19 May 2020 — One of the few questions that keeps small and medium enterprise (SME) owners awake at night is definitely the question of how to raise funds cost effectively as they try to expand their business. This is a big concern as SMEs are more vulnerable to deterioration in business conditions, given limited financial resources and limited access to financing.
Throughout my career, I was fortunate to have experienced being an SME owner, as well as working as an employee for an enterprise. With these experiences, I have noticed a huge knowledge and experience gap in capital raising activities between bigger organisations and SMEs. While I understand that raising funds is one of the most challenging aspects of growing a business, it is actually not rocket science. It is about realising what options are available out there, talking to the experts and deciding on which direction to take.
As SMEs are critical future drivers of Singapore’s growth, we are very fortunate that the government is putting in a lot of resources to help SMEs through Enterprise Singapore. Singapore provides an enabling environment for easy availability of high-quality human capital and technology inputs. However, to sustain our competitiveness and growth, one other area which is key, is the availability of a range of appropriate financial resources to support companies in their internationalisation efforts.
SMEs often struggle to identify alternative sources of funding, particularly long-term funding. If a company chooses not to borrow money to raise capital, it may turn to the market to raise some cash instead. While a start-up SME may raise capital through angel investors and venture capitalists, larger SMEs, on the other hand, may decide to go public through the issuing of an initial public offering (IPO). However, such investments usually involve intensive manual paperwork and high transaction costs, especially in the case of an IPO.
In recent years, more and more SMEs are beginning to be aware of, and some may even be exploring, a new method of raising capital through the offering of digital securities. Digital securities improve a company’s access to finance, allowing for the raising of capital at a lower cost, while providing investors wider access to investment opportunities.
Digital securities improve a company’s access to finance, allowing for the raising of capital at a lower cost, while providing investors wider access to investment opportunities.
But what exactly is Digital Securities?
If I may put it simply, digital securities are the new and improved version of traditional securities. They represent ownership in financial instruments such as equity, debt or real assets. Through blockchain technology, this digital representation of securities is subject to traditional securities laws, while promising easier and possibly, fully automated compliance solutions, such that intermediaries are no longer needed.
Before digital securities, there was not much liquidity in the private market. As such, it was difficult for SME owners to offer equity shares for sale to investors. The same goes for investors, with equity ownership in a privately-listed company being hard to achieve. While it can be done, it will take a lot of effort, time and money.
Benefits of offering Digital Securities
For larger SMEs that are at a stage where they are considering IPOs, many will realise that the fees required for raising capital through an IPO are exorbitant. In addition, the success rate is not very encouraging. The reality is that many have tried, but very few have succeeded. The good news is that the offering of digital securities may prove to be a more cost-effective way of raising funds and could possibly stand a higher chance of success.
Through digital securities, a company is not limited to conducting a private placement with just one or a few investors. Rather, they are able to offer it to a larger group of investors, without any geographical limitations. This makes it significantly easier to raise capital as there is available access to international investors. Investors will be able to trade at any time across time zones, which could lead to higher interest from investors. It is almost like “going public” in the private market but without having the cons of an IPO (i.e. heavy costs and time-consuming process).
It is almost like “going public” in the private market but without having the cons of an IPO (i.e. heavy costs and time-consuming process).
In recent years, the Monetary Authority of Singapore (MAS) has shown commitment and enthusiasm for developing and regulating the growth of the digital assets industry, including digital securities, by building an ecosystem for it. With the ecosystem, SMEs can rest assured that the solutions provided by licensed digital securities facilitators are safe, secure and regulatory compliant.
From the traditional route of raising funds through an IPO, to smaller series of funding rounds and debt financing, nothing is quite like the offering of digital securities. However, before you get too excited and jump on the bandwagon, do your homework first to better understand what you are getting into. Ask around and do your research to ensure that the digital securities provider has the necessary licence and is in compliance with MAS. What matters here is that they need to work within a legally compliant framework to develop and issue a security token, take custody of your digital securities and have a means through their network for you to raise capital through internationally accredited investors, broker dealer networks and digital securities exchanges.
As SMEs progress along Singapore’s Smart Nation journey, let us play our part in realising this vision by embracing the technological advancements of digital securities. This would enable SMEs to have a better and brighter future ahead.
“This article was first published in Entrepreneurs’ Digest issue 90”
Subsequently, originally published at https://www.linkedin.com.