The first step on the way to successful tokenization is always to consider which goals are to be achieved with it. The types of tokenization presented above can have very different tax effects and also effects on the company’s balance sheet, depending on the specific design.
Legal, tax and accounting structuring
These effects can be used specifically for the company. If, for example, loss carry forwards are to be utilized, an instrument can be chosen that leads to an income in the company. If the equity capitalization is to be strengthened without an income tax burden, this can be realized with tokenized profit participation rights, for example. The possible tax burden with sales and corporate income taxes must always be kept in mind, especially in the case of non-repayable instruments. To avoid unexpectedly triggering a tax liability, we therefore recommend involving a tax advisor or auditor in the structuring at an early stage.
The tokenized instrument should be structured depending on the aforementioned tax and accounting considerations. To that end, either the corresponding security token conditions are worked out or other necessary contracts are drawn up. If necessary, the company’s articles of association will be amended. If required, the trusteeship will be set up.
Public offering of security tokens
The preparation of the necessary contracts, and if necessary, the amendment of the articles of association are the first steps. The second step in many cases is the sale of the tokenized assets in a public offering. In this process, a capital-raising company offers the tokenized securities or investments to the general public for subscription.
For this purpose, the company usually creates a dedicated landing page for handling the issue on its website. The landing page is initially intended to ensure that only persons to whom the offer is addressed are given access to it. Interested investors thereby confirm, for example, that they are from the EU. In addition, the landing page primarily serves to provide investors with information. It contains those documents and records that are required by law to be given to interested investors. Finally, the landing page can be used to map the subscription process: In this case, interested investors subscribe to the securities directly with the issuer.
The documents and information to be included on the landing page essentially depend on the minimum subscription amount per investor and the total amount of funds that the company wishes to raise. If the minimum subscription amount per investor is at least EUR 100,000, then as a rule no further information is required apart from the value token conditions and a subscription form.
If, on the other hand, the minimum subscription amount per investor is less than EUR 100,000, for example, if a subscription is to be possible for just a few hundred euros, more information is usually required on the landing page. What exactly is required depends on the total volume:
- Volume < EUR 250,000
For very small placements, a general risk disclosure with the key characteristics of the instrument is sufficient.
- Volume < EUR 5 Million (1)
For small placements, an information sheet is sufficient.
- Volume ≥ EUR 5 Million
For larger placements, a capital market prospectus must be drawn up in accordance with the EU Prospectus Regulation and approved by a regulator in the EEA (FMA, BaFin, CSSF, etc.)
The drawing up of a capital market prospectus is time-consuming. Companies should allow for a lead time of at least three months. The advantage is that an offering can be made in several EEA member states without having to worry about national law. If, on the other hand, a capital market prospectus is not prepared and the offer is to be made in several countries, the respective national regulations must be observed.
1 More precisely: placements of less than EUR 5 million over a period of 7 years, whereby less than EUR 2 million may be raised in a 12-month calculation period
This article is an extract from the 90+ page Security Token Report 2021 co-published by the Crypto Research Report and Cointelegraph Consulting, written by thirteen authors and supported by Crypto Finance, Blocklabs Capital Management, HyperTrader, Ten31 Bank, Stadler Völkel Attorneys at Law, Riddle&Code, Coinfinity, Bitpanda Pro, Tokeny Solutions, AlgoTrader, and Elevated Returns.