Cost Benefits of Tokenization vs. Traditional Private Placement (updated for 2020)

Key discussion points:

We believe the introduction of digital securities offerings (DSOs) into the financial services sector will not only stabilize the investment landscape, but will radically disrupt Wall Street’s old-school ways. Forward-thinking technology players are excited that software decentralization will be the disruption catalyst; however, that can only hold true if the intrinsic and extrinsic benefits outweigh the cost. Put simply, do DSOs save time and money? Entoro, having yet to see an analytical review, decided to tackle it themselves.

Based on Entoro’s analysis, the DSO may just rule the securities world and enable us to create faster and more cost-effective financial instruments. The table below captures Entoro’s attempt to summarize the relevant costs of tokenization compared to traditional methods of capital raising.

Source: Survey of Entoro Capital, STO legal counsel, S&P and Pitchbook

Like all financial compare and contrast studies, there is an intellectual debate of the assumptions. In comparing digital securities offerings and traditional private placement costs using paper, there could be countless factors that significantly change the outcome of any simple analysis. Entoro’s analysis shows the savings may be 40% less expensive using tokenization versus a traditional method of raising capital, and believes there is an unlimited number of structures, costs and benefits to be perfectly precise. However, the purpose of this analysis is not to state a final answer, but to ignite debate.

Any discussion around the purpose of tokenization and digital financial instruments must ultimately benefit all stakeholders by decreasing expense, being easier to use, standardizing format, increasing compliance and reducing friction for investors globally.

Barring that, we are still at the beginning of this securities evolution, but great strides have been made in 2019 and beginning of 2020 with regards to the digital securities infrastructure, technology, and market participants mobilizing to meet these conditions.

Below is a list of the tangible and intangible benefits of tokenization.

Tangible benefits:

Along with the tangible costs and benefits, there are numerous intangible benefits to motivate an issuer to want to digitize their offering.

Intangible benefits:

Market participants adapting to new age of securities

Because of changes in guidance and understanding of the regulatory framework since the start of 2019, certain market participants are proving critical in order to conduct a truly compliant digital securities offering while reaping all the benefits mentioned above.

One key market participant originally thought to be replaced by a smart contract’s ability to program certain features is the transfer agent. If you’d like to learn about a transfer agent’s role and the many reasons they’re necessary in today’s digital securities marketplace, Horizon offers an in-depth explanation in a previous blog you can find here.

Briefly, transfer agents are required in most Regulation A+ offerings and while not explicitly required in a Regulation D offering, utilizing a transfer agent in a Reg D offering sets up an issuer’s digital securities for compliant and efficient secondary trading. After any relevant holding period, digital securities can be seamlessly moved from custody to “street-name” for secondary-trading on a US SEC-regulated ATS.

Summary

In summary, we believe the hard costs of undertaking a digitized securities offering are currently lower than traditional ways. From Entoro’s analysis the cost difference over a five-year period may be 40% less, more than compelling to move to a digital format for private placement securities. As tokenization continues to be the driving force behind capital formation, we believe the cost and additional benefits will replace today’s current methods.

Blockchain technology has demonstrated its ability to greatly improve the ways in which we issue, trade and manage securities. The benefits will continue to become more prevalent as the market matures. This doesn’t mean that we have to, or should, completely absolve all former processes that exist in today’s capital markets. Instead, we can combine the two to create effective, efficient, and user-friendly solutions for the next generation of securities.

About Entoro

Entoro is a global investment bank that elevates traditional banking services with the efficiency of modern technology. Connect with us here and on twitter @EntoroCapital.

About Horizon

Horizon offers a suite of blockchain software solutions from issuance through secondary trading. Connect with us here and on twitter @HorizonFintex.

Horizon licenses and operates global securities exchanges.

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