The dawn of “Dotcom 2.0”: The internet’s next unicorns

I have been actively engaged in emerging technologies and the Internet since having "the internet" as one of my responsibilities while working at Cantor Fitzgerald Securities in New York in 1994.

I still remember spending nights reading the O’Reilly books and teaching myself the basics of TCP/IP. While working on Wall Street between 1995 and 2000 we experienced one of the most exciting times for startups during what became known as the "Dotcom era."

Twenty years ago, the tech world was in the news almost daily with highflying hi-tech IPOs. Back then, both retail and institutional investors contributed to the hype and fear of missing out on a once in a lifetime opportunity to get involved in something which was going to be big, "very big."

Looking back, the Dotcom era was a defining time to be involved in tech and offered those willing to take the risks an opportunity to invest in some of the companies history would show contributed to the growth of the internet economy. Yes, there were some big failures but despite this, the internet happened and continues to redefine how business is done.

Ever since the Dotcom bubble burst in March 2000, I have kept an eye open for the next "once in a lifetime opportunity" for high profile hi-tech IPOs to supercharge the capital markets industry. After 18 years of waiting, I believe we are now on the eve of something which may be even bigger for the financial services industry than the original Dotcom era, something business commentators could refer to as "Dotcom 2.0."

The next unicorns in blockchain infrastructure

2018 has been the year of blockchain. Regardless of the performance of Bitcoin and Ethereum, blockchain, like TCP/IP, is here to stay.

Since 2017 many companies have come forward to establish themselves as meaningful market participants in the next generation capital markets industry. In this new capital markets environment, securities will be traded across a variety of trading platforms and the trades will clear on a blockchain. The companies whose securities are trading may or may not be "blockchain" companies but the platforms that digital securities trade on will be blockchain based.

In 2019, we will see a number of security token trading platforms launch across the world. As trading volumes grow, a multitude of companies will attempt to enter the market and provide services. At the same time, I fully expect the incumbent organizations (like NASDAQ) will relaunch as digital asset platforms and be highly competitive inside the "new" Wall Street.

We are now living in a time where the future of the capital markets industry is being defined. A key catalyst of this change is the advent of digital, smart, programmable securities which the trade press refers to as ‘security tokens’.

It has been 20 years in the making, but now when a hyper growth, hyper revenue startup with a billion-dollar valuation (known as a unicorn) is considering going down the IPO track, there is a new route to consider – the road to a Security Token Offering (STO).

From a numbers perspective, assuming all existing stocks in all the active capital markets around the world are re-issued as digital securities, optimized for the underlying ecosystem of the issuer, the upside for service providers inside the financial securities industry may end being upwards of a quadrillion dollars.

The sweet spot for the dawn of the Dotcom 2.0 era is dependent on working with true unicorns which are in their hyper growth, hyper revenue mode. These are companies that traditional wall street investors find attractive and want to invest in. In fact, they want to invest so much that their intention moves the market valuation of the company skyward.

Companies which are not unicorns should be avoided because to be competitive in Dotcom 2.0 the requirement is to be an operating business generating measurable revenue while projecting hyper growth (and hopefully hyper revenue). Dotcom 2.0 will not be driven only by the dreams of what could be – that was Dot Com 1.0.

Just to be clear, an STO is not an ICO. Most ICOs were associated with startups without revenue. STOs are issued as private placements and are regulated as securities. For the purposes of STOs issued in the United States, most of those that have been offered to date have only been presented to accredited investors and subject to Reg D and Reg S of the Securities Act. In the near future, I expect to see the emergence of offers that are compliant with the recent Reg A and Reg A+ regulations.

Effective from July 2015, the Reg A rules are part of the Jump Start Our Businesses Act and are designed to help startup businesses more flexibly access capital (to a ceiling of $50 million) while remaining compliant with US securities laws

Security tokens will better align company & investor interests

Until recently, investors in companies going public on NASDAQ and the New York Stock Exchange only had the opportunity to benefit from stock appreciation and at times, dividends.

The era of smart, programmable securities means that for the first time, investors can now have their interests aligned with different aspects of the success of the company they are investing in.

What does this mean? Simply that during the design of a security token, it is now possible to offer investors an unbounded number of incentives to join the investor pool – far beyond just price appreciation and dividends. These incentives can include anything from having the tokens represent equity like a traditional IPO, to including a percentage of top line revenue, or discounts to customers, suppliers and vendors in the ecosystem of the company.

Designed this way, smart securities will enable companies already generating revenue to literally pour more gas on the fire of their success, by offering something which more closely aligns their investors (and underlying business ecosystem) with the success of their business.

The benefits associated with the issuance of a smart security is only limited by the creativity of the company involved in issuing the security, and the ability of that company to tell its story to investors.

Conclusion: A unique opportunity

One of the challenges the STO industry will have to face, embrace and deliver on is the challenge of seamless interoperability across the emerging STO industry. Participants in the sector now need to work closely together and drive the creation of a supranational framework for security tokens which ensures the STO assets are compliant with regulators in the jurisdictions they are issued and traded in.

Traditional equity analysts will be challenged to figure out the market value of companies issuing security tokens. Something like "Earnings per Share" may not matter depending on metrics defined in the respective private placement. Since each STO offering by definition has the opportunity to be unique, it will be difficult in the early years to model the performance of this new asset class until the behavior can be properly observed in the underlying market data.

This said, when both retail and institutional investors have an opportunity to invest in a unicorn and align their interests with the interests of the unicorn and benefit from the era of blockchain and digital securities – this offers something never before possible or practical.

The Dotcom 2.0 era will offer the investor community an opportunity to leverage both the internet and the unbounded dynamics associated with leveraging a new asset class born on the internet.