A great Fintech DogFooding story in SME equity fundraising: SparkUp

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The future has arrived and the pipeline of ICOs is active. Keep in mind that this glove does not fit all.  Capital Markets are being re-shaped left and right. We are following the process as it evolves.

How to raise funding, especially for small businesses, remains “The challenge” for the entrepreneurs involved at all stages of their business development,

despite the multiple alternatives, like Alt loans from Kabagge or Sofi, equity crowdfunding from Angel List or Circle Up, equity financing from investment boutiques like FT Partners or Zelig Associates, or equity financing from Corporate VCs like Google Ventures or Citi Ventures, or traditional VCs like Accel Partners or Bessemer.

SparkUp’s value proposition is empowering small business owners to raise funding

whether it is at the early stage or even later when ready to tap into the public markets. It is also empowering investment managers that are looking to leverage their data.

Jeremy Ley is the French young co-founder and CEO of Sparkup, whose disruptive energy one cannot ignore. I spoke to Jeremy last week because SparkUp caught my attention, as they are

“Eating their own Dogfood”, which means they are fundraising using their own AI sales technology that taps into their own network to quickly and effectively do the fundraising.

SparkUp is not an investment bank. SparkUp is not a crowdfunding platform. SparkUp is a sales technology tool with a focus on financial securities.

It is in the same space as CustomerMatrix or Salesforce with their AI CRM system. However, these technologies have a broader scope and are used mostly to improve revenues and sales pipelines in businesses. SparkUp has a laser focus on the sale of financial securities for SMEs, which is a multi-billion dollar opportunity.

SparkUp can tap into your existing business network with their AI CRM and generate leads faster and more effectively. They received their pre-seed funding in 2015 (1.1M€). They are operational currently in France, the UK and Norway. They have contributed to 7 equity public offerings, signed 8 Investment Managers with 3 Bn+ in assets under management and facilitated the equity fundraising of 40+ SMEs.

The average size of equity financing for SMEs is currently around 150k€ and rising. The value that SparkUp brings to the SME market is obvious since it remains a hugely untapped opportunity. SparkUp has its own online diagnostic test that allows SMEs to very quickly (3min!) estimate their fundraising potential, a digital process that improves the efficiency of SparkUp in serving prospects (i.e. not wasting time on SMEs that are not worthy clients).

Publicly trading companies that could benefit from a boost in retail demand or companies IPOing, are the ones using SprakUp. SparkUp can “smartly activate their databases” which results in improved retail distribution in a cheaper way than ads on online brokers or other digital strategies. In addition, brokers can use the SparkUp sales technology on a revenue sharing basis, to leverage their databases and sales people.

Investment managers have been using SparkUp to cross-sell more of their products with the smart use of their databases.

SparkUp is already operating in France, the UK and Norway. They are currently looking to fundraise funds for the R&D development of their algorithms and their scaling up. SparkUp will accomplish this by tapping into its own network and through algorithms identifying contacts at the right level, emailing them, managing the project of fundraising with its own technology. They are an AI CRM that serves the specific purpose of raising funds and currently, demo-ing live its use. This is a great example that we have not seen neither in the crowdfunding space (i.e. still looking for a crowdfunding platform that has crowdfunded itself) nor in the Market place lending space (i.e. an MPL financing its growth by borrowing on its own platform).

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

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T-Zero sings “Love me do” to the SEC with its Blockchain Series A Preferred Shares

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Wonders are still happening in America!

Who would imagine that an online retailer who started out as an e-commerce business liquidating merchandise of failed companies, would be the first publicly traded company offering Blockchain Shares.

Let me introduce to you Overstock, a Nasdaq listed online retailer (OSTK) based in Utah and founded by Patrick Byrne.

Tee-zero (t0.com) is a majority owned subsidiary of Overstock that is focused on using blockchain technology in capital markets. Last summer, we covered the issuance of a private crypto-currency denominated bond that settled on the T0 platform. It was a symbolic move, demonstrating that it is possible to issue, trade & settle (synonymous in the future T0 world), and have very fine divisibility of a bond and fast transferability. The trading activity of this bond was not the point of the implementation.

