The Reality Block Exchange – created in South Africa and registered in the Isle of Man – plans to make it a cinch for entrepreneurs to access capital via tokens. From Moneyweb.
One of the great promises of blockchain technology is the ability to slash the costs of raising capital for business ventures.
PwC reported a 73% drop in equity capital raised in 2021 via traditional African stock exchanges compared with the previous year, with initial public offering (IPO) capital raises slowing to a virtual standstill in recent years.
The costs of IPOs and maintaining a listing are among the reasons for the waning enthusiasm for equity raises on traditional stock exchanges.
A new company formed in South Africa and registered with the Isle of Man Financial Services Authority plans to change that.
Ambitious plan
The Reality Company’s white paper lays out an ambitious plan to create a new stock exchange with global reach, making it easy for entrepreneurs to access capital – and all of this is run on the Ethereum blockchain using ERC20 tokens (these are Ethereum-based tokens adhering to an agreed set of rules defining how they are minted and transferred).
The currency of the exchange is known as Reality Coin Alpha (RLTA) which listed earlier this month at $1.15 a coin, to be backed by real-world investments operating within the company’s ecosystem.
A second token called Reality Coin Infinity (RLTI) is backed by an underlying portfolio of businesses.
Because the tokens are backed by real-world assets, the founders expect the market price to be less volatile than more traditional cryptocurrencies such as Bitcoin (BTC).
Think of it like this: the RLTA is like owning shares in the JSE, and the RLTI is like owning the JSE Top 40 index. Investors will also be able to buy tokens in the individual companies listed on the exchange.
This makes the RLTI rather like a unit trust.
The company aims to raise $90 million in its launch phase, with 95% of that being invested in underlying assets, and the remaining 5% going to administrative expenses and building up reserves. It plans to invest initially in tech-based listed companies, before diversifying into enterprises that normally struggle to raise capital. The idea is to provide the investing public with a ring-side seat to high-growth companies that normally fall within the orbit of private equity and venture capital investment firms.
Entrepreneur offering
What’s unique about this is that it aims to provide a platform for smaller businesses and entrepreneurs to access capital, and – unlike traditional stock exchanges – give them access to professional advisors to help steer the companies in the right direction and open up networks for local and global expansion.
And all this should be done in weeks, rather than the months – or longer – it takes to raise capital via a traditional stock exchange listing.
“We want to break down barriers to entry by providing entrepreneurs with the support that they need to build and scale their businesses,” says co-founder and CEO Edward Cotterell, who spent much of his career as MD in a logistics company.
“The vast majority of entrepreneurs don’t have access to a network of like-minded individuals who can guide and mentor them as their business grows. That’s what we will provide.”
Blockchain technology vastly reduces the costs of traditional stock exchange listings, and overcomes the overly complex regulatory requirements. While buying and selling shares on a stock exchange might cost 1% to 2%, Reality will be able to do the same for fractions of a percent.
Listing
Companies that list on the Reality Block Exchange will be able to tokenise their shares as digital assets.
Though the target is small and medium-sized enterprises, the initial due diligence is rigorous.
Those that pass the test will have potential access to a global investment market.
Qualifying companies will have to hold a minimum number of RLTA tokens, determined on a case-by-case basis, which gives them access to the exchange and its advisors. Anyone holding these tokens can invest in any one of the underlying businesses listed on the exchange, which will have their own Reality tokens. These can also be swapped for other cryptocurrencies.
RLTI tokens will be backed by an equivalent number of ordinary shares in Reality Investments.
The new exchange promises an unprecedented level of transparency, with token holders getting to vote on important governance issues, while the blockchain provides a detailed audit trail of transactions, and token issuance.
They also get to vote on executive remuneration. Some 95% of dividends and proceeds from the underlying investments must be reinvested into underlying companies.
Licences across multiple jurisdictions
Reality’s legal advisor and co-founder David Goldberg, a South African now based in Australia, says there were some major legal and technical issues to overcome.
“We’re registered in Isle of Man, but as we plan to operate in multiple jurisdictions, we’re in the process of applying for various licences in the UK, Europe, Australia, the US and UAE.
“These licences will cost close to $1 million, and we expect [they] will take 12 to 24 months to be issued.
“As the licences are awarded we will open listings on our block exchange for those jurisdictions. Those listings will have their own individual tokenised equity and have a token issued.”
“Reality holdings will always carry an equity stake in these listings and most probably be the first investor in any of these listings giving RLTI holders exposure to all the underlying investments. It’s equivalent to a group fund arrangement,” says Cotterell.