The main ways to finance a business have always been loans from banks and financing through bond issues or equity. However, banks tend to lend money to established companies that are able to provide secure guarantees. Small and medium-sized companies, as well as startups, on the other hand, find in the token economy and in particular in the tokenization of companies a new financing opportunity that can ensure market competitiveness and a rapid expansion.
Tokenization is the process of creating digital assets that represent portions of a real-world resource. One could tokenize anything that can have a property, from a piece of land to a piece of art, and therefore a company can be tokenized as well. After the tokenization has taken place, tokens can be sold and thus allow companies to sell “digital shares” to global investors, enabling any company to raise money through a fast, efficient and legally compliant process.
The tokenization and subsequent token trading are based on a blockchain infrastructure that serves both to ensure immutability and tracking of transactions, as well as the ability to trade without the mediation of classical financial institutions.
Fundraising for companies or projects
The two main ways in which a company can raise funds by making use of tokens are Initial Coin Offering (ICO) and Security Token Offering (STO).
The Initial Coin Offering (ICO)
Initial Coin Offerings are now widely used in the world of cryptocurrencies and Blockchain and are consolidating as a viable possible alternative to traditional financing tools especially for startups or new innovative projects. The ICO is a form of crowdfunding: a type of capital raising used by companies when they want to propose a project or an innovative idea and the necessary capital is raised through the presentation of a specific economic design in which interested investors decide to participate. The advantage of this method of financing is given by the possibility of reaching a very wide audience of investors, without having to undergo the bureaucratic constraints required by a listing. A company promoting an ICO issues digital tokens on a public blockchain, the most widely used of which is definitely Ethereum. The backer-financier buys the token by paying for it with the cryptocurrency of the chosen blockchain and then the token can be sold, traded, or converted into goods or services produced by the company.
The Security Token Offering (STO)
STOs are similar to ICOs in that both serve as a means to raise funds, but STOs are offerings where the issuer explicitly acknowledges that the token is a security. STOs have the potential to benefit investors and companies in unique ways. For example, companies can raise funds for a specific project or division, unlike other forms of equity participation where investors are generally required to acquire shares in the entire company. In addition, companies can gain more flexibility because STOs allow them to define the rights and terms of ownership of a token.
Pros and cons of company tokenization
Company tokenization offers new opportunities for company growth and development. Compared to the traditional listing process, which requires a huge investment of time and resources to prepare the necessary documentation, the tokenization of a company requires much less bureaucracy.
STOs also have low barriers to investment because tokens can allow for fractional ownership, which allows companies to attract a large pool of global investors.
However, there are also a number of aspects that could be critical: the risk of fraud, which has already occurred in the field of ICOs. A few companies, that raised significant funding, then disappeared in a few months, but also the current regulations that vary from country to country, and finally the security aspects related to the use of platforms for STO, which could be subject to cyber attacks.
Given these unknowns, it’s always advisable to rely on business tokenization service providers who can help you set up and tokenize, as well as give investment advice, highlighting the pros and cons and evaluating every aspect of tokenizing a company.
The tokenization of a company is therefore a true form of investment that is becoming increasingly competitive with traditional methods. Approaching the STO experience with the right approach and always keeping in mind the possible risks involved in tokenization, will allow a company to have easy access to capital that can be crucial to its growth and development using an innovative forward-looking system.
Switzerland is at the forefront in this field with the new DLT regulation that came into force in February 2021 thanks to which companies can finally issue their shares in the form of uncertificated securities using a DLT registry.