Fractional ownership through blockchain technology is the new haven for companies and startups looking to raise capital from investors in exchange for a stake in the companies/projects. Traditionally, companies and startups could only do so through the traditional shares market.
In the traditional shares market, shareholders have to undergo rigorous selling and buying procedures, which also involved lots of paperwork. Investors also have to invest the full minimum required amount to own at least one share of a company or startup.
But thanks to blockchain technology. Companies and startups can now digitize or tokenize assets and offer them as digitized securities also referred to as tokens, rather than as traditional shares. By doing so, people looking to own a stake in the companies/projects can now do so by purchasing the digitized securities, which are normally transferred through blockchain networks rather than through the traditional stock market platforms.
Fractional ownership refers to the ability of an investor to own a fraction of a company or startup asset. For this to happen, the asset must first be converted into a form that can be divided into fractions, which is normally possible through asset tokenization.
Traditional shares are normally offered as whole numbers without the possibility of breaking them into fractions. Therefore, investors can only purchase whole shares. For instance, an investor can purchase 1, 2, 3, 4, 5, etc. shares from a certain company, but cannot purchase 0.5, 0.3, 1.3, 1.5, etc. shares.
On the other hand, digitized assets are easily offered as fractions/decimals thus enabling fractional ownership.Investors can purchase 0.1, 0.5, 1.4, etc. digitized assets.
Contrary to the traditional shares market where investors are required to invest a minimum amount to purchase shares, security tokens can be offered as fractions or decimals, therefore, allowing fractional ownership.
Asset tokenization changes how asset ownership is managed and also automates the activities that come after investment.
Blockchain technology makes it possible to have instant, traceable and cryptographically secure distribution and transfer of the digitized assets (tokens) without the need for intermediary parties.
Besides, contrary to the traditional securities, tokens of the digitized assets are issued and settled on a blockchain network. Therefore, the transactions are instant and without the need of signing stock certificates. And this process is not time-bound; it can take place 24/7.
Advantages of using digitized assets (digital securities)
The digital assets can be offered through smart contracts or security token offerings (STOs), where the holders acquire fractional ownership of the company/project behind the tokens.
These digital securities can also be exchanged in secondary markets just like other cryptocurrencies. When an asset is digitized, shareholders can use smart contracts to promptly sell their securities on registered exchanges where there is high liquidity compared to the traditional shares market. This in return help in avoiding the long lockup period of capital that is witnessed in the traditional shares markets
The beauty of it is that companies and projects can basically tokenize any assets whenever the need arises.
Comparing traditional securities to digital securities
Traditional securities (shares) normally call for larger investments while digital securities (digitized assets) allow fractional ownership, which reduces the amount of the required investment.
Additionally, since traditional securities require large investments, access to significant funding can only be done by institutional investors while in digital securities, since there is fractional ownership, there is a large pool of investors which makes it easy to quickly access significant funding.
Secondly, in traditional securities, the capital is usually tied up, especially with private placements like the venture capitals. However, with the digital securities investors can sell the tokens at secondary markets where there is high liquidity.
Traditional securities are also too costly due to the high fee structures. But the digital securities have a low fee structure due to automation using blockchain technology.