Ten Steps to Create a Security Token

March 2019

Confidential – Not for Distribution

About AlphaPoint

Founded June 2013

Extensive Capital Markets Fintech Experience

High-Growth Stage

Global Customers in 35+ Countries

Over $2B in Digital Asset Trading Volume

Confidential – Not for Distribution

2
 Industry Recognition

Waters Technology Waters Technology Blockchain Risk Research CB Insights FinTech Innovation Lab
Best Distributed-ledger Best Infrastructure Steering Committee Future of FinTech Class of 2016
Technology Provider Provider

Benzinga Global 2017 Greenwich Associates MIT FinTech UK Trade & Investment Forrester
FinTech Awards Addressing the Latest Trends Startup Showcase GREAT Tech Awards Breakout Vendors:
1st Place Overall Winner in Distributed Ledger FinTech Finalist Big Data Integration for
Best Use of Blockchain/Bitcoin Technologies Business Process Automation

Confidential – Not for Distribution

3
AlphaPoint Network | Global Client Base, 100+ Global Customers

4
“Making Illiquid Assets Liquid” | Characteristics of an Illiquid Asset

No price discovery Obstacle presented by a limited marketplace

Lack of transparency Value of asset is either hidden/invisible or not discernable

Risk that the other side of the transaction will be unable to meet
High counterparty risk its obligations

Risk of not receiving what you signed up for due to things like
No guarantee of settlement misinformation, miscalculation/fraud or other reasons

Excessive transactional fees or hidden costs that don’t justify

High frictional cost liquidation of assets (e.g., result is 20-30% illiquidity discount)

Confidential – Not for Distribution

5
Oracles & Smart Contracts | Programmatic Compliance

• Oracles are a data source outside of blockchain network

Guaranteed
Transaction Validity • Referenced by a smart contract to determine the validity of the transfer
function in the smart contract

• Example - whitelist of QIBs can be checked, minimum / maximum spend

Customized limits can be programmed and verified
Asset Restrictions
• Can be programmed per asset, geography, regulation

• External data calculations & sources (e.g. cash flow waterfalls) are
Integrated referenced in origination, distribution, management and trading
Data Management • Ensures thorough compliance based on KYC / AML requirements and
filing documents

Confidential – Not for Distribution

6
 The Securitization Lifecycle
Tokenization significantly improves primary issuance, management, and secondary trading

Primary Issuance Secondary Trading Lifecycle Management

• Programmable, verifiable • Increased liquidity through • Programmable principal,

compliance and QIB 24/7 trading interest, coupon payments
verification
• Near instant trade • Automated cap table
• Simplified investor distribution settlement time management

• Flexible smart contract • On-chain compliance • Simplified tax and accounting

templates per instrument reduces risk and cost processing

Confidential – Not for Distribution

7
The Rise of Natively Digital Assets

8
Security Token Offerings | Definition
Security tokens represent programmable ownership of traditional assets

• As regulators crack down on non-compliant Improve Cap Table Enforce Regulations for
ICOs, digital securities (“STOs”) Management Investor Participation
emerged as a new framework to ensure
02 04
initial and on-going compliance

• STOs use blockchain technology to

significantly automate securities offerings
while enabling a large investor base to
participate
01 03

Automatically Verify Automate Investor

Investor Eligibility Rights

Source: NovaBlock Capital Security Token Report

9
Benefits of Tokenized Assets
Tokenized assets transform the capital formation process by automating costly compliance requirements through a
transparent & immutable ledger

Fractional Ownership 24/7 Global Markets Automated Compliance

Rapid Settlement Increased Liquidity Cost Reduction

Source: NovaBlock Capital Security Token Report

10
Digital Security Tokens Have Arrived

Security Token Offerings STO Share by Industry

(Preliminary Data)

