Why STOs Are the IPO 2.0 | The ORO Letter #1
Want to go public? Go STO, not IPO.
Welcome to the first issue of The ORO Letter. Let’s start off with a quick self-introduction!
We’re Arnab Naskar and Tobias Seidl, long-term friends and business partners, and the co-founders of alternative assets marketplace STOKR. In 2018, we bootstrapped STOKR together with our other co-founders Lukas Cremer and Lennart Ante. Our goal is to revamp capital markets, to give companies a new and better way to raise capital.
If you wanted to sum up what we do, you could say it’s like Amazon for investments, except the assets on STOKR are digitized, more accessible, more transparent, and overall more efficiently designed than what you’re used to from traditional securities markets.
We do this by helping our clients launch security token offerings, or STOs for short, to do their fundraising in Europe. Like a marketplace, we connect founders with investors, but we do it with the technological sophistication that the 21st century deserves.
The reason why we’re kicking off this newsletter is not to shamelessly promote our business—although we can’t guarantee that won’t happen every now and then—but it’s simply that we realized there are inefficiencies in the way securities are issued, distributed, stored, and traded on the world’s capital markets. The good news is that there is a solution to these inefficiencies. The bad news is that it’s still largely misunderstood or simply not known widely enough.
There is incredible potential in the innovation of capital markets, both for investors and founders. Our goal with this newsletter is to shine a light on these opportunities and show how you, too, can capitalize on the revolution of our financial infrastructure.
To start off our newsletter, we figured it would be prudent to start with the obvious: what actually are STOs, and why are we so confident in them?
STOs Are the IPO 2.0
The first IPO took place over 400 years ago in the Netherlands for the Dutch East India Company (VOC). This revolutionary method of raising money helped transform Dutch trading companies into a global commercial empire—the “Dutch Golden Age.” It allowed the Dutch to emerge from the shadow of the Portuguese and Spanish and foreshadowed the rise of British trade, finance, and navy.
Over the next 400 years, empires rose and fell, but the mechanics of IPOs changed very little. Paper gave way to microchips, but stock exchanges remained at the centre of the system and became kingdoms unto themselves.
Enter STOs. STOs promise a second revolution for IPOs, bringing a more efficient system to the table that gives power back to companies.
Blockchain technology, cryptography, and smart contracts have revolutionized money by making it programmable, and they’re now doing the same for capital raising.
Startups and growth companies now have a simpler way to raise the money they need. No more stock exchanges, investment banks, transfer agents, high fees, and delays. And perhaps most importantly: investors of all backgrounds can get early access to the next unicorns and zebras.
The IPO Burden
The IPO process is long and expensive. The whole thing typically takes four to six months and on average costs at least €2.2 to €11.3 million for a small deal.
That means before helping companies get access to capital, IPOs will cost them a lot. This also completely prices out smaller companies.
In recent years, startups like Airbnb and Uber have embraced private ownership and Venture Capital over IPOs. But by the time they finally decide to list, ownership has been diluted, and small investors have missed out on the big growth. Not fair!
The rise of SPACs in the U.S. and similar vehicles elsewhere also show how difficult and expensive IPOs have become. Rather than listing themselves, startups are choosing to be bought by a SPAC with an existing listing.
Why Have IPOs Become So Expensive?
The high cost of IPOs stems from the large number of parties and steps involved. You need a large team of professionals, lots of documents, and a whole lot of time to get the job done.
Here are some of the costs involved:
Underwriting fee: the fee for the investment bank to hold your hand
Legal
Accounting
Transfer agents to manage registered shareholders
Filing costs with government agencies and the security agreement organization
Exchange listing costs
Miscellaneous: roadshow costs, reimbursement of various costs for the underwriter and legal team
STOs: The New and Improved IPOs
Now what if we could take an IPO and, through the magic of technology, make it cheaper, easier, and more accessible, but keep the regulatory protections? And to make it really interesting, what if you wanted to have an IPO for a non-traditional asset like an art or wine collection? Welcome to STOs.
Similar to an IPO, and STO describes the sale of securities. Other than in an IPO, however, the securities sold through an STO are tokenized; they’re security tokens.
