The modern options for raising capital investment for SMEs, startups and corporate projects
“Martin Luther King didn’t get up 50 years ago and say:
I have a budget and a plan!” – Alan Clayton
As many in the fundraising business will often say, investment is still in many cases a very emotion driven art rather than a precise science, despite enormous growth of technology driven analytical approaches. Investors invest in the dream, the vision and the people. But what options are there to reach these investors and make their experience seamless and profitable for all concerned?
Selling Equity directly to known investors, publicly via an IPOs or on-boarding a Venture Capitalist (VC) are the time honoured way of raising capital. These continue to be strong options and will evolve with digital transformation in the long run. Already they have become more efficient with online form processing, digital signatures and digital marketing. However these measures do not completely digitize the process and it remains in large part one of relative high up front cost and personal contact. In the case of VCs, it is also a process with opportunities but with huge cost in terms of equity given in exchange for capital, mentoring and introductions.
Crowdsourcing has emerged over the last decade as a method mainly to reach out to consumer investors and fund smaller projects. These are often used for smaller amounts, where there is a benefit investors want from the product or service, for non profits and personal projects. This method works through funding sites like Kickstater and Indiegogo, which charge up to 7% of raised funds.
Borrowing Money is also a way fo raising capital but this does generally require multiple years of operation, regular revenues and other requirements that startups and SMEs may often not be able to provide. Likewise, corporate projects may not have access to bank funds due to tax and other considerations.
Security Tokens – these are simply electronic tokens that represent actual equity in a company, they differ from the, up to now prominent, utility tokens, in that they have actual legislation written into them and therefore follow Securities Law. They are also presented for a given set of jurisdictions as they follow their laws for the sale of investment opportunities. As different to normal shares, these can be held by investors directly in a crypto wallet, much like they would store Bitcoin or other cryptocurrencies, so licensed banks or brokers are not required.
Initial Exchange Offering of Utility Tokens – this is the offering of utility tokens via a Crypto Exchange rather than directly to investors. This has the advantage of being direct to a captive audience, the Exchanges’ traders, and investors are sure that the Exchange has carried out significant due diligence, reducing scams.
WHY TRY THE NEW OPTIONS
Comparative Ease of Execution and Lower Cost: As compared to traditional fundraising methods, STOs are relatively easy to execute and are transparent for investors and companies alike, therefore can cost less as a whole.
Transparency: STOs allow a company’s investor to get information about the issuer on a fully transparent basis
Liquidity: Security Tokens enable fractional ownership of an investment product and thereby lowers minimum investments.
Monetization of Illiquid Assets: Security Tokens enable the tokenisation of traditionally illiquid assets such as property and some commodities or stocks.
The Attraction of New Investors: Due to the regulatory benefits, authorities are beginning to understand the advantages of global Security Token standards and support Security Token implementation. This provides big opportunities for issuers to gain access to an international pool of capital and reach out to a larger potential investor base and individuals new to investors.
ADVANTAGES OF STOs OVER THE (OLD) ICOs
As compared to the utility tokens of 2017 /18 vintage, the new STO/IEO models have several advantages: Recoverable: Properly constructed STOs provide the ability to reissue tokens to shareholders if they loose access to them, this is a key legal consideration as a Security Token is a leglly binding promissory note on the underlying equity it represents. Priority to KYC and AML: Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols are strictly followed by STOs.
On a distributed ledger, where wallet addresses are anonymous, it becomes a challenge to adhere to these protocols. AML scoring with security tokens allows companies to track their investors’ transactions and ensure they are complying with regulations. Intrinsic Value: STOs contrast markedly to the utility tokens of 2017 /18 vintage, that are only calculated to represent future access to an issuing company’s product or service or, sometimes artificially hyped, market value. Alternatively, STOs represent the underlying interest in equity, profit sharing, dividends, voting rights, and other benefits that accrue to the issuing company. BUT WHAT ARE THE ISSUES? Marketing and Listing Costs: While mostly less overall than traditional funding campaign costs, the funds needed to launch an STO are still significant as communication has to go out to specific channels with adequate credibility. This will incur significant spend on market asset creation, PR, marketing spend and roadshows. One of the most important tools is listing on cryptocurrency exchanges.
As noted, the new methodology of the Initial Exchange Offering (IEO) is the ultimate implementation of this, whereby the exchange itself launches and diffuses the token campaign to its registered investors. This approach makes sense, especially when seeking crypto investments, as investors and traders in cryptocurrencies are registered on exchanges to carry out their trades. However, even when not charging the exchange with selling the tokens at the initial offering, a listing on an exchange is an essential part of credibility for investors as it guarantees some sort of liquidity. There is another kind of listing, which takes significant effort and sometimes budgets. This is listing on token evaluation sites and with brokers or investor introducers. Legal Costs: again, while potentially less than traditional set ups, the legal costs are non the less significant for both security Con artists Can it be too easy? Part of the reason the traditional methods work is that entrepreneurs are put through SO SIMPLY WHAT DOES THAT MEAN? A potentially faster and more cost effective way of raising capital for organisations of any size. With the added benefit of potentially creating new business models based on tokenisation.
WHAT CAN WE USE THESE NEW OPTIONS FOR? – Startup late seed or series A finding – Corporate project funding – SME expansion funding Actually just about anything where there is a core seed of funds to kick off a campaign Andrew Rippon is a Digital Transformation Consultant specialising in the transformative power of the blockchain. His achievements have included advising several large governmental organisation, such as the National Digitisation Unit of the government of Saudi Arabia and Smart Dubai. He is currently advising organisations in Europe and the Middle East.