Everyone wants to invest in private equity, that is, without the high expense.
There’s a new way to do just that, and it’s now even more affordable.
Swarm, a technology platform that creates digital tokens for real-world assets, announced a new pricing model that requires no up-front fees from groups looking to issue security tokens.
Security token offerings (STOs) offer partial ownership of assets such as buildings, businesses or hedge funds. Not to be confused with initial coin offerings, which rose in popularity in 2017 before drawing a wave of subpoenas from regulators in 2018, STOs have garnered increased attention over the past year as an alternative investment method. The digital securities have stricter regulatory oversight and are tied to actual assets.
STOs serve multiple purposes. They offer a way to create a liquid market for assets traditionally difficult to trade, such as real estate. They can also serve as an alternative funding avenue for a startup rather than traditional methods like venture capital. And they offer the ability for small investors to gain access to traditionally exclusive investments like private equity or hedge funds.
Despite STOs increased popularity, Swarm chief operating officer Chris Eberle told Business Insider the fees associated with initially tokenizing assets could be as high as $200,000, he said. This has curbed the number of companies that may look to raise money via this model.
“The models that these various players, ourselves included, were looking at put up a bunch of barriers to people actually getting involved,” Eberle said. “Either in terms of cost, efficiency and scalability, or both.”
Swarm has been weighing different pricing plans since launching the platform in January 2018. Eberle said the company chose to not charge the initial funds it set up in order to move fast and learn as it built.
Last year roughly 20 security tokens were issued in the industry globally, according to Eberle. That’s a minuscule amount compared to the ICO market, which launched 1,075 coins in 2018, according to ICO listing portal CoinSchedule.
Swarm specializes in tokenizing assets into digital securities. Other players in the space include Polymath, Securitize and Harbor, which is backed by investor Andreessen Horowitz and launched a token for a luxury student-housing complex near the University of South Carolina late last year.
Under Swarm’s no-fee model, STOs aren’t required to provide any money upfront. Instead, the issuer of the STO sets a funding goal that needs to be reached before issuance begins. Once that’s achieved, the issuer takes a stake of between .5%-1% of what it raised in Swarm’s own utility token, SWM, with a minimum amount of $10,000 and a maximum of $250,000. By taking a stake in Swarm’s token, Eberle said issuers are essentially investing in the technology and ecosystem backing their digital security.
The issuers’ SWM tokens are secured and held for the lifespan of its digital security, after which the entire stake is returned to the issuer. The stake of SWM also generates money for the issuer every month that can be collected.
Eberle compared the process to putting money in a savings account while still being able to withdraw the interest the deposit generates.
As for Swarm, the infrastructure provider will make money off the trading fees created from trading the security tokens in the secondary market. Swarm is currently partnered with OpenFinance, a US-regulated trading platform for digital assets.
“Pushing the value transfer into the transfer/transaction of digital securities pushes us to access and liquidity for everyone faster, and sets the stage for everyone in the ecosystem to be incentivized to deliver value,” Eberle said.
Swarm has already tested the new model, completing one successful issuance. TheArtToken, a digital security backed by a portfolio of art, surpassed its minimum funding goal of $16 million.
Eberle said 12 other issuers are planning to launch or relaunch a security token under the new model for a variety of assets, including shares of a soccer club, a massively multiplayer online role-playing game and a distressed real estate fund.
To be sure, the market for security tokens is in the early stages, and there’s no guarantee of their success. Trading venues are still being established as they go through the necessary regulatory requirements in order to allow the trading of securities on their platform.
But Eberle is optimistic of the potential of the market, and the impact a no-fee issuance can have to push the industry forward.
“We think there is a ton of value in legitimate assets being brought to market,” Eberle said. “It doesn’t make the entire process free. There are still barriers. The largest ones are legal. We just dramatically reduce the friction from bringing these things to market.”
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