Confidential – Not for Distribution

11
Market Maturation
Sophisticated capital markets infrastructure solutions have emerged in recent years

Institutional Grade Secondary Exchanges Blockchain Based Regulatory Guidance &

Custody Solutions for Digital Assets Payment Options Market Investment

Launching a cryptocurrency and digital NYSE parent co. ICE is creating a digital JP Morgan is creating its own SEC indicated crypto tokens 9 guidelines
asset custody solution1 asset exchange called BAKKT2 cryptocurrency to support institutional will come; overall moderate position
clients make payments efficiently7

Piloted a successful cross border

distribution of an investment fund3

BitGo, Coinbase, DACC already offer Stablecoins are collateralized by fiat

institutional custody options Rolling out blockchain tech later this currency, hard assets, etc. to enable on- Significant investment in exchange &
year to improve settlement efficiency4 chain payment without volatility8 tokenization firms

1. https://www.bloomberg.com/news/articles/2019-01-29/fidelity-is-said-to-plan-march-launch-of-bitcoin-custody-service 5. https://www.coindesk.com/circle-raises-50-million-with-goldman-sachs-support
2. https://www.coindesk.com/nyse-parent-ices-new-futures-contract-will-deliver-real-bitcoin 6. https://medium.com/harborhq/harbor-raises-28m-to-reengineer-private-securities-for-blockchains-bbc120bfabd3
3.

4.
https://blog.fundsquare.net/banco-best-and-credit-suisse-asset-management-process-end-to-end-fund-transactions-
using-blockchain-based-infrastructure-fundsdlt/
https://www.coindesk.com/swiss-stock-exchange-six-plans-blockchain-platform-in-h2
7.
8.
9.
https://www.cnn.com/2019/02/14/investing/jpmorgan-jpm-coin-cryptocurrency/index.html
Confidential
https://www.forbes.com/sites/yoavvilner/2019/01/11/stable-coin-101-what-where-why-and-plans-for-2019/#413d39731fbf
https://www.sec.gov/news/speech/peirce-regulation-view-inside-machine
– Not for Distribution
12
 Asset Tokenization | Representative AlphaPoint Customers

Funds Real Estate Stablecoin Commodities Broker-Dealer

• Fractionalizes • Optimal capital • First digital • Fractionalized • Registered

fund ownership deployment pound sterling interest in gold Broker Dealer

• Improves • Greater liquidity • Enables • Trading & • Platform for

liquidity & than traditional instant Exchange companies to
capital RE funds settlement Venue for Spot issue and
efficiency without rate Gold trade Security
volatility Tokens

Confidential – Not for Distribution

13
What is a Security? | The Howey Test

Four Criteria (all must be met to be a security):

1. Is there an investment of money?

2. In a common enterprise?

3. With an expectation of profits?

4. Solely from the efforts of others?

Confidential – Not for Distribution

14
Considerations for Security Tokens Market-Makers
Compliance with Securities
Laws
• In the US, private placement
exemption or SEC registration
under the Securities Act
• The offer must be accompanied
by appropriate disclosures and
follow the required processes
ATS Licenses / SEC
Exchange Registration
• SEC Position on Digital
Exchanges (from March 2018):
“Statement on Potentially
Unlawful Online Platforms for
Trading Digital Assets”….
• Key takeaway: register with the
SEC as a national securities
exchange or be exempt from
registration as an Alternative
Trading System or “ATS”
Advisors
• The SEC DAO Order stated that
any person providing advice
about an investment in a token
that is a security could be acting
as an investment advisor
• Investment Advisors must
register with the SEC (>$100M
AUM) or at the state(s) level
FinCen
• The Department of the
Treasury’s Financial Crimes
Enforcement Network (“FinCEN”)
has issued guidance re: the Bank
Secrecy Act
• Applies to persons and entities
engaged in issuing and
exchanging cryptocurrencies.
15
ABS Tokenization Lifecycle Example

Secondary Market /
Securitization / Tokenization Monthly Remittance
Investment Management

Deal Issuance / Tokenization / Bondholder / Token Monthly Remittance / Secondary Market /

