An equity token is a digital representation of ownership on a blockchain, serving as a modern version of traditional equity certificates. Instead of being physically stored, ownership details are securely recorded in encrypted blocks on a distributed ledger.
Blockchain technology and smart contracts allow companies to issue shares and voting rights without going through the traditional Initial Public Offering (IPO) process. Lenders can also create debt tokens that represent financial obligations, which can be easily traded in a highly liquid environment.
Equity tokens fall under security tokens, often issued during Security Token Offerings (STOs). These tokens signify ownership in an underlying asset, usually a company’s shares. The contract associated with equity tokens outlines the terms and conditions, including entitlements like dividends and voting rights, as well as other privileges such as appraisal rights and subscription rights.
While equity tokens can mirror the value and performance of traditional shares on the blockchain, they do not grant ownership of the security itself. This sets them apart from most blockchain coins available through Initial Coin Offerings (ICOs).
Companies looking to raise funds through Equity Token Offerings (ETOs) may undergo due diligence from regulators or investment banks to ensure compliance with fundraising regulations. Regulated marketplaces for ETOs, such as the SIX Swiss Exchange’s SIX Digital Exchange, provide platforms for companies to issue equity tokens. Examples of equity tokens include The Elephant Private Equity Coin and Neufund.
ETOs have distinct advantages over other crowdfunding methods. They are backed by real assets, providing real value to investors. They are also regulated and legitimate, instilling confidence in investors. The trustworthy structure of ETOs enhances investor confidence and interest in the project. Additionally, ETOs are cost-effective, eliminating the need for intermediaries like brokers and brokerage costs. They also offer transparency, as all essential information is encoded within the token. Lastly, ETOs are accessible to a broader audience, making investment opportunities more inclusive.
The purpose of equity tokens is to revolutionize fundraising and protect investors from the risks associated with ICOs. Unlike ICO tokens, which can resemble financial instruments, equity tokens are digital representations of real assets like equities and derivatives, qualifying them as transferable assets. Compliance with regulations, such as the Markets in Financial Instruments Directive II (MiFID II) in the European Union, is required for the issuance of security tokens during STOs.
Equity tokens offer versatility and can be sold in public and private offerings. Investors in equity tokens may gain valuable rights, such as contributing to the development of blockchain networks and receiving compensation based on token performance in the cryptocurrency market. They were created to replace traditional IPOs, protect investors from ICO scams, and offer a regulated and secure way to invest in digital assets.
Equity tokens can be classified into two main types: dilutable tokens and non-dilutable tokens. Dilutable tokens are initially offered to a group of shareholders, with the remaining tokens held in reserve for future sales. These reserved tokens dilute the ownership percentage of existing shareholders when released. Non-dilutable tokens, on the other hand, make all tokens immediately available in the market, with each token representing a fixed percentage of ownership that remains constant over time.
Equity tokens can be issued through public offerings or private token sales. Public offerings allow a broader audience to participate in owning a stake in the company but require adherence to legal requirements. Private token sales involve selling tokens to venture capitalist firms, allowing the company to retain ownership control while benefiting from staking, holding, and potentially reselling the tokens for profit.
Launching a successful ETO involves choosing the asset to tokenize, developing an event plan, setting up an ETO hosting platform, ensuring regulatory compliance, preparing an informative white paper, launching a pre-ETO, and finally opening the main ETO campaign to investors worldwide.
ETOs offer advantages to investors, including direct transfer of dividends, legitimized token holding, voting rights, and no brokerage fees.
Implementing equity tokens comes with challenges, such as legal framework uncertainty, lack of transaction transparency, regulatory compliance, investor protection, and market acceptance.
ETOs combine elements from IPOs, ICOs, and VC rounds, offering a unique investment vehicle. They provide equity-like rights, transparency, and legality in the investment process. ETOs are more cost-effective and time-efficient than IPOs and target established companies seeking additional funding for growth. They represent a compelling investment opportunity that combines traditional and blockchain-based fundraising. ETOs exemplify the evolving nature of finance and the potential for innovation in capital markets.