Digital securities continue to see further adoption by traditional investment firms for many reasons. These tokens remove many of the barriers encountered by investors and streamline the entire security process from issuance to oversight. Additionally, they provide new market opportunities to nonliquidable investments. For all these reasons and many more, security tokens are here to stay.
Digital securities, or security tokens, come in many forms. All of these forms share one thing in common, they are digital representations of securities, and therefore, subject to traditional securities laws. Importantly, not all digital assets are security tokens.
Security tokens emerged at the tail end of the 2017 bull market run in response to the rising amount of fraud in the space. Investors lost billions on Ponzi schemes such as Bitconnect. Real projects needed a way to distinguish their tokens from the scamsters and traditional investment firms needed to utilize blockchain technology in a regulated manner.
Digital Securities are Born
Digital securities can represent all types of assets including investment contracts, shares of a corporation, a portion of a note, debt security, or even a fractionalized interest. Basically, any electronically registered and transferable debt, equity, or asset that issues or trades using blockchain technology is a security token.
Benefits of Digital Securities
The benefits blockchain technology brings to the sector are immense. For one, ownership is verified and recorded on a distributed ledger. This provides a more secure alternative than traditional methods. Additionally, blockchain technology allows for the transfer of private and non-listed alternative assets. Consequently, security tokens provide more opportunity, efficiency, and liquidity in the market.
Security tokens wouldn’t exist if smart contracts never entered the scene. These preprogrammed protocols can be developed directly into the token. This strategy allows for the automatic enforcement of all regulations. Basically, smart contracts help eliminate much of the redundant paper-based processes currently in use.
Types of Digital Securities
Today, there are more types of security tokens than ever before. The market continues to develop as more advantageous tokenization concepts emerge. You should expect to see this trend continue as security tokens lend themselves perfectly to many markets. Below are the most common types of digital securities in use today.
The real estate sector experienced an explosion of tokenization strategies over the last year. Both developers and tokenization platforms went all-in on tokenizing property. Tokenized real estate has some clear advantages. For one, it allows for the sale to be fractionalized. This strategy lowers the entry-level for investors and provides more opportunities for diversification.
The tokenization platform Polymath made headlines in September 2018 after inking a partnership with the real estate development firm BlockEstate. As part of the strategy, the Block Estate Alpha Token, or BEAT was born. This token utilized Polymaths unique Ethereum token standard ST-20 to ensure that the project remained compliant. Each token represented a share in the ownership of the fund.
Perhaps one of the most popular ways in which digital securities see use is venture capital. Security token offerings (STOs) provide business with all the benefits of blockchain technology such as global reach, added security, and instant trackability. Additionally, STOs allow companies to stay within the regulatory guidelines of their industry and region when hosting a crowdfunding event.
Private equity is another type of security token that continues to see more adoption in the space. These security tokens can also go by the name equity tokens. Equity token offerings (ETO) are more popular than ever before because tokenized equity provides more liquidity in the market.
One of the best features of tokenization is that it can be applied to so many types of assets. Real assets such as gold or diamonds already live on the blockchain. Not surprisingly, these tokens were among the first type of security tokens to emerge.
While the concept of tokenizing assets like gold isn’t anything new to the market per se, the ramifications of these maneuvers are evident. For one, tokenization platforms now seek to not just tokenize gold but to utilize the gold tethered token as a new form of stablecoin.
Stablecoins are coin tethered to real-world assets such as the USD, or in this scenario, gold. These tokens allow users to get the benefits of cryptocurrency but avoid all of the volatility found in the market today.
Tokenized hedge funds are another perfect example of digital securities. Hedge funds are a great way to diversify your portfolio. Traditional hedge funds are restricted in their trading times and the methods used to transfer these assets are outdated. Tokenized hedge funds create a frictionless experience for investors.
The Protos Hedge Fund includes a number of the top cryptocurrencies in existence. The fund sold $6.5 million during its primary issuance. Notably, Protos was the first licensed tokenized hedge fund to trade on an Alternative Trading System (ATS) in the US.
Digital Securities – A Bright Future
Now that you understand what digital securities are, its easy to see why they continue to see adoption in the market. These new-age financial tools provide more investment opportunities and reduce the workload and costs usually associated with these transactions. You can expect to see security tokens become more popular as these advantages become common investment knowledge.
What is Equity Crowdfunding?
Equity crowdfunding occurs when private companies raise capital from the public through the sale of securities. These financial instruments can include shares, convertible notes, revenue shares, debts, and tokens. Today, equity crowdfunding is an important part of the global financial markets because it provides SMEs a more cost-effective strategy to raise capital versus traditional IPOs.
