Many years ago, a traditional security was represented by a piece of paper — a physical stock certificate. As computers became more and more prevalent, stock certificates largely disappeared, replaced by digital databases.
With the recent arrival of blockchain technology, equity is now able to be placed in a new form that is able to be tokenized: the cryptosecurity.
A cryptosecurity represents a stakeholder’s equity shares in a company, issued and maintained in digital form on a blockchain. All transfers and sales of such shares are also recorded on the blockchain. Both common and preferred shares can be issued as cryptosecurities.
In general, securities offered or sold in the U.S. — including cryptosecurities — must be registered with the SEC unless the offering falls within one of the possible exemptions. These exemptions include the conditions set out under Regulation D, Regulation S, Regulation CF, and Regulation A+. Each of these exemptions provides its own set of benefits and restrictions that an issuer must keep in mind.
By issuing cryptosecurities, a founder can benefit from the instant, traceable and secure exchanges permitted by blockchains. Using a blockchain also makes equity management programmable, as smart contracts are put in place to govern the cryptosecurities and any future actions, such as issuing dividends or distributions.
In tokenizing their company’s equity via cryptosecurities, founders also offer an attractive means of ownership to investors, who, thanks to decentralized exchanges, have more liquidity options than those offered via traditional company fundraisings.
