Security Token Offering is a disruptive technology that came into play just recently. It makes the fundraising process vastly more efficient for businesses by making them more attractive for investors. Nevertheless, such a window of opportunity is limited: as the industry grows exponentially, more and more companies are expected to conduct tokenization, and eventually, it will seize being a factor of differentiation.
How is tokenization beneficial?
1. Increased attractiveness for investors. When a company transfers its securities or other assets onto the blockchain, it becomes easier to trade them, for they are now represented in the form of tokens. It also becomes possible to invest smaller sums thanks to fractional ownership. Accordingly, the assets in question become more attractive for investors. They get reduced risk thanks to the possibility of being traded and a chance to increase profitability with staking or other instruments of decentralized finance.
2. Reduced cost of capital. The conduction of tokenization makes it possible to reach a broader circle of investors with smaller checks all over the world. Combined with increased attractiveness, it provides issuers with a better bargaining position to receive investments on better terms. Accordingly, the cost of capital goes down, allowing company founders to retain more profits and execute more projects.
Why is tokenizing now better than it could have been earlier?
A few years ago, implementing tokenization was not as feasible as it is now. There are a couple of reasons for that.
First of all, today's market is much more liquid. At the moment of issuing this article, it has more capital, more trust, and more possibilities for trading. Not that long ago, licensed exchanges for tokenized securities — and even the idea of using them for trading — wasn't really widespread. Moreover, fewer investment companies were interested in the tokenization market as it was newer and was considered riskier. However, structural barriers have been overcome in the last two years, so it's much easier to buy and sell tokenized securities.
Secondly, the regulatory framework is already more developed. The industry used to lack clear regulatory guidance, which made it risky to get involved. By today, most countries worldwide have developed legislation for tokenized securities or recommendations for applying the existing.
Why will the window of opportunity close?
Today, tokenization is a novice technology embraced by a few companies, which makes those who use it now stand out from the crowd at a significant rate. However, at some point, this technological solution will stop being a rara avis and will convert into a new norm ― like having a website nowadays is. While conducting tokenization provides a business with an edge, in the future, it will be required to keep up with the competition and not fall back. There are three reasons why this will happen.
1. The competition for investors will grow. As of today, 99.9% of companies worldwide are privately held. Accordingly, many investors are deprived of investing in these companies; therefore, the tokenized startups represent a lucrative opportunity thanks to being open for investors. When significantly more companies are tokenized, investors will have a vastly wider choice among the number of possible investments growing dozens of times, thus making it much harder for an individual company to stand out.
2. With the development of decentralization, liquidity won't be that big of a deal anymore; instead, it will become an essential requirement.
3. It will be harder to create an investor community. Small investors aren't attracted that easily: it's necessary to create a community that supports your business, invests in your projects, and spreads your ideas. The problem is that as soon as investors become a part of a certain community, they are less likely to invest in other projects as they have limited financial capacity. Therefore, first-movers have the advantage of building their community, thus creating barriers for entry for other companies, for whom raising capital will become harder.
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