How security token offerings promote financial inclusion

Companies listed on the stock exchange are down 50% from two decades ago because IPOs are now rarely profitable, STOs could just be the answer to financial inclusion and business success

26Feb

What's going on with IPOs?

More than 80% of IPOs were unprofitable in 2018. There's even an emergent trend to take companies private, not public. As such, there were 3,600 companies listed on the US stock exchange in 2017, down 50% from 1997.

In simplest terms, the IPO is no longer the only game in town for companies wanting to raise money. They are more expensive than other fundraising mechanisms, and the costs for setup and compliance to stay public are staggering.

Many companies seek new access to funding, and the Silicon Valley types find it in angel investors and VCs. But not every company is a billion-dollar unicorn that can leverage these kinds of relationships. They don't have easy access to these types of funding rounds and their options are limited.

The global marketplace requires a shift if these smaller, lesser well-known businesses are going to meet their goals and create value for investors. Companies need improved access to capital, no matter their size. And it's not just about getting money from big investment banks, but also from the curious investor who wants to support diverse businesses.

Financial inclusion is the middle ground for meeting the needs of companies and investors alike.

What is financial inclusion?

It's defined as easy access to financial tools and services for all people all around the world.

The issue is tough to tackle because it's global. Many individual companies like Quod in Brazil have been trying to solve it on their own, but it will require a full-on overhaul from the world's governments to make serious progress toward understanding, regulating, and promoting affordable financial services.

It will also require an expanded tech infrastructure. Only around half of the world's population has internet access. Lots of people take this for granted, but these financial tools can't operate without it.

So why is financial inclusion important?

Not everyone in the world has access to financial basics the rest of us know, like checking accounts, credit cards or even ATMs. If they didn't exist, our infrastructure would crumble. There's a huge value add from reliable financial solutions.

But this value can't stay with only the most profitable economies. If we'll ever achieve a truly financially inclusive system, that value needs to be scattered around the world. Financial inclusion is important because:

  • It levels the playing field for investors
  • It increases opportunity for investors and for companies
  • It bolsters the economy and provides prosperity
  • It addresses inequality

In a financially exclusive system, it's difficult for businesses and people to collaborate. Security token offerings (STOs) represent a conscious effort to address this problem of head on.

How STOs foster financial inclusion

STOs borrow all the good parts from other investment vehicles and do away with the parts that didn't work. You only need an internet connection and access to a compatible exchange.

STOs bring the four following benefits with them on the way to making the financial market more inclusive.

A low barrier to entry

Cost plays a huge role in investing for companies and investors. It's not just hardcore career investors, either – how much money you have affects what you can invest in, and how much.

IPOs are limiting to everyday investors because accredited investors, angel investors, VCS, and investment banks get early access to funding rounds at a discount. These options aren't open to the public. Early investments here make for massive returns on IPO day, and those returns are sourced directly from the public's investment.

The public is none the wiser that they're being shut out.

Regardless of a person's financial status, STOs favor no one in particular. New investors only need access to an approved security token exchanges and a cryptowallet. For companies seeking new ways to raise money, there are far fewer administrative and compliance costs to get set up with an STO.

New global regulations and exchange markets

It has been insanely difficult for investors to get access to other investment vehicles outside their country's jurisdiction. The New York Stock Exchange only works with approved, public companies based in the US. Although it's possible to invest in foreign stocks around the world, it requires that you only buy and sell within the international markets where each company is located. Investors have had to work within these limiting boundaries, stalling any arrival of true financial inclusion.

But STOs can open up these boundaries through new global markets. Investors could work through security token exchanges instead of bouncing between different foreign exchanges to get access to international companies.

The challenge here will be to draw up a global set of regulations. Once that happens, the world becomes an investor's oyster.

Access to new pools of investors

Companies only rely on a few different categories of investors. These include the investment banks, angel investors and VCs who shop early funding rounds to invest early and cash out later on.

The only limit on the size of investor pool for security tokens will be how far the regulations extend. And once multiple countries adopt the same regulations, the only limit will be internet access.

The way to connect this new pool of investors with companies will be through a user-friendly investing experience. If the road to investing is riddled with complex jargon and difficult processes, the climb to adoption will be too steep. This means the we need easy-to-use exchanges for security tokens to go mainstream.

Tokenizing anything

Blockchain technology is about more than cryptocurrency. It's also a mechanism for turning a real-world asset into a token. But why do we need to tokenize something we already have access to?

Tokenization adds liquidity to illiquid assets like real estate. It's tricky to turn these assets into cash, but tokens make it easier than ever to cash out — they can simply be bought and sold on an approved exchange.

People need education if STOs are going to create financial inclusion

Blockchain technology impacts how industries deal with transactions, data privacy and real-time access to services. But it walks a fine line: If these innovations seem to be only useful to people operating at a professional level in the tech, finance, or business worlds, then everyday, curious investors get left behind. This is why education will be so important for promoting financial inclusion.

STOs prove that there's a way for everybody to access the value created by entrepreneurship. You don't need to be a career investor or part of the elite finance world to gain entry. Before that can happen, there needs to be digestible, user-friendly information to let everyone, everywhere know that they don't have to be a finance wizard to get true value from rising companies.

Once mainstream adoption occurs, we'll see more involvement from investors who want measurable opportunity as opposed to speculative investments. At that point, the IPO will be forced to change or face extinction.

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