Structuring Deal Closing Assets Digitized Management Investor Portal Trading

• Loans (assets) • Assets transferred • Transaction is • Whitelists: QIB • Oracle Updates • Securities Tokens
originated / to legal structure written to Verification: KYC / • Token Balances / Bought / Sold
identified • Auditor review & blockchain AML Pool Factors • Matching Engine
• Structure defined sign-off on • Smart contract • Distributions Updated • Advanced UIs –
• Scenario analysis transaction created (e.g., RABT • Registration (online • Distributions of Issuer or
• Optimize cost of • Document protocol) investor portal) Principal, Interest, Underwriter-
capital Management • Token Definition • Wallets / Custody Dividends (structure branded
• Economic models • Filing paperwork • Tokens ‘minted’ in • Burning / dependent)
completed and parity with Destroying (Clean-
submitted for investment classes up call)
federal and state
(e.g. Reg D filing)

Confidential – Not for Distribution

16
 Ten Steps to Issue a Security Token

1 Select type
of asset class
2 Determine
investor
3 Regulation /
trading
4 Choose
blockchain /
5 Smart Contract
Feature
jurisdiction restrictions token standard Programming

Loan, fund, real estate, US, EMEA, MENA, E.g,. Reg D, Reg S, Reg Ethereum, Corda, etc. Oracles, compliance,
art, etc. APAC A / Reg A+ voting

6 Determine
necessary
7 Create and
distribute
8 Post-issuance
token
9 Set up
exchange /
10 Smart
Baskets
integrations tokens management marketplace

KYC / AML, custody, Mint tokens, determine Dividends and coupons, Enable secondary Create instruments from
payment options supply, transfer to trading restrictions trading for tokens underlying security
investors tokens

Confidential – Not for Distribution

17
Step 1 | Asset Class Selection

Financial Assets

• Debt / Derivatives
• Bonds
• Structured Finance
• Mortgages
• Derivative Securities
• Loans (e.g. hotel loans)

• Equity / Funds
• Private company shares
• Digitization of existing company
shares
• Fund interest tokenization
• Project Finance

Real Assets
• Exclusive Assets / Luxury Goods
• Commodities

• Real Estate

• Currencies (cryptocurrency, stable-coin)

Confidential – Not for Distribution

18
Step 2 & 3 | Eligible Investors & Regulatory Execution
Type of
Place of Incorporation
Interest
• Ownership • Physical asset location
o Of physical asset
• Location of issuing entity
o Of equity in a business
or fund • Type and classification of
interest
o Of debt
• U.S. or non U.S.
• Right to receive dividends investors
or distributions
• Cryptocurrencies to fiat
conversions needed
• Marketing strategies
• Relevant securities
regulation and other
applicable laws
Governing Entity Structure & Tax
Regulations Governance Consequences
• Example: United States • Investor limits • Tokenized interest and
the rights
o Regulation A+ (limited • Holding periods
public offerings) • Income treatment
• Exchange Act Reporting
o Regulation CF • Reporting and withholding
• SPV, PE, Fund, Hybrid
(crowdfunding) requirements
structures
o Regulation D (private
offerings)
o Regulation S (foreign
offerings)
Confidential – Not for Distribution
19
Step 4 | Blockchain / Token Standard Selection

• Select protocol based on asset type

and regulatory requirements

• Supported protocols in Alphapoint:

Ethereum (ERC-20, ERC-721, ERC-
1400), AlphaPoint RABT (Modified
ERC-20). Upcoming protocols:
Corda, EOS, Quorum

