The Security Token Offering as an Alternative to a Classic IPO

April 01, 2019

Security tokens have recently been gaining popularity across the financial industry. Instructions added to the token’s code can automate a number of processes, including dividend payments and shareholder voting, leading to a significant reduction in governance and issuance costs.

Drawbacks of classic IPOs

In one form or another, initial public offerings (IPO) as an instrument for attracting funding have been around for centuries. However, in their current form, IPOs have several major drawbacks.

  • Too many intermediaries. There are typically multiple administrative layers between the investor and the company issuing the stock.
  • High costs. The costs associated with these intermediaries and infrastructure can be prohibitively high. According to a recent study by PWC, the average IPO’s underwriting fee corresponds to 4–7% of gross proceeds. Extra costs amount to an average of $4.2 million, on top of which legal and accounting fees apply.
  • Time-consuming. According to the same PWC study, preparations for an IPO normally take 12 to 18 months.
  • Inaccessible. IPOs may only be offered to investors in certain jurisdictions. Even if this is not the case, currency exchange fees and AML/KYC requirements may prevent overseas investors from participating.
  • Large-scale only. The costs associated with an IPO mean the bar for entry is typically high. Smaller retail investors are unable to participate — only wealthy or accredited investors are eligible.

The STO as an alternative

In a security token offering (STO), a crypto token is issued to investors in exchange for their funds. It should be noted that security tokens are not cryptocurrencies. The most accurate description would be “digitized securities.”

Security tokens’ main difference from traditional securities, however, is that they are programmable. Smart contracts applied to a token determine how it can be purchased, traded and sold in a compliant way. All transactions are immutable, traceable and fully transparent.

In addition, security tokens are easily tradable, while deal execution for traditional securities could face hurdles due to the numbers of intermediaries involved.

Traditional securities are managed by a complicated system of Excel spreadsheets, paper certificates, custodians, accountants and transfer retailers, all of which leads to additional costs and delays. With security tokens, many of these processes become unnecessary or entirely automated, reducing costs and improving efficiency.

Tokenomica’s solution

Tokenomica’s STO platform eliminates Intermediaries. Blockchain technology enables Tokenomica to place buyer and seller directly in contact, while avoiding any counterparty risk.

Issuance costs are substantially lower than for an IPO. Using Tokenomica’s platform, it is possible to issue a token free of charge. You might have to pay legal fees, but it is up to you to decide whether you want to retain a lawyer specializing in STOs.

The process is much faster than for an IPO. With Tokenomica, preparing required documents and having them checked by the Maltese regulator will take just 2–3 months. As soon as the regulator’s approval is obtained, your token will be issued and listed on our platform.

Fair access. Due to the efficiencies of blockchain tokenization, anyone can take part, regardless of the amount they want to invest. Participants can invest $10 just as easily as $1,000,000 — meaning retail investors as well as HNWIs and institutions can take part.

Borderless. The nature of the blockchain means that location does not have to be a barrier to participation — it is possible to access investment from all over the world.

Liquidity. Crypto tokens can immediately be traded on the secondary market, enabling investors to exit or reduce their stake if they wish, and new buyers to invest in the project.