What Exactly Is a Security Token?
A security token is a digital token that provides rights to an asset or its revenue or profit. In a simple sense, they are programmable securities, somewhat comparable to Bitcoin, which is programmable money.
The token is a uniquely identifiable set of code that is stored on a blockchain, a special type of database that records who owns each token or fraction of a token.
Tokens are encrypted with Public Key Infrastructure to ensure security and to provide verification of ownership. The blockchain records each public key associated with a token, and the matching private key can be held by the owner in a digital wallet, as opposed to being custodied by a broker.
The blockchain allows issuing companies to see who owns their equity or debt in real-time and enables direct digital communication.
Security tokens can be bought with cash or cryptocurrencies.
Why Is That Better Than an IPO?
Here are the key advantages an STO has over an IPO.
It’s More Affordable
STOs are not cheap, but they’re much cheaper than IPOs. In fact, the cost of an STO starts at around €50,000 to €200,000. With a standard legal structure, venture type, and token architecture, STO marketplaces can help you cut down on your legal and technical costs to help you raise the money you need to grow your business.
It’s Faster
An STO can be organized within three months, although this varies with the complexity and amount that is raised. A company needs to provide details of the issued asset and promote it, but the actual issuance itself can be done within seconds, and clearing and settlement takes minutes.
It Has Greater Transparency
Security tokens are transferred over blockchains, which provides a complete audit trail of changes in ownership and can be seen by everyone on the blockchain. At the same time, blockchain transactions are pseudonymous. This means that unless you shout your address from the mountaintop (or share it on social media), only you and the token issuer know about your holdings.
It Has Better Compliance and Scalability
For traditional securities, exchanges enforce many of the restrictions and rights. But for an STO, rights and restrictions are automatically enforced via the token’s design. For example, ownership at the cum and ex-dividend dates are automatically determined and enforced, no third party-input needed.
It Has Greater Liquidity
STOs are typically available to a wider range of potential investors because of fewer hurdles for investor involvement. STOs are also not locked into a single exchange, but instead can be traded on multiple marketplaces, or even directly between peers.
It Enables New Asset Classes
Do you have a priceless art collection that allows investors to participate in your business profits or revenues? You could issue an STO against your collection. Unlike an IPO, STOs are not restricted to companies. Any liquid or illiquid asset can be turned into cash through an STO.
It Allows You to Have Fractional Ownership
Have you tried to buy some Berkshire Hathaway shares recently? Like Bitcoin, STOs allow fractional ownership, which further helps liquidity.
Security Tokens Trade 24/7
Blockchains never sleep. So you can trade an STO at any time, and within seconds, with none of the problems recently experienced by GameStop traders.
The Development of STOs
The first STO was launched in 2017. In 2019, 55 STOs raised over $450 million. In 2020, 39 of the largest 100 banks in the world were working on STOs and blockchain applications.
STOs were conceptualized following the ICO boom (Initial Coin Offerings). Companies loved the newfound freedom of raising money through ICOs. But ICOs lacked the financial sophistication of traditional financial securities. What if companies could issue tokens that provided shared ownership of a company? Or a share of its revenue or profits?
On the other side, investors were looking for greater transferability and legal assurance. Regulators also began to take an interest.
STOs Have Regulatory Requirements and Protection
In some ways, STOs have even greater regulatory protection than traditional securities and certainly no less.
STOs are considered “transferable securities” by the European Securities Market Authority (ESMA). In total, over 15 countries recognize STOs, and the numbers are growing.
The ESMA leaves the exact definition and implementation of European law to each EU member state. So far, Luxembourg has taken a lead in the EU as a jurisdiction thanks to its flexible corporate and securities laws.
Final Thoughts
With the advantages of STOs over IPOs, the rise in startups, and the growing legitimacy of cryptocurrencies, expect STOs to lead us into the IPO 2.0 era.
If you want to read more about innovation within capital markets, stick around for the next issue of The ORO Letter. In the meantime, make sure you keep in touch with us on our social media.
The secondary market is where 99% of the complexity of capital markets are. What does the secondary market with STOs looks like? How is liquidity and price stability ensured?