Elon Musk Should Consider Security Token Offerings for Tesla and Hyperloop?
Elon Musk is in the spotlight yet again, with his Tweet about taking Tesla private at $420 per share, valuing the company at over $70 billion. Following his announcement Tesla’s share price surged by over $45, reaching $387.49 per share.
However, now the U.S. Securities and Exchange Commission is looking into the matter and wants to know whether Musk has actually managed to secure the funding for taking the company private, and why he decided to share this decision on social media, especially when no regulatory filing has been done.
Should Elon Musk consider a security token offering to raise private funds from accredited investors for Tesla? It is not a completely absurd idea, and given how Musk promotes technological innovation, this new-age fintech solution could be great for giving Tesla a promotional boost and actually help raise the $70 billion or so needed to go private.
For those who aren’t sure what STOs or security token offerings stand for, here’s a bit of an introduction.
What are STOs (compared to ICOs and IPOs)
You’ve probably heard about Initial Coin Offerings (ICOs), which took the fintech world by storm last year and helped blockchain startups raise billions of dollars. Unlike an Initial Public Offering (IPO), an ICO usually gives no ownership or voting rights to token holders. Its concept is to raise money for promising blockchain and crypto ventures by tapping a passionate community of supporters.
However, ICOs soon became money-making enterprises, as projects saw millions of dollars being raised in a matter of hours, and sometimes minutes. It was the wild west, with little accountability and regulators scrambling to make sense of things.
Things are changing now though, and regulators, particularly the U.S. Securities and Exchange Commission (SEC), have taken a strict stance, and many believe a reckoning is coming for those who thought they could raise money and get away with it.
Meanwhile, Security Token Offerings (STOs) are legally regulated and allow projects to raise money by issuing security tokens, backed by real financial instruments, without having to worry about legal implications. An STO brings the best of both worlds – the flexibility of tokenization and the security from legalization.
Whether or not Elon decides to tokenize Tesla shares, the model could be beneficial for the Hyperloop project.
How Can an STO Help the Hyperloop project?
A paper was first released on the Hyperloop project back in 2013, where Musk proposed designs for a giant enclosed, low-pressure tunnel, which housed a long train-like pod propelled by electromagnets. The idea was to create a more cost-effective, environmentally amicable and faster mode of transport than the California ‘high-speed train’ that was being approved at the time.
Five years later, two companies came forth to pick up what Elon started since the bachelor billionaire became too busy with Tesla and the SpaceX programme to continue any further with it. The race is now on between Hyperloop Transportation Technologies (HyperloopTT) and Virgin Hyperloop One to be the first to develop this pioneering transportation system.
Financing these huge projects will require a massive amount of funding and securing it will be critical in determining which company achieves this milestone first. Traditionally, IPOs and private funding rounds are by far the most common form of raising capital, but these come at the cost of giving away large equitable stakes in the company to outside investors and losing significant control over which direction the company takes.
ICOs combatted this problem by offering cryptocurrency tokens at wholesale prices before they are released on for public trading on exchanges. These tokens come at no cost to the creator and are usually purchased by investors based on pure speculation that when the company’s product or service is created, these tokens will rise in value – much like company shares. The main difference here is that crypto startups still retain power over the direction of their company regardless of how many coins a separate entity holds.
While this might seem idyllic compared to IPOs, there is a serious drawback. The ICO market is wholly unregulated and it wasn’t long before scam-artists began taking advantage of the total lack of consumer protections. The market quickly became a ‘wild west’ for crypto investors and has since been the main focus of criticism/ debate that plagues the global crypto space.
Security Token Offerings have arrived as a third generation funding system for large business startups, combining the regulatory security and compliance of IPOs with the global reach of selling tokens publicly in an ICO format.
For a project as big as the Hyperloop, an STO could open doors to a wide range of tokenized funding opportunities. The project could actually utilize a cryptocurrency within its eco-system and tokenize dividend distribution from profits generated.
The project could also offer voting powers similar to what many ICO projects offer now, where one purchased token is equal to one vote. This way, you could have a decentralized weighted decision-making process for determining how the company develops in the future.
Ultimately, all security tokens would have to be registered with the SEC, meaning investors are not only safeguarded by US security law protections but also insulated from the many fraudulent projects that have saturated the ICO market. With these reassurances in mind, it is highly likely that STOs will become the new face of seed stage funding, bearing traits of traditional financial technology and the global crypto space.
Given how Hyperloop is a project on the cutting-edge of technology, it would make sense for it to adopt this new, tokenized funding model. What do you think? Should Elon Musk consider an STO for his Hyperloop dream? Should Tesla go down the tokenization path? Share your thoughts with us in the comments.
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