The Jumpstart Our Business Startups (JOBS) Act, signed into law in 2012, has been a game-changer for private businesses in the United States. It has enhanced their ability to raise capital, including through crowdfunding, by creating shares in the form of securities. Over the past decade, the JOBS Act has spurred waves of digital innovation, creating new ways for businesses and individual investors to fundraise together.
In recent years, another trend has taken root: tokenization, or the issuance and management of digital asset securities on the blockchain. Tokenization bolsters what digitization started, namely, more cost-efficient fundraising methods that enable businesses to pass savings onto their investors.
SEC and FINRA Regulations
The U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) play crucial roles in regulating blockchain tokenization. The SEC has shown openness to allowing blockchain technology to naturally develop and add to the richness of the market, but warns security token issuers to stay within the bounds of existing regulations. On the other hand, FINRA’s Blockchain Lab serves as a central point within FINRA for the development of blockchain-related regulatory initiatives.
Tokenization of Private Funds
Private companies seeking to raise capital and provide pathways to liquidity to shareholders are increasingly utilizing blockchain technology to tokenize their securities. Tokenization converts private equity funds into tradable digital securities. For example, a $5 million fund commitment could be divided into 100 tokens worth $50,000 each, then fractionalized and sold in smaller units. This process enables fractional ownership and simplified processes for private equity assets.
Securities Tokenization in Private Markets
The real revolution will be in private markets where tokenizing real-world assets such as real estate, private equity, and private debt could improve access to these markets and make trading much faster and simpler. Tokenization offers the potential to expand private markets, unlocking the new potential in traditionally illiquid asset classes through enhanced market access and wider distribution.
Public Markets vs. Private Markets
The number of publicly listed companies in the U.S. has been on a steady decline. From about 8,000 in 1999, it dropped to roughly 5,000 in 2020 (not including ETF’s). Meanwhile, the U.S. private sector remains robust with approximately 33.3 million private companies in 2023, including both registered companies and sole proprietorships. However, this number is dynamic as new businesses are continually established and others cease operations. This trend suggests a waning traditional IPO market and publicly listed companies.
Rialto Markets Solutions
Rialto Markets is a FINRA Member broker-dealer, empowering companies to raise money through their unrivalled expertise in institutional and crowdfunding investment. We operate the Rialto MarketBoard, an Alternative Trading System (“ATS”), or secondary trading platform, for buying or selling shares of private companies. Rialto’s technology empowers direct private capital raising and investing, delivering clarity and simplicity to a complex marketplace.
Conclusion
In conclusion, leveraging JOBS Act securities with blockchain tokenization has the potential to streamline operations and transform financial services. It can democratize finance, improve liquidity, and simplify the management of private equity assets. As the traditional IPO market and publicly listed companies wane, securities tokenization in private markets emerges as a promising solution for growth in institutional financial services.