What Is Tokenized Equity?
Tokenized equity refers to the creation and issuance of digital tokens or "coins" that represent equity shares in a corporation or organization.
With the growing adoption of blockchain, businesses are finding it convenient to adapt to the digitized crypto-version of equity shares. Tokenized equity is emerging as a convenient way to raise capital in which a business issues shares in the form of digital assets such as crypto coins or tokens.
- Tokenized equity is the creation of equity ownership units represented by digital tokens or "coins."
- Tokenization of equity became popular with the advent of decentralized blockchain systems that allow for the easy and affordable creation, issuance, and transfer of digital tokens.
- Tokenized equity has been used in the form of initial coin offerings (ICOs) for blockchain-based projects, although its legal and regulatory status as a traded security remains uncertain.
Understanding Tokenized Equity
Think about tokenized equity like any standard share purchased in a listed company, except that those shares are in the form of crypto tokens.
To draw a parallel with present-day equity share ownership, say you purchased shares of a listed company during its initial public offering (IPO), or bought them on the stock exchange. These shares are then credited to your Demat account. Tokenized equity shares work the same way, except that those shares are in the digital form of crypto coins or tokens, and instead of going into your Demat account, they are credited to your blockchain-hosted account.
The traditional methods of raising capital face quite a few operational hurdles. They include regulatory requirements like regular maintenance of books and accounts and adherence to stock exchanges' strict rules, reluctance on the part of banks and other financial institutions to issue credit, and challenges faced by business owners in convincing private investors to buy parts of a business.
In contrast, tokenizing the business ownership in the form of equity shares on a blockchain offers a lot of flexibility in fundraising. The low-cost method allows for a more democratic way to realistically value the business depending on the direct participation of the interested investors. The valuation is mainly dependent on market forces, rather than on a select group of sponsors or angel investors.
Examples of Tokenized Equity
Many new startups and businesses are deciding to fundraise through initial coin offerings (ICO) that allot token shares to investors. For instance, U.S.-based biotechnology company Quadrant Biosciences Inc. tokenized all of its equity in the form of Quadrant Token and offered 17 percent of its diluted equity via a token sale. It successfully raised over $13 million through the issuance of common shares in digitized form at $1.25 per share. The Quadrant token that resides on its native blockchain represents traditional equity.
The underlying blockchain infrastructure also supports all necessary activities applicable to the tokenized equity shares. For example, all popular corporate actions like dividends, mergers, and acquisitions, and other activities like shareholder voting and follow-on equity sale offers are also handled by the necessary blockchain system.
For instance, Templum is one such blockchain-based platform that is aiming to become the leading regulatory-compliant platform for tokenized asset offerings and their secondary trading.
However, concerns remain about the viability of the business model, and around issues of investor protection. ICOs and cryptocurrency dealings are still in a nascent stage, and tokenized equity issuance and trading add another level of complexity. Lack of clarity around crypto regulations, regular instances of theft and hacking attempts of digital assets, and the anonymous nature of their working have kept the viability and mass adoption of such innovative offerings in question.