Fund Tokenization Offers a New Way to Raise Capital
It is not too easy to raise capital for a business. Companies need endurance, patience and some gamesmanship. Capital formation both at the public market and private sector never gets easier, especially after the financial crisis. Growth capital is essential to enable a company to look into a series of investments.
Fortunately, advances in blockchain technologies such as fund tokenization have made it now easier to raise new capital in which accredited investors can enjoy access to private deals that would otherwise be in limited supply.
Consequently, companies can then market these private deals quickly, efficiently and without the need of an intermediary. This is different from initial coin offerings.(ICOs).
Benefits of Fund Tokenization
Tokenization is a popular security technology that has been effectively used to protect consumer credit card data from online hackers and thieves. Before discussing the benefits of tokenization, it is best to understand how tokenization works and the main advantages of this payment solution.
In a world where online fraud is increasingly becoming common, it is understandable why customers are concerned about exposing their personal information when purchasing products. Fund tokenization is a technology that eliminates all these risks. When customers swipe their credit or debit cards, at the counter, their personal account numbers are not stored in the merchant’s system. Instead, the 16 digits personal account numbers are replaced with randomly generated token IDs.
Once the transactions are completed, the payment processor sends a confirmation message back to the merchant and will just indicate the randomly generated token ID which is stored in place of the personal information in their system. There is no point at which the credit card data is stored within the retailer’s environment. This makes it almost impossible for criminals to get access to sensitive financial information. Hence, the primary advantage of tokenization is security. It protects an individual from anonymous thieves and hackers.
Here are five additional benefits of this security technology:
#1. Internal protection:
Tokenization does not just stop anonymous criminals from prying into your private information. It also protects your sensitive data from being exposed to those connected to your organization. This includes vendors, employees, and suppliers. Only the payment processor can read the randomly generated token IDs and not anyone else.
#2. Reduced PCI scope:
Tokenization enables merchants to become PCI compliant. Since retailers do not store any sensitive data, they don’t have to invest so much in many resources to protect sensitive customer information. The process also makes audits much easier and cheaper.
#3. Online protection:
EMV is chip-enabled credit cards to offer security to retail shoppers. Before a transaction goes through, the chip must be present. In addition, customers must supply their personal identification number and a signature. However, in the online world, these securities still soon become obsolete because the chip is not physically presented when a person is making a purchase. By contrast, tokenization offers unmatched protection whether the business is conducted online or within a brick and mortar store.
#4. Compatible with other technologies:
Tokenization works with credit cards as well as gift cards, ACH transfers, NFC payments, and Apple Pay. As a business person, you can protect your customer’s personal information regardless of the method they choose to send and receive money.
#5. Other types of information:
Although tokenization is mainly used in the U.S to protect financial information, retailers in many other parts of the world use this security technology for a wide range of personally identifiable data such as patient records, employee files, email addresses, usernames, and passwords. When these types of details fall into the wrong hands the damage can be worse than stolen credit cards.
Another main benefit of tokenizing your payment environment is that it is highly cost-effective because it is relatively easy to set up compared to other payment security features. There is no need to add hardware since most of the changes happen on the payment processor’s side. Few fraudulent losses and cheaper PCI audits make this security technology an investment that pays for itself.
Tokenized Security Offerings and Fund Tokenization
Tokenized security offerings are a new fundraising method that can benefit both companies and investors. Companies that need capital to grow and accredited investors can both benefit from these tokens. In fact, it is one most practical uses of blockchain technology. A tokenized security is the use of a blockchain to connect willing sellers of securities offered by a company with buyers of securities who want to purchase them.
Companies in the early stages of their development fund their businesses through private placements. These instruments are sold by the company or a broker-dealer. They are generally pitched to venture capital funds or accredited wealthy investors.
How Does a TSO Work?
A complex contrast is given to all potential investors on the blockchain. The securities are sold in form of tokens whose ledger is known to all investors. The terms and conditions such as the time of offering and price are specified on the contract. The contract cannot be changed once it is created and deployed. Once it is has been put into the blockchain all potential buyers will be able to access to and therefore any changes to the contract will be immediately reported in the blockchain.
Prospective buyers can expect the public to access the information of the offered security. The company may have a platform in which a potential investor can see if he meets the appropriate qualifications for accredited investors who wish to buy the securities. Once all these factors have been established, and the prospective investors have decided to invest, an investor may directly invest in a private company without the need of a broker-dealer. Moreover, these investments can be turned into small and manageable increments of thousands of dollars. This makes building a portfolio of private securities more feasible.
In conclusion, investing has taken a new turn and enhanced security system makes it possible for small-time investors to break into the market.