Blockchain coin offerings provide a new way of funding innovation from a global investor community. However, the initial wave of coin offerings lacked normal regulatory oversight and largely failed to meet established standards of transparency and investor safety. This has damaged the early public perception of blockchain offerings.
Fortunately, these Wild West days are quickly fading. More robust models of blockchain offerings are in sight, bringing the regulatory certainty investors expect from traditional investments. This will open up new investor opportunities and substantially improve fundraising.
Traditional funding is falling short
Historically, the main routes for corporate fundraising have been private and public offerings. Both of these approaches suffer from inefficiencies and structural bottlenecks: They involve various middlemen and gatekeepers who control access to capital and siphon value from both the company and its investors. In today’s globally connected world, these approaches remain geographically siloed, with offerings typically restricted to a single economic region.
Private offerings have been the traditional funding mode for early-stage innovation. However, private offerings typically have limited geographic reach and are controlled by wealthy investors and venture capital firms with privileged deal access. Even if companies can gain access to this exclusive investor group, deal terms ensure that most value is extracted by the investor, not the company.
As companies expand and need increasing funds to support their growth, public offerings provide access to established marketplaces and prestige. However, they are still very pricey and limited in reach. Initial public offerings (IPOs) are lengthy undertakings involving sizable fees paid to various advisors and intermediaries. The SEC recently stated the average middle-market company pays 7 percent of what they have created to access public markets. Depending on the size of the issuance, fees can easily exceed 10 percent.
Traditional fundraising has drawbacks for investors, too. Despite their name, ‘public’ offerings are not directly accessible to the broad public. Before common investors get access, shares have already passed through the hands of large, privileged institutions. By influencing the pricing of the offering, those institutions ensure a healthy return for themselves when they sell their holdings to smaller investors.
A better way
In contrast, blockchain technology allows companies to directly engage with a larger pool of investors and offers unique opportunities to reduce bottlenecks and fees. Blockchain enables global participation, 24/7 trading, and has the potential for larger long-term liquidity.
Security token offerings (STOs) provide a new way to fund innovation while streamlining costs. Through STOs, companies have control over how their securities are defined and can connect with a global investor community.
Given IPOs’ restricted access to capital, incumbent financial players can often dictate predatory deal terms and take control of unfairly large portions of the company. STOs let issuers directly engage with many investors — and on fairer terms for both parties. Fees typically paid to intermediaries are also reduced, leading to substantially lowered costs of access to capital.
STOs aren’t geographically siloed. While registration with regulators to extend compliance internationally may be necessary to access a large pool of retail investors, STOs can provide companies with unprecedented access to a broad, global pool of investors, both non-accredited and accredited.
Regulatory compliance — the missing piece
Currently, however, there’s no comprehensive solution to ensure token sales and trading on the blockchain comply with the complex regulations that govern securities trading worldwide. In many countries, regulatory bodies like the SEC require that private offerings be restricted to accredited investors. Other regulations may impose predefined holding periods before selling in secondary markets.
The global nature of STOs requires a robust, transparent methodology to ensure compliance with multijurisdictional regulations.
Blockchain promises a more fluid and efficient economy by allowing issuers to engage more directly with investors. Key players going forward will be those establishing the tools to ensure STOs conform with securities regulations internationally and fulfill investor safety and transparency expectations. Once these conventions are established, security tokens will become a central part of the global economy.
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