Continuous Security Offering (CSO) — A New Type of Financing

It all started with the Initial Coin Offerings (ICOs), which attracted capital and attention as a new form of financing for blockchain start-ups, especially in 2017 and 2018. After the ICO bubble burst, Initial Exchange Offerings (IEOs) and Security Token Offerings (STOs) took place.

The DeFi start-up Fairmint now wants to establish a new type of financing. Instead of an equity centering, i.e. a focus on the ownership structure, the (future) income of a company should serve as a starting point for financing. So it is not percentages that are issued or traded, but claims to the future earnings of the company. The model could be compared to trading dividend claims detached from the share structure in a very simplified way.

For this purpose, future earnings claims are reserved and securitized in a certain number of ERC-20 tokens. These tokens can then be traded on the decentralized Exchange Uniswap within a certain period. After completing the continuous security offering, funds are available to the company, just like with other forms of financing.

In principle, it is to be welcomed that blockchain technology and further DeFi applications question existing forms of financing. Technologically, it has never been so easy to develop an individual and participatory form of financing.

It is to be expected that in addition to the classic IPO or STO or financing through venture capital companies and private equity, new models will also be established. However, what will not happen is that the principle of equity and ownership of companies or real estate etc. is questioned.

The current situation at STOs shows why the potential for CSOs is limited. In theory, shares can be issued to investors in an STO as in an IPO. In practice, however, this does not yet take place, since it is difficult for regulators to tokenize equity. From a legal point of view, the STOs that have already taken place were bond issues and not equity issues, even if they were profit participation rights with an equity character.

What a future of continuous security offerings can look like

To make matters worse, CSOs appeal to more established start-ups or companies that already have sales and predictable future income. However, this is usually not the case with start-ups. So it will be particularly difficult for Fairmint to find companies that are brave enough to try this new form of financing. So while startups that are only months old and have not yet earned a cent are eligible for ICOs or STOs, this tends not to be the case with CSOs.

Fairmint’s DeFi platform is more dependent than other token sales platforms on reluctance to accept token investments. Only then will established companies dare to take advantage of this new form of financing. And vice versa, only then will larger investors be willing to accept CSOs. A market for trading income claims can certainly be established. Fairmint’s idea is a good one, but whether it will last until the DeFi ecosystem has developed and matured is another matter.

Author: Marko Vidrih

Featured image credit: Pixabay