The following interview is a conversation between Sandra Kumhofer, RealPort’s General Counsel, and Detmar Loff, Partner at Ashurst LLP. Ashurst is RealPort’s external legal partner and is considered to be one of the most progressive and innovative global law firms, making them an ideal partner to advise RealPort. This discussion is a part of our “In Conversation with RealPort’s Ecosystem” series.
Sandra Kumhofer: Detmar, firstly can you please tell us about your background and expertise?
Detmar Loff: I head the German Regulatory and Investment Funds Department at Ashurst in Frankfurt, where I have been based since 2015. Before this, I worked at another global law firm and additionally at one of the big four firms. Over the past 15 years, I have been in supervisory law with a particular focus on new distribution channels and products — exactly the structure promoted by RealPort. Our German team currently consists of two partners and six associates whose responsibilities reach across the full range of Fintech and common regulation. Here, we provide support and guidance to issuers and investors alike. With a holistic understanding of both of these parties as well as the Fintech perspective, our expertise makes us a great fit for RealPort.
Why, in your opinion, is the partnership between Ashurst and RealPort is so exciting?
My department, in particular, was an early player in the Fintech environment, dealing with tokens, digital-assets and so on. When I first met RealPort’s founder Ekow, I immediately knew we would be a great fit. I could sense his enthusiasm and energy. He has a unique way of conceptualising ideas and then executing the steps to get them done. These characteristics have led to a strong partnership between Ashurst and RealPort. The department at Ashurst is young, entrepreneurial and full of spirit, so in this case, our two energy streams have aligned extremely well together.
You mentioned that you first engaged with the Fintech scene some years ago, how have you seen the sector evolve?
Basically, you can identify three large waves in this scene. In the first wave, mostly young software developers worked on creating various concepts. Though they were very energetic and enthusiastic, they typically lacked regulatory experience in a traditional environment. This disconnect had consequences and most of those groups had to learn the hard way that their product needed to better adapt to thrive in a regulated environment.
Then we see the second wave: the Neobanks, which still have this entrepreneurial feel to them, although in many ways somehow unstructured. These projects learned as they were progressing, incorporating the relevant regulatory processes as they went along and this has been quite visible as we, as a firm, have been working with them in much detail. I think this gradual evolution occurred as these platforms were still in a type of start-up phase. However, unlike some of the larger banks and institutions, the companies within this second wave did not have to deal with multiple layers of procedures of incumbent organisations. In particular, they did not need to deal with overly complex and outdated systems and procedures.
In my opinion, the next wave is where the big players started to come into play. Instead of viewing these projects solely as distribution channels, they see it as gaining access to the customer experience. The confluence of entrepreneurial, agile and Fintech innovation paired with the resources and networks of the real economy, embody the third wave. This wave has a significant amount of monetary backing. On one side, you have venture capitalists backing startup projects. On the other side, you have collaboration between larger institutions with those same projects. In the latter case, the startups have the innovative ideas and the partner institution has the resources. For Fintechs, this stage is a new learning experience — dealing with large organisations is a totally different cup of tea than having discussions with their tech-driven peers. The challenge then, for this wave of Fintechs, will be to grow and adapt to a more mature and in some instances, a highly regulated environment.
You have been the lead legal adviser to RealPort as we have been building our product, particularly consulting us on the investment structure. What have been the main elements considered when establishing this framework?
The construction and establishment of the RealPort investment platform had to meet requirements from various legal angles. Firstly, the platform is set to enable investors to invest into individual real assets via a tokenised instrument — which is particularly relevant in the context of investors from Asia, or alternatively, via common securitised financial instruments — which is especially relevant for European institutional investors. This structure had to be flexible enough to allow both investor groups to indirectly invest into the underlying real asset exposure, whilst also allowing an investor to cash out of the investment if and when desired.
Secondly, the investment structure needed to be transparent with low costs involved to allow investors to gain maximum economic benefits. That transparency is vital to unlocking access to real assets which these investors would otherwise find difficult to attain.
Thirdly, the structure must be easily understandable by both the investor and the underlying real asset entity.
Next, of course, the structure must be manageable by RealPort themselves.
Last but not least, any overly burdensome regulatory obligations must always be mitigated without triggering regulatory risks.
These requirements resulted in a dual-securitisation structure, where the token issuing securitisation vehicle invests into the underlying real asset entity. The investor can invest into the token directly or through a securitisation vehicle issuing common financial instruments referencing to the token. The structure does not qualify as AIF or otherwise fully regulated structure, allowing the minimisation of costs while still maintaining high reliability standards for the investors through the use of a typical securitisation structures common in the market.
Can you explain a little as to why Ashurst and RealPort chose a cross-border structure with the issuers of the products in Luxembourg and the main body of the RealPort Group in Germany?
The Luxembourg securitisation regime allows for the use of digitalised instruments. The proposal for tokenised securities, that will be addressed in Germany by the “Electronic Securities Act” (Elektronisches Wertpapiergesetz), is already a step into the right direction, however due to its limited scope, we think that for now, Luxembourg or Ireland are better domiciles for digital securitisations. The “centre of gravity” for brokerage activity and analysis of the underlying assets is however based in Germany, due to better access to human resources and a magnitude of institutional investors.
Can you tell me a little about how transparency and fair treatment of the investors will be ensured throughout the process?
The investors will receive an offering memo, including all the relevant documentation explaining the structure, the risks of the structure and the underlying assets, as well as the costs involved. An independent trustee is established, who will control relevant cash flows. All investors, investing into the same instruments are treated alike. Since RealPort Broker GmbH provides services as a tied agent, it is subject to strict organisational governance and conflict disclosure. Further, an additional layer of comfort is given through RealPort’s partner Scope Analysis GmbH, who provide real asset analysis and risk evaluations.
Could you speak about our Profit Participation Notes (PPNs) USP?
The PPN serves the purpose of linking the investor to the real asset. Different from equity instruments, the PPNs do not grant voting rights which is beneficial for shareholders of the underlying asset and avoids changing in its shareholder also. However, asset holders may allocate the inflows from the PPNs to their equity-like balance sheet position. The instrument does not require fixed interest obligations and allows the investors to fully participate in any upsides of revenue streams. In addition — and this is also an important topic for the structure — PPNs can be structured in a very flexible way to align with the underlying real asset exposure. However, whether the PPNs are issued digitally or as common financial instrument, they always follow a high and standardised disclosure regime and allow for easy access from institutional investors.
Detmar, thank you for taking the time to participate in this interview.
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