January 9, 2024

The Future of Private Equity is Tokenized (Why to Tokenize Shares now)

 BlackRock CEO Larry Fink stated said

The next generation for markets, the next generation for securities, will be tokenization of securities.


In this article, you'll learn how tokenization relates to more entrepreneurial freedom, simple accounting, and a competitive edge for SMEs and Startups over larger corporations.


An overwhelming majority (about 99%) of all Swiss companies have no more than 250 employees and thus belong to the small and medium-sized enterprises (Startups included). Although these companies operate in a wide variety of industries, they have one thing in common: their shares are not traded on a public stock exchange.

The main reason for this is that the administrative and especially the financial hurdles for these companies are insurmountable. Apart from the high price of an initial public offering (IPO), which can be up to 56 million Swiss francs in Switzerland, the disadvantages include closer public scrutiny of the company, and the large amount of time required to get listed (four to six months).

Nevertheless, the advantages of an IPO are manifold and include the following:

-      Easy access to new capital

-      Greater credibility through increased visibility and transparency

-      Exit strategy for founders and early investors

-      Potential increase in the value of the share on the secondary market


Sadly, this exclusivity is visible also on the side of investors. Despite the high demand from retail investors, they simply cannot invest in private equity (PE) i.e., company shares that are not listed on a stock exchange.


It is even more jarring when we consider the fact that retail investors make up a large portion of all market participants, and that their buying power has been impressively demonstrated in cases like the Gamestop saga.


The fact that most Swiss companies are withheld from offering their shares to the public combined with the number of investors who don’t have access to PE suggests a great inefficiency in the market.


This is where tokenization and the blockchain come into play. To understand to what extent this technology eliminates the aforementioned imbalance, one must first understand what tokenization is.


According to Nicola Plain, CEO of Aktionariat AG, which specializes in tokenizing equity, tokenization can be thought of as the following:

Tokenizing means creating a digital representation of something on the blockchain. In this case, it is a share of a company.


Hereby it is crucial to understand that a share token is not a digital twin but represents the share itself!


Of course, the digital share on the blockchain has numerous advantages. Among other things, it automatically tracks all transactions in a tamper proof way. Additionally, it also becomes obsolete to sign a declaration of assignment since all rights are transferred together with the digital share. Finally, shares that use open tokenization standards can interact with markets built on top of a blockchain. Therefore, they can be traded more easily.


Taken together, this tremendously reduces the administrative effort for any company, especially if you have many shareholders(e.g., through crowdinvesting).


However, critics usually note that you don’t necessarily need a blockchain to create such a system. But this holds true only if you consider each aspect in isolation and only if you have a third party involved. A closer look reveals that almost all shares of large companies that are traded on central exchanges rely on the order-book principle and are thus dependent on market makers. These market makers are essential because they have an obligation to buy and sell shares. This keeps the order-book market liquid.


This is great for investors, but market makers only enter this obligation if they can generate profits from their trading activity. In the case of stocks of unknown and small companies, the risk of not being able to resell a stock becomes too large. Therefore, it is not worthwhile to “make the market” with those shares. Ultimately, this makes the private equity market illiquid, highly unattractive for investors and leads to the so-called "illiquidity discount". This means that investors show a diminished willingness to pay and demand discounts of up to 80% for any particular share.

Now here’s the solution and it involves Automated Market Makers (AMM), public blockchains and tokenized shares. With this combination, no third party is needed for trading, the price can be tracked in a transparent and predictable manner, and even tokenized shares of small companies can be traded in a liquid way. Another key advantage of these technologies is that they can be used by everyone—retail investors included.


Aktionariat has recognized the potential early on and created the Brokerbot, an AMM running on the public ethereum blockchain. It enables liquid trading of tokenized shares. Therefore, your company is neither dependent on a third party that lists you for millions of Swiss francs nor a paid market maker. Last but not least, your company has a maximum amount of freedom when it comes to the design and implementation of your share offering. That way, you can create an attractive market for your shares in less than a month and use your equity for a simple employee participation program, a phased exit or to raise funds easier than ever before.


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