Security Token Offerings — Will we have retail investor market?

Equity crowdfunding and security (equity) token offerings are the same thing. There are technical differences, but by its nature, it’s the same transaction: investor gives money and receives equity in the company. Everybody, including us, are preparing for the boom of the security token industry. Yet, it’s undeniable that equity crowdfunding hasn’t really had the impact people thought it will have. What are the reasons for this? If it’s the same thing as equity crowdfunding, then why should security token offerings have a bigger impact?

We’ve spent a fair bit of time thinking about this. Let’s try to list out reasons for why equity crowdfunding hasn’t taken off — in our opinion.

No culture of investing

Most people shop online. E-commerce is hugely popular. If you would ask from people on the street whether they have ever bought anything online, then most of the people will say yes. It’s self-explanatory. If you ask the same question about investing, then an overwhelming majority will say no. Investing via crowdfunding platform is literally as easy as making an account on Amazon and buying shoes. Yet, people don’t do that. Though I don’t have any reliable data to back it up, it does seem that the biggest reason is the lack of investing culture. Investing isn’t taught in school. Most of the people have never invested into any asset class, ever. It’s common in wealthy families, but the average working-class doesn’t even think about investing, or even if they do, then it’s a long way of taking action. It’s also a problem which is perhaps the most complex to tackle in a private sector. We need to educate people from the ground up, and it should be part of the education system. Getting people to invest needs a systematic approach by the government. After all, the pension systems are clearly bankrupt and haven’t fulfilled the function of providing a comfortable retirement for people. Investing is an absolute necessity.

I would say it’s about things such as understanding terms like compound interest. Albert Einstein called compound interest the eighth wonder of the world. Warren Buffet has said compound interest made him a billionaire. And this takes me to the second point — we saw an influx of retail investors into ICOs and cryptos in general in 2016–2017. People who had never invested before were pouring money into this new market. Why? 10000x gains, of course. FOMO kicked in. Buying Lambos was an everyday theme in Reddit crypto forums . And 100x gain in a day is attractive enough for anybody to jump in. It was a pure speculation, but it gives you an idea what people expect in return of their money. The expectation is unreal both in terms of return on investment and timeframe. So the question is — does investing into equity have attractive enough value proposition for the retail investors and more over, can they understand it?

The short answer is yes, the value proposition is attractive enough, but we need to focus on educating people.

Delayed gratification

People in general are extremely bad at delaying gratification. If you buy stuff from Amazon, you will receive your new bag or watch the next day or next week. The gratification is basically instant. With investing, the gratification is perhaps 10 years away. We have a really hard time valuing something that will materialise in 10 years time. If you’re given a choice of having an extremely tasty dinner next week at the most posh restaurant (for free) or having an extremely tasty dinner at the most posh restaurant plus a glass of quality wine (for free) one year from now, most of the people would rather have the tasty dinner next week. As investing does not give an instant gratification, it’s difficult to get them to invest at all.

Security Tokens

In conclusion, lack of financial education, culture of investing, investor expectation and psychology are the key things to tackle if we want to grow a strong retail investor market for STOs. Quality projects doing the issuances is a must, but this is self-explanatory and something we highlighted in our TokenizEU manifesto. We have ideas on how to tackle at least some of the aforementioned issues at TokenizEU, but it remains to be seen if our assessment turns out to be a correct one. Additionally, security tokens will have a lot more liquidity compared to equity crowdfunding thanks to the trading venues that are built for security tokens. Secondary market is extremely important for investors, and they key ingredient for many investors who haven’t participated in equity crowdfunding before, but have invested in stock markets.

Can’t wait to see how this market will unfold.

TokenizEU is a security token issuance platform managed by Comistar. We help to structure security token offerings and comply with the regulations in the European Union, as well as issue tokens and enable investors to participate in the offerings. To enable non-EU residents to participate in the offerings, we support creating SPVs (special purpose vehicle) in the European Union through Estonian e-residency program.