This article is by Ransu Salovaara, CEO of TokenMarket
Over the past ten years, the landscape for growth finance has changed dramatically as new funding options for promising start-ups have developed, in turn opening up new opportunities for adventurous investors.
The development of equity crowdfunding has introduced businesses and entrepreneurs to a new pool of investors. Those investors can now think about putting money in start-ups and SMEs that were previously the preserve of angel investors and venture capital funds. Major crowdfunding sites such as Seedrs and Crowdcube have helped to pioneer equity crowdfunding, raising hundreds of millions of pounds for hundreds of innovative companies.
However, the very recent launch of so-called Security Token Offerings (STOs) is set to disrupt the world of growth finance once more, promising more opportunities for investors and benefits for growth companies. How so?
Tokenisation entails issuing digital tokens that represent underlying assets on a blockchain. Those assets can include regulated securities such as shares but also bonds, commodities, and other physical assets such as property. Security Token Offerings (STOs) enable businesses to raise money via equity crowdfunding or private placement through the tokenisation of their shares.
Now you might have heard of ICOs (Initial Coin Offerings), blockchain-based assets typically denominated in digital currencies such as bitcoin or ethereum.
ICOs saw a boom and bust in recent years as little to no regulation encouraged bad behaviour. Many investors lost a lot of money investing in fraudulent or unviable ICOs. As is hinted in the name, security tokens are regulated and investors are afforded the same rights and protections as an investor in securities such as voting, ownership and dividend rights. In addition to greater protections for investors, STOs also offer some crucial advantages over other methods of fund raising.
The distributed ledger technology that creates the framework for security tokens allows businesses to manage large numbers of shareholders more efficiently, as well as shortening the time it takes as well as the cost of organising and executing a fundraise.
Ongoing costs are lower as trading tokens on a digital exchange cuts out the need for a broker or investment platform (so no fees). Instant settlement and zero counterparty risk also make for a more efficient investment process.
Fundraising network and access
In such a competitive landscape, connections are vital. But often leaders of SMEs might not have the necessary business network to tap professional and institutional investors for finance. STOs can widen and deepen the pool of capital by drawing in international money, from sophisticated to retail investors. This, in turn, transforms finance by offering these investors opportunities that were previously restricted to VC funds. Access to investors and growth finance is democratised.
A lack of liquidity has traditionally hamstrung crowdfunding investors, as the absence of a viable secondary market hampers their ability to liquidate holdings. This can also depress valuations. Likewise, VC investors can find their money tied into a blind pool for up to seven years or more (and blind pools mean they don’t get to decide how their money is invested!).
In due course, the development of digital exchanges around the world will facilitate cross-border, 24/7 trading of tokens. Imagine being able to trade bonds or shares issued by, says, a small German manufacturing company, anywhere in the world, and at any time of your choosing!
Blockchain-based but not blockchain exclusive
Entrepreneurs of growing businesses can be highly effective at seeking out and securing capital. But what some may not realise is that the STO market is open to all. Businesses do not have to be blockchain based in order to access investors or list on exchanges. There are already planned STOs of non-blockchain businesses such as Cryotech Nordic, an Estonian company and the world’s leading producer of Cryotherapy cabins and currently fundraising in the UK.
When competing for access to investors and growth finance, SMEs can often be running against the current. STOs help to bridge the gap between entrepreneurs and investors. Innovation and ambition do not correlate with business size; the STO market and the wider development of tokenisation mean David can now stand eye level with Goliath.