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Funding high impact business models

A new capital market doesn’t thrive because it is slightly more efficient than the last. It thrives because it funds new business models. The ICO and “utility token” market has exploded because it funds new types of open source communities. Our contribution to blockchain securities will be built not on the mechanics of selling securities, but on the new business models that we support. Here are some ideas.

ICOs and Cryptonetworks

A lot of ICO’s are stuck in the pipeline because the SEC and other regulators have said that they should be handled as as securities. Security tokens help us rise to the challenge, funding the next generation of utility tokens and decentralized communities. In my article “SAFT is obsolete”, I outline a new and improved model for funding these projects.

Startups

In the old world of startup funding, a startup sells stock to a small number of people who put their stock certificates into a desk drawer. Sometime much later, the startup may go public and reach a much bigger set of investors. In the new world, a startup goes to market incrementally. Startup stock can be sold internationally to “professional investors” or “accredited investors”. In many markets, professional investors can trade between themselves. A growing company can access more investors by doing more disclosure, and eventually going public under rules like Reg A+.

The new market funding track is quite different from the old VC track.

  • VC’s want a small number of early shareholders, so they can easily implement corporate actions and changes. An ICO-style fundraiser wants to have the largest number of shareholders, who become supporters.
  • VC’s like to structure series A,B,C preferred share classes with different rights. An ICO-style fundraiser just issues common, because it is easier to move to trading.
  • VC’s like to do secret deals, and they keep an information advantage over the fundraisers by looking at lots of deals in the same category. An ICO-style fundraiser markets publicly, and interacts with competitors.
  • VC’s want board control. ICO buyers discipline management with social pressure, Internet flaming, and selling pressure.
  • VC’s invest in a series of milestones. ICO-style fundraisers often try to raise all of the money at once. This builds more commitment among the buyer community, and it is more suitable for a crowdfunding process where the “crowd” does not return on regular intervals.

Private funds

VCs and PE funds are engaging in the same search for liquidity as startups. We are seeing an increasing number of VC and PE firms that are offering units in their funds through tokenized securities.

There is currently a big demand for crypto funds because investors want to allocate a portion of their portfolio into crypto. This demand is not being satisfied with ETFs, because the SEC does not think crypto markets are liquid enough to handle the buying and selling that ETFs need to do. So, crypto funds will be sold privately.

Real estate is the largest asset class in the world. A number of tokenized security startups are working entirely on real estate, either on funds, or on tokenizing the ownership of specific assets.

Private companies and corporate governance

In almost every country, we can find big private companies run by successful local entrepreneurs. The owners of these companies might want to sell minority stakes in order to raise money, or to take some cash out. However, it is often difficult to sell those stakes, because the minority shareholders know that it will be difficult to get the money back. Minority rights are difficult to protect in any closely held company, and they are even more difficult to protect if investors do not trust the local legal system. It’s possible that we can find an innovation in corporate governance — with tools like staking and vouching — that will protect minority rights at a trans-national level. If we can do that, we unlock a huge new market for investment banking.

Industry collaboratives

Industry collaborations can be very successful. VISA was started and owned by a group of banks that needed payment processing services, and now it is worth $275B. DTCC was started and owned by securities firms that needed to settle trades, and in 2016 it settled trades valued at $1.5 quadrillion. We see an expanding need for this type of collaboration because of the shift to shared cloud services. Blockchain economics and blockchain securities can help.

Consider that in the US there are about 100 significant hospital networks, with revenue of nearly $1T. They all do basically the same thing, in different places. They are adapting to new technology. They are investing in many redundant capabilities. As they move their IT to cloud services, they can share those services. They can also collaborate on other types of innovation and product development.

We can create a structure to reward contributors of shared services, investors, and early customers. I imagine a mutually-owned merchant bank to support spinouts, startups, and shared services. This merchant bank could tap into the tokenized securities market for on-demand funding, and offer presale rights to its members.

Debt and Yield

Our article “Rising interest in blockchain debt” covers the demand for yield. It’s important to bring yield bearing securities into the coin economy, so that we can profitably park our savings, deposits, stakes, and premiums.

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