US Regulator Clears Security Token Trading System to Launch

The Public Private Execution Network (PPEX), an alternative trading system (ATS) for exempted digital assets and other private securities, has regulatory clearance to launch in the U.S.

The trading system’s parent, broker-dealer North Capital Private Securities, completed FINRA’s continuing membership application in February and received SEC approval on its Form ATS filing in March, said North Capital CEO Jim Dowd. Those greenlights were all his Salt Lake City firm needed, but it sat on the news until this past Thursday. Now, the company plans to launch with digital asset trading capabilities hardwired into its ATS.

Dowd said that’s a notable difference from many other approved exempted digital asset ATSs, which he said were retooled to handle digital securities only after they were already built. 

“We basically went the other way and said, ‘OK we’re going to do something de novo,’” Dowd said.

PPEX will enter the capital markets with a wide but specialized net. By Dowd’s telling, PPEX supports secondary trades for all manner of exempt securities, including digital assets native to a blockchain. These private equity products aren’t subject to the same disclosure and registration requirements as their publicly-traded products who have to register with the SEC.

Exemption appeals to issuers who “don’t want to go through the brain damage and the cost of doing a registered offering,” said Dowd, but it comes with a caveat, too: Private capital markets are generally more illiquid than public ones, and their lack of transparency makes it difficult for potential investors to know what they’re getting into. PPEX will attempt to address both, Dowd said.

“We’re going to offer a solution that’s kind of in between a fully private illiquid non created asset and a kind of a traditional public offering,” Dowd said. His plan will institute due diligence procedures, disclosure requirements and other processes comparable to the public listing process.

Dowd said PPEX also addresses the technological deficiencies rampant in private capital markets, where the systems that securities trade on – if they trade on systems at all – are often far behind the times. That’s especially evident in the age of COVID-19, he said.

“I believe now more than ever that pushing paper and having meetings and signing things in person and doing all these things that we do with private securities could definitely be improved with blockchain,” Dowd said. 

North Capital’s crypto ventures began shortly after the July 2017 DAO report release. It was still the “go-go” blockchain days, as Dowd said of the time more often referred to as the ICO boom, but in spite of what he called the “mania of the period” in a 2019 letter to the SEC, Dowd saw an opening. 

“The explosive growth of the market nevertheless showed that investors want to trade private securities,” Dowd wrote to the SEC. It “offers a means by which responsible, regulated broker-dealers and ATSs can develop market protocols and systems for trading private securities on secondary markets.”

North Capital previously released the precursor issuance tool in TransactAPI, which lets broker-dealers conduct online offerings of private digital assets and other exempted securities that PPEX, which is a secondary trading system, can now facilitate trades of. Dowd said TransactAPI has been involved in 1,000 deals worth a total $1.9 billion.

Though digital assets are only part of TransactAPI and PPEX’s wider private securities trading capabilities, they do represent perhaps the most transformative point, from a technological aspect at least, Dowd said.

“The digital asset technology of blockchain technology really could offer a way to automate and to make more efficient some of the inefficiencies in private markets, and that’s what got us excited about technology three years ago,” he said.