Interestingly, equity crowdfunding is a relatively new investment tool. President Obama enabled equity crowdfunding back in 2011 when he signed the JOBS Act, but it wasn’t until the last five years that the practice became popular. One of the reasons it took so long for equity crowdfunding to gain popularity is that it took until May 2016 for key regulations to come into effect.
How Does Equity Crowdfunding Work?
Equity crowdfunding works very similar in function to the popular crowdfunding website, Kickstarter. Basically, investors seek out private firms that meet their criteria. Once a suitable investment is found, an investor visits a funding portal website that gives them access to the opportunity and its details. Here, investors are able to explore different equity crowdfunding investment opportunities for the firm.
Key Differences from Kickstarter
Unlike Kickstarter, investors don’t receive early access to a product or service for their contributions. Instead, investors in equity crowdfunding campaigns seek to make a profit for their participation. In most instances, investors receive shares, rights, and other benefits for their investment.
Different than Stocks
It’s important to understand why equity crowdfunding provides entrepreneurs with different opportunities compared to trading shares on the stock markets. For one, equity crowdfunding firms are private companies and in most instances, startups. In the past, IPOs were the only form of crowdfunding a company could engage in. This practice restricted access to the markets for SMEs for many entrepreneurs.
Many companies simply lacked the funding to cover the huge financial and legal requirements needed to host an Initial Public Offering (IPO). In turn, only the largest firms could generate the funding needed to launch an IPO successfully. Consequently, studies show that IPOs continue to see a decline in use as more affordable options are now available.
Additionally, these practices left investors out of the loop as well. Many IPOs are only open to accredited investors. Accredited investors make at least $200,000 per year, or can show over $1 million in assets. Notably, your assets must exclude your home. As you could imagine, this system left your average investors shut out from the most lucrative investments.
Thanks to the rise of equity crowdfunding platforms, now everyone has access to these valuable opportunities. Prior to the rise in internet crowdfunding platforms, investors were mostly VC and angel investors. These were the only individuals that had the funding to both make a major investment and wait for the mandatory lockup period before receiving returns.
No Lockup Period
Notably, investors that participated in private equity crowdfunding before the 2016 regulations implemented had to wait to access their funds for a designated lockup period, similarly to IPOs. During this time, investors were unable to trade or cash out their investment. This lock-up left investors exposed to major losses. Thankfully, the new regulations opened the door for secondary trading of these financial instruments via Alternative Trading Systems (ATS). In this way, ATS provide much-needed liquidity to the market.
Benefits of Equity Crowdfunding
Aside from the obvious financial gains equity crowdfunding brings to the table, there are plenty of other reasons why a firm would follow this strategy. For one, businesses gain strong brand support from investors. Each investor in your firm acts as a brand ambassador for your company. Since these investors need you to succeed in order to make a profit, they will often diligently spread the word about your business and products.
There are also managerial aspects that make equity crowdfunding a more attractive option to consider. For one, an entrepreneur raising capital via equity crowdfunding has total control over the offering. The entrepreneur can chose the valuation, how much capital to raise, what to sell, how much to sell, and at what price. They can even specify a minimum funding goal to ensure the firm receives enough backing to proceed with its plans. In comparison, a company engaged in an IPO is beholden to its investor’s terms.
Keep it Reasonable
Of course, with all of this flexibility also comes new responsibilities. Only companies that can produce a reasonable valuation and terms see success in the equity crowdfunding space. Investors are looking for great opportunities with minimal risk.
Crowdfunding Regulations and Rules
There are some key requirements a company must first meet prior to launching an equity crowdfunding campaign. First, the firm has to be privately owned and not listed on any stock exchange globally. Secondly, all investors must prove their identity and that they are over the age of 18. Additionally, many equity crowdfunding campaigns include limits on how much capital an individual can invest based on their income and net worth.
Currently, each region has its own equity crowdfunding regulations in place. In the US, there are two main types of equity crowdfunding campaigns – Regulation Crowdfunding and Regulation A+. Both provide SMEs with a more efficient and less-costly alternative than hosting an IPO.
Regulation Crowdfunding allows companies to raise up to $1.07M annually. Currently, these companies can start raising capital for free after filing a Form C with the SEC. Importantly, if the firm seeks to raise more than $107,000, an independent CPA must review the company’s financials for the past two fiscal years.
Regulation A+ companies can raise up to $50M annually. Companies that seek to go this route must first undergo a financial audit for the past two fiscal years. Additionally, they must hire a securities attorney in order to create a Form 1-A. This form must get submitted to the SEC for qualification. Unfortunately, the qualification can take some time to complete. On average it takes 3-5 months at the minimum.
Importantly, companies are unable to raise funds during this time frame, but, they are able to collect investor information to better rate investor excitement levels. This practice is called “testing the waters” and it’s a powerful tool that enables firms to receive valuable market feedback prior to the official launch of their crowdfunding strategy.
What is Real Estate Crowdfunding?
Importantly, equity crowdfunding platforms have given way to a new way to invest in commercial real estate, real estate crowdfunding. Real estate crowdfunding involves a group of investors who each contribute money to a specific real estate deal. Importantly, this strategy lowers the entry bar for investors and provides real estate owners access to global capital. As such, the practice has exploded in popularity in recent years, especially since the introduction of blockchain technology.
How Real Estate Crowdfunding Works
In most real estate crowdfunding transactions, a developer or experienced real estate professional identifies an investment opportunity. This real estate professional may decide that they don’t want to fund the entire project. This decision could be because of a lack of funds or a desire to utilize other peoples funding to complete the project. Either way, the professional would then open the opportunity to investors.
There are three key players in any crowdfunded real estate investment. All crowdfunding real estate ventures begin with the sponsor. The sponsor is the individual or company that identifies, plans, and oversees the investment. Their responsibilities can include purchasing the asset, organizing needed work, arranging the financing, and handling the eventual sale of the property. For their labors, sponsors require a certain share of any profits they earn.
The second key component of any crowdfunding real estate transaction is the platform. Think of these platforms as the middleman between investors and sponsors. Their primary purpose is to link investors and sponsors. As such, they are also responsible for collecting funds from investors. Along with this task comes a host of other responsibilities such as verifying standards, guarantying that investors meet the requirements for investment, advertising deals to potential investors, and dealing with regulatory issues.
The investor is the final piece of the puzzle. An investor trades their funds for some form of income distributions from the profit the property generates. Additionally, they will receive a proportional payout from any eventual profitable sale of the property. In some instances, certain voting rights are a part of the deal. for example, these rights could include whether or not to accept an offer on the property.
Advantages of Crowdfunded Real Estate
There are some major advantages realized through real estate crowdfunding strategies. For one, there is a much higher potential for increased returns when compared to other major asset classes. Additionally, investors gain access to assets that may otherwise be inaccessible to them. A such, crowdfunding real estate is an awesome way to diversify your portfolio.
Importantly, equity crowdfunded real estate platforms usually focus on a specific property. This is opposed to real estate investment trusts (REITs) that can involve billions in properties. Consequently, crowdfunded real estate investors can enjoy the benefits of single-property investments without the financial exposure of actually becoming a landlord. In the end, these investors get the best of both worlds. They receive an income as well as a targeted lump-sum return without major risk exposure.
Top Crowdfunding Websites
Now that you have a firm understanding of what equity crowdfunding is, and how it benefits the entire market, you are ready to explore some of the top platforms providing these services. Importantly, many of these companies now utilize blockchain technology to reduce the overall costs needed to manage and implement their equity crowdfunding concepts.
SeedInvest was founded in 2012 and launched in 2013. The platform is unique in that it has a stricter acceptance policy. Only handpicked start-ups in upcoming future tech industries gain access to this powerful tool. Specifically, a firm needs to deal with blockchain, augmented reality, 3d printing, artificial intelligence, robotics, or space technologies. Importantly, SeedInvest‘s pickiness has paid off as the firm has successfully helped raise money for over 150 companies to date.
The Austin-based crowdfunding platform Microventures entered the market in 2009. The company focuses solely on late-stage companies as part of its niche market. Late Stage companies are firms that are expected to go public within the next couple of years. As such, these companies are usually well-known players in the sector. For example, you can invest in SpaceX, Lyft, Pinterest, and Robinhood via Microventures. Importantly, the company only allows accredited investors to join because each investment ranges from the $5000 to $50000 range.
WeFunder entered the market in 2011. This San-Francisco-based firm originated from the Y Combinator accelerator program. Importantly, the Y Combinator helped launch some of the most successful ventures to date. These ventures include companies such as Coinbase and Airbnb. Also, due to the fact that WeFunder is one of the oldest platforms in the market, the company participated in writing the JOBS Act with the Obama administration.
