A Guide To Reverse Token Offerings And Securitized Tokens

2018-09-26T19:45:16+00:00June 13th, 2018|

An Insight Into ICOs And Reverse ICOs

While ICOs (Initial Coin Offerings) are becoming a lot more popular in recent years, they are facing regulatory challenges, and they were also built for start ups and not already established companies. This means a solution for existing businesses was required and now there is one in place – the Reverse ICO. This solution is fully compliant with all regulations and laws, and this creates a new way for companies to issue securities which are fully tradable. Reverse ICOs follow identical disclosures and regulations, however rather than stock, they are issuing tokens to investors who are tech-savvy and ready to try something more innovative.

How Do Reverse ICOs Work?

A Reverse ICO follows the same audits, diligence, best practices and SEC regulations as standard ICOs with the only difference being that instead of issuing stock certificates tokens are issued instead. Reverse ICOs are designed to meet the needs of successful existing companies which have solid revenue and are ready to launch themselves to the public. They are particularly useful in the case of VC portfolio company exits. Tokens are listed the secondary SEC certified exchanges to essentially create an alternative to the traditional stock market with a superior liquidity. Tokens can act as preferred, common or other innovative classes of equity. Investors in Reverse ICOs are also in a class of their own with rapidly growing portfolios and a greater interest in innovation than in financial statements allowing for reduced financial micromanagement and higher valuations.

An Insight Into Securitized Tokens

The key technological advancement of blockchain has created a multitude of opportunities for entrepreneurs to make a host of exciting projects become a reality. Cryptocurrencies, or tokens as they are better known, have three functions, allowing them to be used for payments (i.e. Payment Tokens), or to give digital access to services or applications (i.e. Utility Tokens). Security Tokens (or Asset Tokens) are the third function of cryptocurrencies and this is a particularly interesting function which insects traditional financial products with this latest technology in the field of real estate, and private and public equities.

The Advantages Of Security Tokens

Securitized Tokens remove the middle man from a number of investment transactions leading to several advantages that prove particularly appealing to investors and entrepreneurs. Some of these benefits include:

  • Lower fees – the need for bankers and other middle men is removed and this in turn reduces the fees associated with transactions. Smart contracts will probably also soon remove any need for lawyers too, exponentially reducing the paperwork, costs and complexity of managing securities for a much cheaper transaction overall.
  • Speedier execution – if there are large numbers of people involved in any deal it will take longer to execute. Securitized Tokens take out the middle men from the transaction and this accelerates the timeline in which issuers can offer the security successfully.
  • Exposure to the global investor base – with traditional investment transactions, there is a lack of exposure to the global investor base. However, with Security Tokens, the asset owner can market their deal to anybody who has a working internet connection, and this exposure to the free market will lead to significant changes in the valuation of assets.
  • A wider investor base – if an asset owner can present their deals to anybody with a functioning internet connection, the number of potential investors will hugely increase. The healthy competition is excellent for the financial market.
  • Automated service functions – Security Tokens allow issuers to use a smart contract to make the service provider function automated via software. This means that there is considerably less need for lawyers and when they are required their role will primarily be advisory in capacity.
  • Less manipulation by financial institutions – when financial institutions can be removed from the processing of investment transactions the chances of manipulation and corruption are reduced.

Compliance And Security Tokens

One major advantages of Securitized Tokens is that when done properly they do not skirt any regulations or laws. As Security Tokens are subject to the Federal securities regulations they remain fully compliant for complete peace of mind.

Are There Any Disadvantages To Security Tokens

When financial institutions are removed from the process of investment transactions, this is generally viewed as being an advantage, however it also means that the responsibilities normally shouldered by the middle man in the transaction then becomes the responsibility of the seller or buyer. Traditionally, financial institutions would underwrite the deal, prepare marketing materials, solicit investor interest and ensure a high level of regulation and security compliance to drive an ultimately successful transaction execution.

Securitized Token Offerings require the issuers to underwrite the deal themselves through third party audits as well as to solicit the interest of investors themselves, prepare their own marketing materials and ensure that their regulatory and security compliance is fully in place. As most traditional investors still hold to the belief that many potential issues cannot execute those functions themselves without a traditional financial institution to assist, this could be problematic.

 

For more information on Reverse Token Offerings contact IBC Group.