How to tokenize your business

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Have you ever wondered why so few companies go public? According to the World Bank, there are more than 100 million companies worldwide but less than 1% are listed on stock exchanges.

If you want to allow investors around the world to buy and trade your shares, you need to conduct an IPO (initial public offering) on the stock exchange. And the reason for such a small number of public companies is precisely the IPO and its cost. For example, the price of a small IPO in the US could be worth $2.6-13.3 million, according to PwC. And it’s without taking into account the annual costs of complying with the various requirements that may reach millions of dollars. Although the cost of going public may differ depending on the country and company, the IPO process is still quite expensive and time-consuming. So many companies, especially small and medium-sized businesses, remain private.

But if the company is not public, then this greatly limits investment potential. Most people do not have open access to investments in such companies; instead, only high-net-worth individuals and institutions invest in them. Limited access to capital quite often forces the owners of non-public companies to accept unfavorable terms offered by banks and individual investors.

One of the possible solutions is business tokenization that became possible with the advent of blockchain technology and the evolution of the cryptocurrency industry. Here’s what you need to know about business tokenization and what to look out for before using this fundraising method.

What is tokenization?

Tokenization is a method of converting assets like real estate, stocks, art, and so on into a digital token. Tokens are created and stored on the blockchain and can act as a digital counterpart to real-world assets.

With tokenization, you can attract new audiences and store the asset in a safe and secure environment. If you want to tokenize a business, then you can tokenize company shares to increase liquidity, transparency, and availability for international investors. Additionally, blockchain-based shares provide opportunities for the formation of a traceable secondary market.

However, asset tokenization still has several restrictions in certain countries due to the lack of regulated rules and the recognition of tokenized assets as the equivalent of real assets. Therefore, it is recommended to get legal advice before conducting business tokenization in your country.

Where to start with business tokenization?

Preliminary analysis is one of the most important steps for business tokenization. You need to assess the financial needs of the company and determine why you need tokenization — for IPO replacement, to promote a certain product or service, to sell an asset, etc. After that, it is worth identifying your target audience, as well as analyzing the market and competitive offers to assess the prospects for your solution.

The next step is the token economy formation and its technical implementation. A token means that a unit of an asset exists on another blockchain and is created using smart contracts. So you need to choose which blockchain to use for token creation.

At the moment, the top network for smart contracts is Ethereum, one of the advantages of which is the versatile standardization of tokens. For example, you can create ERC-20 tokens that are fungible and do not differ in any way from each other, or ERC-1400 tokens where each token is unique and has its own serial number.