ICOs have come under fire for a host of reasons, and are now slowly making way for Security Token Offerings. This article discusses STOs and their advantages.
A lack of liquidity is the main reason for the slow development of crowdfunding and other types of fundraising. To date, only peer-to-peer (p2p) platforms have established a secondary market to resell loans.
However, there is no opportunity to resell the stocks which an investor has accumulated through investing in crowdfunding platforms. As result, less than 5% of the alternative finance in the world belongs to equity-based crowdfunding and 95% of the turnover currently resides at p2p lending platforms.
The recent rise of Initial Coin Offerings (ICOs) has shown that the traditional stock exchanges and crowdfunding platforms are unable to meet the demand from new early-stage issuers and global investors. Additionally, the ICO market wouldn’t exist without the possibility it offers for the exchange of tokens and their liquidity.
From a legal and financial perspective, ICOs are, however, not the best example of blockchain-based investing. Moreover, misuse of ICOs could discredit the use of blockchain technology in the investment sector in much the same way as bitcoin discredits the use of blockchain in the traditional monetary system.
In the ICO process, both companies and investors should understand the risks that are associated with a “trap of the coin economy” – a company which has issued tokens is limiting almost to a zero ability to earn revenues directly from their main business activities, not, as they do, indirectly from the crypto exchanges where their coin is traded.
In case the company gives too much power to the token on its platform, this results in losses to its equity investors. Investors can expect the dividends to be based on token sale revenues, as opposed to the company’s actual business activities.
This model is impossible to scale sustainably, as the number of ICOs grows and the liquidity decreases. There are two potential ways out of this dilemma:
• Utility tokens/coins have to be limited in functionality to allow for main services still to be paid in liquid currencies and thus generate a sustainable revenue stream for the team and shareholders.
• Innovative companies that aim to build sustainable revenue-generating businesses may choose to raise funds through a Security Token Offering (STO) instead of ICO. It is true that most traditional businesses and start-up’s consider the issuance of tokens for crypto fundraising reasons, these are the most suitable for the issuance of equity type tokens.
Companies that offer for sale tokenized shares and debentures are more attractive from an investment perspective, trustworthy in legal terms, economically sustainable in the long-term and eligible for investments by traditional funds.
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After a year of opposition between regulators and crypto innovators, finally, we can see that the ICO is evolving into STO. These offerings will be conducted on the emerging regulated platforms that facilitate trading in tokenized securities. Corporations and start-up’s will thus have the opportunity to issue their tokenized shares and bonds to a greater number of fiat and crypto investors. Fiat investors will hence get the necessary liquidity for their private investments, while crypto investors will obtain legally compliant tokens, which actually represent their share in the companies.
When investing in security tokens, investors are interested in sustainable companies with a solid [potential] generation of revenue from their business activities, experienced operational teams, a business plan with financial projections, as well as the legal standing of the security token issued on the platform which is conducting the STO and the legal status of the platform itself. Most investors prefer to invest in countries with English law, like the US and the UK, where investors experience the greatest protection.
Fundraising through tokenized equity, debt or reward empowers SMEs and start-up’s to connect with investors and other interested parties at any stage in the company’s growth phase and hence raise the necessary funds faster.
By choosing regulatory compliant fundraising platforms for their STO, companies can receive the full spectrum of services out of the box – security token issuance, exchange listing, investor on boarding (KYC, AML, accreditation), and management of future dividends or interest payments.
While a new more sustainable security token economy is evolving, there are not many platforms that are ready to offer compliant STO services. There are tZero and Polymath in the US and Canada, respectively. And in Europe, HighCastle is the first to be offering technological and legal infrastructure that supports a compliant Securities Token Offering and Reward Token Offering, to be launched under the auspices of the UK securities law framework.
HighCastle blockchain-based protocol is designed to tokenize and enable smooth trading of private securities, which stimulates the liquidity of private investments and opens access for private companies to over $18 trillion of individual and institutional capital vs only $12 billion available to ICOs. In contrary to private venture fundraising, companies get a fair access to a much broader pool of global crypto and fiat investors, an opportunity to raise funds faster at lower cost and higher valuation of their company.
Around 20 new ICOs appear on the market each day. Most of them are simultaneously listed at the HighCastle Marketplace. At HighCastle Exchange, those and other companies, on their own or with the help of HighCastle’s Authorized Advisers, have the opportunity to launch an STO.
Thus, companies have the potential to fundraise global capital easier and faster through the STO, whilst they can choose to stay registered and located in their home country, supporting their domestic economy through global expansion and internationalization of local businesses and innovators.
For innovative companies and traditional businesses that want to leverage their sustainable and long-run growth, HighCastle has created a platform where they can undertake an offering of their tokenized securities, giving an opportunity to investors to hold traditional shares or bonds in their crypto wallets. The use of blockchain in capital markets is unlocking a new opportunity for investors to trade and participate in the private securities market.
This new emerging model of tokenized fundraising and trading ensures that securities issued by promising developing companies can be accessed by crypto and fiat investors, both retail and institutional investors, who can invest through highly-compliant and regulated platforms.
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