Fundraising with Security Tokens: STOs Vs. Traditional Equity Financing Models

by | Sep 7, 2020 | Industry | 0 comments

Traditionally, companies planning to raise capital via the sale of equity had to consider either angle investors, venture capital investment, or an initial public offering (IPO). Today, businesses can leverage on blockchain technology to fundraise by carrying out a security token offering (STO).

In this blog, we will discuss security token offerings (STOs) and how they compare to traditional equity fundraising models.

STOs

A security token is defined as a financial security run on a blockchain network. For instance, instead of being issued with a share certificate as you would when you purchase stocks, you are given digital tokens representing shares in the issuing firm (if the security token comes in the form of equity tokens).

Security tokens are gaining traction as authorities have begun to cramp down on unregulated initial coin offerings (ICOs), mainly because security tokens fall under Securities Laws and are, therefore, regulated. Besides, fundraising through an STO is more cost-effective than via an IPO. This is why this new model of financing mainly attracts startups and SMEs.

It is good to note that security tokens come in various shapes and sizes. They do not just require to offer equity to the holders since they can also come in the form of digital bonds or other fixed-income tools. But, for our comparison with traditional financing models, we will assume that we are only dealing with equity tokens since they are the most common type of security tokens nowadays.

STOs Vs. Traditional Equity Financing

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Initial Public Offering (IPO)

By going public, a business sells shares to investors in exchange for money. To carry out an IPO, a firm must find an underwriter (mostly a bank) to help them go public. The firm will then be required to go through vetting to certify that it is eligible to have its shares listed on a public stock exchange. Lastly, the company will have to carry out a roadshow with its underwriter(s) to reach out to many institutional investors as possible for the success of the IPO.

The main challenges with IPOs are that they are expensive, time-consuming, and can only be accessed by businesses that have stabilized. Therefore, startups fail to exploit this form of fundraising.

Venture Capital (VC)

Venture capital companies typically invest in startups during seed or series A or B funding rounds by buying equity in the business through a private share transaction. They only invest in high potential startups and SMEs that can go public.

Nevertheless, VCs are notorious for putting preferential terms and often engage in investments that will benefit them more than the business owners. Therefore, VC investments can either be exploitative or beneficial for business persons based on the terms of the investment.

Angel Investors

Angel investors are wealthy people who invest in early-stage startups to potentially multiply their invested money when the firm goes public or gets sold. They prefer to invest during a company’s seed round and usually are less demanding- regarding preferential terms- than VCs, but that differs from one individual to another.

Like VCs, firms should look for angels that fit them and do not put up overly demanding investment terms.

Final thoughts

As you have seen from the above comparison, security tokens bring multiple benefits compared to traditional financing models as they have low entry barriers and allow businesses to choose the terms of investment, among other advantages. There are several reputable security token offering platforms, like Polymath, Globacap, Securitize, and Tokenizer that you can leverage to tokenize assets.

Are you in need of raising funds or investing in security tokens? Apply to raise funds in Tokenizer by visiting our platform here. If you want to invest in security tokens, contact us by creating an account here. Lastly, if you’re going to liquidate and trade in security tokens, we have a decentralized exchange designed for you.

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