This December an even more important symbolic implementation happened. After the SEC approved in early Fall the issuance of a blockchain public stock offering; Overtstock will go down in history as the first publicly traded company that offered blockchain shares trading on an Alternative trading system (ATS).

The historic offering: Overstock Preferred Shares

Voting Series B Preferred Shares

  • 560,333 @ $15.68 (roughly $9mil)
  • Trading on NasdaQ OTCQB

Blockchain Voting Series A Preferred Shares

  • 126,565 @ $15.68 (roughly $2mil)
  • Trading on ATS under the symbol OSTKP

The above offering (total roughly $11mil) was handled by Keystone Capital, a conventional broker-dealer that worked diligently and closely with the regulators to obtain the required approvals.

Existing shareholders had the right to participate in the offering as follows: One subscription right for each 10 shares of common stock owned. Each share of the preferred stock has a preferential right to a 1 percent cumulative annual cash dividend.

The symbolic significance of the Blockchain Series A transaction is all about the

Transparency of the transaction and the fact that it boils down to the verification of two blockchain addresses.

What’s next?

I wasn’t an Overtsock shareholder on the required date and therefore didn’t participate in the offering. The broker-dealer, Keystone Capital handled the onboarding of the buyers (existing shareholders that exercised their right to buy the Series A preferred stock) of the digital securities. They created digital wallets and accounts for them and are now continuing to onboard outside buyers who will be matched on the T0 platform to sellers (those that participated in the first placement). Any individual that qualifies under the Title III Jobs Act, can participate.

Nasdaq is watching and probably nodding its head, since a large-scale adaption of such a process is not imminent. However, it is threatening to its core business.

Stock exchanges are one of the main three categories of players involved in capital markets; Brokers and Central Securities Depositaries handling settlements, are the other two main categories. The million-dollar question here, is who of them will embrace the T-zero or some such blockchain based platform and make the other two obsolete?

T-Zero is actually a viable product that targets the capital markets B2B vertical and is out there for the first mover to embrace it. Ironically T-zero is a private blockchain. In addition, this first symbolic implementation was accomplished with the participation and collaboration of market players and intermediaries that will be directly affected should this technology prove to change the capital markets infrastructure. Broker-dealers for example, which were instrumental in obtaining approval from the SEC and effectively laying the seeds for the growth of such an ecosystem of digital assets; will be cannibalized.

At the same time,

T-zero with Keystone Capital, are bringing up to speed the SEC and holding their hand towards Full Regulatory Transparency in public markets.

For me, this symbolic transaction is the first public performance of “Love me do” from T-zero to the SEC. Right at the time that the SEC has committed to a plan to spend $1.5billion to create a consolidated audit trial (CAT), T-zero is echoing loud and clear to them “Love me do”

T-zero can offer a freemium service to the SEC, if they adopt the T-zero platform which will naturally include a Consolidated Audit Trial.

If T-zero manages to seed an ecosystem of publicly traded digital assets (even if it starts small); then I foresee Lykke, the frictionless global marketplace for digital assets, accelerating its growth. Lykke, an open source platform, has started with frictionless, transparent, immediate settlement of FX, ICOs and cryptocurrencies, but is ready to broaden its assets base (anything digital can be on boarded).

The transformation in capital markets is here. Timing is uncertain but the trend is clear.

Sources: T zero news; Nasdaq news

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

Capital Markets and IDs

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In theory, we have been able to design Digital Identity solutions for a while now. However, the costs were prohibitive and interoperability issues needed to be solved.

Today, we can implement technology (hardware) that is cheap and this allows us to experiment and target opportunities that couldn’t be exploited before.

It is cloud computing, cryptography, public key encryption and peer-to-peer networking protocols that are the critical “cooking ingredients” for recipes that can solve costly and basic problems in Capital markets, like provenance, authentication and reconciliation.

In this post, we zoom into the Digital identity issue (whether for an end-user or a corporate entity) in Capital Markets. In traditional financial lingo, this is coined as KYC and it shifted on the very top of the stack of issues that keep up managers at night, mainly after Sep 11.

