How a Hockey Scare Led Banking Vet to Issue First Digital Shares

(Bloomberg) -- Before Richard Uhlig spent decades climbing Wall Street’s ranks, he wanted to be a doctor. After a hockey injury left his son with a concussion six years ago, his career tacked back to the sciences as he founded a startup to make it easier to diagnose brain health.

Now, the former chief executive officer of Morgan Stanley Bank is championing a possible fix to one of his old industry’s most enduring problems: the messy and opaque system of recording equity ownership through common shares.

His company, Quadrant Biosciences, will become the first to issue digital shares in Delaware under a new law passed last year, Uhlig, 52, said in an interview. The equities will be recorded on the Ethereum blockchain, bypassing the decades-old registry at Depository Trust & Clearing Corp. in a move supporters say improves transparency and allows for real-time certainty of ownership.

“This is where the real potential of blockchain comes in, where assets are digitized as opposed to a purely post-trade infrastructure solution,” said Richard Johnson, an analyst at Greenwich Associates. “I really see it as a logical progression. I think all companies will be listed this way in the future.”

Though the concept sounds obscure, it represents a milestone in the state where more than 60 percent of Fortune 500 companies are incorporated. While DTCC usually has no trouble keeping track of who owns what, in hectic times such as mergers and buyouts, when hundreds of millions of shares switch accounts in seconds, the Byzantine system of U.S. stock-certificate ownership can lead to legal battles and courtroom confusion. Inaccurate share counts also cost Delaware tax revenue.

The U.S. system of stock-certificate ownership dates to the late 1960s “paperwork crisis,” when Wall Street brokerages were drowning in securities certificates, leading to routine shutdowns of the stock market so they could catch up. Before the advent of electronic trading, shares bought and sold by investors had to be hand-delivered by messengers.

DTCC was created as an industrywide clearinghouse to modernize the system by tracking and settling ownership. Its Cede & Co. unit became the registered owner of all U.S. shares, resulting in most investors not having a direct claim to their stock, what’s referred to as owning shares “in street name.”

Dutch Auction

The Delaware Blockchain Initiative aims to change that. The plan is designed to weave distributed ledger technology through the fabric of the state’s business and legal systems. While it would change nothing about how shares are traded on the New York Stock Exchange, Nasdaq Stock Market or other U.S. exchanges, it would allow investors to have direct ownership of their holdings for the first time since the early 1970s.

Quadrant raised $6.1 million in 2016 though a private placement, and another $13 million selling stock to existing shareholders in a more recent offering, Uhlig said. The firm, which is incorporated in Delaware and still closely held, plans to use a Dutch auction in late May to sell its next round of equity to accredited investors under the Securities and Exchange Commission’s Registration D process. Once those digital shares are sold, the 2016 shares will be digitized so the company’s entire ownership structure will be on the Ethereum blockchain, he said.

Uhlig, who studied biology at Cornell University, said he went into banking rather than medicine because he couldn’t afford medical school at the time. After working at Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., he became chief investment officer for Merrill Lynch Bank USA, according to his resume. He later spent several months in 2009 as vice president and head of liquidity risk for the Federal Reserve Bank of New York.

Spit Test

Yet he never lost his love of biology. When his son was hurt, he was shocked at the lack of sophistication in diagnosing concussions. Thinking of the smartphone in his pocket, he remembers wondering, “How do I have this but we have no idea about the extent of my son’s brain injury?"

After some planning and recruiting, he founded Quadrant, whose ClearEdge brain-health assessment product is expected to earn Quadrant $17 million in revenue this year, Uhlig said. The firm is also developing a spit test to determine concussion damage, as well as one that uses saliva to detect Parkinson’s disease and autism, he said.

Matthew O’Toole, a partner at Delaware-based firm Potter Anderson & Corroon LLP who helped draft the state’s blockchain law, said interest in issuing shares on digital ledgers is growing. “There’s a lot of tire-kicking going on,” he said.

Digital shares allow Uhlig to skip the initial public offering process, which is controlled by banks and closed to most investors. Music-streaming service Spotify Technology SA also recently avoided the normal IPO process to get its shares trading at the NYSE. As a Wall Street veteran, he said he always “cringed” when he watched a company’s shares shoot up 30 percent immediately after the IPO.

“Any CEO who allowed that to happen to his or her company should be fired” because the first rule of management is to “act as a fiduciary of my shareholders,” he said. Going digital, he said, “allows me to treat my existing shareholders and all my new shareholders on an equal basis."

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