As one of the financial industry’s biggest developments, security tokens have gained popularity and traction over the years due to their immense potential.
When configured with a bit of expertise and applied practically, security tokens can be used to revolutionize various financial processes through automation. Such processes include shareholder voting and dividend payments or issuances, whose issuance and governance costs are essentially reduced. Out of all the different applications of security token offerings, the one use that has been shown to maximize the revolutionary technology the most is its ability to function as an IPO alternative.
To better understand just how well security token offerings (STOs) work as an alternative to classic IPOs, let’s first go over the pitfalls of the latter:
The drawbacks of a standard or classic initial public offering
Although the standard initial public offering (IPO) has been around for centuries as a method to amass funding, it is no stranger to possessing several significant flaws. The main drawback of IPOs lies within the fact that they have too many intermediaries, which are essentially administrative layers that create long-winding processes.
Having an abundance of intermediaries between the investor and issuing company also entails the issuance of excessively high costs that often act as a barrier to entry. Generally, the average IPO’s underwriting fee can range from four to seven percent of gross proceeds. That figure is not much when you look at a single transaction, but the cumulative amount of $4.2 million is another story.
Another significant drawback of classic IPOs is that the preparation process is immensely time-consuming, taking anywhere from 12 to 18 months on average. On top of all the pre-existing drawbacks, the complications of the design of an IPO can also mean a severe degree of inaccessibility, cutting out a significant portion of potential profit.
How do STOs function and fare as an alternative to the classic IPO?
A security token offering mainly enhances three essential components of successful fund sourcing: ease of accessibility, recording, and consumer or investor convenience. By functioning in place of a classic IPO, STOs offer digitized securities in the form of tokens that represent a certain value. In this case, the tokens represent a share in the issuing corporation. Here are a few concrete functions that are imbued in STOs, which overcome the common pitfalls associated with IPOs:
1. Faster recording of pertinent information
Every security token has a programmable smart contract that records the transaction history of a token and determines how it can be purchased, traded, and sold. Regardless of whether it’s to track the transaction history of a token or determine its legitimacy, investors or stockholders can learn more about their purchase through an embedded smart contract.
2. Transparency of records
One of the main drawbacks of standard IPOs that STOs improve on is the lack of transparency of records in a transaction, which severely compromises investor security to a certain extent. With the help of a smart contract, every transaction that is undertaken during an STO becomes immutable, traceable, and transparent.
3. Ease of trading
By taking an inconvenient layer of intermediaries out of the equation, STOs make it much easier for investors to trade their digitized securities back and forth. As opposed to the complex and time-consuming process of deal execution of a classic IPO’s traditional securities, the tokens in an STO can be traded quickly, similar to a physical exchange.
With security token offering technology evolving at an unprecedented rate, the possibility of STOs fully replacing the current flawed IPO systems is imminent. Despite being a relatively new system, to begin with, it is clear that STO technology holds an abundance of potential in revolutionizing the way the corporations acquire funding.
If you’re looking to learn more about STOs and how to create successful campaigns, get in with STO Filter to see how we can help!
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