Security token offerings (STO) are the novel capital-raising mechanism poised to make a breakthrough in 2023, combining the best of traditional markets and blockchain technology. By embarking on an STO, entrepreneurs can leverage the unique benefits of security token offerings that merge regulatory compliance with the disruptive potential of decentralized finance.
Security tokens offerings are the natural evolution of raising capital through digital assets. On the one hand, security token offerings are similar to initial coin offerings (ICOs) in that they are built on the blockchain and offer the benefits of transparency, inclusivity, and instant settlement afforded to blockchain-based assets.
On the other hand, security token offerings can be compared to an IPO of a stock in that they must be approved by the appropriate regulator such as the SEC.
Security token offerings combine the best of blockchain-based digital assets with the peace of mind gained from investing in a regulated vehicle such as a stock or bond.
Security tokens provide an opportunity for retail investors to invest in assets that are not listed on the public stock exchanges, thereby allowing for investments, and in effect, equity in privately-owned companies. Thanks to security tokens, asset classes like early-stage ventures that were traditionally open only to accredited investors only can now be made available, under certain SEC regulations, to accept f retail capital flow. Not only does this contain the potential for bringing trillions of dollars into private markets, but also allows retail investors to access these markets which goes a long way in democratizing finance.
With the right kind of compliance, firms can launch global STOs in the future, attracting investors from all over the world. Companies would be able to raise capital from previously untapped sources. This truly levels the playing field in allowing equal opportunities for all investors, as opposed to previous restrictions based on “who you know”.
Private markets are generally known to be long-dated, meaning they lock up investors’ money for a long time period before they have an opportunity to sell, if at all. By introducing security tokens to private markets, investors can have an opportunity for liquidity in their equity positions that previously did not exist.
Traditionally, markets for certain high-value assets find very few participants due to the high costs of entry. Commercial real estate and art are both excellent examples of such restrictive markets. With the tokenization of these assets, more investors can be attracted to these markets, improving their overall depth and level of activity.
By dividing up securities into fractions, small investors can buy securities directly from issuers, which presents a great opportunity for them to invest in up-and-coming companies, or assets with long-term opportunities, and thereby positioned to benefit from their potential increase in value in the early stages of the company. As a result of fractionalization, private markets can now have many individual investors taking part, who will in turn have the opportunity to participate at the early stages.
Even in this digital age, it takes stock exchanges up to two days to process the sale of shares. Bond trades can take even longer. During the waiting period, there is a material risk involved with waiting for your counterparty to settle the trade. Just as email and instant messaging replaced postal letters, security tokens can replace traditional shares. With blockchain technology, exchanges can process transactions in a matter of minutes.
Slower transactions can drastically affect parties involved in a sale, particularly sellers. For instance, a delayed real estate sale could potentially reduce the price, imposing a sort of liquidity penalty on the property owner. With real estate security tokens, we have smoother, faster sales, unlocking liquidity and allowing for substantially shorter wait times for entering as well as exiting the market.
Security tokens allow previously-illiquid VC investments to trade on secondary markets. VCs no longer have to wait years until the startups they invest in go public or are acquired to see a return. Instead, VCs can trade in and out of positions on liquid secondary markets should they require capital, or should their investment thesis change. It’s not just the VC market that stands to gain from a transition to tokenization.
Traditional markets follow a strict office schedule, closing in the evening and on weekends. This hampers the ability of investors to make moves in time to capitalize on changes in the market. Moreover, it is a highly inefficient system. With blockchain technology, future security token markets can stay open and operational 24/7/365.
The ability to automate control for compliance with security laws since tokens allow for building compliance requirements into the token. Smart contracts facilitate built-in features that can be designed case-specific to include rights, obligations, and compliance provisions that inherently become instilled in the agreement. This can include provisions such as KYC (know your client) and AML (anti-money laundering) checks. Profit sharing, voting rights, and even bankruptcy protection clauses can all be written into smart contracts, thereby limiting potential fraud and misappropriation of funds.
As advocates of the digital revolution, it seemed an obvious decision for INX to create its own token. In 2019 INX announced the filing for its own security token offering, which started trading on July 28th, 2021. INX token was the first SEC-regulated token to IPO on the blockchain. Today INX offers an end-to-end service for issuers as well as investors. From internal due diligence, through pre-issuance, to SEC registration, creating your personalized token and ultimately listing the token on INX’s regulated ATS for trading.
Our team of experts is there to guide you through the entire process, including tokenomic design, guidance with SEC registration, a capital raising platform and token issuance. Once the token is live, we also provide cap table management and secondary market trading for your token on the INX alternative trading system (ATS.) All under one roof. All in one place. All under SEC regulation.
Investors have made it clear that the three most important features to be considered in financial investments are trust, transparency, and regulatory protection. Security Tokens on INX checks off all 3!
For more information, visit our raise page.
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