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Tokenisation as a form of financing

Tokenisation as a form of financing

In times of crisis, many companies reach their financial limits due to unforeseeable dips in sales and profits, which prevent planned projects or expansions from taking place. Alternatively, cost-intensive projects can also be financed by issuing tokens. 

Simply put, tokenisation is a tool that maps the value of an asset as digital units based on blockchain technology. As a result, each digital unit represents a share of the underlying asset. These digital units are called (security/asset) tokens. The term ‘asset’ is to be understood very broadly: it can be real estate, raw materials, works of art, machines, and company shares, but also entire projects. Regardless of the type of asset, there is a relatively large scope for the design of the contract on which the token is based. The major innovation, however, is not the contract on which the token is based, but the simple transferability of the legal position represented by it. Just as the internet has suddenly made it possible to send documents digitally, tokenisation now allows assets to be transferred to other people at the click of a mouse. 

Imagine, for example, that an entrepreneur wants to expand his existing hotel or build a completely new hotel. To put the project into practice, he needs capital totalling EUR 50 million. If this project were to be financed by issuing tokens, this would allow investors to participate with smaller amounts than usual, such as hotels in this case. This is because tokenisation allows assets to be divided into units of any size, enabling the minimum investment sums to be determined as desired. 

In the course of tokenisation, the hotel would be ‘broken down’ into digital units as an asset. For example, a person could choose a denomination of 50,000 ‘hotel tokens’ at 1,000 euros each. Each token would then represent 0.002% of the hotel. Depending on the design of the tokens, the investors could, for example, be given a share of the current profit or, in the case of the tokenisation of a project development company, a share of the one-off sales proceeds from the hotel. Tokens could then be issued either to the general public in a public offering or to selected individuals in a private placement. 

The opportunity this creates, enabling people to participate in different asset classes with smaller investment sums, is already creating a completely new market. This has two positive effects for holders of such assets. On the one hand, it permits initially illiquid assets such as real estate to be made liquid through tokenisation, meaning that a possible sale or exit can be carried out more quickly due to a broader group of buyers. On the other hand, the increased demand generated by this is reflected in correspondingly higher sales proceeds. 

However, tokenisation is not only important for real estate. It is also conceivable, for example, that you could set up a kind of fund for a company in any industry. Imagine that an entrepreneur wants to sell a new product due to a coronavirus-related shift in demand, and a new additional production plant needs to be built for this. Let’s say that capital totalling EUR 10 million is required to put the project into action. One conceivable financing option would, again, be for the production company to issue tokens that would grant the tokenholder in question a share in the company’s profits, for example. This would provide the company with additional capital through the issuance of the tokens and the investors would be able to enjoy profits that were in proportion to their token holdings. 

If a token owner wants to part with their investment, they can simply transfer their tokens to another token owner or a third party via the blockchain. This kind of transfer may be made via a platform or directly between the buyer and the seller, without the need for any intermediaries. As a result, leaving this kind of investment could, therefore, be very straightforward. In addition to their arbitrary denomination and the easy transferability, the accounting of the ‘collected’ capital can be another major advantage of tokenisation. Depending on the legal structure, this capital can also be shown as equity on a company’s balance sheet. In this way, companies could carry out credit financing with a bank following the token financing, say, in order to achieve a leverage effect. 

These two sketches only demonstrate a fraction of the conceivable possibilities and the advantages associated with them. Depending on the use at hand, there are project-specific benefits both in a legal and economic respect which we would be pleased to discuss with you. 

Authors:

Mag. RONALD FRANKL, Managing Partner, Head of Corporate, M&A and Capital Markets and Head of Blockchain and Cryptocurrencies at LANSKY, GANZGER + partner
Mag. PETER VIRTBAUER, Associate at LANSKY, GANZGER + partner

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