Since the discovery of innovations that can be procured through integrated concepts- blockchain, tokenization, and smart contracts; the fundamentals of real-world assets have drastically changed. Tokenization is a dynamic tool that enables us to extract the optimum value out of any asset, be it tangible or intangible.
In this article, we are going to understand how businesses can extract liquidity through the tokenization of an asset, what are the challenges they face in executing a Security Token Offering, and how to promote an STO.
The liquidity of any asset essentially enables a firm or a person to buy and sell an asset real quickly without causing major fluctuations in the price of an asset. Tokenization primarily facilitates converting a real-world asset into its digital representation such that the ownership of the inherent asset is defined and tracked on a distributed ledger. Through blockchain and smart contracts, these digital tokens can be easily bought and sold on secondary markets that have access to a global network.
Any asset, even a firm’s receivables can be tokenized. These digital tokens can help raise funds by exchanging them on a global peer to peer market. The integrated concept of smart contracts aid in the transfer of rights of an asset with all the transactions recorded on a shared and decentralized ledger. This further enables a corporation or an individual to raise funds from assets like real estate property or private securities, which are highly illiquid by nature.
The question is how do small and medium businesses extract liquidity from tokenizing and which asset can be tokenized?
The Covid-19 pandemic has brought the economy and businesses to face uncertain times. This is especially relevant for small and medium-sized businesses, who are now facing a larger economic impact. Can tokenization be a tool that helps attain value out of illiquid assets and thereby raise funds to minimize the impact on SMEs?
SMEs have limited access to receiving finance from banking institutions. Owing to inaccessible data of SME credentials including payment history, records, performance, and financial records, the small and medium-sized businesses face unfavorable financing terms. They either may not receive financing at all or if they do, the terms of interest rates are high.
Tokenization enables a firm to tokenize their receivable assets in exchange for working capital. Instead of relying on bank lending, which does not work in the favor of SMEs, they can tokenize their account receivables in exchange for capital. Instead of waiting for two or three month period to receive their credit amount, a small firm can tokenize their receivables. Financial institutions can provide working capital in exchange for these receivables thereby enabling a firm to access liquidity from an illiquid asset.
Moreover, businesses can mint tokens even for a redeemable asset such as tea. Tokens representing tea vouchers can be raised on a blockchain platform. The firm can use these tokens as collateral against a loan. Ownership and transfer of these tea tokens are monitored through smart contracts.
The small businesses can even tokenize their commercial property on a peer to peer platform. Through tokenization, a physical property can be fractionally divided into several digital tokens. Instead of selling their entire property, a firm can sell a portion of their property in the form of digital tokens to an international audience on a secondary marketplace. The fractional ownership reduces the barriers of capital and in-turn enables a wider audience in the equation. This further facilitates a firm to extract liquidity from the commercial illiquid assets.
While the concept of tokenizing an asset does sound transformative, it is yet relatively new and the ecosystem does have challenges to over. Security tokens representing a real-world asset are raised through a process of Security Token Offerings. In this process, an issuer raises money by selling an asset on a peer to peer network. While a buyer gains rights to an asset in exchange for capital.
However, although tokenization holds huge potential, some concerns need to be addressed for it to function in an efficient and compliant manner.
There is a legal ambiguity about blockchain infrastructure and securities raised on the platform. Moreover, legal compliance concerning security tokens varies from one jurisdiction to another. Since security tokens on a blockchain encompass an international audience, it is necessary to have a uniform legal infrastructure across all nations. Moreover for tokenization and blockchain to reach mass adoption, a legally compliant structure is necessary.
There are various costs associated with the development and completion of an STO. First and foremost, development on a blockchain-enabled infrastructure requires expert talent which converts to greater costs. Secondly, launching an STO will subsequently require marketing and promotion to bring a wider audience. Third, there are legal costs associated to ensure that an STO is legally compliant.
