Capital formation is crucial for companies as it fosters growth and enables businesses to pursue new growth opportunities. For generations, companies looking to raise capital from public markets had to go through a lengthy, manual IPO process before the investment dollars could start flowing in. Thankfully, security tokens offer a capital raising approach that is both compliant with SEC regulations while also being innovative and inclusive.
Companies can benefit from the synergies conveyed by the combined utilization of registration-exempt offerings and Security Token Offerings (STOs). These assets allow – by means of a Blockchain – the transferring and holding of tokens representing ownership of a company. We will thoroughly examine the benefits of fundraising and investing through these assets and offerings. We will also introduce the regulatory framework underpinning a security token sale, specifically focusing on the Reg A+ “mini IPO” rule.
Businesses can access capital by two different mechanisms: registering a full prospectus public offering with the SEC (The U.S Securities and Exchange Commission) or participating in one of the SEC registration-exempt offerings. The former mechanism is a particularly costly procedure for small and midsize companies that would need to cover significant legal and accounting expenses and ongoing reporting.
All companies that intend to raise capital must file a prospectus with the SEC, except those businesses that are fundraising pursuant to registration-exempt offerings. These offerings were conceived to simplify the capital raise formation process of early-stage companies that cannot afford the high costs that a conventional offering implies.
In April 2012, the U.S. Congress enacted the JOBS act, replacing the now-extinguished Reg A with the new Reg A+. This new law allows small and medium-sized businesses to raise funds (with either a $20 million or $75 million limit) without meeting several time-consuming and onerous requirements, paving the way for an easier path to secure funds. Reg A+ allows companies to increase the number of investors from which they may raise funds: they are no longer constrained to raise funds only from those deemed as accredited investors (i.e., individual or corporate investors that meet specific requisites). Instead, companies fundraising under this type of offering may target non-accredited investors, effectively broadening the universe of potential investors by a significant number.
A Security Token Offering (STO) is an efficient way to take full advantage of the use cases of Regulation A+. An STO allows firms to raise capital by issuing equity owned by those who buy and hold the tokens. Even though STOs share some similarities with traditional broker-mediated issuance of shares, the deployment of the token on a blockchain conveys several advantages to both corporations and investors. Investors can trade the token 24/7 in a simple and low-cost way, benefiting from the blockchain’s transparency and safety. Investors can fractionally acquire the tokens, and thus they can own a small part of a business, even if they lack the funds to buy a whole token.
Additionally, security token offerings allow the opportunity for the creation of a secondary market for those security tokens; thus, investors may benefit from higher market liquidity which was not previously the case with traditional securities issued in exempt offerings. Furthermore, investors can use their crypto holdings to purchase the STO token. Also, STOs allow investors to buy tokens from foreign countries; thus, the pool of funds available for companies is larger. All these features allow for a burdensome investing process for investors, leading to larger amounts of funding.
There are various essentials to conducting a successful Reg A+ STO. It is vital to get legal advice to ensure that this investment vehicle is appropriate for your firm. Hiring a marketing firm/specialist is crucial to devise an effective publicity campaign to reach potential investors optimally. Companies will be required to submit form 1-A (offering circular) to the SEC, and they are also required to file audited financials on a semi-annual basis while the offering is live.
INX can help you navigate the market whether you are an investor looking for investment opportunities or a company looking to raise capital.
We allow investors to get exposure to innovative companies through STOs that can be traded 24/7 in a fully transparent and secure way. Investors also enjoy higher liquidity availability, which is particularly relevant in small markets. Additionally, by taking advantage of the blockchain’s efficiency and subsequent reduction of transaction costs, we can offer investors lower minimum investment amounts and allow them to engage in low-cost trading.
Issuers at INX benefit from our burdenless mechanism for raising capital while maximizing efficiency from a regulatory and operative standpoint. We guide companies on their whole capital-raising journey, from choosing the optimal token model to opting for the capital-raising form that best suits their needs (Reg A+, Reg D, Reg S1, and others). By using our platform, companies delegate to us the KYC/AML verification processes of their potential investors and the token minting/smart contract deployment process, along with transfer agent services.
Want to learn more? Head over to our raise page to discover.
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