Authored by Dan Abbate, one of the co-founders of 81-c, a company that’s pioneering entrepreneurship as an asset class enabling anyone in the world to invest in businesses that would typically never be available to the public.
Dan is an entrepreneur, thought leader, and investor with a career-long focus in business process automation through the use of advanced technology and organizational development and improvement.
Investing is like gambling, and if you’re an everyday retail investor (instead of a bigwig) then you have to place a big bet to play. But the cards are unfortunately stacked against you before you ever play your hand.
Retail investors have been shut out from access to lots of value. When companies go public, they typically favor the accredited investors and big-name investment banks of the world. It’s easier for them to sell huge stakes to these clients instead of selling small stakes to lots of individuals.
One hand washes the other, and when it comes time for an IPO, the big dogs make a hefty profit. Too bad that profit comes directly from you, the retail investor.
You buy a stock at what you think is a good price, but your investment actually helps early investors cash out. They bought into the company during earlier funding rounds, so when the company’s valuation skyrockets on the day of the IPO, their early dollars turn into major gains.
What market changes are necessary to distribute this value to everyone? Security token offerings (STOs) are beginning to level the playing field by changing how people get to invest. There are five big benefits to investors when they choose an STO as their next investment vehicle.
There are fewer middlemen to deal with
If you want to invest in the stock market, you have to go through a broker-dealer. This back-and-forth communication can get tiresome and downright frustrating — you’re paying for their time and services to do something that should be available to anyone. Why should investing require multiple intermediaries?
Security tokens do exactly this, eliminating the need for multiple middlemen. You get to pursue opportunities you deem worthwhile without weeding through multiple advisors.
Blockchain became popular in part due to the staggering prices tied to bitcoin. As miners became millionaires overnight. everyone started examining this technology and what it could truly do.
It specifically enables real-time transactions between individuals without the need for a third-party to validate anything. The distributed, anonymous community is in charge of approving the transaction.
This saves an investor time and money, because control is back in their hands. This level of access also increases investor privacy because their data isn’t collected by an intermediary.
Regulations are baked in from the start
ICOs lacked any semblance of formal regulation from day one. Even though the Howey test helped to clarify what was and wasn’t security, regulatory agencies the world over were left to clean up the ICO mess. There were crackdowns and fines, resulting in a number of closed doors.
Unlike their ICO counterparts, STOs are governed by regulations because they are treated like securities the moment they’re created. Each country around the world has their own regulatory agencies that determine how securities ought to be handled, and these regulations ensure the companies are accountable to their investors, who are putting their money in real things (like shares in a company) instead hypothetical projects that might never see the light of day.
Low barrier to entry
Prior to security tokens, there were only two ways that investors could get in early with companies: become an accredited investor, or throw money at the ideas described in an ICO whitepaper.
STOs change everything about this exclusive access because there are so few barriers to entry. Anyone with an internet connection and the will to become an investor could participate.
The challenge is in establishing a robust ecosystem of exchanges. There are already a few platforms that work with security tokens — Polymath, Harbor, tZERO — but there need to be strong leaders here offering user-friendly dashboards and mobile apps. The low barrier to entry won’t be enticing if the platforms are too tough to use.
More versatile companies to invest in
Before ICOs became a crowdfunding rage, the curious investor was left to pick stocks from the market. But the stock market is a truly limited investment because not all companies can go public. Think of the all the big names that are teasing the market with talk of a 2019 IPO: it includes Uber, Lyft, Pinterest, and more. These companies are household names, yet they are still unavailable to the curious investor.
STOs will change the game by letting anyone invest in companies, whether they’re promising startups or profitable, established giants. Instead of relying on IPO announcements, investors can choose to support smaller companies with a solid business foundation and proven financials.
Security tokens are changing the investment landscape
The market will see some serious shifts in response to the emergence of STOs as new investment vehicles. IPOs are already losing popularity as companies favor funding from VCs and angel investors before ever turning to the investing public — taking a company public is just too costly. ICOs are lately few and far between after the crackdown in regulatory oversight. But in their place are STOs, bringing more benefits to the investor that demands an easier, affordable, and secure way to invest.