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 via traditional African stock exchanges in 2021 compared with the previous year, with IPO (initial public offering) 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.
The Reality Company plans to change that. Its 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 runs on the Ethereum blockchain using ERC20 tokens (Ethereum-based tokens adhering to an agreed set of rules defining how they are minted and transferred).
Alpha and Infinity coins
The currency of the exchange, Reality Coin Alpha (RLTA), will be available for purchase in several jurisdictions on 17 October at £1.10 (R22) a coin.
RLTAs will be issued by the holding company of the Reality Group, which is registered with the Isle of Man Financial Services Authority (FSA).
The initial coin offering will be available to ‘sophisticated investors’, defined as those with a high net worth and are aware of the risks usually associated with non-mainstream investments.
This short-term directive has been put in place by the Isle of Man FSA. Once the directive has been lifted, the intention is for RLTAs to be available to the broader public.
A second token called Reality Coin Infinity (RLTI) is backed by an underlying portfolio of businesses.
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 eventually be able to buy tokens in the individual companies listed on the exchange.
This makes the RLTI rather like a unit trust.
Because the tokens are backed by real-world assets, the co-founders expect the market price to be less volatile than more traditional cryptocurrencies such as bitcoin (BTC).
Strategy
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.
Investments are planned to focus on building a low-risk portfolio and establishing a solid investment foundation, before diversifying into enterprises that normally struggle to raise capital.
The idea is to provide the investing public with a ringside seat to high growth companies that normally fall within the orbit of private equity and venture capital investment firms.
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 even years it takes to raise capital via a traditional stock exchange listing.
More than money
“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 of 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.
And while buying and selling shares on a stock exchange might cost 1-2%, Reality will be able to do the same for fractions of a percent. Companies that list on the Reality Block Exchange will be able to tokenise their shares as digital assets.
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Though the target is small and medium-sized enterprises, the initial due diligence will be 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.
Subject to Reality’s anti-money laundering and other requirements, 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 and the Reality Group’s underlying investments.
Transparency
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.
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Reality co-founder David Goldberg, a South African now based in Australia, says there were and are still some major legal issues to overcome.
“Our holding company is registered with the FSA in Isle of Man, but as we plan to operate in multiple jurisdictions, we may need to obtain regulatory approvals and licences for various other jurisdictions. We anticipate that obtaining some of these approvals could take as long as 12 to 24 months.
“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,” says Goldberg.
Cotterell adds: “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 similar to a group fund arrangement.”
Brenton Naicker of CV VC and Ian Putter of Standard Bank discuss their predictions for blockchain development on the continent with Ciaran Ryan:
