4 Reasons to Tokenize Equity

Reasons to Tokenize Equity

So you need to raise capital. Once upon a time you might have issued stock certificates — yup, actual pieces of paper representing investor equity in a company. In 1973 came the centralized registry, which replaced paper certificates with uncertificated bookkeeping, allowing for faster, more efficient trading. And now there is the decentralized ledger, also known as blockchain.

First of all, we are not talking about ICOs (initial coin offerings). The Wild West days of cryptocurrency are on the wane as ICOs with their unsavory reputations have evolved into a more sophisticated and regulated vehicle known as the security token offering (STO). Sometimes also referred to as a digital asset offering (DAO) or tokenized asset offering (TAO), security token offerings take all that is good about blockchain and cryptocurrency, and wrap it up in a regulated package that is compliant with securities regulations and laws.

Let’s repeat that: In a security token offering, a company creates blockchain tokens to represent a security, such as equity in the company or an ownership interest in a piece of real estate; investors hold and trade these tokens on a network designed for holding and trading; and it’s compliant with securities regulations and laws.

Why is this a good thing?

  1. Greater efficiency at lower cost
    • Blockchain allows for the automated tracking and administration of stakeholder ownership, reducing the cost and overhead associated with maintaining a traditional registry, administering voting and governance, and related services.
    • Blockchain allows for payments of dividends through smart contracts and publicly available token balances, reducing back-end work and cost to administer and process distributions.
    • Transaction fees are reduced as traditional brokerages and settlement are no longer necessary.
  2. Access to more capital
    • Crypto investors have capital that they are looking to deploy in crypto assets. Some of these investors may not be available through legacy capital-raising methods.
    • Foreign investors can seamlessly purchase security tokens, reducing friction for those looking to get exposure to crypto equity.
    • Markets are open 24/7, allowing for easier trading.
  3. Increased flexibility in pricing and investment strategies
    • Because blockchain tokens can be divided down to several decimal places, investors can make fractional investments, providing for more flexibility in pricing and investment strategies.
  4. Increased liquidity
    • As blockchain developers build platforms to facilitate investment, trading and compliance, equity holders will have more and more options for liquidity. This is especially important for stakeholders in smaller companies, who may not have a lot of options to cash out in the current environment.

“Security token offerings represent one of the best use cases for blockchain technology,” says Lee Schneider, co-founder of Genesis Block and former head of FinTech and broker-dealer practices at two international law firms. “Tokenization of equity is poised to disrupt the world of traditional finance, and what we’re seeing now may very well be the beginning of how capital will be raised in the future.”

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