Time to Tokenize: 3 Reasons to Consider Listing a Digital Security
Potentially higher valuations. Lower capital costs. Fewer administrative hassles. As the digital securities market continues to grow, more issuers are investigating the benefits of digitizing their listings.
Digitization makes perfect sense for issuers in the $8.8 trillion alternative asset space, where inherent inefficiencies have prevented both issuers and investors from realizing the market’s full value. The industry’s paper-intensive, manual and redundant processes have remained largely unchanged for decades, making it nearly impossible to buy and sell assets on the secondary market and ultimately depressing valuations for issuers.
Digital securities offer an efficient, modern alternative, enabling investors to buy and sell smaller stakes electronically in assets like real estate, private equity, and venture capital. For issuers, this approach can help them reach a broader market, boost valuations and streamline administration, all while meeting regulatory requirements. But while digital securities are a natural fit for most alternative assets, they’re not the answer for every situation. For issuers interested in the advantages of digital, here are three good reasons to pursue a digital listing.
1. Expanding access to more investors
For the most part, issuances in the private securities industry happen behind closed doors. Companies typically offer ownership in a real estate project or an up-and-coming startup to a select group of investors, shutting out those who don’t have an inside connection to the deal. Even if these investors knew the right people, most can’t come up with the capital to invest, with minimum investments often starting at $50,000 or higher.
Digital securities democratize this process by allowing investors to take part in deals that were once out of reach. More efficient distribution enables investors around the globe to buy and sell securities more easily, and a secondary trading market expands the number of people who can potentially own these assets. By breaking up larger assets into bite-sized units, digital securities also allow issuers to take on smaller investors more efficiently. While an investor might have once needed $100,000 to invest in a traditional real estate project, they might now be able to own part of the same deal for just $5,000.
For easily accessible assets like public equities, the benefits of enhanced access that comes from digitizing may not be meaningful, but for assets where investor access has traditionally been limited, like private securities, a digital approach can help issuers reach a broader pool of interested investors and achieve the liquidity that can lead to higher valuations.
2. Improving transparency to help investors make more informed decisions
Understanding private security performance can be a mystery for investors, thanks in part to infrequent business updates. For securities like REITs or venture funds that include multiple holdings, performance data on individual holdings is also often scarce. This lack of data often makes it difficult for investors to research and build a healthy, well-diversified portfolio.
Digital securities offer more transparency to investors by enabling them to see real-time market pricing, data that’s never been available for most of these these assets before. Based on each asset’s performance, investors can vet current and potential holdings to create a portfolio based on their individual needs. Since asset entry sizes are smaller, investors can also select assets based on the specific markets and properties they’re interested in. For example, rather than investing in a single REIT, an investor could spread a similar amount of funds among investments across multiple areas of the REIT market. This transparency also benefits issuers, who can use it as a key selling point to generate investor interest among those uncomfortable with less transparent products.
3. Increasing flexibility for investors
Traditionally, investing in an asset like venture capital or private equity often meant tying up capital for anywhere from seven to 10 years. If an investor needed to liquidate, they typically had to take a large discount — if they could find a buyer at all.
Thanks to their smaller increments and a secondary trading market, digital securities give investors more flexibility to buy and sell assets as their needs change. And while clearing and settlement can take weeks to complete with traditional private securities, the digital format offers cost-effective, frictionless transfer with near-instant settlement. For private securities issuers, these advantages can help improve investor satisfaction, keep them coming back for new offerings and boost asset valuations.
While digital securities can help facilitate liquidity, however, they don’t guarantee it. As the market matures, truly unlocking the value of digital securities will require a robust ecosystem of platforms and providers like Openfinance. For issuers whose goals align with the advantages of digital securities, the potential to transform their businesses is great.
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Juan M. Hernandez is the CEO of Openfinance, the first U.S. regulated platform for the secondary market trading of digital alternative assets. Juan is a serial entrepreneur, technologist and polymath experienced in financial markets, exchanges and blockchain technology. He holds a CS degree from Northwestern University and an MBA from the Kellogg Graduate School of Management.