Throughout its life, a successful company may be faced with a conundrum; either go public through the launching of an IPO (Initial Public Offering) to raise additional capital or remain privately-owned to retain greater control over their activities.
For decades, going public and ringing the bell at the New York Stock Exchange was seen as a great privilege and synonymous with success and public recognition. Despite a certain amount of loss of control endured by company founders, IPOs certainly provide a number of advantages. In addition to increasing the firm’s capital base, a company can achieve notoriety, brand awareness and access to a much larger base of potential investors by going public.
As of late, one of the most well-known companies to go public has been Snapchat by raising about $3.4 billion. On its first trading day alone, Snapchat’s total market value jumped to $30 billion as its share price surged by over 40%! Less than a year after Snapshat’s IPO, investors have been able to invest in Spotify Technology SA, a new and promising music-streaming service. This example is even more interesting than Snapshat, as Spotify opted to forego the traditional IPO process and was able to get listed directly. This made a huge difference since Spotify did not have to issue new shares or seek to raise funds by going public, though its listing still made it possible for existing shareholders to sell their shares to the public. Spotify’s alternative approach helped it cut costs as it didn’t pay banks to underwrite its offering. It also preserved Spotify from having to deal with share lockup and dilution as is the case with traditional IPOs.
In fact, an increasing number of growing companies have decided to forego IPOs and retain their private status for longer. Over the last three years, the declining IPO trend has become quite obvious, especially when compared with average IPO figures for the last eight years. According to global management consultants McKinsey & Company, the average period for a tech company to go public has increased to eleven years from just four in 1999.
The two main reasons for the shift away from IPOs are:
1. Cost: the hefty costs of listing and compliance with rules and regulations can be dissuasive.
2. Listing publicly doesn’t offer many benefits, while it does entail a substantial number of additional legal obligations, restrictions on management and trading, as well as mandatory disclosures to the public.
Add the above to the unavoidable consequence of loss of control over decision-making, it is then easy to understand why companies that have sufficient funds and are successful on their own may feel that they don’t need to go public.
Declining IPOs are leading to a new paradox: some unlisted companies have achieved a higher valuation than many listed companies!
A new intermediate step enabling companies to enjoy the benefits of getting listed, such as accessing additional funds and investor markets worldwide, without the cumbersome and costly IPO process, has become available with blockchain technology and tokenization. Historically, every new technology has allowed entrepreneurs either to construct new things or improve existing ones. It is no different with blockchain: Security Tokens open the door to a number of improvements for certificate ownership by bypassing intermediaries used to facilitate trades within traditional channels. Security tokens bring about many enhancements such as lower fees, faster deal executions, access to a wider investor base, and transparency and constitute a more ethical model overall by giving the same investment opportunities to everyone. On top of that, because tokens are programmable by design, they give the ability to improve governance models. As an example, long term investors can be rewarded by a greater implication in the corporate governance through voting privileges.
Security tokens enable value to be shared among multiple actors. They are a unique opportunity to unlock investments worth trillions of dollars and to spread them to investors worldwide.
Powered by blockchain and Smart Contract technology, Ledgity places a large investment universe at the user’s fingertips through a user-friendly mobile app interface, enabling all to browse, own, and trade assets directly.
There is a paradigm shift going on, away from the old world of finance to the new one, using blockchain. At Ledgity, we intend to remain at the forefront of this shift!
Let’s make securities frictionless!
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