Currently in Capital Markets we are looking for the following qualities in a Killer Digital Identity solution:

  • Cheap
  • Ability to be accurately updated
  • Accessible and Granular = Interoperability and Granularity
  • Immutable

The last two qualities are critical and encapsulate the practical difficulties of such a service. A Killer Digital Identity solution should offer both individuals and organizations the ability to authorize actions on their behalf. This can range from settling a trade, to registering for a financial product or service like an investment product or a loan.

At the same time, it has to be granular so that only the pertinent bits of the Digital Identity are used.

This is what Pascal Bouvier has been pointed out for a while. It is critical because it enables individuals and corporates to choose how to interact with a merchant or a supplier or a client. Being able to have a secure way to divulge only the granular bits of information is the key. It is also the enabler to be used in different contexts without having to go through the whole process again.

Imagine a world that any individual can open a bank account for their consumer banking needs, a telco account, an investment account, a brokerage account …. with different institutions securely, with all updated info, without having to repeat the whole process (e.g. they all need a copy of passport or a digital picture but the telco account needs much less information than a brokerage account that allows me to trade options and futures and buy stocks on margin). In addition, in order to register a corporate entity for a business, imagine a world where one can avoid repeating the process that overlaps with all the above, the registry is able to obtain accurate Social KYC information around the shareholders and directors of the company (updated real time), and have access to any particular cross-border information necessary.

There is one Fintech based on the Isle of Man that has been focused on developing such apps using blockchain technology. Credits, has been working with the government on the Isle of Man to develop “The Federated Know your Customer” app that was demoed at the recent Misys World Trade Symposium. This sits on the cloud and has the four elements mentioned above. Credits is also in conversations with the UK government for use cases in regulatory reporting and healthcare. Credits has not been at all focused on creating some cryptocurrency or some decentralized app. They have been thinking differently, in that they are focused on solving specific problems in the infrastructure of capital markets. Digital ID has been their first use case.

We are in the very early stages leading towards an invisible ID for individuals and corporates for the variety of functions in Capital Markets.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network. Efi Pylarinou is a Digital Wealth Management thought leader.

Stock exchanges are aggregators of market data feeds, not playing to the Fintech rhythm

A check on stock exchanges before Halloween makes sense. We covered stock exchanges in a two part series in May, with a focus more on Fintech innovation and naturally, we found Blockchain parties and concerts all over the planet. These activities continue to spread but today I want to highlight the major source of the extended revenue growth over the past 5yrs of Stock exchanges. Lets not fool ourselves by believing that the revenue growth is due to some innovation. It is heavily due to a government created oligopoly that exploits customer transactions data!

When and why did exchanges transform into profit centers?

Exchanges before the turn of the century were serving a global service and were operating very much like utility companies or social servicers. They were scaled versions of Jonathan’s Coffee house in London (original site of LSE) and the Button wood tree in New York (agreement that started the NYSE).

It all changed in the very first few years of the 21st century, not because they were waiting to make sure that computers could overcome the Y2K problem. It was mainly due to the wide adaptation of electronic trading for stocks at least, which led to setting up clearing and settlement businesses like DTCC. These for profit businesses post trade companies led the way to raising capital by accessing the public markets. In the US, it was NYSE In 2005; and in Europe, Deutsche Börse and LSE, in 2001.

The next pivot in their business model of these publicly traded ex-social servicers happened 100% because of regulation. SIP (Securities Information Processor) resulted in an unintended consequence that many believe as a government-led oligopoly of stock exchanges. SIP was conceived to protect end-investors from being taken advantage from those operating the electronic trading circuits. It created a filter, operated by the exchanges, in order to ensure that the best quotes get fed to the broker dealers. Simply said, exchanges which act as aggregators were also crowned with another role, the filtering SIP role.

In addition, the subprime crisis resulted in reduced trading activity and shrunk the market-maker activities. The revenues from trading volume shrank and the business shifted its focus to increasing charges on Market Data feeds. This was and is a captive market – Real-time access to Market Data feeds – is absolutely necessary for brokers, and market makers etc.

