According to the World Bank, there are around 150 million companies around the globe but there are only about 45,000 listed on global stock exchanges. This means that only 0.03% of companies have access to retail investors and liquidity. Let’s figure out why this happens.
Having your own company is a great achievement and one which many people are attracted to. In order to design a product or service, you need to invest money at the very early stage of your enterprise. Where can these funds be obtained from? Well, maybe you have your own savings or maybe you rely on the 3 Fs – Family, Friends and Fools. You can also apply for a loan from the bank but in order to get any money from a traditional institution, you need to have a good credit history and a good banking score.
You could try to contact business angels or get access to VC funds but it is very time-consuming and quite often frustrating to pitch dozens (if not hundreds) of times in front of greedy investors only to end up going through months of negotiations and ending up with less than 50% of your company’s shares.
Of course, there’s always the option of listing your company on the stock exchange but according to PwC, the average small IPO in the US varies between $2.6 million to $13.4. If you haven’t already, go back and have a read of this topic in our previous article for a closer look [tutaj link to łopaty].
How to Get Funded – IPO, ICO, STO and Loans: Pros and Cons
Initially, Security Token Offering was created as an alternative to Initial Coin Offering. Enthusiasts of this solution point to the numerous advantages of STO over ICO which resembles IPO but at the fraction of its costs.
Security Token Offering guarantees, above all, much greater security than ICO. Where Initial Coin Offering is vulnerable to fraud, STO is secured with funds which largely makes this solution much more acceptable to traditional regulators.
Here is a breakdown of the most popular fundraising methods at the start of your project:
|Backed assets||There are underlying assets on which an investment is based on||There are no underlying assets||There are underlying assets on which an investment is based on||There are underlying assets on which an investment is based on||There are underlying assets on which an investment is based on|
|For whom||Mainly for institutional investors||Mainly for retail investors||For institutional and retail investors||For institutional investors only||For institutional investors only|
|Costs||Very expensive||Very low cost||Low cost||Expensive||Expensive|
|Security||High security and protection for the investors||No protection for the investors||High security and protection for the investors||High security and protection for the investors||High security and protection for the investors|
|Time||Long-lasting process||Short process||Short /medium length process||Long-lasting process||Long-lasting process|
|Liquidity||Medium||High||High||Very low||Very low|
|Regulated||Yes||No, and banned in the majority of jurisdictions||Yes and allowed in many jurisdictions||Yes||Yes|
Why Asset Tokenization is a Game-Changer
Blockchain and security tokens are characterized by incredible flexibility when seeking financing. It combines the security of a classical stock exchange (both legal and technological) with a low entry barrier as it is with ICO.
Here are 5 main highlights of the security tokens backed by blockchain technology:
- You can digitize most things – from real-estate projects right through to solar and wind farms and even art and jewellery. In other words, literally anything you can call an “asset”.
- Let retail investors invest in your business. Leverage blockchain technology and split up your shares and divide them into pieces even as small as $100. With 100% programmable smart contracts, you can create cashflow and investment according to your needs. Of course, you still need a qualified programmer but in terms of your business needs, the only limitation is your imagination!
- Get liquidity from day one. You can list your newly minted security tokens on marketplaces such as Polymath, Swarm, Harbor or tZERO and enable investors (both retail and institutional) to trade your security tokens instantly. You can also decide to build a so-called private pool and enable all trades there which will make you totally independent from any 3rd party services (except the blockchain itself).
- Another advantage of the digital and decentralized approach to your venture is the fact that your share can be purchased by investors from distant parts of the world and can be traded 24/7. It makes your shares independent of any specific stock exchange’s opening hours and eliminates the issue of inaccessibility because of timezone differences.
- Last but not least, cost reduction. As outlined above/in this article [Łopata] the costs of a small IPO can be as high as $13.4 million. With the STO, you can reduce this cost several dozen times. Isn’t it amazing?