Fundable entered the market on May 22, 2012, as a rewards-based investment vehicle. Investors would pledge funds in exchange for pre-orders. In 2012, the firm switched over to a true equity crowdfunding strategy. Notably, Fundable’s equity crowdfunding tools are only available to accredited investors at this time.
StartEngine entered the market in 2014 with the goal to provide more flexibility for entrepreneurs in the space. Unlike most of the competition, StartEngine is laxer on what type of firms and investors can utilize its services. As such, investors need to use a little more due diligence when investing on the platform. Importantly, StartEngine showcased its abilities after successfully raising $10M via a self-hosted STO in 2018.
Equity Crowdfunding – The Future is Today
Today, equity crowdfunding is an essential tool used by startups to access capital markets. Consequently, you can expect to see this style of crowdfunding increase in adoption due to its lower costs and more efficient business model. Thankfully, blockchain technology continues to streamline the entire equity crowdfunding process. If the trends continue, equity crowdfunding is set to overtake the stock market as the premier crowdfunding strategy in the coming decades.
What are Digital Assets?
The definition of a digital asset is “anything that exists in binary data which is self-contained, uniquely identifiable, and has a value or ability to use.” When the term originated in the mid-90s, digital assets were items such as videos, images, audio, and documentation. Since then, technological advances have given the term new life.
Enter the Blockchain
Blockchain technology didn’t change the meaning of digital assets, but it did make the term cover a broader range of items. Importantly, many digital assets have the potential to disrupt entire industries and even the global market moving forward. Today, inventions such as cryptocurrencies are part of the digital asset revolution.
Why Did Blockchain Create More Digital Assets?
To understand why digital assets evolved so much, you need to first study why blockchain technology creates new efficiency in the market, and even new markets. Simply put, a blockchain is nothing more than a giant network of computers that simultaneously verifies data on a digital ledger. This network enables data to be stored, unaltered, and verified via code.
The transparency blockchain technology brings to the world is unprecedented. This technology allows people, for the first time in history, to unequivocally prove certain aspects of a digital asset. You can prove items such as ownership, authenticity, transaction history, and location without the need to involve third-parties. As such, blockchain technology ushered back in the age of bilateral exchange.
The ability to erase the middleman comes from blockchain’s programmability. Blockchain digital assets utilize rules that are built into the code of the network, and, or, the token itself. Importantly, these standards receive continuous auditing via the network. This coding has advanced significantly since the emergence of blockchain tech. Today, advanced integrated protocols known as smart contracts are at the core of the digital asset revolution.
Bitcoin – The Code that Changed the World Forever
Bitcoin represented the biggest change to the meaning of the term digital asset to date. This coding was the first time someone attempted to combine cryptography and blockchain technology to create a digital asset successfully. In essence, the Bitcoin whitepaper was the beginning of the digitization of the economy. Discussing the impact of Bitcoin globally, Marc Lowell Andreessen, the father of the internet browser said: “We’ll all look back in 20 years and conclude that bitcoin was as an influential platform for innovation as the internet itself.”
2008 Financial Collapse
To understand the motivation behind the Bitcoin concept, you need to take a look at the economic state of the world in 2008. The international banking system was in the middle of a crisis. In multiple instances, governments and central banks altered regulations to further their debt holding capabilities. It was this perceived instability of fractional-reserve banking that led the anonymous founder of Bitcoin, Satoshi Nakamoto to seek to create a decentralized international economy. This new open market would be free from the stranglehold of government and borders.
Bitcoin – The Start of an Industry
As the Bitcoin concept began to gain international attention, so to did the coin’s value. In less than five years, other developers started to create their own coins. These coins such as Litecoin, Ethereum, and Monero all utilized blockchain technology to secure their value. Although these coins utilized similar technology, each digital asset had a different approach to the market.
For example, Litecoin sought to be the silver to Bitcoin’s gold, whereas Ethereum wanted to provide developers an alternative to Bitcoin’s scripting limitations. Monero took a totally different approach, creating a digital asset that focused primarily on privacy.
Digital Assets as an Asset Class
Today, blockchain technology allows us to tokenize nearly everything we own. Consequently, items that were once non-liquid such as debt can now be traded between anyone, anywhere, in person, or across the internet. This ability to tokenize any item creates entirely new digital asset classes in the market. These new asset classes continue to develop. As such, lawmakers continue to adjust regulations to account for the new efficiency that these services bring.
