Openfinance's appeal for money is the tip of the iceberg for a sluggish token market

Security token platform Openfinance has been struggling, and have asked issuers to fork over more cash and invest in the floundering firm, according to two emails reviewed by The Block.

As reported by CoinDesk on Wednesday evening, the firm sent out a notice alerting issuers that it would delist tokens trading on its platform unless they provide cash in the form of listing fees to keep the company's lights on.

The firm said it would halt trading on its Openfinance alternative trading system on May 21 if it can't raise the necessary funds, according to the email. Upon delisting, tokens would be transferred to transfer agents who will store the tokens in wallets. 

As the email noted:

"While a difficult decision, we have concluded that, in the absence of renewed listing agreements, all security tokens currently listed on the Openfinance ATS will be delisted, effective 3pm CDT on May 21, 2020. Trading of the impacted securities on the ATS will halt at that time."

But that's just part of the story. The company also sent out an email to issuers asking for them to invest in the company, according to a memo reviewed by The Block. From the memo (emphasis is our own):

"Attached please find documentation describing the details of this process, along with the requirements to renew your listing agreement on the Openfinance platform. They include an annual listing fee from issuers and a successful capital raise from ecosystem participants. We will need firm decisions on your interest no later than April 21, 2020."

Launched in August 2018, Openfinance's platform has supported Current Media's CRNC token and Blockchain Capital's BCAP token, among others. It has raised funds from crypto exchange Huobi, Sharpe Ventures, and M25, picking up $8.6 million in its last round. 

"I have never seen anything like that in my professional career," said one source, regarding the firm's request for customers to invest. One source described the valuation as "delusional."

In an email sent to The Block following the publication of this report, Openfinance co-CEO Jim Stonebridge defended the company's recent steps. Here's Stonebridge:

"Openfinance has charged its listed issuers almost nothing as it partnered with them to create the first US-regulated secondary market for third-party issued security tokens.  As trading volumes have not grown as anticipated, characterizing Openfinance’s proposed cost-sharing – including potential equity stakes by market participants – as unusual exhibits a lack of understanding of the robust secondary markets Openfinance is working to develop for private securities."

Ecosystem trend?

Openfinance's funding shortfall aside, it hasn't been an easy time for security token platforms – particularly in light of the wider slowdown spurred by the coronavirus and subsequent economic shutdowns worldwide.

Elsewhere, Harbor – which made headlines for its ambitions to tokenize venture capital funds and an exorbitant college dormitory – was bought by BitGo. Sources say BitGo is not pursuing new business for Harbor. Harbor and BitGo share an investor in Craft Venture's David Sacks. 

At tZero, the security token platform run by e-commerce firm Overstock, the firm has built a pipeline of potential issuers that tops 200, according to a 2019 recap penned by CEO Saum Noursalehi. 

The unit just raised $5 million via an equity stake sale. The raise follows an earlier one in August 2018 in which tZero raised $134 million via a security token offering. 

Earlier this month, the firm announced a partnership with Vertalo on a tokenization real estate deal. Token representations of Real Estate Capital Management could trade alongside tZero's over digital token, TZROP and its A-1 preferred stock, according to the company. 

Still, this year the firm quietly announced the departure of one of its rising stars, chief algorithms officer Kamelia Aryafar, as The Block reported in February. The executive exit followed the exit of its CFO Greg Iverson and a subpoena from the Securities and Exchange Commission regarding its digital dividend that investors claimed created a short squeeze. 

Noursalehi said the company has seen a bit of a slow down due to current market conditions. 

"Larger issuers have continued to maintain their momentum, but recent inbound potential issuers have been skewed toward larger issuers with strong distribution capabilities relative to smaller issuers," he said. "The optionality for liquidity on private assets has become even more attractive in this macro environment."

He said the pipeline for potential issuers still stands above 200.

Meanwhile, Securitize chief executive officer Carlos Domingo says the coronavirus lockdown has forced certain projects from Q2 to Q3 or possibly Q4. 

"We are focusing on serving existing customers and projects and product development of new features," he said in an interview with The Block. 

The firm launched a new service it says will make it possible for users to trade tokenized securities peer-to-peer, in a way that is both compliant with regulators and poses "no counterparty risk."

This post was updated to include a statement from Openfinance's co-CEO.