4 Alternatives To The IPO
Investing in the stock market is overhyped.
Placing a bet on a new company can be as exciting as gambling at the casino. This high is the reason that many founders and early investors become millionaires overnight.
Just consider the success stories that dominate the business headlines. Facebook raised more than $16 billion for their May 2012 IPO. Surely IPOs hold some sort of value?
The IPO is definitely a valuable business mechanism, but it’s not actually helpful to the curious investor. These people don’t stand a chance of making as much money, because they miss out on multiple rounds of early funding. These rounds occur prior to the official IPO date, and they only let investment banks, VCs, angel investors, and accredited investors in, driving up the IPO stock price ahead of time.
There’s a dire need for improved investment vehicles beyond the IPO. We’ll explain four viable IPO alternatives, along with the pros and cons of each.
Initial coin offerings (ICOs)
Realizing the exclusivity of IPOs, many investors turned to ICOs as the next-best investment vehicle. ICOs gained popularity with the rise of blockchain, the technology that powers cryptocurrencies like Bitcoin.
ICOs were attractive because they opened up investing to everyone. You didn’t need to meet accredited-investor-level criteria. You just needed a full crypto-wallet and access to either an ICO platform like Waves, NXT, or ICO Bench, or access to the company itself. Then you could freely choose to back any company or project by trading your cryptocurrency for ICO tokens.
Despite the technological and financial advantages of the ICO, things fell apart on the human side. ICOs were completely unregulated, and lots of people got burned by false promises. ICOs call for investment in a future product or service, not something tangible. Bitcoin.com reported that 46 percent of ICOs in 2017 failed. Tokendata found that 902 crowdsales took place in 2017, and of these crowdsales, 142 failed at the funding stage and 276 failed since then.
ICOs exist in a regulatory gray area, earning attention and ire from regulatory agencies like the SEC. ICOs were promising, but they couldn’t operate in a way that protects the investor.
ICOs absolutely opened up the investment playing field, but they did so in a risky way and generally fell out of favor.
Security token offerings (STOs)
When ICOs took a beating from regulatory agencies, many investors took a step back to look at what they were really getting into. They wanted something legally compliant so they wouldn’t be hoodwinked by companies misrepresenting themselves. This is where STOs took the lead.
In the United States, the SEC determined that most ICOs were distributing securities, not utility tokens. This means ICOs were beholden to all the rules and regulations governing conventional securities. Many other countries also followed suit on this determination, stating that ICOs had to follow financial regulations or face consequences.
But there are two things holding STOs back from widespread adoption: education and cohesive regulation.
The vast majority of the public doesn’t know about STOs. They might be familiar with blockchain technology and know crypto buzzwords, but they need education in order to see the true accessibility and security advantages of these tokens.
Regulations are also holding security tokens back from mainstream adoption. Only accredited investors can invest in security tokens in the US right now. Other countries have regulations governing securities, but they are unique to each country.
In order to make STOs more inclusive, regulatory agencies around the world need to collaborate on a standard set of regulations. At that point, anyone in the world could easily buy or sell security tokens.
Instead of investing in a product or service via traditional crowdfunding like Kickstarter or Indiegogo, people can back a company financially in exchange for partial ownership of the company.
The biggest benefit of equity crowdfunding is that anyone can get a stake in any company. Only private companies choose equity crowdfunding, so you won’t be locked out of private funding rounds.
The downside of equity crowdfunding is that it only happens via a funding portal or broker-dealer. Both of these limit the investor’s options of what they can invest in. There are also certain restrictions: you must be eighteen or older to invest, and you can only invest a certain amount based on your net worth and income.
These investments are furthermore illiquid and may require some time before you can trade them. They’re also risky — there’s always a chance that the company flops, so only invest what you can comfortably lose.
Most people understand peer-to-peer (P2P) sharing from the days of Napster and file-sharing. Beyond these applications, the P2P concept also works in other sectors. One of these is P2P lending.
Using a P2P lending service cuts out the middleman. This saves time and money for users who don’t have to rely on a third party to complete their transaction. People seeking a loan with better terms than their local bank can use a P2P lending site to connect with investors seeking better returns on their money. These investors may see up to 8 percent return on their investment versus a savings account’s 1 percent.
P2P lending isn’t without its drawbacks: there’s no quick way to get a return on your money. You may end up with a long-term loan that you can’t get out of by selling. There’s also a complete lack of government oversight or legislation here. As an investor, you may be interacting with someone who has bad credit. If the borrower defaults, you get burned.
Why are you still investing in IPOs?
IPOs have been a staple of investing for generations, but they don’t cut it anymore. Their lack of shared value and preference for deep-pocketed investors makes them inaccessible for everyday people.
At 81-c, we’re passionate about opening up the investing playing field. We’ve seen how the curious investor gets shut out from early funding rounds only to invest at higher prices that make everyone else rich. We’re changing how people around the world can invest with just an internet connection.
Welcome to the new age of investing.
Disclaimer: this piece is only meant to educate and inform the reader, and should not be used as investment advice. Investing in anything is risky, and you should always exercise caution before investing your money in a product, service, or company.