How to Raise Capital Using Digital Securities


Raising capital is a core part of owning a business, whether you’re at the beginning of your entrepreneurial journey or the CEO of a business you want to scale. There are a variety of capital raising options, each with its own unique set of features, pros and cons, depending on your financing needs.

Traditionally, the most common ways of raising capital have been debt financing and swap financing, whereby, in exchange for an investment, a company’s shares can be offered to venture capital funds, forms of private equity , angel investors and crowdfunding participants.

However, you may face limitations with these traditional methods. The process can be, and often is, bureaucratic, lengthy, complex, and costly. In addition, the institutions that provide the financing are often highly risk-averse, meaning that in most cases, without a fundamentally sound business proposition, your company will not be able to raise the capital it needs.

Despite this, the rise of blockchain technology provides an alternative capital raising strategy that you may want to consider to finance 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’s 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 raising capital differs from traditional venues. These differences are as follows:

Digital

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

Transparent

The information recorded on the blockchain is auditable and transparent; The data is available to everyone at any time. In addition, users can submit issue rewards and benefits, shareholder communications, and issue distributions.

Fast

With less reliance on humans for operational tasks, raising capital leveraging blockchain happens faster than traditional avenues. Businesses can benefit from instant settlement and transactions can be completed in minutes.

Types of digital tokens

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

Fortunately, companies do not need to be in the tech space or have blockchain experience to sell digital tokens to investors; however, there may be natural efficiencies if they do.

A token will generally serve one of four purposes:

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

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

3. Safety data sheet: gives the owner a property right in an asset (for example, raw materials or shares of a company)

4. Non-Fungible Token (NFT): grants the owner ownership rights to a unique and authentic real-world or digital asset

Types of Digital Asset Values

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

1. Debt Security

A security token represents a loan at an interest rate. An investor finances an asset of a company 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 times.

2. Asset security

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

3. Asset-Backed Securities

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

Digital securities can be traded on global markets or Alternative Trading Platforms (ATS). Among the most popular of these platforms is INX — an ATS that generates funding potential beyond traditional markets and unlocks secondary liquidity and value for investors. Unlike many other ATS like Tradeweb, Virtu and Liquidnet, INX offers cryptocurrency trading on a fully regulated platform. Using it, investors can easily and efficiently transfer, list, and trade a variety of digital securities.

How to raise capital through a security token offering

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

To sell tokens to investors, a company will first need to decide what it wants to tokenize, and the applicable value proposition, tokenomics, and supply amount at which the company will sell the token to investors.

A company should then seek expert technical support in various areas, including determining how the digital tokens are sold, whether through a centralized or decentralized exchange or directly to investors. These options are commonly known as an initial exchange offering, initial coin offering, or security token offering.

However, comparing each option is beyond the scope of this article: setting up the token framework, choosing the right blockchain network, ensuring proper smart contracts to govern receiving payments and token sales.

Finally, in terms of the official token sale, a company will often implement a pre-sale promotional campaign to stimulate as much interest in the digital token as possible. The sale window usually closes within hours, but can last for a period of weeks. Investors are usually instructed to pay for tokens in fiat currency (USD, AUD) or other forms of cryptocurrency (Bitcoin, Ethereum, Cardano or others).

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