What is an Equity Token Offering (ETO)?
An equity token offering is a certificate of equity that is recorded on the blockchain. It is based on various blocks in the form of encrypted data. In terms of functionality, it is similar to book-form equity certificates. In this manner, equity tokens contain the same contractual information but they are recorded on a distributed ledger instead of a share register.
A firm that is not going for a traditional initial public offering (IPO) uses blockchain and smart contracts to publish shares. The buyers of the shares also get voting rights that took place in a digital manner on a blockchain.
At the same time, lenders have the option to generate debt tokens that represent financial obligations of the firm allowing it to sell and purchase loans in a trading environment.
Equity tokens are a type of security token that are issued during Security Token Offering or STOs. In this manner, the purchasers of STOs are able to represent a share in the ownership of an underlying asset that could be the propriety of the firm. At the same time, STOs can also issue dividend, appraisal rights, subscriptions, and other types of incentives.
Additionally, equity tokens follow traditional share value and track their performance on blockchain. In this situation, equity tokens are called derivatives that do not contain ownership rights. Equity tokens represent underlying assets in a direct and indirect manner.
The firms that issue equity tokens are subjected to regulatory scrutiny or required backing of investment banks to ensure legal fundraising.
Utility of Equity Tokens
Equity tokens are generated as a substitute for the traditional model of fundraising via IPOs and ICOs. Equity tokens are approved as transferable assets because they are digital representation of backed securities such as derivatives and equities. Equity tokens are also sold as public or private offerings.
The flexibility of equity tokens is proportional to investor participation. Meanwhile, investor participation is dependent on factors such as blockchain generation, monetary incentives, and token performance on spot market.
How does Equity Token Work?
Equity tokens is another form of security token that is used to gather funds from potential investors through tokenization of assets in a private sale. At the same time, tokenized equity is also traded on public platforms for early seed round, if the token is registered on a regulated equity token exchange. Here are some steps in launching an ETO:
Exchange Registration
A firm that intends to launch an ETO has to apply for registration for a trading platform. In this manner, the firm will be able to record all details regarding share transactions and issue equity tokens for investors.
Pre-ETO
For a pre-ETO, issuers publish a specified amount of tokens that are available to a limited number of investors. If this private sales is meets the required funding goals there is no public sales and vice versa.
Enterprise Terms and Provisions
The ETO issuer has to inform the broker-dealers or investors regarding terms and provisions for trading the ETO tokens.
Listing and Trading
Private Token Sale
Private token sales allow blockchain projects to invest in startups as VCs without diluting equity. In this manner, VCs are able to stake their holdings in the form of post private sales tokens. Furthermore, VCs can resell private tokens such that both issuers and investors are able to gain profits using this model.
Public Token Sale
If an ETO extends fundraising after initial round, it conducts ETO token sales on public trading platforms. However, a firm has to adhere to the native federal legislator for public token sales.
Advantages of Equity Tokens
- Equity tokens are safe since they follow the regulatory guidelines of traditional stock offerings.
- Equity tokens grant delegation, ownership, and maintenance rights to investors.
- ETOs retain value until the issuing firm that has gathered the money during fundraising remains operational.
- ETO allows traditional firms to invest in blockchain-based firms while following the regulatory guidelines of federal financial regulators.
Conclusion
ETOs are regulated form of fundraising that allow enterprises to conduct blockchain-based fundraising. There are some risks associated with ETOs such as restricted legal jurisdiction.
