Security Token Offerings Could Disrupt Venture-Backed Tech Startups Positively

A handful of methods exist for raising capital, from private offerings to semi-public to a full-blown IPO or ICO. Now STOs are on the rise which might just be what tech startups need to revitalize the market

According to data collected by Pitchbook, a smaller number of startups are being obtained by larger firms or are going public. Many of these startups, though venture-funded, have a minimal chance of starting an initial public offering (IPO). Some are resorting to cost-cutting measures to better their operating margins in the hopes of drawing mergers and acquisitions (M&A).

The Statistics

Today, more young companies are being allocated capital by VCs, and yet, fewer are exiting through M&A. And the exits are taking longer for those who go through an IPO.

It is said that 2014 was the height of VC-supported exits with 200 startups lined for an IPO. As the years passed the numbers dropped, in 2017, not more than 100 IPOs reached the market.

The sloping movement persisted throughout 2018. Now even less companies backed by large investments are being offered an IPO or M&A exits.

Pitchbook notes that in 2006 it took businesses an exit time of around 4.9 years. But by 2016 it took roughly double that time, 8.3 years. Investors are holding back for an exit from a position for 10 years.

The STO: A Modern Route to Liquidity

Initial coin offerings (ICOs) have transformed crowd-funding and capital-raising. However, a majority of it was ineffectual in delivering business benefits.

On the other hand, an STO can lead the way to equip medium, VC- supported tech startups to re-define itself whilst allowing innovative entrepreneurs to elucidate new problems.

Anticipated to be compliant, security token offerings (STOs) behave like traditional equities. Typically, it has a standard exemption through the SEC’s Reg D. Its difference from the traditional lays in the execution which is done through a smart contract.

Tokenizing a business backed by big money unravels liquidity difficulties. The accepted scope for tokenizing starts from $100 million up to $1 billion. But there are other alternatives such as a partially private token offering using the SEC’s Reg D exclusion which can be offered to qualified investors, or a semi-public offering through the Reg A+ Sec exemption. Though it can be proffered to non-accredited investors, the semi-public offering is restricted to $50 million per year.

The significance of tokenized shares can also be felt in the secondary market enabling seed investors to shift funds to other innovative businesses.

Advantages of Tokenization

Young companies that have undergone several funding rounds possess proof that can be considered quantifiable and comparable. After half a decade or so, these startups already have a client base, a product, revenues, and financial background where fair market valuations can be derived.

Startups in tech have the financials ready for tokenization. Through tokenizing, the opportunity for discovering capital and talent is realized. It can revitalize the tech industry and its accompanying market.

Another benefit that comes with the process is that token converted shares can be sold at a later time on exchanges viz. Open Finance and tZero.

In summation, tokenizing shares and conducting STOs can pick up on the innovation started by ICOs and breathe new life into the market.

Related news

BlockState Gains Clarity on STO Taxation Within Switzerland

No Tax. No Vat. BlockState, a Swiss digital securities issuance platform, has recently closed their very own STO. Upon doing so, multiple questions were raised with regard to how capital, brought in during this event, would be taxed. The STO hosted by BlockState represented the first of its kind in the region, making the young company a trailblazer within the digital securities sector. As stated by BlockState, confusion remains on the taxation of capital raised through STOs…until now. Clarity In an effort to gain clarity on the situation, and set a precedent moving forward, BlockState turned to PST Legal. This law firm was tasked with gaining clarity from Swiss regulators. Their efforts were successful, with recent rulings being doled out. It was ruled that capital raised through such means would NOT be subjected to either profit tax, nor value-added-tax (VAT). Rather, much like traditional capital raises, funds garnered through STOs structured in such as manner would only be subjected to ‘security issue tax’. By achieving this, BlockState has not only made their own path easier moving forward, but for others as well. This ruling provides future STOs with precedent and clarity on how their actions will be received by regulators. Commentary In their release, BlockState comments on the development. They state that it was concluded that the, “…issuance and the profit on the sale of own shares through a security token offering in this specific case does not trigger profit tax and added-value tax, but security issue tax. This is a unique tax clarification for the BlockState’s security token offering model and marks the first time that a Swiss tax authority has issued a ruling on the tax classification of an equity STO.” With this development, BlockState commented on what it means to them. It was stated, “We are excited to be part of the progress in this space, not only developing leading technology and legal frameworks, but being able to play an active role in the regulatory conversation around security tokenisation.” BlockState BlockState is a Switzerland based company, which was founded in 2018. Above all, Blockstate acts as an issuance platform for companies looking to tokenize assets. The company operates with a mission of unlocking trapped wealth, through the use of blockchain technologies. CEO, Paul Claudius, currently oversees company operations. Zug, Switzerland With their progressive approach to blockchain, and companies taking part within the industry, Switzerland is fast becoming a hub for the technology. This has led to the town of Zug being dubbed ‘Crypto Valley’. Companies involved with blockchain have been drawn to the area, as the Swiss government has taken the initiative to provide clarity on law and regulations governing the sector. Being afforded this clarity allows for these companies to operate efficiently, and without fear of repercussions for actions taken. In Other News In months past, we have detailed development pertaining to BlockState multiple times. From their migration of ERC tokens, to hosting STOs on behalf of others, BlockState has remained busy. The following articles dive deeper into each of these events BlockState Hosts First STO for Streetlife International BlockState to Add ERC Tokens to Corda The post BlockState Gains Clarity on STO Taxation Within Switzerland appeared first on Securities.io.
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Fervent Push for Regulatory Approval by STO Issuers

