The world of utility tokens and ICOs is just about dead, but the world of security tokens (STs), a means of raising capital via STOs, is alive and well. The trend is very real and it is going to grow very rapidly.
There are several benefits of STOs, issuing tokens, over common share IPOs, but two of the most important are transaction speed and tradeable hours. Depending on the blockchain implementation, trades can register on the blockchain nearly instantly. Moreover, because of the decentralized, thus potentially global, trading base for blockchain assets, trading hours are all hours. That is, one can trade 24 hours a day, 365 days a year. The market is never closed. Tokens make these two benefits possible, while conventional security assets do not.
Another prominent benefit arises from the trend of digitization, wherein everything is becoming digital and quantized. As long as securities laws are followed, tokens are a logical extension of the conventional security asset. Chris Carl gives a good interview on the STO market.
What are security tokens?
Regulators such as the Canadian Securities Exchange consider a security to be an asset through which a company promises a stake in future revenue, equity, or a combination thereof. Security tokens are the digitization of this concept of the security. In some cases, there may be no cash flow; in those cases, the token represents a share of the underlying asset, such as partial ownership in a gold mine or piece of real estate.
For example, a company with one million dollars worth of gold might issue one million tokens. Each token represents one dollar worth of gold, using the price at the time of issue. As the gold price fluctuates against the dollar, so too will the price of the token. The token is considered a security because the issuing company has an obligation to give the investor something in the future. In this example, it may be gold bullion or the fair market value thereof. It might also be a part of the cash flow generated from the gold held by the company, if the company generates cash flows from the gold.
For more information about tokenization, you can check out this CNBC article.
Advantages of STOs for Issuers and for Investors
STs are likely to be very successful because they are beneficial both to investors and to issuing companies. For the latter, the reporting requirements are much lower. Once a company becomes public (as in an IPO), the reporting requirements increase 10 fold. However, companies that raise capital via STO are considered reporting issuers. They are required to report some basic information quarterly or semi-annually, and the information must be audited. However, the amount of information reported is much less than a public company’s obligations. For young companies, STOs are a great way to raise capital without the reporting requirements. Once the company is generating sufficient cash flows to cover the additional costs of increased reporting, they can IPO.
As for investors, they win in a couple ways. First, ST dividends tend to be revenue-based rather than profit-based. Of course, it is much easier to generate revenue on the top line than it is to generate profit on the bottom line. Thus investors may recoup dividends faster.
Secondly, many STOs do not offer equity immediately, but there are some interesting conversion mechanisms. For example, one of our clients uses a mechanism that converts to equity in the event of a change of control. If the company IPOs (gives the public control) or is purchased by another company (a new company takes control), then the token holders will see their tokens collectively converted to 20% equity in the emergent company.
Continuing with our trend of linking to video resources, here is one discussing the details of the advantages of STOs.
How STO’s affect Global Capital Markets
Security tokens are one more financial instrument in the world of financial instruments. STs are true, core financial instruments, like equities or bonds. They are not derivatives, like options or futures. And while the estimate may vary, we use the $1.5 trillion estimate for the size of the public capital markets. If industry remains compliant and legitimate and delivers on its benefits, we believe STs can make up 20 to 30 percent of the public capital markets. This would place the STO industry in the $500 range.
Our company, DigiMax, which is about to IPO itself in Toronto, brings high quality STO deals to the public. Our service is to connect startup, low-revenue, but promising companies with broker dealers and interested investors. Our job is to make sure the deal is fully compliant with securities laws.
A further testament to the interest in the STO market comes from an organizer of a recent ST conference. He stated that two and a half weeks before the conference, 3500 people out of an expected 5000 had already signed up. By conference day, 7000 attendees participated. Clearly the crypto and coin world’s are continuing their momentum from the 2018 highs, albeit more subdued than during the Crypto Craze.
However, the Crypto Craze was centered around utility tokens, which have fallen by the wayside; the conference and its 7000 attendees were interested in security tokens, not utility tokens.
At DigiMax, we expect to grow rapidly, even if we only capture 1% of this new, behemoth market. We can help STO-oriented companies sell in cities all over the world rather than just one or two. Our Number One Rule is ensuring 100% regulatory compliance, removing a stumbling block for many new companies. After the first round, we can assist in fundraising in Series 2, Series 3, and beyond. DigiMax is a leader in ensuring compliance and helping sell in liquid markets around the world.
How STOs scale
Presently, DigiMax is operating through Joint Venture affiliates, which will be registered broker dealers within the next two years. Currently we have these joint venture affiliates in Korea, Singapore, Hong Kong, Canada, the US, the UK, Switzerland, and right here in Malta. Any company registered in these jurisdictions are invited to work with us to tokenize their cash flows or equity. Future prospective offices and broker dealer registrations are for Germany, Barbados, Moscow, India, and the Philippines.
These affiliates are partners located in the host countries, making them intimately familiar with the laws and regulatory requirements of those countries. The Canadian-listed public company DigiMax will control the affiliates in each of the territories. We are a new kind of global investment bank.
Market Readiness and Regulatory Framework
The rules and laws already exist: they’re called Securities Laws. They only need to be adapted to this new form of asset, the token. DigiMax has designed tokens to follow the laws in their respective countries, and we are committed to continually updating our designs and procedures to remain compliant. Security tokenization is a relatively new concept and way of representing financial ownership. For that reason, one should expect a lot of regulatory activity surrounding STs and STOs in the near future. Blockchain technology advanced rapidly, and hence governments and regulatory bodies are playing catch up.
Several countries are making announcements regarding Securities Exchanges and tokens. Switzerland announced its plans about 3 weeks ago, while Malta is about six months out from an announcement and Hong Kong just released a white paper, giving the impression the country will start accepting tokenized securities trading within two months.
Due to the revenue- or equity-based purpose of STs, they are far less risky than the utility tokens that debuted with ICOs. The ICO storm has passed over and fizzled out, but STOs are far more robust and will enjoy a solid place in the financial world. Now it is up to the individual countries to decide whether STs will be allowed. The trend in tech and society is toward digitalization, a prime characteristic of tokens. Now all that remains is to see whether countries allow STOs, which seems reasonable, as there is no law preventing the registration of securities. Security Tokens are simply a new form of securities.