Security tokens, tokenized securities or investment tokens, are financial securities compliant with SEC regulations. Security tokens can provide an array of financial rights to an investor such as equity, dividends, profit share rights, voting rights, buy-back rights, etc. Often these tokens represent a right to an underlying asset such as a pool of real estate, cash flow, or holdings in another fund. These rights are written into a smart contract and the tokens are traded on a blockchain-powered exchange.

Tokenization refers to a method of converting rights to an equity or debt instrument into a token; digital representation that lives on a blockchain. Tokens retain the investor protections of a regulated asset, but still enjoy the benefits of blockchain technology with instant settlements, borderless distribution (in accordance with legal and regulatory requirements) and counterparty risk mitigation.

Blockchain (or a distributed ledger) as an expanding list of cryptographically signed, irrevocable transactional records shared by all participants in a network (in a peer-to-peer fashion). Each record contains a time stamp and reference links to previous transactions. With this information, anyone with access rights can trace back a transactional event, at any point in its history, belonging to any participant.

A key aspect of a blockchain is use of a consensus mechanism across computers to complete a transaction, rather than using a middleman or a centralized system. A consensus mechanism is a process by which certain assigned nodes in a distributed network agree on proposed transactions and provides a way to record information in the ledger in a manner that ensures data integrity, immutability and consistency. Consensus mechanisms are distributed network governance rules and protocols that enable the recording, completion and execution of transactions under certain conditions.

Smart contracts are another aspect of blockchain technologies. A smart contract is a computer program or protocol, typically running on a blockchain, which facilitates, verifies or executes business processes that could be triggered by events, on-chain transactions or interactions with other smart contracts.

Advantages of tokenization include fractionalization of larger assets, increased liquidity, lower issuance fees, and greater market efficiency. However, the greatest benefit that security tokens provide an issuer is access to a global pool of capital. As these tokens can be sold and traded internationally (when compliant with regulations), they become more fairly priced and, therefore, attractive to investors. This SEC compliant offering is appealing to both institutional investors for its more recognizable structure, and to crypto investors for its technological innovation.

BlockCrowd can digitize stock certificates, bond certificates, real estate titles, shares in limited partnerships and many other proprietary interests. By utilizing blockchain technology and smart contracts, many aspects of the securities industry can be improved.

By tokenizing securities, companies will be able to take control of their equity issuance through programmable code. In addition, the underlying blockchain network eliminates the need for an intermediary and the financial infrastructure, which currently raises transaction costs and hinders the deployment of capital.

A STO has some similarities to a company that is going public via an Initial Public Offering (IPO). In an STO, a company issues security tokens to investors. Security tokens are asset-backed legally binding smart contracts that give investors access to shares of an asset, dividends and even a voice and voting rights concerning business decisions. A Security Token issued via an STO is therefore very similar to a traditional financial security as it is backed by something tangible.

An Initial Coin Offering (ICO) has been common method to raise funds amongst blockchain technology companies over the past few years. In an ICO, the company sells their tokens with the assurance that these tokens will have a utility in the future. A company conducting an ICO sells its Utility Tokens with an intent of distribution, but does not sell equity.

STOs are more akin to traditional crowdfunding but just tokenized. Instead of representing equity the traditional way, you would receive a token which represents equity. Tokenized securities give investors ownership of an asset be it Equity, Real Estate or any other Financial Security.

STOs are viewed as more legally-compliant than ICOs and are better equipped in protecting investors against fraud as STOs effectively use current-existing laws for securities and apply them to blockchain-based companies.

BlockCrowd is a regulatory compliant solution for security token issuance and subsequent secondary trading. Thus, we can take traditionally illiquid assets, like Alternative Investment Funds or Real Estate, attach a digital wrapper to them and allowing them to be exchanged on the secondary market, thereby increasing its liquidity. Additionally, through tokenization, shares of an asset can be fractionalized which greatly reduces capital entry requirements in investments which have traditionally demanded very high minimums. Tokenization will be able to throw away the age-old adage that “it takes money to make money” into the garbage can where it belongs.

As well as increasing access to assets which were traditionally only reserved for the wealthy few, tokenization also increases liquidity. As a result of the way certain assets are structured, there are numerous assets that are quite illiquid, including: Private Equity, Hedge Funds, Real Estate and Startups. Research has shown that illiquid assets are often discounted, selling for less than their actual worth, in extreme cases up to 50% less than their true value. By liquidating one’s assets via tokenization, one is likely to obtain a higher valuation of their assets compared to a scenario in which they would liquidate their assets via traditional means.

Additionally, if you are the owner of a hundred-million dollar property portfolio or a niche Investment Fund or Startup, it can be quite difficult to find an individual with both the net worth and the interest to take it off your hands. By tokenizing the aforementioned assets, the ownership can be dispersed into hundreds of global investors who may want a piece of your property. Through this, a valuable Private Equity or niche asset will never become something that is “unsellable”.

Traditional Alternative Investment Funds are usually much easier to issue and far more cost-effective than going public. However, as mentioned above, the process for secondary trading is highly inefficient, often leading issuers to impose trading restrictions thereby making private securities inherently illiquid. To account for the lack of liquidity, the value of private securities is often discounted preventing issuers from capturing the full value of the underlying asset.

Tokenized Investment Funds are more easily traded on secondary markets without the administrative burdens of traditional Alternative Investment Funds and private securities. In other words, digital/crypto Alternative Investment Funds can have increased liquidity while maintaining the cost-effectiveness of traditional private equities. Since the Private Equity and Alternative Investment Fund markets are trillion dollar markets and the liquidity discount can often be quite high, BlockCrowd can potentially unlock billions of dollars of value from untapped assets.

The issuer determines how the Security Tokens are fractionalized.

An owner of tokenized Real Estate has autonomy over the securities and properties they own which offers investors far more flexibility.

BlockCrowd offers its users premium access to this new Asset Class. In this area, BlockCrowd has the foremost global reach and cutting-edge projects and technology. BlockCrowd are also fully SEC and FINMA compliant throughout.

From an issuance prospective, BlockCrowd has a massive continuously-expanding client-base and investor network all around the globe, including: North America, South America, Europe, Middle East and Asia, thus ensuring that your tokenized project gets mass coverage from our investor network.

BlockCrowd has designed critical technology using the blockchain to deliver end-to-end solutions that make transfers instant, secure and compliant.

BlockCrowd is a fundamental bridge between the traditional offline and crypto economies, offering fund managers a seamless transition toward meeting the growing appetite of millions of new investors globally who want to own real-world assets. The digitization of real-world assets enables fund managers to realize organic growth via new global markets, while offering more stable revenue streams and delivering strong operating leverage.

One could tokenize their assets via a Security Token Offering to supplement their existing fundraising efforts, or they can make it their primary fundraising strategy.