How Security Tokens Are Revolutionizing Crowd Financing
How Security Tokens Are Revolutionizing Crowd Financing
Developments in crowd financing over the last few years have blown the doors wide open for startup founders eager to fund their next project. However, the story is far from over. While 2017 started as the year of the ICO, the STO and tokenization of real-world assets are now opening up new channels for raising capital. These channels aren’t just limited to startups though, both established businesses and entrepreneurs alike can benefit from these new ways of funding their next venture.
Challenges of Seed Funding
Before the idea of crowdfunding ever became popular, entrepreneurs looking to raise capital had only a few limited options available to them. Either they took out a loan, or they convinced an investor to come on board and provide seed funding in exchange for an equity stake in their business.
Financing a business through loans comes with drawbacks. Founders must demonstrate that they have the necessary collateral to cover the loan. After all, if the venture doesn’t take off, the loan must still be repaid. Due to the business certainty required by banks, many founders have a hard time to secure loans from banks. Only founders who already have substantial assets served as collaterals, either from family and friends or from one self, have a good chance to receive loans from banks. Thus for founders who don’t have assets, the option is to seek a venture investor.
However, finding a venture investor willing to provide seed funding can be a great challenge, as the venture investor might lose all his investment if the startup doesn’t take off. After all, it’s called seed funding precisely because the business itself hasn’t yet achieved any profitability or growth, so the risk is high from an investor’s perspective. So, even if they are successful in finding a venture fund willing to invest, startup founders invariably have to sign away a large share of the company, which reduces their own future profit gains due to the low valuation of the company at initial stage. We can often see in the popular TV show <Shark Tank>, how difficult it is to secure an investment, if succeeded, how much shares startup founders have to give up.
And also a venture investor may have a conflicting view on how the business should be run. Moreover, they often have extremely high performance expectations and may even have a mid-term vision of selling the company for a better return on their initial investment.
Despite the drawbacks, new businesses can also benefit greatly from the experiences and resources of having venture investors on board. But finding a good venture investor is extremely difficult at the first place.
Along Came Blockchain
Blockchain provides a different means of sourcing startup capital — crowd financing. Although blockchain has been around since the inception of Bitcoin in 2008, and Ethereum had run a successful ICO in 2014, it wasn’t until 2017 that ICOs hit the mainstream.
Last year, 454 startups managed to raise more than $6.5 billion in ICO funds. If that seems impressive, then 2018 has far surpassed it, raising more than $20 billion in 992 ICOs so far.
Interestingly, the vast majority of ICOs in 2018 were concluded during the earlier half of the year. Perhaps partly because the ICO itself started to get a bad name due to a proliferation of scams, but also that regulators began to notice that most ICOs were effectively unregulated securities offerings. The decline of the ICO has now ushered in the next evolution in blockchain crowd financing — STOs, and the tokenization of assets.
Security Token Offerings (STOs) provide a way to crowdfund a new business venture in a hybrid model between venture funding and an ICO. In this model, tokens are issued to investors as a means of raising project capital.
However, unlike an ICO, security tokens are an agreed equity stake in the project. As an STO is more transparent about its status as a securities offering and seeks to comply with regulations, it represents the next generation of ICO. This presents huge opportunities for startup founders looking for funding, as well as for venture investors looking for the next unicorn project.
Tokenization of Assets
Tokenization turns real-life assets into tokens that can be traded on the blockchain, bringing liquidity to otherwise illiquid markets. Tokenizable assets may be tangible or intangible, provided they have a value.
An STO is one example of tokenization — tokens backed by shares in a company. Copyrights and patents are examples of intangible assets that can be tokenized and traded on a blockchain. However, tangible assets like real estate, gold, art or literally anything else can also be tokenized and traded as digital claims.
Business Benefits of Asset-backed Tokens in STO
From a business perspective, asset-backed security tokens offer enormous potential. Not only by eliminating the need to trade actual physical assets and documents, but they also provide the intriguing possibility of fractional ownership.
For example, a company wanting to raise more capital for future ventures could also tokenize some of its existing assets for sale. Fractional ownership of real-estate-backed tokens is already possible. For instance, the St. Regis Aspen Luxury Resort is offering investors the opportunity to purchase security tokens representing individual stakes in the resort. Although the owners haven’t disclosed what they intend to do with the funds raised from the sale, they could use them for activities such as building new resorts.
Similarly, a Singapore-based company has launched an initiative to tokenize diamonds. Rather than investing in a whole gemstone, interested parties could buy a token backed by diamonds. If the value of diamonds goes up, investors can sell their share at a profit.
Tokenization of intangible assets such as intellectual property (IP) including copyrights or trademarks also offers the opportunity to decrease friction in business transactions, which is the focus of blockchain company Ambitorio. Today, if two companies in different countries want to license or sell a particular piece of IP, lawyers need to draw up lengthy agreements to protect the legal interests of both parties within their respective jurisdictions. By tokenizing the IP, smart contracts can automate the licensing and payment terms, and even specific elements of the agreement itself.
And these are just a few examples of the many potential benefits of tokenization for companies worldwide. Not just for companies, either. Venture capital funds are also seeing new avenues of investment opportunity opening up to them, as startups and existing companies start to realize the opportunities of digital asset tokens. Because the tokenization of real-world assets is a relatively new phenomenon, the best is still yet to come.
Businesses are waking up to the possibilities offered by asset-backed tokens. It’s surely only a matter of time before more startups or existing businesses consider Security Token Offerings as the go-to means of raising capital given the challenges in obtaining traditional bank loans and venture capital. In the meantime, there’s still plenty of opportunities for earlier adopters to join the trailblazers in using tokenization to fund their next venture.
This article is brought to you by CoreLedger.
As a prominent blockchain infrastructure provider, CoreLedger is making blockchain technology simple for businesses to use. With CoreLedger’s offerings, clients can readily tokenize their offerings with fast-to-implement resources that will allow them to modernize their services. Thanks to our in-house developed software solutions and experienced blockchain specialists, CoreLedger is ready to help you make your next move with blockchain technology.