While security tokens themselves fall under certain compliance, the decentralized network on which they are created yet has an unclear framework. The most popular platform for creating dApp and security tokens is the Ethereum blockchain.
However, the decentralized network is open-source and hence information about securities can be extracted. But this is in direct contradiction to the investor privacy laws. The unclear framework is one of the loopholes that an issuer needs to address before launching an STO.
While an ICO allowed communities to participate in the token sale easily and without any intermediaries, it might not be such a case for an STO. Since a security token has to comply with regulations, there might be limitations to investor participation. This would, in turn, reduce the size of an investor pool and the token issuer might not be able to reach a wider community.
In traditional markets like stock markets, there are reporting requirements performed every quarter. This is to ensure transparency between the company and the public. However, in the case of security tokens, there are no clear rules defined on reporting requirements that an issuer of the token has to go through.
It is more true than a security token offering yet needs to have a clear paved way to add value-based innovations. However, it is also true that they hold immense potential to revolutionize the way we interact with assets. Moreover, even with all the complexes, STO’s are still a legally compliant way to raise money from the investors.
For an issuer to bring attention to their STO, promoting the project to a mass audience is imperative. To reach a wider number of viewers, a company needs to develop marketing strategies, a website entailing all the important details, promoting it on different platforms, and ultimately launching it on a suitable network.
Here are ten strategies that an issuer needs to adapt to promote, market, and launch their STO:
Once an issuer has a clear framework on the project, an issuer needs to develop a dedicated website such that it brings mass attention. The website should mention all the relevant details of the product in a well-structured manner. Additionally, all the details that an investor seeks should be made easily available on the platform.
This is perhaps the most important step in launching an STO. Ensure that your project meets all the regulatory compliance and is legally structured under your jurisdiction. Institutional investors have a knack of verifying each aspect of legal compliance in a project. Moreover, this would add trust among the investors. Make sure that all the legal documents are readily and easily available through your website. The legal aspect has also become a popular marketing tactic used by STO issuers.
A whitepaper has been an important aspect of an ICO and is as relevant to an STO. It gives potential investors an idea of what the project is, how are the tokens distributed, what are the benefits that they can expect, and a future roadmap of the project. It also gives investors a deeper understanding of the legal and compliance aspect of an STO.
While this aspect is relevant for almost any industry, content is one of the most effective in the blockchain industry. Content helps clients understand the project in a variety of ways and facilitates a client to make a decision. Guest blogging, publishing blogs on the website, graphics, articles, etc are all effective ways to drive attention towards your STO project. But also engage in SEO, link building on high authority websites to market tactfully.
The blockchain industry has leading media players that have millions of followers and subscribers. This makes the media one of the most effective instruments to market your product. Release a well-drafted press release on such platforms to drive users to your token sale.
List your STO token on an exchange platform so that users of the exchange can trade your token. This would further attract potential investors to your token and your project. At the time of listing, make sure that you add all the relevant details including the whitepaper, website link, token statistics, etc.
Social media has become a powerful tool to promote your goods and services. The same goes for your STO project. Different social media platforms allow you to interact with a larger community. Further, new social media platforms like Telegram have emerged that specifically cater to projects in the crypto and blockchain domain. Reddit, Twitter, Facebook are some of the sites that have become popular for marketing an STO.
Several online forums have become popular for discussion of blockchain and crypto projects. These forums also allow the issuer company to directly address concerns of their clients and investors. They also help an issuer to review feedback about their project. Reddit and Bitcoin talk have become prominent forums to engage in such discussions.
Multiply your investors by networking partnerships. The different means through which you can grow your investors include referral programs and promotion partnerships.
Potential investors who are genuinely looking to invest are bound to have questions regarding the project. Ensure that investors can easily get their questions answered. Create a dedicated team that answers queries of your investors. Engaging with your investors would also build trust for founders, the team, and the project.
If you are planning an STO for your project then please see how LCX is tokenizing projects via its STO Launchpad.
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