Why is dexFreight pursuing STO and not ICO to raise funds?
Security token offerings or STOs have gained significant traction in recent months. One of the reasons can be because ICOs have cooled off due to regulatory issues. Our community continually asks us what an STO is and why are we not raising capital using “traditional” ICO like many others. This blog is to clear the air with regards to our rationale against using ICOs to raise capital. It also ties to why we are pursuing dual token model to separate utility and security tokens.
Following are four reasons for NOT raising funds through ICOs: (TL;DR):
- We want the dexFreight community to own the company’s equity instead of minted token, participate in the company’s long-term success, and at the same time be able to trade and liquidate tokenized equity easily.
- We believe a single token model presents challenges in a B2B platform from a user’s price stability perspective. Our dual token model includes a stable utility token to run the platform (token as a fuel or TAAF), security token to raise capital, and capture platform value.
- Utility tokens in single token model ICOs are both assets (according to SEC) and expense (cost of goods sold) since it will be used to access the application. This creates major complexities for company accountants.
- dexFreight will serve small, medium, and large logistics companies. Having a positive reputation and credibility is important.
Reason 1: Tokenization makes it easier for the dexFreight community to trade and liquidate ownership of company stocks.
Tokenization is a process of creating a digital representation of ownership of an asset. As a result, they can be recorded, transferred, and liquidated easily. Blockchain maintains an immutable ledger of transfers and ownership of such assets. In that regards, any physical asset can be tokenized and traded to create immediate liquidity given they make economic and regulatory sense.
We are all familiar with owning stocks in a company. Buying, selling, and transferring stocks is not easy. In most cases, you don’t even possess the stock. Somebody else holds it on your behalf. And then, there are fees incurred during ownership change to pay for a transfer agent that maintains a ledger of such changes. As you may have connected the dots by now, tokenization of stocks will reduce fees paid to transfer agents, custodians, banks etc.
Reason 2: Business owners need price stability, something single token traded in the secondary market cannot provide.
The logistics industry needs market stability. As an example fluctuation of variable cost like fuel can considerably affect the bottom line. These users will never accept utility tokens fluctuating wildly on a daily basis. Single token models adopted by some startups with B2B platforms run the risk of their tokens becoming too volatile after being traded in a secondary market.
If the same token provides access to the platform and is used for payments, users will find it extremely difficult to manage volatility. Our B2B platform serves the logistics industry, which operates on a very tight margin. For this very reason, our utility token is a stable token to provide users with the stability they need to run their businesses.
Reason 3: Is a utility token in a single token model an asset or expense?
Another reason for a dual token model and separation of the two tokens is related to reducing accounting complexities for companies. If a company buys utility tokens in the single token model, then those tokens will be deemed a security. That means they may have to report it to tax authorities as an asset while using it in the platform as an expense. So, what is it? Is the token an asset or an expense? Can you imagine the accounting nightmare this can create for companies? This way companies can report utility tokens as a cost of goods sold/expense and security token as an asset (if they hold any.)
Reason 4: “We will NOT be your partners if you do ICO.”
When we approached companies for partnerships, we heard this statement over and over again. They were very clear in telling us that they don’t want to be associated with a startup that may run afoul with regulatory agencies here in the US or abroad because of negative attention received by ICOs. It is imperative that we listen to potential customers for the long-term success of the company.
Tokenization and tokenized platforms are gradually taking shape. We’re certain that the space will continue to evolve and take shape in the future. We are committed to democratizing investment opportunities for unaccredited investors in the US and abroad, through legal avenues such as crowdfunding, Reg A+. We are certainly open to hearing arguments against our rationale to raise capital through STOs.