What is a Security Token?

By: Sebastian Forste
WINHELLER Attorneys at Law & Tax Advisors
Frankfurt

Initial Coin Offerings (ICOs) have established themselves as a possible alternative to corporate financing. Compared to traditional financing methods, ICOs offer numerous advantages. An ICO sells units (tokens) of a virtual currency that are still at a very early stage of development or even in the status of a theoretical white paper.

Different forms of tokens

Tokens represent a digital form of a coin. You can fulfill a variety of functions. Depending on the function, they are divided into different classes. These include the payment or currency token, which is usually used as a means of payment.

The utility token also forms its own class. This is similar in content to a digital coupon, which grants the buyer, for example, the right of access to a product or service that is still under development.

What is a security token?

A security token offering (STO) is a modern form of crowdfunding, ie a way of financing a startup or other business. As a rule, an STO invests a large number of people in a project or in a newly founded company. The special thing about it is that the buyer does not acquire company shares as usual, but so-called tokens. In contrast to company shares, for which German company law sets narrow specifications, companies have a great deal of room for maneuver in the development of the rights associated with tokens.

Security tokens comparable to shares

Security tokens are best compared to stocks and debt securities. For example, they promise the holder an interest in future profits of the company in circulation as well as in interest payments. The goal of an investor is to participate in an increase in the value of the company's earnings.

In contrast to traditional equity participation, there is usually no transfer of company shares to the buyer. On the contrary, by means of the security token, the latter acquires a legal claim against the company for fulfillment of the promised services.

Advantage: Free design

The financing by means of STO offers companies a high degree of flexibility, since they can determine the content-related structure largely freely. An STO is thus also an interesting investment opportunity for private individuals. They too can benefit from the flexible design of security tokens.