Stock exchanges are the aggregators and are continuing to charge an arm and a leg for real-time access to these feeds. In fact, they are the only aggregators that have increasing these charges.

Tabb group reports that the revenues from US stock exchanges have climbed 16% over the past 5yrs, largely due to data revenue. Of course, the acquisition spree that has been happening is very much contributing to these figures too.

 

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From “Costly data battle heats up between traders and equity exchanges

 Lawsuits on Market data feeds are dragging

 There have been multiple lawsuits around this issue. However, the rulings take very long and in the meantime, the exchange sector continues to consolidate, leading to further strengthen of the oligopoly and resulting in fewer and fewer players. The most recent announcement of the BATS exchange acquisition from CBOE takes an innovator out of independent action. ICE is a huge conglomerate with a global web that makes the space very tough to disrupt.

The most significant lawsuit saga continues for more than 10yrs. SIFMA (Securities Industry and Financial Markets Association) and a coalition of Internet companies filed a lawsuit against the exchanges in 2006. In 2013, the U.S. Court of Appeals for the District of Columbia instructed the SEC to reexamine its approval of data fee increases and require the exchanges to justify the price hikes. Since then, the case was  awaiting review by the SEC’s own administrative court. This summer, the SEC judge threw out the case and SIFMA has stated that they will appeal the ruling.

The double disruption from IEX: speed bumps and free real-time data

IEX, the sole disruptive force left in the stock exchange space, got approval to operate just 3months ago.

Remember this is the only such business that isn’t heavily influenced and tied to the Sell-side; contrary to all others who came out of a Sell-side membership type of organization before becoming public. IEX is a membership held organization but from the Buy-side! It’s first positioning was-is to use a speed-bump in the way it operates the electronic circuits of the IEX exchange. The purpose is to protect the market from HFT rigging and serve the interests of the Buy side.

The second move, which is upcoming will be-is to offer free access to real-time data to its customers (Kurt Dew, an industry veteran has been covering these issues in Seeking Alpha as they unfold). This is a direct and major disruption to the other players that count on such data feeds constituting a major source of their revenues.

How soon will the data source of revenue disappear for exchanges? Will technology solutions and private markets become the areas of revenues for the exchanges?

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge Network.  Efi Pylarinou is a Digital Wealth Management thought leader.

 

Regtech in Capital markets & Investing

Rules and regs

Working on Wall Street has always been a hazardous profession, especially for those in the front line of the business, the traders. Market risks, volatility, and uncertainties, are the stressors for traders and those allocating capital and managing risk. This is the nature of the business, the markets, whether currencies, stocks, bonds etc.

This will not change with digitization. Some even claim that it may become worse (the HFT guys taking over and generating extreme gyrations and disruptions in public markets).

But following the 2008 subprime crisis, the biggest risk and potential hazard of the profession is no more the unpredictability of the markets, but the high probability that one does something wrong; whether by negligence or not, legal risk (compliance breach alert) has become the number one hazard for employees and the corporations alike.

The other new reality, is that more often business decisions are suboptimal from a risk/return perspective, simply because they may be driven by hitting the limits and barriers imposed by regulators. A Fintech related example of this, is the reason that Santander offloaded the $1 billion loan portfolio (Lending Club loans) earlier this year. This was triggered by capital adequacy constraints. Of course, capital adequacy requirements always existed but have now, become much more complex and multidimensional, grâce à Dodd-Frank and Basel III.

Financial professionals are cornered into a position that has tilted their focus more to protecting themselves and their employer organization from breaching any relevant regulations or compliance rules; rather than focusing in serving their clients. There is no group that is left alone to focus on the essence of their value proposition; from banks, fund managers, VCs, buy side and sell side, private securities, financial advisors, etc

The club of regulatory bodies is growing. Starting from broad scope entities like the G20, the EU commission, then add all the associations protecting consumers in general, and last but not least, all entities with a financial services focus. Within the last category, there are numerous covering every possible aspect of investment management activity, some specializing in banks and insurance companies, some in payments only, and the list is growing as countries have every reason to appear caring to the users of the financial system. Chris Skinner, reports that there are more than 400 entities in the US that are relevant to financial services! This can only create inefficiencies in the functioning of the system and raise questions as to why and how to deal with the reality of the unregulated financial service providers (i.e. unregulated fintech startups).

