The Capital
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The Capital

Why Equity Token Offerings (ETOs) Are The Future Of Cryptocurrency

And are here to stay.

Photo by Christian Fregnan on Unsplash

Before we get in deep...

Let’s do a quick rundown of the most important terms for those of you feeling pretty fresh to the topic.

What Is Blockchain?

Block | chain.

As in, “a chain of blocks”. But there’s much more beneath the surface (it’s not Lego after all).

In essence, it’s a decentralized ledger technology used mainly for peer-to-peer transactions.

How Is It Different From A Typical Wire Transfer You Ask?

Well, besides being a lot faster, it also enables you to execute and confirm transactions without a central “clearing authority.”

Each “block” contains information and data mushed together, waiting for verification. Once verified and validated, these blocks are then added to the previous blocks. And ultimately, you end up with a chain of transactions and information. Secured and recorded in the distributed ledger.

Besides Blockchain enabling the existence of cryptocurrency, there are many more uses. By now, you can not only transfer funds but also settle trades, vote and even invest in real companies.

All you need to know in one infographic. (Credits: PwC)

What Is Cryptocurrency?

Bitcoin, Ethereum, Litecoin, and on the list goes.

You might have heard these names thrown around in the last years. They’re the world’s most popular Cryptocurrencies and have caused a bit of controversy.

But How Do They Differ From Traditional Currencies?

Simply put, cryptocurrencies are a tradable digital currency (or digital asset). They’re called “cryptocurrencies” because cryptography is used to verify and secure transactions. And blockchain technology is what they’re built on.

One quick online search will show you the thousands of cryptocurrencies we already have in the world. And some people even believe that they are the future of our modern economy.

Well, let’s talk about why they think that.

Blockchain and cryptocurrencies are subverting traditional financial models.

Why? Because the transactions made are fully decentralized.

This means that transaction approval comes from a peer-to-peer network of computers. And once they’ve come to a consensus that the transaction is legitimate, it’s approved.

With traditional currency, transactions have to be approved by a third party. Namely, Banks or services like Paypal. And beyond currency, the positive applications of Blockchain seem almost endless.

Yet, despite privacy and transparency being appealing for many, there's still a long way ahead…

The Volatility Of ICOs

Since the birth of blockchain technology, the market has exploded with a variety of “initial coin offerings.” Think of them as an unregulated digital IPO (Initial Public Offering) equivalent.

ICOs give early “investors” access to units of a new cryptocurrency or crypto-token. With big promises and strategic marketing, even billions can end up in these ventures.

The best part? Almost no legal protection for the potential investor.

With transactions based on trust and still being unregulated, any ICO could be a scam. The website deadcoins maintains a list of ICO exit scams. There are over 600.

How Are Equity Token Offerings The Solution?

Looking for an improved system, the Equity Token Offering emerged. An ETO is a hybrid investment model that combines the advantages of an IPO, ICO, and VC funding.

Not only is it fully regulated, but it also ensures absolute legal protection.

Even better, any company — blockchain-based or not — is able to issue equity tokens on Blockchain, in a public or private placement.

Let’s take a quick look at the standard process.

Source: tradinglikeabusiness.com

The Equity Token Offering Process

  1. Register On An Exchange Platform. Before ETOs can be given out, blockchain companies have to register on an interchange platform. After registering, the company must present all relevant corporate documents for verification. Launched in 2016 and based in Berlin, Neufund is one of the only platforms that offer opportunities for both investors to invest in ETOs and companies to raise funds for upcoming ventures.
  2. Stating Of Commercial Provisions. Like every investment platform, nothing can be finalized until the commercial terms have been stated. The company has to inform potential investors of the investment terms and provisions. This includes the companies valuation, voting rights for investors, the lowest investable amount, and rules for transferability of bought tokens. Once the fundamental terms are met, a binding contract is established between investors and the company.
  3. The Pre-Sale Of An ETO. Companies intending to raise funds through ETOs might offer their tokens to prosperous potential investors before offering their tokens to the public. As a pre-ETO, offers can be made to the investors regarding a certain quantity of ETOs. If the initial tokens show impressive sales, the company can decide to offer all the tokens it created.
  4. The Public Placement Of An ETO. Access to the general public is opened if the needed funds weren’t raised privately. Now anyone, including other companies and individual investors, can purchase the remaining tokens. After this, a binding agreement is signed between the company and investors. Making the investors legally recognized owners of their purchased tokens. Lastly, the company puts together a community of shareholders, regularly updating them with company developments.

Feeling curious and want to learn about one of the first-ever ETOs in the world? Then find out more: here.

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