How Does Tokenlab™ Improve Investor Confidence?
Tokenlab will elevate investor confidence by creating a decentralized rating system that will organically grow using input from actual ICO creators and investors on the Tokenlab platform.
How Do Issuers Buy Investor Confidence In the Traditional Economy?
In the traditional economy, there are three entities that take care part in the IPO process: The issuer, the underwriter and the investor. The underwriter is typically an investment bank. The company issuing the shares, also known as the issuer, contracts with the underwriter to sell its shares to the public. The underwriter approaches interested investors to sell the shares, retaining a portion of the issue as the underwriting fee.
The Agency Problem
Since President Franklin Roosevelt took United States off the gold standard in 1934, society has embraced the middleman to provide insurance — under the assumption that the middlemen have our best interests at heart. Underwriting is also a common practice in the insurance and mortgage industries.
The incorporation of middlemen such as underwriters, raises the Agency problem, which essentially raises the question of whether the underwriter can be trusted. The worst part is, even if the client is reasonably certain that he won’t get a good deal with the underwriter in the middle, there is little chance to avoid it since it’s almost inconceivable to think that the institution can function without them.
Lack of Investor Diversity
Due to the sheer complexity, regulations and costs associated with issuing stock through the IPO process, underwriters only approach wealthy investors to sell them the shares at the IPO price. This price is typically much lower than what the shares will cost when they hit the exchanges. This leaves out opportunities for the average investor, which results in the typical problem of the rich getting richer and poor getting poorer — thus increasing the gap between the rich and the poor and resulting in various moral hazards.
DPO’s (Direct Public Offerings)
Even though we live in highly regulated financial markets today, this wasn’t always the case. Financial historians Richard Sylla and Robert E. Wright have shown that before the 1860’s DPOs were the only way companies issued equity to the public. DPOs, unlike ICOs, level the playing field and allow both institutional and regular investors to take part. There is also significantly less overhead when issuing stock through DPOs.
Crowd-sourced Underwriting
What do we actually mean by crowd-sourced underwriting? As with traditional IPOs, the issuers contract the services of underwriters to help them reach out to investors. Crowd-sourced underwriting is the decentralized way of achieving similar results, but with a lot of transparency and equality. Our vision for crowd-sourced underwriting is that anyone can apply to be a underwriter on the Tokenlab platform and can help issuers reach more investors. Eventually, they can also help with liquidity by buying the majority of the Tokens issued via the ICO and then sell them to interested investors.
Investor Confidence in the Decentralized Economy
The frenzy around ICOs is understandable. All these years the average investor has been kept out of the investors circle on promising IPOs, such as Facebook, Twitter, Snapchat, etc. Only institutional investors with high net worth are able to take part in these events. With the help of ICOs, the playing field is leveling, and the average investor can now see light at the end of the tunnel. Investors can also dream about having a life out of the 9-to-5 schedule. One can dream about retiring early, which quite frankly, given the printing press that the fed is running, is turning out to be a pipe dream for most individuals.
All that glitters is not gold. It’s very hard to find true value in this decentralized economy. The cost of issuing an ICO is very low, and most people can get in. So, the question becomes: How do investors feel comfortable with their investments? How do they know that the project they are investing in is legitimate? In the traditional economy, if Morgan Stanley or Bank of America underwrites an IPO, the investor is certain that the underlying business is legitimate and they won’t run away with their money. There is no such guarantee with ICOs.
The crowd-sourced underwriting process aims to resolve that issue by organically creating a community of underwriters. When investors are reviewing ICOs, they can pick ICOs that have gone through evaluation by underwriters they approve of. These underwriters could be individuals, companies or even existing investment banks wanting to venture into the world of blockchain.
Conclusion
The tokenized economy is clearly revolutionizing the equity funding space. This year alone, ICOs have taken over VC funding. Evidence suggests that ICOs will soon take over IPOs as well, with respect to total money raised. The need for platforms that will fill the trust void is greater than ever. Tokenlab aims to fill this avoid to provide its users the best possible experience in the IPO world.