Security tokens are tokens that, in one way or another, entitle their holders to participation or similar rights in the issuing company. They can be modelled in many different ways. For example, they can take the form of
There are several terms used as synonyms for "security token":
Depending on the structuring of the ICO, the issuing company will have to meet different requirements as regards regulation and prospectus. But even the tax consequences largely depend on the actual structuring.
Security Token Offerings (STOs) have now replaced Initial Coin Offerings (ICOs) in the financing of business models. One of the reasons for this is the numerous cases of fraud involving the issuance of cryptocurrencies to raise capital. The Security Token Offering, a simple and reliable form of corporate financing, has now become the preferred option.
In the case of an STO, a "security", i.e. a bond, is placed on the blockchain and sold to investors. Following a decision by the Federal Financial Supervisory Authority (BaFin), in principle, it is possible to design all types of securities, but also asset investments, as security tokens. For example, the very flexible profit participation rights can also be transferred to the blockchain as security tokens.
If security tokens are sold to private investors, companies need a securities prospectus, which must be approved by BaFin. With such a prospectus, it will then be possible to distribute the tokens within the entire European Economic Area (EEA). Those who do not wish to invest in such a prospectus and do not wish to raise more than eight million euros in capital can also create a so-called securities information sheet. It may be only three DIN A4 pages long and can be distributed exclusively in Germany. In this case, BaFin approval is also required.
Generally speaking, security tokens usually represent either equity or debt capital of the issuing company. As such, in most cases the company collecting the funds does not need to book them as earnings but on the liabilities side of the balance sheet. And this is exactly what makes these tokens so attractive.
In the below overview, we present the tax consequences for each of the three types of tokens (currency tokens, utility tokens and security tokens) standardized for an ICO with a volume of EUR 10 million:
|Corporate Income Tax||Trade Tax approx.||Sales Tax||Tax Total||Amount retained by the company|
|ICO with currency tokens||15 %||15 %||0 %||30 %||7,000,000 €|
|ICO with utility tokens||15 %||15 %||19 %||49 %||5,100,100 €|
|ICO with security tokens||0 %||0 %||0 %||0 %||10,000,000 €|
Of course, there is a reason why the collection of EUR 10 million is tax-exempt in the case of security tokens: In fact, as it is the investors' capital, it is associated with a repayment obligation, a participation in the liquidation proceeds, or a termination option. As, however, depending on the structure, the capital is made available for very long periods of time, it can, in most cases, be treated in the same way "as own money", which is the reason why it is often shown as equity on the balance sheet.
Hence, preparing an ICO with security tokens requires a whole range of considerations. Besides the decision on whether to grant investors a participation in the liquidation proceeds or a termination option, this also involves the question of whether the issuing company will be able and willing to provide the funds for the advisory services required in the early phase.
The investment in the advisory services necessary to develop legally watertight security tokens is naturally higher than it is for other types of tokens because authorizations from the Federal Financial Supervisory Authority have to be obtained, regulatory requirements met, and prospectuses complying with the Securities Prospectus Act drawn up and reviewed.
The wide range of possibilities afforded by security tokens can be shown most clearly by taking participation rights as an example. As the term "participation rights" is not defined by law, it may refer to various rights the holder may have in the company, including profit participations, without being a shareholder at the same time.
The corresponding agreements may be drafted in a way ensuring that the investment made by the holders of participation rights is received as
Differences also include the tax treatment of the annual profit participation received by the holders of the participation rights on their investment: On the part of the issuing company, these may either be deductible operating expenses or possibly constitute non-deductible operating expenses.
From the point of view of ICO investors, security tokens are certainly the best choice. They are the only tokens with a genuine investment character, which, depending on the structuring, in most cases represent shares in the company's profit or assets.
The investor will also have to treat security tokens in a different way than conventional currency tokens. Sales of security tokens are taxed as income from capital assets. They are usually subject to withholding tax.
In the ICO scene, the importance of security tokens will continue to grow in the future. They are extremely attractive as regards their taxation. This advantage will more than compensate for the higher expenses for advisory services.
Are you planning an ICO or an issue of security tokens? WINHELLER assists entrepreneurs through all areas of contract drafting, regulation, and taxation of security tokens in Germany. We represent you in a competent manner in your dealings with all supervisory authorities. Our team accompanies numerous ICOs and will be pleased to support your project, too.
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