So, something I want to talk about are Real Estate Investment Trusts, or REITs. Specifically, I want to discuss what happens when you marry an REIT with an STO, a Security Token Offering.
ICOs showed that tokenization in itself isn’t special. The first REIT was nearly 60 years ago. The beauty of a compliant STO is that it doesn’t require regulators to do anything as the laws have been on the books since 1933. The exciting part is the compliance of the STO coupled with the low cost and automation of the Security Token itself.
Now, Private REITS, just like private securities today, have no liquidity.
The reason for that is because it’s very hard for the buyer and seller to find one another. If you knew about REITs before this, then you are in a very small percentage of the investing class.
On top of that, you have to repaper every transaction, and most important of all, there are strict transfer restrictions on the shares.
Even if you had a buyer, you can’t just sell them the shares like you might with public shares.
Instead, you must get the go-ahead from the fund manager. Given that blockchain is all about minimizing or removing the middleman, I think you know where this is going.
But, let me explain.
With private shares in a REIT, what we’re looking at is a really a C Corp with a special tax treatment, dependant on the dividend structure and the limits it has on real estate investment.
So, you have very complex and binding regulatory and contractual requirements dictating the shares of this private REIT.
That’s why the fund manager must give approval for transfer of shares.
In one example, you could have a private REIT that must have a minimum of 100 investors, a maximum of 2000 investor or they must go public, non-US investors cannot own more than 50% of the shares, and the top 5 shareholders must not own 50% of the shares.
Now, you don’t have to have a degree in Computer Science to understand conditional logic. We can build pretty complex things just by dictating “if then else” and setting parameters around that logic. So, when we tokenize the shares of this REIT, instead of having a fund manager manually tracking that these parameters are being respected, we can instead bake them into the security token representing the shares.
Just like that, not only do we massively reduce the overhead cost of the REIT fund management, but we also massively speed up the process as well. Additionally, we get a much larger pool of liquidity that didn’t exist before because now the buyer and seller can transact with one another without having to go through the approval of the fund manager.
This opens up a whole avenue of possibilities for our REIT and hopefully you can see why this is so groundbreaking.
Smart contracts baked into security tokens representing private equity are about to change the world.