Venture capitalism could be on its way out or at least the current form of centralized, fragmented, high risk and high valuation, multiple phase capitalization associated with IPOs. Initial Coin Offerings (ICOs) and Security Token Offerings (STOs) are not only gaining significantly in reputation as a more unified and transparent method of raising capital but blockchain technology is in a very real way the wave of the star-up capital future, and for some very obvious and practical reasons. If we consider ICOs landing somewhere between traditional venture capital funded initial public stock offerings and crowdfunding systems, and ascribe the power of disruptive technology to this function, harnessing blockchain encryption as a means of protection and verification, as well as considering STOs to represent a regulated security token, literally programmable ownership backed by external tradable assets. These tokens grant entrepreneurs access to the capital they need to successfully scale their company as they deem essential. In theory and in practice we are dealing with a verifiable and secure asset that equitably aligns entrepreneurial ingenuity with investor compulsion.
Another wat to think of ICOs is in terms of a utility token, representing the future access of a company’s products or services vs. security tokens, federal-registered securities, granting companies the ability to issue tokens that are equivalent to ownership shares.
A crypto currency token represents a programmable currency unit secured to a blockchain ─ a constantly growing ledger of accounting records ─ as part of a “smart contract” lucidity in the context of a specific software request.
Smart contracts help individuals exchange stuff like money, property, shares, or essentially anything with an assumed value in a transparent, conflict-free way while avoiding the oversight and encumbrances most notably associated with an intermediary (lawyer, notary) individual or group. Smart contracts don’t simply lay out the ground rules and penalties around an agreement but they also automatically enforce them.
In the traditional marketplace contractual, legal agreement, law or the law of obligations is tricky to navigate and extremely expensive to draft and to enforce.
As with traditional IPOs it is very important to customize and leverage bespoke relationships with individual investors. Traditionally venture capitalist firms and individual angle investor provide private funding to business opportunities that they deem rewarding. But VC’s and angles are far from impartial parties. They can be either value-added or a real problem. Deals can get messy.
Companies looking to leverage an Initial Coin Offering have the added advantage of building their strategy by placing their ICO on a service such as Coinschedule and have it rated on ICORating, Digrate, or other rating services to help summarize any leaks in the coin offering. This is an excellent and cost effective way to start pushing free listings in order to place the ICO.
Ensuring that the venture is well packaged is critical. A well packed ICO is comprehensive of all materials in a language and format that is attractive to the investors (white paper, one pager, website content, etc.). As more financial expertise finds its’ way into the token offering space there will be more professionals from traditional financial markets among them so there will be an increased need to attract these particular individuals with language that they are familiar with.
STOs might just be that vehicle needed to bridge traditional financial markets with regulated token offerings. One very attractive financing model aims to empower entrepreneurs and revolutionize investor-management relations by leveraging a digital innovative funding strategy based on revenue-sharing. CORL Financial Technologies Inc. has conceptualized a revenue-sharing model based on CORL’s own CRL token.
A secured crypto token or asset token represents [programmable ownership of public & private equity, debt, real estate] the removal of the intermediary resulting in free market exposure, lower fees, faster deal execution, privation of financial institution influence and much more.
CORL stands to be the first company in history to issue 100% of its equity ownership as digital token; the CRL token is legally equivalent to a Class B share. Analogous to a royalty agreement, revenue sharing investments allow investors to introduce capital into a company in return for a percentage of the company’s gross revenue (Revenue Rate: typically 2-10%). Revenue-sharing also offers a unique blend between debt and equity (“dequity” as coined by CORL) that mutually benefits both the entrepreneur and the investor, seamlessly aligning financial incentives with enhanced business processes and stimulated growth strategies.
Coins require an incentive mechanism in order to encourage the broader cryptocurrency community to take part in its protocol and to verify transactions; the analysis of certain economic incentives that are needed to back a specific token. Whereas security tokens are packaged as equity in early stage corporate financing. Investors must be approved prior to purchasing CRL tokens. The CRL smart contract provides all the conditions governing the sale and contains all digital legal documentation; the documents are cyptographically signed and stored using Merkle trees. Tokenized dividends will be issued in ETH.
Risk and Reward
Smart contract security audits are necessary but not sufficient to mitigate ICO risk. These types of audits function to assess whether the offering organization is following sound data protection practices.
In cutting out the middleman STO’s require the issuer to do all the heavy lifting i.e. underwriting their own arrangement using 3rd party auditors, prepare marketing materials, solicit investors, and possess great assurance in their security and regulatory compliance. Only time will tell how successfully this type of token offering will prove to be. But by all indications STOs will capture a large portion of the early stage investment market in the coming years.