Type of Tokens, Technologies and Possible Solutions
There are 3 types of asset-backed tokens:
- Equity Tokens – These are a type of security token which work similarly to classical stock. Investors who are in possession of such tokens also have ownership (proportional to the number of tokens) of the equity (usually 3rd party) they invested in. Thus, they are entitled to be paid dividends once the venture records a profit. These tokens can be represented by stocks, futures, or options in tokenized companies.
- Debt Tokens – These are for investments such as real-estate mortgages or corporate bonds. In short, they are loans to a company (token issuer) at a specific interest rate for a given period of time.
- Asset Tokens – These represent ownership of a certain type of asset such as real estate, diamonds, gold, energy, art, intellectual property and so on. Simply put, they can represent a certain value of tangible or intangible objects.
Token Standards and Their Implementations
- ERC-1400 – This was created to specifically deliver security tokens based on the commonly used standard, ERC20, which unifies the standard for all security tokens. It sets the standards for core compliance components, document handling and notification, security token controls and permissions and partial fungibility.
- ST20 – The author of this implementation is Polymath. It consists of a predefined set of rules (such as preset smart contracts) which define who can interact with the contract on their in house blockchain (called Polymash) and how they can do it.
- R-Token – This is another implementation of the ERC-20 standard and it is based on Ethereum blockchain enabling a set of rules and interacting with the so-called Regulator Service to meet the relevant securities regulations, Know Your Customer (KYC) policies, Anti-Money Laundering (AML) requirements, tax laws and so on.
There are 2 options:
- Creating your own pool using, for example, white label solutions and enabling investors to buy and sell your security tokens directly on your website. The advantages of such solutions are that you gain independence from any 3rd party (except blockchain itself), there are no trading fees, plus you can create extra income if you decide to charge more for trading as you will have full control over the process. One challenging factor here is providing liquidity as your investors may expect to trade your token from day one. Not to worry though, there is a remedy for this as you can use The Liquidity platform where you can borrow money for just such a purpose.
- Listing your token on one of the most widely used STO platforms such as tZERO, Polymath, Harbor or Swarm. They provide liquidity for your tokens and easily integrate with the token standards mentioned above. It is important to bear in mind that this is a 3rd party software and trades may be subjected to fees.
Why Does STO Need Top-Notch Experts?
Although Security Token Offering sounds like an appealing way of achieving great success, it requires consultancy and a dedicated group of experts to pull it off well. There are three basic fields of expertise that are key elements when it comes to crowdfunding with security tokens.
- Marketing – You will need someone who knows how to attract the attention of the people who will be interested in investing in your venture and are at least somewhat familiar with blockchain technology.
- Legal and Compliance – It is important that you hire a legal team to avoid unnecessary risks when conducting STO. They will help you with legal compliance under each local jurisdiction.
- Technology – There are several good decisions to be made when it comes to choosing the right tech in order to secure your business and the business of your investors.
At the very beginning, choosing the right blockchain platform is crucial. Basically, there are two main options: public or private. Private blockchains tend to serve corporations in certain business industries better when those businesses operate under highly regulated legal requirements. In order to join their technology, you have to meet dozens of legal and accounting requirements.
On the other hand, public blockchains provide more resilience as more participants in different parts of the globe are engaged in support of the operations on the blockchain. They can often be more flexible and much cheaper as you can skip all the bureaucracy which we have just described above.
Another aspect that’s worth mentioning is the market adoption of a certain blockchain. It is important to choose one which is widely recognized and has a large community as there will be a much larger amount of essential and auxiliary services (such as wallets) where investors will be holding your tokens.
Last but not least, you need to choose the right token protocol. As a security token is legally approved, it has to meet many standards such as:
- how tokens are stored on the blockchain.
- how they can interact with investors/ 3rd parties.
- whether they enable whitelisting, secondary trading, blocking and burning tokens.
- setting transaction limits.
- carrying out the KYC (Know Your Customer) process.
Although the STO process might seem to be challenging and require a large number of steps to be done with a team of experts, you can reach or even surpass your business goals faster, cheaper and in a 100% legal way! All you need is a reasonable (tech) partner in each field of expertise.
Author: Boleslaw Kruszewski