• Determine whether force transfer or

pause of trading is needed

• Determine whether tokens need be

fungible or non-fungible

Confidential – Not for Distribution

20
Step 4 | AlphaPoint’s Regulated Asset Backed Token (RABT)

• Oracles inside Intel SGX maintaining

Operator controlled whitelists​

• Whitelist maintenance integrated to

KYC and approval workflows to
approve deposit addresses /
authorize transfers​

• Custom workflows can be created

and enforced via Smart Contracts on
and off-chain​

Confidential – Not for Distribution

21
Step 5 | Oracle & Smart Contract Terms

• Smart Contract Terms

o Future Advance in Effect (Y/N)
o Repayment Terms
o Prepayment Terms
• Oracle Inputs
o 30 day LIBOR
o Repayment and Prepayment amounts
o Events of Default: LTV ratio, DSCR, Debt Yield
Test Result
• Consensus Algorithm
o Voting rights in Event of Default
o Satisfactory off-chain submittals
o Guarantor financials
o Phase 1 report
o Phase 2 report
o Property appraisal (yearly)
o Commercial tenant leases
o Capital expenditures
o Title commitment
o Title insurance
o Other insurance
o Property condition report
o Lender’s due diligence
o Loan Documentation receipt

Confidential – Not for Distribution

22
Step 6 | Integrations

• Payments- on or off-chain payments

AlphaPoint Partner Network

accepted, and currency type.

• Payment processor Blockchain

• KYC / AML provider & verification
levels needed

• 2 factor authentication (2FA)

integration for issuance and trade
Payments
• External exchange operator

• Data rooms / NDA workflows (e.g.

DocuSign) KYC / AML

2FA

Confidential – Not for Distribution

23
Step 7 | Create & Distribute Tokens: Architecture

• Browser controlled operation for ease of use Brow ser

• Approved and audited smart contract

templates used for asset digitization
Contract Library Application DB
• Oracle infrastructure for trusted data
sources off-chain

• Interoperability with multiple blockchains Wallet Enclave

• Trusted Virtual Machine inside Intel SGX for

Wallet & Oracle Security
Oracles REST API

Blockchain API
Gatew ay(s)

EVM/TVM

Blockchains

Confidential – Not for Distribution

24
Step 7 | AlphaPoint Asset Digitization

Brow ser

Confidential – Not for Distribution

25
Step 8 | Post Issuance Token Management

Lifecycle management of tokens:

FIAT Paym ent
Bridge
• Dividends / profit sharing
distributed on set frequency Log Reader
based on investor holdings
Other Chain
• Tax / financial documentation Paym ent Bridge

generated
Declaration Ex-Dividend Record Payment
Block Block Block Block
• Shares minted, burned,
redistributed as appropriate

• Manage trading restrictions and

lock up period if needed
Cashflow
• Asset information updates can be Cap Table Cashflow
Processor Table
Blockchain
Recorder

hashed to the token smart

contract
Distribution

Confidential – Not for Distribution

26
Step 9 | Digital Asset Exchange / Marketplace

• Integration / enablement of a
Brow ser
secondary exchange to allow
additional investors into the
security token while maintaining Adm inistrator
compliance with appropriate Orchestrator

regulations
Operator
• AlphaPoint’s exchange software
seamlessly integrates with its
Issuer Contract Library Issuance Exchange
digitization tools to configure a DB

customer-branded secondary
marketplace Investor/Trader

REST API
• Issuance and Exchange solutions
can leverage common APIs,
administrative consoles, and
wallet infrastructure Blockchain
Oracles
Adapters
• Permissioned user types to
control Issuance and Asset
Lifecycle management Blockchains

Confidential – Not for Distribution

27
Step 9 | Customized Investor Portal
Step 10 | Create Derivative Instruments / AlphaPoint Smart BasketTM

• AlphaPoint provides functionality to create a tradeable digital token that represents a unit of underlying
digital assets

• Requires the correct amount of underlying to be escrowed to a dedicated account.

• Enables issuers to easily offer bundled products and investors to access a diversified portfolio

Index Assets Rebalancing Redemption Exchanges

Select index / create new Select underlying security Determine if the smart Determine if investors can
Select transferability to
index (optional) – tokens (if creating a basket needs to rebalance redeem underlying assets,
other exchanges (if
AlphaPoint Movers & customized basket) based on the index, and and restrictions on
available)
AlphaPoint Leaders frequency redemption

Confidential – Not for Distribution

29
Ten Steps to Create a Security Token

Thank you

Confidential – Not for Distribution