Why Tokenized Securities May Well Lower the Barrier to Entry for Entrepreneurs
People often dream of starting their own business. Of being the boss. Setting their own hours. Following their passions. But dreams are hard to come by these days. And starting a business, in many cases, is a seemingly insurmountable task. The barrier to entry is especially high when you take into account the funds, time and effort needed to start, and the addition of the funds further required to keep the dream afloat until profitability is reached.
But there are solutions out there: For instance, entrepreneurs emerging in the cryptocurrency space can work to unlock the power of tokenized securities, to lower the barrier to entry posed by their need to raise money.
Over recent years, this scenario has improved. Kickstarter for example, is an online location where communities come together to help fund projects and ideas. Indiegogo is another example, whose site has stated, “By giving entrepreneurs everywhere a platform to launch new and groundbreaking products, we help surface innovations in tech, design, and much more, all before they go mainstream.”
In 2017, the initial coin offering craze proved to be a massively successful way for entrepreneurs to raise significant funds for their projects. ICO fund-raising carried over to 2018, with $6.3 billion raised in ICOs in the first quarter of 2018 alone.
Unfortunately many of the projects that raised funds in 2017 have shown little traction since that rise, and a couple have even disappeared with the money. Furthermore, the current infrastructure surrounding ICOs is missing stability and proper backing. There have been reports of fraud, and as a result, many investors have lost money. In July 2018, Satis Group Crypto Research reported that about 81 percent of ICOs since 2017 had been found to be scams. One reason is that guidelines and regulations are currently very loose for the ICO market.
Additionally, many projects over the past year or so have been able to raise fantastic amounts of capital initially, but then often lost significant value once they were out of the investor spotlight; many projects simply faded from existence. In a recent interview I conducted with Desico (tokenized securities) CEO and co-founder Laimonas Noreika, he pointed out, “Companies used ICOs as a fund-raising mechanism, not because their tokenomics needed a utility token.
"That’s why most of the utility tokens issued are below their initial capitalization,” Noreika said.
This loss of value is caused by the value exchange between investors and projects. When an investor puts money toward an ICO, he or she receives a specified number of coins or tokens in exchange. The investor may then trade, hold or use these assets as he or she pleases.
Yet, tokens do not fluctuate in price based on the success of the underlying project. At this point, ICOs' utility token assets are confusing. Their utility beyond trading really lies only in whatever ecosystem they support, which is also speculative. Prices reflect whatever people surmise their value to be.
Stocks, in contrast, reflect the success or failure of the underlying companies. Dividends are paid out to investors of certain companies, and earnings largely dictate stocks’ prices, with a direct correlation to the stock price and the value of the company. Owning a stock essentially means owning part of the underlying company.
But for a company to go public with a stock offering, or initial public offering (IPO), requires an extremely large amount of capital -- as far as the average person is concerned. A study by Strategy& (formerly Booz & Co.) showed that “based on public registration statements, on average companies incur underwriter fees equal to 5 percent to 7 percent of gross proceeds, plus an additional $3.7 million of costs directly attributable to their IPO.”
Tokenized securities are a solution to the ICO problem because they seem to be the best of both worlds; and Desico is one company helping to make this scenario a reality. Tokenized securities take the benefits and successes of ICOs, and match them with the stability and backing of traditional stocks/securities.
In the interview, Noreika explained that “it will all change when companies have the chance to attract funding without pretending that they need a utility token. Instead, they can offer asset-backed investment opportunities for investors.”
Where STOs are beneficial
Security token offerings (STOs) have the benefits of cryptocurrencies, but are matched with the legitimacy of traditional securities. Tokenized securities have greater liquidity, as they can be moved easily from exchange to exchange and be held in regulated wallets. STOs also mean that the barrier to entry narrows for entrepreneurs and small businesses.
Instead of having fixed rates totaling millions of dollars, STOs conducted through Desico have fees based on a percentage of the total crypto raised. “IPOs generally have high costs associated," Noreika said. "Conducting an STO through Desico enables projects to pay a percentage [around 4.5 percent] of their total fund-raising, instead of high fixed rates.”
Entrepreneurs who are able to conduct STOs, and not have to spend the millions of dollars required for an ICO, will enable more startups to enter the market. They will have the freedom to conduct a regulated and stable offering, in compliance with the law, while giving their investors a safer vehicle to put their money into.
Tokenized securities also hold their value based on the associated company, and fraudulent practices are minimized due to compliance with governing bodies.
In this context, another platform that enables tokenized securities is Republic. Republic is an affiliate of AngelList and CoinList, the latter of whose CEO, Kendrick Nguyen, is a founding advisor and a highly credentialed one: Prior to Republic, Nguyen served as general counsel and venture hacker at AngelList and, before that, as a fellow of Stanford Law School and the Rock Center for Corporate Governance at Stanford University.
“We follow guidance from the SEC and FINRA very closely and work hard to protect our investors," Nguyen told me. "With a rigorous due diligence and selection process, we’re a highly curated platform for both equity-focused and crypto-focused offerings. We think innovation, efficiency and inclusive entrepreneurship will ultimately be the outcome of all the development happening with blockchain technology."
Finally, Noreika made an additional interesting statement: “I believe that tokens need securitization much more than securities need tokens, at least at the current stage of the market," he said.
There is a validity to this statement: It sums up the public’s ability to enter the ring without millions of dollars for their project. Indeed, the existence of tokenized securities seems to make the future a little bit brighter for all those entrepreneurs out there facing the inevitable struggle with finances.