The crypto industry is making great strides in establishing Security Token Offerings (STOs) as a secure fundraising method. With the market’s attention diverted to the first-ever SEC-supported STO, and the U.S. Securities and Exchange Commission (SEC) pledging “plain English” directives on ICOs, 2019 could finally see security tokens used as fundraising tools. In 2018, the digital market registered significant drops in ICO numbers. Although investors saw great potential in the fundraising system at the beginning of the year, financial analysts exposed 80% of ICOs as scams by March 2018. A research conducted by Bitmex observed a 97% slump in ICO markets in Quarter 1 of 2019. While utility tokens only give access to protocols, STOs allow an investor to own a company’s assets much like stocks and bonds. This gives investors the right to vote, as well as share profits, interests, and dividends. Although utility tokens are not direct investments, some companies cling to them with the hope that they will increase in value. However, there is no assurance that the prices will rise in the future. Not only that, utility tokens involve uncontrolled token sales. STOs, on the other hand, enjoy regulatory oversight which ensures investors` interests are protected. On the whole, it is possible to organize security tokens according to securities laws so that the rights of token custodians match the ones provided when buying shares with a publicly listed company. STOs in Figures The total number of STOs launched worldwide in 2018 exceeded 1200. In spite of the SEC’s failure to approve any STO, launches increased by a margin of 60% in the United States. With only 174 STOs in 2017, the number was just shy of 300 in Q4 of 2018. Interestingly, STOs rose beyond 130% in Q1 2019. This surge did not come as a surprise considering the efforts by regulators to make sure security norms are observed. Even so, this pressure made it difficult to establish public token offerings. Besides, numerous STO service providers are joining the digital market, therefore, setting the pace for organizations to launch STOs. It is imperative to note that security tokens are not limited to only trading STOs or investments. It is possible to fractionalize security tokens kept on the blockchain. Therefore, retail investors can inject small sums into venture capital initiatives like gaming and medical care. Building a Credible Asset Class and Regulation Industry players are keen on ensuring security tokens together with their supporting infrastructure conform to regulatory stipulations. As long as the underlying infrastructure is in good condition, security tokens are capable of providing numerous investment opportunities to entrepreneurs with likely secondary market liquidity. Within the United States, security tokens fall under different regulations. They include:       Regulation S This offers an SEC-compliant procedure for both US-based and non-US investors to raise funds outside of the United States. In this case, security offerings can accommodate both Equity as well as debt securities. Although Regulation S offerings do not need SEC registration, an investor should ensure to sell their non-US tokens in line with US laws. Even so, the sale proposal might encounter limitations when the investor is an American organization. As such, it is prudent to combine two regulations. Since their concurrent use is legal, an investor can fuse Regulation S with D. The only variation between these two rules is that Regulation S allows an investor to raise cash from overseas without investor accreditation. So to say, Regulation D enables an investor to raise funds from US financiers while Regulation S guides contributions from outside the U.S.       Regulation D It allows the provision of securities to both US and foreign organizations alike. Moreover, it neither has limits on the maximum fundraising nor the size of a single participant’s investment. Thus, it is appropriate for all securities types. Even so, the regulation only allows certified American investors to participate. According to SEC’s section 506B, around 35 unapproved players can take part. Furthermore, Section 506C urges investors to get verified and only provide truthful information during their solicitation.       Regulation A+ This allows creators to present non-accredited investors with SEC-approved securities. The highest investment for this option is a $50 million sum or $20 million in the case of Tier 1. Tier 2, on the other hand, bars investors from committing above 10% of their annual income alone or together with their spouse. Regulation A+ issuance can take longer than other alternatives and is usually more complex and expensive. However, it is reliable because it does not have restrictions for prospective entrepreneurs (excluding US citizenship). What Does the Industry Have in Store? Despite the crypto industry being a budding market, it has shown tremendous growth in the recent past. This is evidenced by the increasing SEC applications for security tokens. Furthermore, organizations are now building their own digital commodities. The industry has high expectations that the SEC will release additional guidelines on STOs. There is mounting pressure to align regulations with vibrant markets like Switzerland. Overall, security tokens are a valuable instrument for accessing substitute investment openings in global markets amidst a secondary market liquidity chance. Featured image via BigStock.
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