SMEs are a crucial pillar for any modern economy, driving GDP growth, creating jobs and generating wealth. Yet they are being held back by insufficient access to growth finance, writes Joseph Portelli.
Europe's banks have retrenched under the weight of tougher regulation post financial crisis, shrinking their balance sheets and their appetite for lending. The alternative option of listing on a stock exchange can be a great solution for bigger companies, providing access to deep pools of capital and diverse investors.
However, it is a daunting and expensive process for SMEs, testing the bandwidth and pockets of entrepreneurs with compliance costs, legal fees and corporate governance requirements when they need to focus instead on growing their business.
Blockchain technology makes for a cheaper, faster, and easier fundraising process, promising lower administration and management costs for both investors and companies."
Many SMEs have turned to equity crowdfunding for their salvation. This method allows them to tap into a large pool of sophisticated investors for growth finance at a reduced cost. Investors gain access to opportunities they might not have gotten before, because they were previously the preserve of venture capital funds or angel investors.
Finance becomes a bit more democratic. This meeting of interests between yield-hungry investors and cash-starved companies has worked out incredibly well for some of the best-known crowdfunding sites such as Crowdcube and Seedrs. Together they have raised hundreds of millions of pounds for countless high-growth businesses.
As is ever the case in finance, however, prepare for further disruption- and opportunity.
In 2018, UK regulator the FCA approved the first STOs or ‘security token offerings' and we expect other regulators to follow suit. This is yet another new, innovative way for companies to raise growth finance, and investors to tap exciting opportunities.
So what are these STOs? With typical equity crowdfunding, a company sells equity to investors. In this case, they sell security tokens, which offer the same rights as traditional shares such as voting, dividend and ownership rights. These tokens are just digital representations of the same financial instruments that investors have been trading for centuries.
Just as importantly, STOs also have several advantages over traditional equity crowdfunding which will make a difference to both investors and cash-hungry entrepreneurs.
For a start, security tokens are built and managed on blockchain technology. What does this mean and how does this technology work? We wouldn't try to understand the operating system that drives our iPhones, instead we care more about the benefits we get from using it. So it is with blockchain.
The technology makes for a cheaper, faster, and easier fundraising process, promising lower administration and management costs for both investors and companies. Unlike traditional equity crowdfunding, start-ups can tap into a wider, deeper pool of international investors. In due course, and here's the ultimate holy grail, we should see the development of a network of cross-border exchanges where tokens can be traded 24/7, promises deep liquidity for companies and investors.
Today, you might have to wait for the markets to open in London or Wall Street, before paying a broker or a trading platform a not insubstantial fee to buy shares in a company. Imagine instead being able to trade the security tokens of a German, Japanese or Brazilian SME anywhere in the world, cheaply and without a middleman, and at any time that suits you.
Malta is determined to play a role in making this happen. Last year, the Malta Stock Exchange signed two MoUs with leading digital currency exchanges Binance and OKEx to launch digital exchanges for security tokens.
And it is important to highlight that the tokenisation revolution isn't just about equities. Tokenisation promises to become the ultimate method of unlocking value in a whole range of assets, from bonds and private debt to real estate, art, intellectual property and more.
The dwindling number of IPOs and the privatization of public companies by cash-rich private equity buyers mean there are fewer investment opportunities for your everyday investor. Tokenisation will help to reverse that trend, promising nothing less than the re-democratization of finance.
Joseph Portelli is executive chairman of the Malta Stock Exchange