An Andreessen Horowitz-backed company is launching a new way for investors to own a piece of a luxury dorm in South Carolina through digital token sales
- A new company backed by investors including Andreessen Horowitz on Tuesday launched a token sale for a luxury student-housing complex near the University of South Carolina.
- The company, called Harbor, is using blockchain technology to reduce friction for investing in real estate.
- Several notable investors - including Michael Novogratz, the founder and CEO of the crypto investment firm Galaxy Digital Capital Management - have tapped into the idea of tokenizing traditional assets.
Investing in real estate can be lucrative, but it also involves a great deal of tedious work, from finding an appraiser to preparing mountains of paperwork. Now, a new company called Harbor is trying to get rid of this elbow grease by using technology to invest in commercial properties through asset-backed digital tokens classified as securities.
Incubated by the former PayPal executive David Sacks and backed by investors including Andreessen Horowitz, Harbor is partnering with Convexity Properties, the real-estate investment arm of the trading shop DRW, to launch a sale of digital tokens for a luxury off-campus student-housing complex near the University of South Carolina on Tuesday.
Convexity Properties, the owner of the student-housing complex, plans to sell a minority interest in the building to raise at least $15 million. To facilitate the sale, the company is issuing 995 tokens, priced at $21,000 apiece. The tokens, akin to equity shares, give investors fractional ownership of the property.
Investors can purchase the digital assets in dollars, bitcoin, and ether, the cryptocurrency powered by the Ethereum blockchain.
The process is similar to a crowdfunding method known as an initial coin offering, which has attracted regulatory scrutiny. The difference in this case is that the sale comes under regulatory compliance, said Harbor's CEO, Josh Stein. Harbor would enforce compliant transfers between buyers and sellers through programmable smart contracts, he said.
In an ICO, a company launches a new digital token and pre-sells it to investors in exchange for cash or cryptocurrencies like bitcoin or ether. An easy way to raise money, ICOs have increasingly gained interest in the past two years, but they've also attracted their share of scams, and the rate of ICO activity is slowing.
Security tokens also derive their value from tradable assets, but issuing companies make the assets subject to securities laws and regulations.
Harbor moves the compliance requirements "from paper to being electronic, and then we are able to programmatically enforce all these rules we call the who, what, and where of compliance," Stein said. "Buyer and seller can transact as easily as sending an email."
The startup has cooperated with one of the big four accounting firms to review the documentation and fund flows, an outside IT security firm to audit the smart contract that creates the security tokens, and a qualified custodian to create the crypto wallet service.
The sale is marketed to investors in the United States and other select jurisdictions, including Singapore, Hong Kong, the Cayman Islands, and the British Virgin Islands.
One catch: The fundraising is available only to accredited investors, meaning those who had an income of $200,000 (or a joint income of $300,000) for each of the past two years, or have a net worth of more than $1 million.
The idea of tokenized securities and security tokens has long been discussed in the cryptocurrency industry, and some companies have already tested the concept.
These companies use digital tokens to represent shares in a spectrum of underlying assets, from a real-estate property to holdings in a fund to cash. The tokens resemble rights encoded into a smart contract and can be traded on a blockchain-powered exchange.
Such an approach, according to Stein, injects liquidity into the real-estate industry, known for its difficulty in matching buyers and sellers.
Crowdsourcing platform Indiegogo in October helped a luxury hotel in Aspen raise $18 million by issuing security tokens.
A luxury condo in Manhattan appraised at $30 million was also tokenized on the Ethereum blockchain in October.
The billionaire investor Michael Novogratz has also jumped on the bandwagon of real-estate tokenization, poaching an investment banker from Goldman Sachs to run that part of his crypto investment firm, Galaxy Digital Capital Management, Bloomberg previously reported.