Initial public offering IPO is a practice that allows companies to raise fund for the reason to develop and expand their business by allowing the public to buy shares in the company, This practice has been proven effective for more than 400 years, specifically since 1602 when the shares of the Dutch company VOC were offered for the public, to be the first public joint stock company, since that time IPO has evolved and countries adopt developed laws to regulate the process and organizing the buying and selling between the issuers and the investors
The technological development that the world has witnessed and is still witnessing during the past years, especially after the emergence of the blockchain technology on which the cryptocurrency technology was built, and then the emergence and spread of a new method in 2017 to raise fund that where the company will create its own cryptocurrency or token and sell it to the public, the owner of that token will exchange it with services provided by the company at a reduced price, this method is called Initial Coin Offering (ICO), and this method has spread widely due to its effectiveness and ease of offering it to individuals also it doesn’t need for an intermediary where the buying and selling process takes place directly between the individual or investor and the token issuer. The absence of laws governing cryptocurrency trading has led to the existence of many scams companies and many frauds, as a study in 2018 concluded that 80% of the entities that offered tokens through ICO were fraudulent as a result of the absence of laws governing the issuance of these token in addition to the absence of public awareness.
The emergence of a large number of frauds and the problems that accompanied them led to the necessity to search for a method that uses blockchain technology to issue tokens but is subject to regulation and laws. As a result, the concept of Security Token has come out to regulate and protect the holder of the token where that holder will own a stake in the company, beside that Security Tokens allow the issuer to regulate the ownership transfer process and confirm the identity of the investor through KYC before adding them to the shareholders' registry book. This process of raising funds through Security Tokens is called a Security Token Offering or STO, it is very similar to the process of offering shares to the public through Initial Public Offering IPO, but using blockchain technology and smart contract.
Through my work with Deca4 Advisory, one of the most common questions we ask is if the STO process is very similar to an IPO, why I use the new STO instead of the traditional IPO that has proven effective as mentioned for more than 400 years?
To answer this question, it must be noted the blockchain and cryptocurrency ecosystem has fundamentally changed the way of funding for both investors and startups through:
It is estimated that the cost of the STO is 40% less than the cost of issuing through the IPO, as a result of the use of blockchain technology and smart contracts, which allows the asset issuer to program and automate the processes and steps of legal verification of the investor's identity KYC in addition to enabling and facilitating sales and provide exit strategy from investment by reducing a number of intermediaries and steps to accomplish that.
It is estimated that the cost of the STO is 40% less than the cost of issuing through the IPO, as a result of the use of blockchain technology and smart contracts, which allows the asset issuer to program and automate the processes and steps of legal verification of the investor's identity KYC in addition to enabling and facilitating sales and provide exit strategy from investment by reducing the number of intermediaries and steps to accomplish that.
Although the process of issuing and raise fund through STO is subject to legal controls as in the IPO, meaning that it needs to achieve compliance with applicable laws by employing lawyers and legal experts, the fees to achieve this is much less than the fees required for issuance through the IPO, in addition to that the STO provides transparency and direct transacting between the asset issuer and the investor, which reduces broker fees.
The issuance through STO is open and allows all nationalities to invest and the investor needs only to have an account to start investing, unlike IPOs that are usually performed within the jurisdictions in which the business conducts operations, shutting out foreign investors.
The STO provides the ability to own part of the asset or stock of the company using smart contracts via blockchain making the investment more affordable and attractive to investors, a feature that cannot be applied through IPO.
· Spaceurity Tokens and STOs Tokens are decentralized autonomous organizations (DAOs) because Security Tokens and STOs Tokens are decentralized autonomous organizations (DAOs), the majority of administrative responsibilities are done by the executive, stakeholders, panel members, financial analysts, and brokers in the analog realm of the human-run public business are automated.
Trading in Security Token markets is 365/24/7 which allows the investor to trade those assets around the clock Because Security Tokens and STOs Tokens are decentralized autonomous organizations (DAOs), the majority of administrative responsibilities which are done by executive, stakeholders, panel members, financial analysts, and brokers in the analog realm of the human-run public business are automated without the need for centralization.
The United Arab Emirates were one of the first countries to notice the benefits and advantages of technology in general and blockchain technology in particular by adopting the Vision 2021 launched by His Highness Sheikh Mohammed bin Rashid Al Maktoum, which aims to make the UAE among the most innovative countries in the world by stimulating innovation In 7 major national sectors:
In the first phase, the strategy includes 30 national initiatives, including the Dubai 10X initiative, covering a set of new legislations, support for innovation incubators, building specialized national capabilities, a set of incentives for the private sector, building global research partnerships, and changing the government work system towards more innovation. As a result of implementing this vision, the Securities and Commodities Authority (SCA) in October of 2020 issued and approved the law for the activities of encrypted assets, which indicates the importance of all forms of cryptocurrencies, Security Tokens or Digital Assets and Blockchain technology in the country's economic and financial system and the adoption of the system because of the potential to spread and attract investment.
Fintech Products Manager