By Scott Harrigan, CEO of Securitize Markets
When Steve Jobs first introduced the iPhone, he made a bet that the world was going to change with fully integrated, internet-connected devices. And he was right. Now, our online world -- from how we communicate to how we transact – is changing again, with the movement from centralized to decentralized processing, increasingly known as Web3. And nowhere is the potential impact of this advancement more evident than in Web3 Crowdfunding, a fully-digital take on raising capital through tokenization.
Tokenizing Startup Equity in Web3
Web3 is a decentralized vision of the internet that is more direct, decentralized, and transparent than Web 2.0.
Today, most equity crowdfunding occurs through a digital facade atop underlying paper processes. Although centralized, it’s hard to know what shares are really worth, prove or transfer ownership, or see the path to future liquidity. With private companies taking more than a decade on average to IPO (if they ever do), that path can be long indeed. Tokenization improves all of this by digitizing those paper processes, with share ownership immutably and transparently recorded on blockchains, enabling lower minimum investments, and an easier path to liquidity. And Web3 improves this, with investors able to contribute funds and see their shares right from their digital wallet.
How Web3 Crowdfunding Works
Typically, when a company uses Regulation Crowdfunding (Reg CF) or Reg A+ to raise capital, a Simple Agreement for Future Equity (SAFE) is sent to investors to sign. Once signed and executed, the SAFE contract is sent to a transfer agent to record the ownership rights. Eventually, the investor receives paperwork indicating that their purchase was completed. But they don’t have direct ownership or control over their shares. Web3 Crowdfunding is changing this for the better.
In Web3 Crowdfunding, SAFE contracts are recorded in the form of digital asset security tokens. A unique identifier is associated with the investor’s whitelisted wallet address. And then our Digital Securities Protocol registers each SAFE contract with the investor’s wallet on the blockchain. Smart contracts automate this process without revealing any personally identifiable information. The use of smart contracts also makes Web3 Crowdfunding trustless, providing automated compliance, immutable ownership, and instant settlement with no counterparty risks.
To invest using Web3 Crowdfunding, an investor with a whitelisted wallet first gets access to purchase a security token. Then, the investor signs the subscription agreement and purchases the tokens all in one transaction, instantly receiving the security tokens in his digital wallet. That’s it.
Now, investors can instantly own and control your equity as a security token, instead of waiting days to receive a receipt indicating that your purchase is complete. Plus, you can truly own your asset, which provides quicker access to potential liquidity and access to a broader ecosystem.
Community Benefits of Web3 Crowdfunding
Another big benefit of tokenization is that it bolsters community development. Imagine turning your fans into investors so that they can directly own a piece of your company. This can also drive customer growth and new revenue, as shareholders are more likely to talk positively about a brand that they are invested in and new shareholders' average weekly spend increases by 30-40% (during 3-6 months). This community building not only generates more brand awareness, it supports local businesses at the same time. And that can bolster local economies.
In Q4 2022, a Crowdfund Capital Advisors report revealed that more than 300,000 jobs have been created or supported as the direct result of Reg CF. What’s more, $3.4 billion has been injected into local economies.
Like the iPhone enabled the masses to access the mobile web, tokenization empowers community-based interactions to take place in Web3. With Web3 Crowdfunding, investors can now directly own a piece of the companies they love. And this ownership can build brand loyalty.
In fact, 80% of retail investors agree that being a shareholder in a company would make them more likely to buy from that company. Providing investors with true, immutable ownership over their investment has the potential to make this sentiment even stronger.
Removing Friction to Improve Efficiency
Like other forms of equity crowdfunding, Web3 Crowdfunding leverages Reg CF and Reg A+ to let retail investors purchase shares of privately held companies, pre-IPO. What’s unique about Web3 Crowdfunding is that it removes a lot of the traditional paperwork that can make investing in private businesses cumbersome, and prevent downstream issues for those private companies as well.
By using a digital wallet to sign and execute transactions, Web3 Crowdfunding reduces paper-based frictions that typically occur during the onboarding process. This opens the door to retail investors who prefer to invest online and want to know how their private investments are performing at the click of a button.
Securitize is the only company that owns and operates all four pieces of the regulatory puzzle that make compliant Web3 Crowdfunding possible.
In anticipation of acquiring a broker-dealer, a top 10 transfer agent, and an alternative trading system, we built our own identity management system called Securitize iD to tie the systems together. As a result of this integration, investors are now able to send security tokens directly to one another simply using their digital wallets. Like the iPhone enabled an ecosystem to develop around a single device, Web3 Crowdfunding is empowering a new fundraising ecosystem to develop around one, integrated platform.
Continuously Innovating to Improve Investor Experiences
This improved capital raising experience didn’t happen overnight. It was the result of deliberate innovation intended to solve a pain point that many private companies regularly face: efficiently raising capital without shifting efforts away from community development.
Like Apple changed the world by putting the power of the internet directly into people’s hands, Web3 Crowdfunding is putting equity crowdfunding into play for businesses and investors alike.
As the first and leading digital securities firm to offer an all-in-one solution for digital asset securities management, Securitize is making it easier for businesses to raise capital and innovate with solutions like Web3 Crowdfunding. Buckle up to see what comes next.