When Bitcoin was first created back in 2009, cryptocurrencies were still only an idea that few people were familiar with. Today, a sizable majority of the populace is aware of this technology, albeit many may not understand how it works. The cryptocurrency market is growing in popularity among consumers, companies, and governments. With the popularity of cryptocurrency continuously increasing, new and unique types of cryptocurrency are being introduced. One such type is equity tokens. In this article, we answer the question, “What are equity tokens in cryptocurrency?”
Tokens vs. Coins
Before we jump into the discussion of equity tokens, it is important for us to know what is the basic difference between coins and tokens. They both fall under the huge umbrella of
cryptocurrency, but they share some unique features which make them different from one another. From an end-user perspective, they can be considered one and the same. However, there are technical differences in how they are developed on a
blockchain.
A coin is a native asset of a single blockchain, whereas tokens are designed by platforms and applications on top of a pre-existing blockchain. and
Ethereum are examples of coins, whereas MATIC, LINK, and USDT are examples of tokens. Coins are the core pillar of a blockchain. There can only be a single native coin for a specific blockchain. However, you can have hundreds of tokens built on top of a blockchain. Tokens are basically used for real-world applications of the blockchain. When a token is created in a blockchain, a developer does not have to write a code, nor does he have to be anxious about how the transactions would be validated. But a coin, on the other hand, is responsible for keeping track of the data of the blockchain, storing its value, and validating transactions. That is why they are said to have a much higher intrinsic value than that of tokens.
What are Equity Tokens?
Equity tokens serve to represent equity in an underlying asset. These assets are usually shares of a company. With the massive uprising of cryptocurrency, companies are looking forward to adapting digitized versions of their equity shares and, thus, the introduction of equity tokens. Equity tokens are a trending and convenient way to raise capital where companies are issuing shares in the form of digital tokens. Equity tokens have become popular only recently due to the upsurge of decentralized blockchains. These blockchains enable companies to easily create, issue, and transfer digital tokens.
Understanding Equity Tokens
The unique feature of an equity token is that they are basically shares of a company, but they live on the blockchain. You share ownership of the relevant blockchain project as a holder of an equity token. As a shareholder, you are also entitled to have control of the company, and this will depend on the number of shares (tokens) you hold. You can compare these equity tokens to buying shares of a publicly traded firm at its initial public offering or on the stock market. When you buy a share, your brokerage account gets credited. The same principle can be applied to equity tokens; in this case, tokenized equity shares are instead credited into your
The conventional method of fundraising faces several operational challenges. Strict rules of the stock exchanges, the difficulty in persuading retail investors, and the reluctance of big financial institutions to lend money are some of the common challenges these companies have to face regularly. However, tokenizing firm ownership as equity tokens on a blockchain gives the company much flexibility. The low-cost approach enables a more democratic technique of genuinely valuing the company based on the active involvement of interested investors. Instead of being heavily influenced by a small number of sponsors or angel investors, market forces mostly determine the value.
How are Equity Tokens Issued?
There are basically two ways of tokenizing the asset of a company:
- Private Token Sale
- Public Offering of Tokenized Equity
Private Token Sale: When venture capitalist (VC) companies invest in start-up businesses in return for stock or a stake in the business, they get paid when the business goes public or is acquired by another business. However,
Solana created a unique example. When they secured an investment of more than $300 million from Andreessen Horowitz and Unique Square Ventures, they did not surrender any stake. Instead, they engaged in a private token sale and sold their VC investors Solana tokens. . This is now becoming a new trend in the cryptocurrency market. Young blockchain-based enterprises may benefit from VC investment without having their ownership stake diluted, thanks to the private token sale. Meanwhile, VC firms make good money by staking, retaining, and reselling the tokens. Therefore, this partnership is a win-win for both sides.
Public Equity Token Offering: Just like an IPO, equity token offerings may also occur. However, there are a number of steps that must be taken before distributing equity tokens to the broader public. In order to conduct buy and sell campaigns for shares or securities, equity tokens must conform to each nation’s ETO regulations. To start an ETO (Equity Token offering):
- The business must first sign up for an exchange platform. This platform will make the path to releasing its equity token easier. It will also assist in maintaining a record of its data.
- Next, it is time to inform brokers-dealers and prospective investors of the business terms and conditions governing the sale of equity tokens.
- A pre-ETO campaign may be run to distribute a certain number of tokens to a select group of participants. This will make it easier for other people to understand the importance of the equity token sale.
- The tokens are offered to the general public if a sufficient amount of funds is not raised during the private sale. This public includes retail investors as well as companies.
Benefits and Drawbacks of Equity Tokens
Equity tokens are beneficial when the required funding cannot be raised through a pirate sale. However, there are benefits and drawbacks that are mentioned below:
Benefits: Equity tokens are a secure option since they are heavily regulated and resemble a standard stock offering. You may exercise, preserve, or delegate control using such tokens. For example, when assets are sold via equity tokens, the buyers have the option of taking part in regulating the business. Equity tokens will continue to have their worth as long as the company that issued them and raised money via an ETO is still in business. Additionally, equity tokens let investors engage in businesses using blockchain technology while abiding by the regulations of the issuing country regulator. It also gives business owners a fresh way to finance innovative products.
Drawbacks: In specific regions, it is illegal to represent shares electronically. Providing digital ownership certificates is governed by local regulations that are relevant to the particular kind of business wishing to sell equity tokens. For example, what is feasible in one nation, like Germany, may not be feasible in another, like the United States. In addition, there are many investors who wish to remain anonymous. Big investors need assurance that all relevant rules and regulations are being followed. These investors are skeptical of the whole blockchain technology because it lets other parties examine the worth of their transactions and investments. As a result, there are many who do not feel like letting a blockchain private key control their held shares.
Successful Equity Tokens
At present, multiple companies are attracted to the idea of Initial Coin Offerings. For instance, Quadrant Bioscience Inc., a biotechnology business, tokenized all of its stocks into Quadrant Tokens and sold 17% of its diluted ownership via a token sale. The company was successful in raising nearly $13M by issuing common shares as tokens for $1.25 each. All relevant operations about the tokenized equity shares are supported by the underlying blockchain technology. For instance, the required blockchain system handles all common corporate events like dividends, mergers, and acquisitions and additional activities like shareholder voting and follow-on stock sale offers.
The Bottom Line
You have a different investing possibility with each kind of token. Make sure to carefully weigh your alternatives. remember that authorization is required before any transactions involving equity or security tokens. As conventional investment organizations learn to comprehend the benefits of blockchain technology, the crypto space is still expanding. As these trends continue, new standards and token kinds should appear.