By Doug Clinton of Loup Ventures
Security tokens will enhance the liquidity of private security offerings, provided there is sufficient on-going information about those companies available to investors, but this liquidity will also have another effect: real-time mark to market. In today’s private securities markets, mark to market is generally done on a quarterly basis as funds analyze their holdings and adjust book value based on things like new financings and comparable company valuations. In most cases, unless these funds are entities that disclose holdings to the public like mutual funds, for example, the private marks stay private. They are only shared with the LPs of the funds, not the public. When security tokens are freely traded on exchanges, as is the necessary intent of most offerings to achieve the benefits of liquidity, these marks will be publicly available as a reflection of supply and demand for the token on security token exchanges.
Without a real-time price that reflects all reasonably known information about a company, as well as human emotion that always impacts the valuation of securities, there cannot be a liquid market for tokens of that company. Even with limitations on what kinds of investors can participate on security token exchanges, there will still be public marks for them to assess. Therefore, any company that seeks to do a security token offering must be comfortable that their token will be marked to market real time when things are both good and bad. These companies won’t have the luxury of private marks when they stumble. This is perhaps one of the few downsides of enhanced liquidity.
Consider Spin, a bike/scooter company that is looking to raise $125 million via a security token offering. The company is competing in one of the hottest venture spaces ever, so demand is high. Prices for scooter companies are aggressive relative to the progress of the industry in total (see Bird). Whether you have doubts about the scooter industry or not, it’s reasonable to wonder if the market demand for the theme will be as strong a year from now as it is today. If it isn’t, and the degree to which these companies can build rapidly scaling businesses will go hand-in-hand with that assessment, investors may look at valuations differently than they do today. Spin’s mark will be public and Bird’s will not, although Spin will be a barometer for the industry in total.
This isn’t to discourage companies from considering security token offerings, but rather to encourage them to go into offerings knowing the realities. Many things in life tend to be a relative tradeoff between freedom and safety, and STOs [security token offerings] are no different. Companies must be willing to give up the safety of private marks to enjoy the freedom of a robust, liquid market for their shares and all the benefits that come with that.
Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.