An equity token is a digital representation of ownership on a blockchain, similar to traditional equity certificates but stored securely on an encrypted distributed ledger. Companies can issue shares and voting rights through blockchain technology and smart contracts, bypassing the need for an Initial Public Offering (IPO). Lenders can also create debt tokens that can be easily traded. Equity tokens are a type of security token, often issued during Security Token Offerings (STOs), and represent ownership in an underlying asset, such as a company’s shares. They outline terms and conditions, including entitlements like dividends and voting rights, as well as other privileges. While equity tokens can mirror the value and performance of traditional shares, they do not grant ownership of the security itself, distinguishing them from most blockchain coins available through Initial Coin Offerings (ICOs).
Companies that want 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 these offerings. Examples of equity tokens include The Elephant Private Equity Coin and Neufund.
ETOs have distinct advantages that make them unique crowdfunding methods. They are backed by real assets, subject to regulations, have a trustworthy structure, are cost-effective by eliminating intermediaries, offer transparency, and are accessible to a broader audience.
Equity tokens were introduced to revolutionize fundraising, protect investors from ICO risks, and provide a regulated and secure way to invest in digital assets. They can qualify as transferable assets and require licenses in certain jurisdictions, such as the European Union under the Markets in Financial Instruments Directive II (MiFID II).
There are two main types of equity tokens: dilutable tokens and non-dilutable tokens. Dilutable tokens initially offer only a portion of the total tokens, with the remaining tokens held in reserve for future sales. Non-dilutable tokens make all tokens immediately available in the market, with each token representing a fixed percentage of ownership.
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, while private token sales involve selling tokens to venture capitalist (VC) firms.
Launching a successful ETO involves choosing the asset to tokenize, developing an event plan, setting up a hosting platform, ensuring regulatory compliance, preparing an informative white paper, launching a pre-ETO phase, and finally opening the ETO campaign to investors.
ETOs offer advantages for investors, including dividends, legitimized token holding, voting rights, and no brokerage fees.
The adoption of 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 into a single investment vehicle. They offer important equity-like rights, cost and time efficiency compared to IPOs, and target established companies seeking additional funding for growth.
In conclusion, ETOs present a dynamic and innovative approach to fundraising and investment. They provide transparency and legality in the investment process, offer a cost-effective and time-efficient way for companies to raise capital, and target established firms with a track record of success. ETOs exemplify the evolving nature of finance and the potential for innovation in capital markets.