Europe is not simple, although different. Add on to the multiple domestic legislations of each country; the broad EU directives. A sample of such regulations are: the infamous Markets in Financial Instruments Directive (MiFID), Fourth Anti-Money Laundering Directive (AMLD IV), Capital Requirements Directive and Capital Requirements Regulation (CRD and CRR), European Market Infrastructure Regulation (EMIR), the Second Market Abuse Directive (MADII), the Alternative Investment Fund Manager (AIFM), the fifth Undertakings for Collective Investments in Transferable Securities Directive (UCITS V), Packaged Retail Investment Product (PRIIPS),….

Europe has more acronyms and directives for public markets, than the US. The US, most certainly wins the prize for volume of private markets, with its new JOBS Title III, having captured the headlines because it is a game-changer (if they don’t kill it with footnotes and in the implementation) and the Red D, Reg A etc acts.

The fundamental difference between Europe and the US, is that Europe has taken a principal-based approach to regulation whereas the US has taken a rule based approach. As a result, Dodd-Frank took forever to be completed and approved. In the meantime, Europe has been innovating with MIFID I and RDR and is nearly ready to launch MIFIDII and PSD2. European legislation is pushing incumbents to innovate! Consider the directives around brokerage and research transparency, and opening banking data. Europe may lack the VC funding but is ahead of the game in implementing structural changes to host financial innovation. Europe is not only focused on startups, and entrepreneurship a la Silicon Valley; it is supporting and pushing intrapreneurship from incumbents and most importantly, creating the environment for true partnerships.

Europe has also been dealing, during the last two years, with the adaptation of the requirements of the Automatic Exchange of Information that has taken up a lot of the reporting resources.

Parsing through the DailyFintech Regtech database of startups, which is approaching the 100 mark, the West is the place that they mostly reside and whenever they have offices in Asia, it is really to serve the expat business in Hong Kong and Singapore; or businesses with a more generic focus like KYC, AML, and surveillance.

Growth in Regtech

 I see this happening in three ways:

Launching more Fintech startups specializing in very specific parts of regulations, much like Cappitech for EMIR, SilverFinch for Solvency, Voitrax for voice-to-text conversion as it relates to Dodd-Frank compliance rules.

Forming partnerships between Regtech Fintechs and incumbents; this is where new value creation can scale. Examples of this nascent but very promising trend are:

Incumbents leapfrogging startups by copying innovations and enhancing their services. Examples are Bloomberg marketing their transactional cost analytics (TCA) system as a MIFIDII problem solver, and Flextrade, specialized in algorithmic trading and execution systems and integrating surveillance and data security systems. SIX Group and NASDAQ from the exchange groups.

Market opportunity

Regtech operates in a market with a captive audience. In the West banks are closing down and bank licenses aren’t increasing. However, there is a great market opportunity for Regtech companies to serve the underserved of this market in the West, that is the small to medium size banks that simply cant afford the disproportionate cost of doing business.

In the East, mainland China and India, the number of online banking licenses is growing despite the fact that the three tech giants (BAT) are already in the space. As the market matures and gets regulated in more a Western way, there opportunities will abide.

The biggest opportunity lies for Regtechs to serve Fintechs. Up to now, Fintechs have in some cases been engaging in Regulatory arbitrage and in others, they have “leased” the licenses of regulated companies. This will all end very soon and there will be more entities needing Regtech cloud services.

How it will end merits a separate discussion. Will it be by new regulations (e.g. bank lite licenses a la FINMA) or will “leasing” be monitored, analyzed, and reported (i.e. regulated) or BANNED!

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Efi Pylarinou is a Digital Wealth Management thought leader.