What is Equity Token Offering (ETO) and why is it safer than every ICO ever created?

Milan Reder
Nov 6, 2018 · 5 min read

An Initial Coin Offering (ICO) was the most popular way of fund raising during the recent months. ICO is a situation where someone offers investors some units of a new cryptocurrency or crypto-token in exchange for cryptocurrencies like Bitcoin or Ethereum. Funds are used to finance the development of a new application or project. Future investors receive tokens and a promise that their investment will benefit from the capital gain. Unfortunately, the legal protection of potential investors is still very poor. The possibility that a team of any ICO can scam you always exist because the whole process is based only on trust. Blockchain revolution and all the changes which it contributes came faster than an adjustment of the law to those changes. Luckily, Equity Token Offering — the ICO 2.0. meets the needs of investors who are seeking safe, legally protected and technological advanced solutions.

ICO 2.0. — Equity Token Offering

An ETO is a hybrid investment model combining advantages of an IPO, an ICO, and a VC round.

Source: tradinglikeabusiness.com

ETO and IPO — what is common and what is different

Going public using both an Initial Public Offering and Equity Token Offering, allows companies to reach investors and raise capital to further a business.

The mutual benefits of an anticipation in an IPO or ETO for the future investors is protection and participation in a legally regulated market. Equity tokens represent an ownership of a company. It gives holders the same rights as shareholders of a company listed on the stock exchange.

Equity Tokens guarantee crucial equity-like rights for the investors and the issuers. The process and advantages for potential investors are exactly the same as on a traditional stock exchange including a payout of a dividend and legal protection of the investors and issuer similar to classical forms of VC investing. The whole process takes place through Platform Neufund complying with German law. Equity Tokens are securities structured as Vermögensanlagen (“Investment Assets”). The offering is subject to the German Banking Act (KWG) and the Investment Asset Act (VermAnlG).

The whole venture is legal and transparent. The company receives additional funds to finance the development or marketing strategy while the investors become actual equity holders of a prosperous and growing business with the right to dividends.

The advantage of an ETO over IPO is that tokenization is more cost and time effective both for issuers and potential investors. Going public using IPO can take anywhere from six months to over a year to complete depending on the company and its advisors. Projected costs could be easily from $ 100 000 to over few million. Tokenizing a business using ETO is much more cheaper and quicker.

The acquisition of shares is much easier also from the investor’s perspective. It requires much less legal formalities to purchase shares. Anyone, regardless of age and social status, can acquire shares. Because this is based on blockchain technology, banks and financial institutions do not participate in the whole process, it is done on a peer-to-peer basis and the purchase and sale transactions are done directly between an issuer and investor. When comparing transaction costs with a traditional stock broker, equity tokens have also much lower commissions.

The advantages over ICO

The amount of funds collected through the ICO process in the third quarter of 2017 exceeded the value of all the money raised in all Venture Capitals over 1600%.

Source: coindesk.com

A meteoric rise of ICOs and the insane success of most projects is an ICO bubble. Some of the ICOs were completely nonsensical. To mention only a few:

  • UET — stands for Useless Ethereum Token raised $ 40 000 within a few hours. The website states: You’re going to give some random person on the internet money, and they’re going to take it and go buy stuff with it. Probably electronics, to be honest. Maybe even a big-screen television.
  • PAquarium — financing “the world biggest aquarium” raised around $ 1 MLN
  • Venezuelan Petro — supported by Venezuelan President Nicolas Maduro who said that the coin would be backed by oil, gas, gold, and diamond reserves. How? It remains unknown.

ICOs projects are created when people come together with the idea that they want to receive funding for developing projects. It works like this, an ICO team asks investors to invest the money and they will prove that they are capable of developing projects successfully and generating profit.

What differentiates an Equity Token Offering and ICOs is that ETOs projects are existing businesses and additional funds allow to finance the development of a company. An owner or an ETO issuer is someone who has already proved their ability to develop a successful company and tokenizing a business is just another step to set the stage for further growth.

ICOs are great solutions for an issuer and small investors which place potential profits above the security of their fund. What about serious investors which look for certain solutions and put investment security above all? Such investors need legal and regulated solutions. ICO is a rapidly growing but still unregulated phenomenon. A recent research shows that more than 80 percent of ICOs conducted in 2017 were identified as scams. In the world of blockchain only ETO assures investors the security of their funds.

Summary

Equity tokens are a safe form of investing in the nascent trend like blockchain technology. It is regulated by the German securities law which guarantees legal protection of investors. It gives a chance to take advantage of the opportunity offered by blockchain revolution in a slightly different way than what traditional cryptocurrencies offer. ETO allows you to bet on technology and also diversify the risk. It’s kind of a bridge between blockchain and already existing and prosperous businesses. The many advantages that this technology comes with, will soon result in many companies choosing this path and tokenizing their businesses. ETO tokens will become the securities and shares of tomorrow.

Milan Reder

Written by

Investor • Entrepreneur • Engineer

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