Security Token Exchanges May be the Next Phase in the Finance Evolution

June 18, 2020

Cointelegraph – June 18, 2020

In 1996, there were over 8,000 public companies listed on exchanges in the United States. Fast forward to 2020 and there are only approximately 4,400 — a drop of 46% despite the fact that the S&P 500 quadrupled in value. Conventional wisdom would lead readers to think they are looking at a misprint. This paradox has led to efforts from both the public and private sectors to help jump-start initial public offerings. Unfortunately, legislation like the Jumpstart Our Business Startups Act, or JOBS, has not had the desired impact, and companies have instead elected to stay private longer than they once did. While we could chalk this up to capital being freely available via private equity and venture funds, the simple fact is that, for smaller companies, the benefits do not currently outweigh the burden and expense of going public.

Legislation like Sarbanes-Oxley Act, or SOX, the additional scrutiny that comes with being a public company, and byzantine U.S. equity market structure are all partially to blame. Fortunately, the pace of formation of private companies is at a record high and entrepreneurism is alive and well in the U.S. There has been a 106% growth in the number of private equity-backed companies from 4,000 in 2006 to more than 8,000 in 2017. While we champion the formation of new innovative companies, the shift from public to private ownership has had the negative side effect of locking out most public investors from the rewards of ownership. AOL, Microsoft, Intel, Facebook and many other successful companies went public early in their evolution. Now, with large companies going public later, private investors reap most of the financial gains by the timeshares that are available on a listed exchange.

Secondary equity market trading has been transformed by technology, but capital raising on public markets is stuck in the past.

Technological innovations have so far not significantly improved the process of going public on an exchange. Transformational tech companies are going public in an almost identical fashion as did their grandfather’s rail and industrial companies decades ago. However, there are green shoots to be seen in fintech today that could help the financial markets evolve and improve the path to becoming a public company. Novel technologies such as blockchain are starting to be embraced by stakeholders in financial industries. One application of blockchain technology that has been getting particular notice is security token exchanges.

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