As the world of digital assets continues to grow, also has the desire for regulators and investors to categorize the different types of tokens in existence. Token taxonomy is the classification of digital assets on the blockchain. Importantly, token taxonomy will play a prominent role in the markets moving forward because the classification of a digital asset determines its issuance and trading capabilities. For example, security tokens must adhere to securities regulations. If not, there are legal repercussions. The three main types of token classifications are:
- Cryptocurrency – This type of digital asset includes traditional cryptocurrencies such as Bitcoin and Litecoin. These tokens usually function as a form of digital cash. As such, they are decentralized and offer a true peer-to-peer exchange protocol.
- Utility Token – This type of digital asset operates within the ecosystem of a platform to derive value and complete various tasks. Importantly, it doesn’t represent any direct ownership or investment in a firm.
- Security Token – Security tokens are any token that by design represents a share of ownership or an investment in a company. Usually, these tokens are found in highly-regulated markets such as real estate, securities, or stock markets.
Tokenization – Changing Markets Forever
Digital assets such as security tokens continue to disrupt the real estate market. For example, platforms such as Red Swan allow property owners to tokenize their real estate. The firm recently partnered with Polymath to tokenize $2.2 billion in commercial property across the US. Tokenized properties offer some huge advantages over traditional real estate sales. For one, the entire sales process is faster and requires less involvement from third-party organizations. Also, tokenized properties can transfer ownership in seconds.
Digital Assets are Everywhere
Today, digital assets are everywhere we look. Every single currency, asset, supply chain, and even reward point has the potential for tokenization. As such, the term digital asset will continue to encompass a growing number of items. For now, tokenization appears to be the path towards the future.
PWC & Crypto Valley Association Release Yearly STO Market Report
As the STO market continues to expand, reporting has now taken center stage with investors and companies seeking more insight into the intricacies of the market, This week, PricewaterhouseCoopers (PwC) Strategy Switzerland and The Crypto Valley Association released their highly-anticipated Spring 2020 STO/ICO market report.
This twelve-page document is packed with insightful information to help guide investors and blockchain firms moving forward. Importantly, the report features an easy-to-read layout complete with graphics and tables to help you better understand the statistics. Blockchain-based firms rely on this yearly overview to get a new perspective on developments within the initial coin offering (ICO) and security token offering (STO) markets.
PWC & Crypto Valley Association – Real Insight
The study includes all types of data that would be useful to professionals in the sector. For example, you can see items such as the total number of offerings or what countries are the leading hubs for blockchain crowdfunding projects. Additionally, you can see statistics on how governments, corporations, and traditional banks utilized blockchain or distributed ledger technology (DLT) to tokenize financial instruments such as securities.
The report shed some light on last year’s market movements. For one, the data suggests that the overall volume of token launches dropped about midway through 2019. In total, the report identifies 380 token offerings that completed throughout last year. These offerings raised a combined total of around USD$4.1 billion.
Initial Exchange Offerings – PWC & Crypto Valley Association
Uniquely, the report also had a section dedicated to initial exchange offerings (IEOs). These new financial instruments saw a significant increase in use during the later part of the year. Notably, the report shows that the Bitfinex IEO led the pack with a total of $1 billion in funds raised.
The study also highlighted the institutional infrastructure and emerging regulatory framework seen in the sector. These regulations helped to spur more blockchain participation from traditional entities such as banks and governments. The report points out that the Austrian Government, World Bank, Daimler, and Bank of China all directly-issued tokenized assets. These assets included securities, bonds, loans, and commodities.
Regional Statistics – PWC & Crypto Valley Association
The PWC report also gave some insight into the geographic regions with the most successful blockchain projects launched. The USA, Singapore, and Hong Kong led the pack with strong positioning across the market. Additionally, some smaller countries made it into the top spots such as the British Virgin Islands and the Cayman Islands. Both of these locations hosted major events in 2019 including the EOS and Telegram ICOs.
Europe also saw significant growth in the market. The study pointed to Switzerland and the U.K as the leading hubs in the region. Also, Estonia took a top spot for its continued development of the country’s blockchain market.
The PWC analysis will work as a guiding light for companies seeking to expand their blockchain positioning in 2020. This yearly report continues to produce insightful and valuable market insight. In turn, you should expect to see more firms depend on this data to make the right tokenized crowdfunding decisions.
- Kin Releases its Transparency Report
- Raiffeisen Bank in Cooperation with FinTech Billon to Pilot Digitized National Currency
- Security Token Group Study Reveals Investors Hedging US Markets with Security Tokens
- France’s Central Bank Completes Security Issuance with Digital Euros
- DTCC Unveils Two Security Token Research Platforms