First ever blockchain public equity offering set for 27 November
It's the first of many.
Cryptocurrencies have introduced some new ways of raising funds. The most ubiquitous to date has been the ICO, or initial coin offering. This is when someone sells tokens to traders with the promise of delivering a project to raise the future value of those tokens. In most cases, this ends up disappointing those traders.
The brief age of ICOs, by all indications, is now winding down. ICOs raised $1.5 billion in January, but by July that was down to about $430 million. Now by November, it's down to $76.5 million so far. A large part of the reason is that lawmakers and enforcers have started cracking down on the industry's excesses and making sure they're appropriately registered and conducted as security sales.
Despite their overall shadiness and tendency to attract bad actors, ICOs had some clear benefits. They lowered the barrier for entry, allowed fundraising to occur globally and directly connected everyday traders with the projects they wanted to follow. ICOs also reduced or eliminated many of the costs usually associated with launching a public offering of any kind, helped account for and handle securities after purchase and generally presented a very attractive option for both buyers and those who wanted to raise funds.
The new frontier set to replace it, security token offerings, aims to maintain all the benefits of ICOs, while eliminating the downsides.
And it's going to be taking a significant step next week, with Neufund announcing that it will be launching the world's first ever blockchain public equity token offering on 27 November.
There are many different kinds of securities, including equity securities.
Equity is a stake of a company. When a firm launches an IPO and sells shares to the public, it's generally selling equity in that company. And when you tokenise that equity and turn it into a security token, you have something that could bring those ICO benefits.
For example, by letting buyers participate directly rather than going through a broker and having to pay additional fees associated with those third parties.
That's what's happening next week, with Neufund platform operator Fifth Force GmbH floating its IPO on the Neufund platform itself.
"More than a year ago we made a promise to conduct the first ever legally binding offering of tokenised equity on blockchain in 2018, and we remain true to that plan. The first ETO (equity token offering) will be an ultimate showcase of our product," said Neufund co-founder and CEO Zoe Adamovicz.
To give an example of how far this can reach, Neufund has already on-boarded over 3,000 buyers from 91 countries. It's the kind of global reach that Fifth Force GmbH would probably not be able to achieve with a traditional IPO.
There have been some frictions involved with bringing this new system to the public, however. After a technological audit request from the German Federal Financial Supervisory Authority (BaFin), Neufund has raised its minimum ticket to €100,000, up from its initial minimum goal of €500. This first offering perhaps won't be as accessible as intended, but Neufund co-founder and CTO Marcin Rudolf is confident that this is just a temporary obstacle which can be resolved in time.
"We are convinced the technological audit will have a positive outcome. We remain fully committed to making investment opportunities accessible to anyone, without baseless entry barriers," he said.
The plan now is to go ahead with the €100,000 minimum ticket ETO, and to then conduct the second part of the ETO next year, offering similar investment conditions with the planned €500 minimum.
The growing field
There's a lot of room for disruption in this field and plenty of reasons for the industry to go digital.
For example, a company that wants to conduct a shareholder vote can reach out to all stakeholders via the tokens, regardless of how many times the tokens have changed hands or where in the world they are. The same shareholder vote today might require a company to pay a third party for information on its own shareholders so it can then send them snail mail voting instructions – while hoping everyone involved has remembered to keep all their details up to date along an entire web of third parties and token owners, and that no one's made a typo while entering details into a database.
Neufund's system is built on the Ethereum blockchain, and the tokens themselves are legally binding the same as more physical representations of equity holdings. The vision is for this equity to eventually be traded on cryptocurrency exchanges, the same as other digital assets. Many exchanges, including Coinbase and Binance, are already trying to leap the regulatory hurdles which will allow them to trade these kinds of security tokens.
This first offering is partly a test drive for the system, and partly a way for traders to purchase a stake which will entitle them to a portion of Neufund's profits. Beyond that, Neufund has seven other companies lined up to carry out their IPOs as ETOs.
The age of ICOs might be coming to an end, but in the process, it's being replaced by something better.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, XLM and BTC.