How to Raise Capital Using Digital Securities

Raising capital is a core part of being a business owner, whether you’re at the beginning of your entrepreneurial journey or the CEO of business wanting to scale. A range of capital raising options exists, each with its own unique set of characteristics, advantages and drawbacks, depending on your funding needs.

Traditionally, the most common avenues of capital raising have been debt funding and exchange funding, whereby, in exchange for investment, shares in a company may be offered to venture capital funds, private equity forms, angel investors and crowdfunding participants. 

However, you can face limitations with these traditional methods. The process can be, and often is, bureaucratic, prolonged, complex and costly. Moreover, the institutions that provide the funding are generally highly risk averse, meaning that in most cases, without a fundamentally sound business proposition, your business will fail to get the capital it needs. 

Despite this, the emergence of blockchain technology provides an alternative capital raising strategy that you might want to consider to fund business expansion and development. This process involves raising capital by selling digital tokens to investors. The following discussion will examine how capital can be raised through the use of digital securities. 

What is Different About Raising Capital Leveraging the Blockchain?

Before explaining how to raise capital using digital securities, it is important to understand how this method of capital raising is different from traditional venues. These differences are as follows:

Digital

At the most basic level, the blockchain refers to a digital ledger where transactional data is written, similar to a database. Smart contracts with predetermined rules are written into the block to automatically trigger activities, such as distribution, at a specific milestone or on a specific date. The transfer of securities, creation of the issuance and recording of the transaction all occurs digitally.

Transparent

Information recorded on the blockchain is auditable and transparent; data is available to everyone at any time. Moreover, users are able to send issue rewards and perks, shareholder communications and issue distributions.

Quick

With less human dependency for operational tasks, capital raising that leverages the blockchain happens more quickly than traditional avenues. Businesses can benefit from instant settlement and trades can be completed in minutes. 

Types of Digital Tokens

Generally speaking, most forms of digital asset securities are represented by a type of digital token. Digital tokens are computer-generated, digital representations of value or a particular right in, or to, something. In essence, they are a type of cryptocurrency, meaning that they are secured by a technique known as cryptography.

Fortunately, businesses don’t need to be in the technology space or have expertise with blockchain to sell digital tokens to investors; however, there may be natural efficiencies if they do. 

A token will typically serve one of the following four purposes:

1. Utility token: grants the holder the right to obtain a service or product or generally transact with the business once the business’s capital raising goal is achieved, such as a token offering loyalty-styled discounts

2. Payment token: acts as a means of exchange or payment

3. Security token: grants the holder an ownership right in an asset (for example, commodities or shares in a company)

4. Non-fungible token (NFT): grants the holder ownership rights to a unique and authentic digital or real-world asset

Types of Digital Asset Securities

Security tokens are the most common type of token used to represent digital asset securities. The following are the three most common types of digital asset securities:

1. Debt Security

A security token represents a loan at an interest rate. An investor funds an asset of a firm in part of the whole in exchange for interest — real estate mortgages are an example. Smart contracts facilitate this process by making automatic distributions at predefined schedules.

2. Equity Security

The security token may represent ownership stake in the issuing business, and in most cases, gives voting rights. This ownership stake is then recorded leveraging the blockchain.

3. Asset-backed Security

A security token can represent an ownership stake in an asset such as real estate. 

Digital securities can be traded on global marketplaces or alternative trading platforms (ATSs). Among the most popular of these platforms is INX — an ATS that brings about financing potential beyond traditional markets and unlocks secondary liquidity and value for investors. Unlike many other ATSs such as Tradeweb, Virtu and Liquidnet, INX offers crypto trading in a fully regulated platform. When using it, investors can easily and efficiently transfer, list and trade a variety of digital securities. 

How to Raise Capital Using a Security Token Offering

A Security Token Offering (STO) is a method of raising capital in exchange for value, such as debt, equity or asset-backed securities. In the process, investors are issued tokens as a representation of their investment. 

To sell tokens to investors, a business will need to first decide what it is they are wanting to tokenize, and the applicable value proposition, tokenomics and the quantity of supply at which the business will sell the token to investors.

Next, a business should seek expert technical support in a number of areas, including determining the way in which the digital tokens are sold, whether through a centralized or decentralized exchange or directly to investors. These options are commonly referred to as an initial exchange offering, initial coin offering or a security token offering.

However, the comparison of each option is beyond the scope of this article — setting up the token framework, choosing the appropriate blockchain network, ensuring appropriate smart contracts to govern the receipt of payment and token sales. 

Finally, in terms of the official token sale, a business will often implement a pre-sale promotional campaign to stimulate as much interest in the digital token as possible. The sale window typically is closed in a matter of hours, but it can last a period of weeks. Investors generally are instructed to pay for tokens in either fiat currency — USD, AUD — or other forms of cryptocurrency— Bitcoin, Ethereum, Cardano or others.

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