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Invest in a startup with equity tokens?

More and more startups in America, England and around the world are financing themselves via equity tokens and profiting from this lean alternative to shares. We tell you what you need to watch out for as an investor. It is true that holders of equity tokens have contractually regulated voting rights. But investors also take risks.

Blockchain networks are growing continuously. Every year, new cryptocurrencies and tokens come onto the market. Interest among private individuals and companies is growing. Thinking about the security of digital currencies and their transaction channels is changing.

Equity tokens as part of ICOs

Investors aren’t the only ones looking for their place in the new system. Companies are also discovering new ways to increase their own capital. Not coincidentally, most blockchain networks now introduced Initial Coin Offerings (ICO). The ICO is launched by a startup that has previously calculated its capital needs and created a “white paper.” This describes the business model. Investors fund this company by making payments in cryptocurrencies such as Bitcoin or Ether.

Raising funds as a startup

Equity tokens are integral to the growth of the blockchain network. When a company finances itself through equity tokens, it is called an equity token offering (ETO). Equity tokens offer startups comparatively easy access to financial markets. “It enables a startup to raise large amounts of capital in a short time and at low cost,” writes the SME portal for small and medium-sized enterprises of the Swiss Confederation. On the other hand, it ensures a distribution of access rights

Companies appreciate several advantages:

  • The time savings: tokenization is faster
  • The lower costs: the purchase is between the token-issuing company and the investor. It is cheaper because no bank is involved in the transaction.
  • In addition, fewer formalities are required than with shares.

With an equity token offering via the blockchain, it is possible to issue the tokens via public placements or also via private placements. The respective supervisory authority of the company’s parent country is then responsible for supervision. The associated process is comparable to the issuance of shares by another company.

Equity Token Offering: the company expects to raise capital for the establishment and expansion of the company.

Registration with the exchange platform

The company offering equity tokens has to fulfill some conditions. There are some steps required to register with an exchange platform for equity token issuance. The main focus is on the offering conditions for the potential investors.

  1. Registration with the exchange platform

    The company offering equity tokens registers with an exchange platform as a first step.

  2. Submit company documents

    Then the company submits its company documents. These serve to identify and verify the company, owner and management.

  3. Statement of value

    The company states its value as well as the total amount for the available investments. The terms define the minimum investment amount. They explain the possible voting rights for the token holders.

  4. Define trading classes

    The trading classes of the Equity Token Offering define what the transferability requirements are.

The contract regulates the trading conditions

The definition of the trading conditions finally leads to a contract between the company and the token holders. The token holder is usually represented by a single legal entity. The company publishes the details of the listing on its website. Investors can track the performance in this way.

For the select few: The Pre Equity Token Offering

In the Pre Equity Token Offering, the company offers its tokens to a select group of investors. This could be, for example, wealthy investors who would like to order Equity Tokens before the public offering. In this phase, the company can increase the investment amount if the preferred investors already buy all the tokens offered.

Public placement follows at the end

Some companies do not find enough investors in the Pre Equity Token Offering phase. The funding level is not reached. The company can now offer the remaining number of Equity Tokens to the public. This step ends the funding phase.

The community of shareholders

If many investors or shareholders participate in a sub-issue via equity tokens, a shareholder community is created. It is the company’s responsibility to provide investors with full access to its activities and information. Various channels can serve this purpose:

  • Voting platforms
  • Reporting tools
  • Payment methods for token holders.

FAQ – Frequently Asked Questions

Is my data stored when I make an Equity Token investment?

When you invest in a company via equity tokens, the blockchain stores your name. The question of whether companies are allowed to store shareholders’ names in blockchains is unresolved. However, without storage, blockchain-based equity trading is not even possible.

Is there a risk of fraud with equity tokens?

A traditional IPO is subject to controls. When you buy Equity Tokens and invest in a company, no banks or other financial institutions are involved. There is no control by an intermediary. This encourages fraud. The token issuance is not verified for its seriousness. Therefore, it is worth taking a close look at the company and the business model.

What are the risks with equity tokens for companies?

The ICO process via equity tokens is quick and easy. It tempts many young companies to generate funds for future projects prematurely. This promotes risks for investors. After all, there may not even be a prototype for a project yet. The investor thus has hardly any guarantees and cannot make any claims.

New sales opportunities through equity tokens

Trading with Equity Tokens can also be an interesting option for banks and online brokers. This is because these providers already fulfill all the necessary regulations for securities trading in advance. They have an existing customer base with a large number of potentially interested investors. In addition, trading with equity tokens also offers banks new sales opportunities.

Equity Token: Legal RequirementsThe

Federal Financial Supervisory Authority (Bafin) in Germany classifies equity tokens as securities-like tokens. Accordingly, equity tokens in Germany are subject to the Securities Trading Act and the Prospectus Regulation of the European Union. Accordingly, companies can only finance themselves via tradable Equity Tokens if a comprehensive securities prospectus is available. In this way, the legislator wants to reduce the risks for investors and prevent fraud.

Martin Berger

Crypto Specialist | Study of Economics.
Main focus: Tokenization | Security Tokens | Cryptocurrencies | Change Management

Martin Berger

Krypto-Spezialist | Studium der Wirtschaftswissenschaften
Schwerpunkte: Tokenisierung | Security Tokens | Kryptowährungen | Change Management