Beware raising capital through issuance-only platforms
Building investor relationships needs long-term support
Access to capital is one of the biggest challenges to business growth, so it’s exciting to see new tools entering the market that are making fundraising more accessible. But while these digital asset platforms are offering a quick connection to new investors, not all of them are quite as helpful as they first appear.
Many digital marketplaces are purely focused on primary issuance, with little regard for what happens after investors come on board. However, the legal, practical and financial implications of ignoring the investment journey are huge – and shouldn’t be underestimated by companies looking to generate more capital for their business.
Opening up the market
One of the eternal frustrations with growing a business is that traditional investment models like IPOs and private fundraising simply aren’t set up for the needs of SMEs. The process is long, complex and often expensive, and rapidly expanding companies need quick access to capital.
A new wave of financial services platforms have overcome this problem, turning equity into digital assets, which can be sold securely via the blockchain. The advantages of this approach are significant: there are fewer middlemen involved, which makes the process quicker and cheaper, and digitising assets means fractional shares can be sold, opening up investment opportunities to new audiences.
However, many of the players in this field are focused purely on primary issuance – helping companies to sell their digital assets – rather than what happens beyond initial transaction. As a result, many of the investors are anonymous, or limited Know Your Customer (KYC) checks are carried out; something which has long-term consequences for companies.
Life after issuance
To ensure ongoing growth, organisations need to think about the complete lifecycle of their investments – not just raising money in the short term. They must find a digital investment platform that can support the end-to-end journey, for many reasons:
- Greater authority – without knowing who their investors are, companies cannot set rules such as where they come from, their age and minimum/maximum share allowances. Issuance-only platforms may not enable detailed enough regulation of who can invest, and won’t always ensure that these rules stay in place if the asset is sold on at a later date.
- Legality and compliance – many countries require businesses to report on who their investors are, which means records must be accurate at all times. Equally, there needs to be an up-to-date list for practical matters like voting requirements and dividend payments. Issuance-only platforms do not guarantee this information is updated in real-time, or synchronised so that all stakeholders have one view of the truth.
- Continuous control – even if technology platforms record essential details at the point of investment, issuance-only platforms will not track data on subsequent transfers or secondary market sales. This means that companies may end up with legal records that do not accurately reflect who their investors are.
- Customer conversion opportunities – the more investors engage, the higher chance of securing their long-term commitment, or converting them into customers. Issuance-only platforms do not provide the communication tools needed to engage shareholders, and therefore their value isn’t maximised. Even basic communication opportunities like annual reporting can be compromised if organisations don’t have the correct investor contact details.
Playing the long game
It’s easy to spot a capital growth opportunity and want to jump in quickly, but closer consideration about who to partner with will enable businesses to get greater long-term value from their fundraising activities.
Companies should be looking for digital asset marketplaces that not only enable primary issuance, but also support the complete investment lifecycle.
A long-term partner will take care of legal and compliance protocol; make it easy to build and update online share registers; set investment criteria that is upheld even when assets are sold; offer communication tools to establish regular dialogues with investors; enable online voting so that investors feel engaged and valued; support dividend payments so that the reward goes to the right person; and provide the analytics tools necessary to see who their current investor base is, to identify new growth opportunities.
The rewards of choosing the right technology platform are great. Removing the physical barriers of traditional investment methods creates a new world of opportunity, where investors can live in any location or time zone, yet their requirements can be easily managed, and ongoing communications are seamless.
Digital investment platforms present fantastic potential to growing businesses, but issuing assets is only the first step. The real money can be made in playing a much longer-term game.