The Evolution of Equity Crowdfunding

If you are unfamiliar with Crowdfunding, the idea that eventually addressed the fundamental disadvantages of mainstream finance. Its beginnings were rooted in the need for middle-ground between a growing demand from global investors seeking more speculative returns, and startup entrepreneurs wanting more direct access to those investors.

Even though there is a growing amount of options for startups with a need to raise capital, that does not mean that the process of offering equity is an easy one.

Equity Crowdfunding with TaoDust means that we take the best practices of both the traditional finance world and traditional Crowdfunding methods and combine them one platform.

— We call that synergy Equity Crowdfunding 2.0.

Illiquid Assets and Private Equity

Traditionally, to fund private companies in the hopes of achieving larger returns there was a trade-off for the investors who dabbled in early-stage companies or startups. It is a common practice among these private placements that the investor’s equity is most often locked up in the startup for up for 5–10 years.

This was a problem for both the startups and the investors!

For entrepreneurs, the lock-up period had another negative consequence: in order to get investors to be interested in illiquid securities, the terms are usually offered at a heavily discounted rate to account for the long holding period. Unfortunately, this is due to the hard truth that there is just simply little to no liquidity in the investment.

What happens in private equity offerings is that there is only a small market of dozens or even hundreds of accredited investors putting in larger amounts of capital into private business. This small investor pool does not sustain a large enough market to offer liquidity in the way that having thousands, or even tens of thousands, of investors, does.

When securities are illiquid, investors have to wait it out and hold their position with the company until a public IPO is issued or becomes involved in a merger or acquisition.

These drawbacks have traditionally been tolerated by accredited investors who could then draw from their deeper access to other liquid capital as a means to support themselves in preparation for the lockup period.

However, this lockup isn’t so manageable for less wealthy unaccredited investors who need quick access to their investment; or even the startups who may want to retain more of their company during early-stage funding rather than issue discounted shares to venture capital firms.

Crowdfunding as a Solution

This need for a financial middle-ground eventually gave birth to the first generation of modern crowdfunding platforms. People found that seeking funding outside of the traditional marketplace was becoming a more flexible solution. Thus, the modern method of funding from ‘the crowd’ was born.

In the traditional crowdfunding world, there are three main types of options:

Donor Based

Donor platforms let just about anyone raise money without carrying any obligations to investors. Contributions that are raised by the campaign are considered donations or gifts with no strings attached. This method is very popular for causes related to philanthropy, medical expenses, and disaster-relief.

Rewards-Based

Through a rewards system, individuals and businesses crowdfund money by offering a product or service in exchange for a campaign contribution. This Rewards-based crowdfunding is most commonly associated with platforms like Kickstarter and Indiegogo.

Equity-Based

Equity Crowdfunding is a method of raising capital in private companies from unaccredited investors, which is just another way of saying ‘everyday people’. With Equity-Based crowdfunding, securities are issued from a private company and not listed on a stock exchange. Through equity crowdfunding, everyone in the world has access to these early-stage investment opportunities — Not just financial institutions and venture capital.

With equity crowdfunding, these shares can be traded on public markets. If, after a year, an investor no longer wanted to own shares in a company, they could sell them on an Alternative Trading System, known simply as an ATS, to an interested buyer.

The Era of Equity Crowdfunding 2.0 and TaoDust

Traditionally equity crowdfunding has meant that a business is raising capital from “the crowd” but for the sale of securities. These securities can be issued as shares of the company, convertible notes, debt, revenue sharing, or any other type of instrument or derivatives.

TaoDust takes the Alternative Trading System to new levels of liquidity when equity is tokenized on the blockchain. These assets are not only available to be traded on an ATS but also enjoy the ever-increasing demand of the cryptocurrency as a secondary market.

The TaoDust platform allows startups to offer equity to investors by tokenizing the assets in a way which qualifies them as security tokens, making them purchasable by just about anyone. With more shareholders, there is a larger market. With a larger market, there is liquidity.

Tokenized Asset Offerings on TaoDust will offer startups the same benefits of traditional equity crowdfunding but have expanded the number of potential buyers to international markets. While the regulatory framework for equity crowdfunding is relatively new, it has proven to lower the barriers set by mainstream finance and is fueling smalling business growth all over the world. With the advent of cryptocurrency and its ability to distribute and ledger tokenized assets, and with increasing cooperation from regulatory entities, we are quite certain that era of Equity Crowdfunding 2.0 has just begun!

Thank You!

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