By Vanessa Malone
A series of events led to the emergence of digital securities, from the rise of equity crowdfunding to the fall of the ICO-era. While the majority of issuers thus far have been utilizing Rule 506(c) of Regulation D to conduct a digital securities offering, a new industry milestone was reached in August when two Reg A+ digital securities offerings became qualified by the SEC. The Reg A+ capital raising vehicle aligns closely with core blockchain values of access and transparency as investment opportunities previously limited to high-net worth individuals could be shared and marketed to fans, customers and community members. As digital securities offerings become more commonplace, it’s important to separate the hype from the truth.
Below are 5 common myths associated with digital securities offerings:
A digital securities offering changes or removes steps from a traditional securities offering.
A big misconception when it comes to conducting digital securities offerings is that it alters the actual process for issuing securities. This isn’t true. Digital securities are still securities which means issuers must go through the same process required in a traditional securities offering. Utilizing Reg D or Reg A+ to issue digital securities includes working with legal counsel and other intermediaries to prepare all the legal documents and collect necessary information from investors. What digital securities paired with blockchain technology does do is remove friction and dramatically speed up the process. With technology like what Horizon offers, the entire process is digitized and each step of the process is time stamped on the Ethereum public blockchain for transparency and enhanced protection for issuers and investors.
Digital securities offerings are cheaper than a traditional securities offering.
The issuance of securities, whether traditional or digital, are not automatically cheaper as they must follow the same process. They include the same types of costs. In fact, in order to accomplish the Reg A+digital securities offering milestone, YouNow spent an estimated 2 years working with regulators on their offering while Blockstack spent an estimated 10 months and approximately $2 million on their token offering. Fortunately, their investment as the first of their kind will help pave a clearer path to innovative companies who wish to pursue a Reg A+ token offering.
Regulation will harm the industry or slow growth.
The ICO boom showed what can happen when no rules are in place. Investors lost a lot of money and the industry became stifled with scams and lost credibility. It’s clear that there needs to be some oversight and despite what some may believe, the regulators role is to protect investors and combat fraud. The great thing about digital securities, at least using the most common Ethereum ERC-20 framework, is that smart contracts can program and greatly enhance compliance efforts. Lockup periods, investor count, and other rules and regulations can be embedded in or alongside digital securities, allowing them to follow, enforce, and adapt to various jurisdictions.
Digital securities offerings provide more liquidity.
This point is made a lot and should be clarified. Currently there are no liquid digital securities exchanges but digital securities issued on the blockchain does add greater potential for liquidity as investors are able to trade globally, 24/7, with T+0 settlements through a much more efficient and transparent process. For example, Horizon’s vision is to power a global network of digital securities exchanges that all interact with one another. Through a user-friendly smartphone app, investors can buy and sell digital securities on the Ethereum public blockchain directly from their smartphone. We have an MOU with the government of Antigua to build its digital exchange and are announcing additional jurisdictions in the near future. Join the waitlist here to be one of the first to try our demo app showcasing the technology.
Digital securities are the same as cryptocurrencies.
The industry is doing a much better job at separating blockchain from cryptocurrency but it’s important to reiterate. Blockchain does not equal cryptocurrency. Cryptocurrencies are just one use case the blockchain offers. Digital securities are digital representations of ownership interests in an underlying asset or company. The ownership of shares is what is recorded on the blockchain in a token offering. Each step of the investment process can also be timestamped on the blockchain which is how Horizon technology does.
Digital securities offerings represent what we believe to be the future of issuance and secondary trading. Horizon offers a suite of blockchain software solutions from issuance through secondary trading. Visit https://www.horizon-globex.com/ to learn more.