out process. Difficult, but not impossible. They recommended pursuing the regulated path the old-fashioned way, assuring us that it would be a collaborative effort on their end, as the process was going to be somewhat square-peg-round-hole. We agreed on taking that approach, to build INX Limited from the ground up with regulation in mind.
Breaking new ground
It became clear very early on, that in order to make this work, 75 years of regulation had to be applied and adapted to innovative token and blockchain platforms. Another complication stemmed from the fact that INX Limited, being based in Gibraltar, had to deal with a non-traditional jurisdiction. Under Gibraltar law, the Gibraltar counsel did not view the tokens as an equity security, but the SEC asked us to treat it as an equity security for purposes of the filing.
At many points, it was as though we were running around in circles, as we ended up having to deal with Gibraltar law by taking one approach, then dealing with our accountants from Ernst & Young who viewed this as something of a hybrid instrument, and then the SEC saying it was an equity security. Naturally, the mandates from the SEC ultimately superseded the rest.
The process became further extended due to almost a dozen people (in addition to the accounting examiner, non-accounting examiner and supervisor) examining each filing, which brought about a plethora of comments each time. There was also the language barrier – in regards to the terminologies that were freshly developing in the space, because no one really agreed on what the words truly meant. It took two-and-a-half years for our token raise IPO launching our trading platforms to eventually be declared effective.
The successful launch of INX Limited
The process that INX Limited went through in the name of regulation ended up creating a precedent and pathway for all offerings to follow. It was a lot of work, but the SEC-registration of INX, which was finalized in mid-2020, will play a significant role in pioneering the advancement of the practice of regulating digital assets. Our efforts set a gold standard that benefits the ecosystem as a whole.
Within 3 days of opening, and with an offering price set at $0.90 per Token, and a minimum investment of $1,000, we announced that INX had already raised over $7.5M USD in the continuing initial public offering, which exceeded the minimum requirement in our registration statement. That allowed us to begin accepting crypto in the form of BTC, ETH and USDC, along with USD wires as payment, yet another first for a US Security offering. We also announced that over 3,000 retail and accredited investors had registered for the INX token in those first few days, and we declared our intention to use the net proceeds raised from the sale of INX Tokens to launch our regulated trading platform for digital assets, including cryptocurrencies, security tokens, and their derivatives, for the establishment of a cash reserve fund, and for the continued development and operation of INX Trading Solutions. A few months later we announced our acquisition of Openfinance, and our application for listing on the Canadian Securities Exchange, which should make us the first digital security to be listed on a national exchange.
The INX security token, and platform, introduces the next step in the evolution of capital markets in numerous ways, including digital asset trading open to retail and institutional investors;
raising capital for fractional and illiquid assets; reduced trading costs as a result of efficient processes; and automated KYC/AML compliance.
About Shy Datika: Mr. Shy Datika, a co-founder and President of INX Limited, has more than 25 years of experience in the banking and finance industry. As founder and former Chief Executive Officer of ILS Brokers, a multinational brokerage house based in Tel-Aviv, Israel, Mr. Datika has a significant role in the adoption of electronic trading in the global OTC foreign exchange (OTC Forex) market as well as in the brokerage activity and online trading business. During the last 20 years, Mr. Datika has been extensively involved in financial technology (“fin-tech”) as an investor, director or manager of several companies, including as CEO of ForexManage Ltd., a software company providing professional technology platform solutions for institutional risk management and trading activities in the forex and interest rate derivatives markets for the banking industry, anyoption, Ouroboros Ltd (CySec licenced CIF) and as an independent (external) director and the Chairman of the Investment Committee and member of the Audit Committee of Altshuler Shaham provident funds and Pension Ltd. Prior to that, he was a senior dealer in Bank Hapoalim heading the G7 spot desk. Mr. Datika possesses broad knowledge in the areas of fin-tech and trading and has an extensive track record in building sustainable businesses in the financial market. Mr. Datika serves as a director on the board of numerous private companies.