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Security Token Offerings: The New Way to Raise Capital?

The disruptive impact of covid-19 is catalysing change in the business world. As industry leaders are forced to adapt to unique and challenging circumstances, opportunities have been created to redefine problems, consider new solutions, and transform age-old paradigms.

Adjusting to the post-covid world, many companies have discovered an increased need for capital. And subsequently, many business leaders have begun to explore new and creative methods of raising capital, such as through security token offerings (STOs). Indeed, in 2020, the security token market cap grew by over 500%. This number is only expected to grow, with estimates predicting that the market will reach over US$2 billion by the end of this year.

But what are security token offerings that are shaking up financial markets? Essentially, an STO is a unique token issued on a permissioned or permissionless blockchain, representing a stake in an external asset that already has value, like a car, house or equity in a company.

Combining blockchain technology with the requirements of regulated securities markets, the advantages of STOs are numerous – and this is particularly true when it comes to financing the extractive industry.

Very often, mining companies need to raise significant amounts of capital. This is because mines are hugely expensive to construct, with each mine bespoke designed to accommodate regulations, geographical locations, and resource requirements. To add to costs, the process by which miners identify reserves, test geological deposits, and acquire licenses to mine resources is expensive and lengthy.

Traditionally, the only viable option to secure the necessary funding was to dilute equity in the mining company through a public listing or through external investment. But STOs present a shift in the way in which mining companies can raise capital.

For one, STOs cut out intermediaries. This makes them an affordable and efficient means for mining start-ups to raise the necessary capital directly from the market. No longer needing to rely on expensive venture capital funding or angel investors, mining companies can use STOs to easily and securely access the capital market at a fraction of the cost.

One way to achieve this is for mining companies to tokenise their un-mined resources and sell those tokens to the global market at a discounted rate. Through this process, mining companies can raise capital while avoiding predatory financing.

But it is not only entrepreneurs that enjoy the benefits of STOs. Investors can reap rewards too.

As an upgraded and highly regulated digital version of traditional securities, security tokens display the ownership information on the blockchain, which protects the tokens against fraud and misuse. This means that for investors, STOs offer a secure and transparent direct investment in a company.

STOs also allow for flexibility. Unlike other forms of equity ownership in which investors are typically required to bet on the whole company, STOs allow businesses to raise funds for a specific project or division.

Most importantly, however, STOs have low barriers to investing. This is because STOs can offer fractional ownership, which gives smaller investors direct exposure to mining projects without having to invest in listed mining companies through shares or funds. Typically, this kind of investment opportunity is reserved only for very high net worth individuals, commodity houses and funds. But no longer. Now, a much wider pool of investors can participate.

Having worked with private investors in the Gulf, particularly in the UAE, to match investors and financers with opportunities across sub-Saharan Africa, I know how important widening access to investment opportunities can be. I have witnessed first-hand how enabling more to participate and benefit from investment in mining projects can simultaneously spearhead development. For example, I have seen the transformative power of increased investment in the extractive industry in Zambia, with the country now constantly unveiling new projects in copper, gold, manganese and associated metals.

As Africa’s extractive industry continues to grow from strength to strength, I anticipate that STOs will play a wider role in this growth. As a transparent, flexible, and highly regulated digital version of traditional securities, STOs are here to stay, enabling more businesses access to vital capital whilst levelling the playing field to allow more investors opportunities to participate in growing markets.

While it is evident that STOs present exciting opportunities for entrepreneurs and investors alike, the concept of STOs is in its infancy, with legislation in this area still developing. For instance, in the US, the Internal Revenue Service has stated that digital currencies should be treated as property for tax purposes. However, the US Securities and Exchange Commission has yet to provide definitive guidance for how digital assets should be accounted for. Nonetheless, as governments strive to keep up with the pace of change and develop regulations, STOs will become increasingly popular with companies and investors.

STOs may encounter teething problems, but it is clear they represent the next phase in the evolution of the financial market. For the extractive industry, in particular, STOs are a lifeline.

By Zuneid Yousuf, Chairman, Zumran Group

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