An equity token is a collection of several blocks that functions as an equity certificate on the blockchain (encrypted data). Equity tokens include the same contractual information as book-form or traditional equity certificates; a distributed ledger stores them rather than a share register.
By employing blockchain technology and smart contracts to issue shares and voting rights on the blockchain, a company may avoid making a conventional initial public offering (IPO). Additionally, a lender may produce debt tokens representing the company’s financial commitments, enabling loans to be bought and traded in a highly liquid market.
An equity token is a security token representing ownership in an underlying asset, typically the shares of a firm that is issued during security token offerings (STOs). Similar to claims, the contract outlines the conditions and terms that apply. The owner of an equity token may also be qualified for dividends, voting privileges, or both. Warrants, like share certificates, can include entitlements like appraisal rights and subscription rights.
Additionally, equity tokens might replicate regular shares’ performance on the blockchain and track their value. In this case, equity tokens are referred to as cryptocurrency derivatives because they do not grant investors ownership of securities.
Therefore, equity tokens differ from other blockchain coins made available through initial coin offerings in that they always reflect underlying assets, whether indirectly or directly. One of the equity token exchanges to provide regulated markets for ETOs, for instance, is the SIX Swiss Exchange’s SIX Digital Exchange. BFToken is an example of an equity token.
Why Were Equity Tokens Created?
Creators replaced the old method of raising capital through IPOs with equity tokens to protect investors from ICO fraud. Additionally, tokens created through initial coin offerings (ICOs) are likened to financial instruments. Still, equity tokens—which are digital models of underlying securities like equities, derivatives, etc.—might be considered transferrable assets.
For instance, because security tokens are transferable, the Markets in Financial Instruments Directive II (MiFID II) in the European Union mandates that companies hold a license before issuing them as part of an STO. To meet the criteria of the MiFID II, companies taking part in the STO must also determine if they offer any investment services or engage in any activities linked to the security tokens.
The equity token’s ability to be offered in either a public or private offering is another benefit. The prospect of earning investor rights, which include the ability to take part in the creation of the blockchain network and get cash compensation based on how the token performs in the cryptocurrency market, is comparable to this significant flexibility.
How Are Equity Tokens Issued?
Tokenising the company’s assets in a private sale for fundraising purposes is one technique to issue this type of security token. Additionally, during an early seed round, tokenized equity can be offered through a token sale open to the public. The token sale can be achieved by registering it on the equity token market.
1. Public Offering Of Tokenised Equity
When distributing tokenised equity to the broader public, you must take several steps. Equity tokens must adhere to each nation’s ETO regulations to buy and sell campaigns for shares or securities.
2. Private Token Sale
When venture capitalist (VC) firms invest in start-up businesses for equity or a stake in the industry, they receive payment when the trade goes public or another company acquires.
When they secured more than $300 million from Andreessen Horowitz, also known as a16z, and Unique Square Ventures, Solana (SOL), however, did not surrender any stake. Instead, they engaged in a private token sale, which is increasingly popular among blockchain firms, and sold its VC investors Solana tokens.
Young blockchain-based enterprises can benefit from VC funding without diluting their ownership stake, thanks to the private token sale. Meanwhile, VC firms make good money by staking, retaining, and reselling the tokens. Consequently, this benefits both parties.
How To Launch An ETO
Step 1: Register On An Exchange
To get started, register for an exchange platform. It will enable the company to issue its equity token and record its information.
Step 2: Disclose Commercial Term And Provisions
Inform the brokers-dealers or some potential investors about the terms and conditions of the investment for selling the equity tokens.
Step 3: Perform A Pre-ETO
The goal of a pre-ETO campaign is to deliver a certain amount of tokens to a specific number of people to understand the relevance of the equity token offering properly. Meanwhile, this action will suffice if private sale achieves the benchmark funding; otherwise, a public deal will exist.
Step 4: Perform ETO
If the benchmark funding amount is not achieved during the private offering, the tokens are sold to the public, including individual investors and companies. If the investors buy the rest of the tickets, they become the owner of these tokens (bound by law) via a legal agreement.
Benefits And Challenges Of Equity Tokens
Benefits Of Equity Tokens
Equity tokens are a safe option because they are heavily regulated and resemble a standard stock offering. You can exercise, preserve, or delegate control using such tokens. For instance, when assets are sold due to the issuing of equity tokens, buyers have the option of taking part in or not taking part in the decisions made by your business or activity.
Equity tokens will continue to hold their worth if the company that issued them and raised money through an ETO is still in business. Additionally, equity tokens let investors engage in interactions using blockchain technologies while abiding by the regulations of the issuing country regulator. It also gives business owners a fresh way to finance innovative products.
Challenges Of Equity Tokens
In some places, it is illegal to represent shares electronically, so providing digital ownership certificates is governed by the local regulations relevant to the particular kind of business wishing to sell tokenised equities. For instance, what is feasible in one nation, like Germany, might not be feasible in another, like the United States.
Additionally, many investors want to remain anonymous, and big investors need confidence that all pertinent rules and regulations have been followed. Additionally, they are sceptical of blockchains because they permit outside parties to view the worth of their transactions and investments. As a result, some of them might not desire a blockchain private key to control their shares.
ETOs need to be able to cater to both retail and institutional investors on crowdfunding platforms that can comply with local legislation to be a successful method of generating money for blockchain-based initiatives.
Reliable and skilled broker-dealers must be available to locate and sell tokenised assets to eligible investors; this will protect ETO development businesses and investors from fraud.