Real Estate STO Whitepaper Chapter 2

Colliers, HKbitEX, Baker McKenzie and Deloitte jointly published the second edition of the Real Estate STO Whitepaper series, a sequel to the first paper published in August 2021 which discussed the uses of security token offerings (“STOs”) as an additional fundraising channel within the real estate sector to access a broader base of investors.

With joint efforts and industry experiences from real estate valuer, legal advisor, tax and audit advisor, digital asset exchange and web3 technical consultant, this paper takes a deep dive into the end-to-end process of an STO and provide examples of how real estate developers can approach STO product structuring as well as key considerations for market participants.

Security tokens are widely regulated as securities in major jurisdictions including USA, UK, Japan, Singapore and Hong Kong. STOs, as an additional capital markets fundraising channel, enable illiquid asset owners to tap a wider spectrum of investors and compliant secondary market infrastructure. In 2022, the market witnesses more successful STO cases globally, including the tokenization of KKR Health Care Strategic Growth Fund (HCSG) II. Most notably in the real estate sector, the tokenization of a GBP140 million central London property by Knight Dragon, an entrepreneurial urban regenerator and property developer, took place in Hong Kong with support from Baker McKenzie as legal advisor, Deloitte as financial advisor and Atom 8 (an affiliate company of HKbitEX) as the web3 technical consultant.

Akin to a traditional securities offering, the STO process involves multiple professional service providers. Legal, tax and auditing advisors continue to play essential roles to ensure compliance and sufficient investor protection, while certain functions are no longer needed with the application of blockchain, such as the Central Securities Depository (CSD), registrar and transfer agent.

Authors of this paper particularly highlight the importance of the technical service providers, which includes the tokenization service provider and digital asset custodian. In the advent of continuing cybersecurity risks in the digital asset space, it is imperative that these service providers are subject to industry best-practice compliance and security standard such as the AICPA SOC 2 certification for service organization. While custodial wallets generally offer a higher degree of security, they are not immune to hacking, whether the digital asset custodian is covered by sufficient digital asset insurance also tops the selection criteria for service provider.