Capital markets News

Security token IPO for INX is unconventional in numerous ways

digital asset exchange

Yesterday INX, the company developing crypto and security token exchanges, announced it would commence its initial public offering (IPO) on Monday. The Gibraltar firm published its registration with the United States SEC. It is issuing up to 130 million security tokens at 90 cents, so up to $117 million. However, it will consider the IPO a success if at least $7.5 million worth of the Ethereum tokens are purchased within a year. At this time, the company has neither revenues nor a functioning product or service, nor the required licenses.

The tokens can only be bought by people that have complied with know your customer (KYC), so a smart contract checks whether potential purchasers are on a whitelist. Token holder identities will remain private apart from legal compliance.

The firm’s purpose is to develop at least two exchanges. The first, INX Digital is for cryptocurrencies, a space already occupied by more than 300 other platforms. And the second, INX Securities, is for trading security tokens. It also plans to get into derivatives.

According to Crunchbase, INX secured a $3.5 million Series A from SPiCE ventures in April 2018 (which also backed Securitize), and INX states it has raised more than $7 million in total. Although it started almost three years ago, the company has not yet launched an exchange in this fast moving sector. However, it states that it’s targeting the professional sector, which may require more advanced tools.

INX very recently hired Paz Diamant, former managing director of R&D and Product at eToroX, including its crypto platform.

Unusual features

Other unconventional aspects include the auditor’s opinion that there is substantial doubt about its ability to continue as a going concern.

The token is neither listed on a conventional stock exchange nor one of the 300 plus cryptocurrency exchanges. In fairness, the whitelisting of token holders probably precludes a listing on crypto exchanges. So the securities effectively will be unlisted until it launches its own exchange.

Token holders are not shareholders and appear to have no say in the governance of the platform. Instead, they have the right to 40% of “adjusted operating cash flow”. That cash flow excludes the initial tokens offered but will include the proceeds of any future tokens issued. So for any future tokens issued, the company would only get 60% and the share of cash flow to current token holders can be diluted. By giving away such a large chunk of cash flow, this potentially incentivizes INX to issue a lot more tokens to make up for the cash going to token holders.

75% of any monies raised above $25 million will go into a cash fund to act as insurance in case of cybersecurity issues.

The cryptocurrency markets have seen a resurgence in the last six weeks or so. Given the decent valuations the stock market is giving to large but bankrupt companies, INX seems opportunistic in its timing. It said it was planning this move a year ago.

Others, such as Blockstack, have registered Reg A+ security token offerings, which restricts the amount raised to a maximum $50 million.