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INX IPO — The advent of Hybrid digital asset class

INX IPO

Recently, Gibraltar based trading platform INX grabbed headlines when it filed a preliminary version of “Form F1” with the US Securities and Exchanges Commission (SEC). According to the filing, INX plans on raising capital by launching an Initial Public Offering (IPO) in the US, which seems ordinary at first glance, as “Form F1” is a regular security filing for foreign issuers. What sets INX’s IPO apart is that investors in its offering will receive INX security tokens instead of equity. Marking a major milestone in the history of Tokenized fundraising. 

Notably, INX is a cryptocurrency trading platform that aims to bring tokens to the institutional arena. The company has raised a cool $4.5 million to date, having concluded a $3.5 million Series A funding round in 2018, according to InWara’s Market Intelligence Platform

INX’s IPO: The Hybrid token structure

The Gibraltar based company plans on raising up to ~$130 million through the sale of its INX tokens through an IPO. The offering will be targeted at retail and institutional investors which makes it the first security token sale registered with the SEC. In the US, most security token offerings have been targeted at accredited investors as it enables issuers to file for an exemption with the regulator. 

Interestingly, INX Tokens will have the mixed characteristics of both a security token and a utility token. Each INX Token will entitle its holder to an annual pro-rata distribution of a whopping 40% of the company’s net cash flow but restricted to the operational activities and importantly doesn’t include any cash proceeds from the Initial Sale of INX tokens.

This it doesn’t mean that investors will be equity holders but instead investors would be first in line ahead of shareholders to get repaid incase of a liquidation event. “It is the Company’s intention that the INX Token holders’ claim for breach of contract will be senior to the rights of the holders of the ordinary shares of the Company in liquidation,”. This gives the tokens, characteristics similar to that of preferred stock in traditional capital markets.

Also, the company’s prospectus mentions that it could grant “record holders of INX tokens” special discounts on its trading platform for the purpose of promotion of its services. This gives the token a utility characteristic as well, on top of having security characteristics. 

“When fully operational, we expect to offer professional traders and institutional investors trading platforms with established practices common in other regulated financial services markets, such as customary trading, clearing, and settlement procedures, regulatory compliance, capital and liquidity reserves and operational transparency," mentions the document.

What are the advantages of a Hybrid token structure?

The single biggest reason for the unprecedented success of the Initial Coin offering (ICO) model of fundraising was because of the ease of launching one. Teams have raised mind-boggling numbers using nothing but a website, a whitepaper and a lot of hype. But this relatively free structure and the fact that there was little to no regulation was also the reason for its decline. Bad actors took the ICO model’s biggest asset and turned it into a flaw — it’s estimated that investors have lost $3.1 billion to ICO scams in 2019 alone, according to security firm Cipher Trace. 

Security Token Offerings, despite its massive potential to revolutionize the financial ecosystem, has mostly dropped off the map. In August 2019, Funds Raised through as STO represented just 0.28% of the total funds raised by Blockchain and Crypto startups, according to Blockchain and Crypto report: August 2019.

INX IPO

 

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This is mainly because launching an STO is relatively more time and Capital intensive than ICOs. Also, the major advantage of the STO model is the liquidity they provide but isn’t just available right now as secondary trading markets don’t possess the required volumes of infrastructure. Although, currently there are several startups aiming to bring the required infrastructure to the marketplace.

The main advantage of a hybrid token is that they combine the best of both worlds. Ensuring regulatory compliance ensures that token issuers are legally required to answer to investors in the event of any misappropriation of funds. This element can be taken from security tokens. Hybrid tokens can also serve the purpose of some utility within the network or ecosystem.

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