Fundraising through tokenisation

Fundraising through tokenisation

What is tokenisation?

The term was initially coined for data security. It describes the process of substituting a sensitive data element with a non-sensitive one, referred to as a Token. The Token is a reference that maps back to the sensitive data through a tokenisation system.

When applied to fundraising, the Tokens map back to Assets owned by an Originator.

The beauty of tokenisation is that it allows Investors, through the purchase of Tokens, to acquire a Right over an Asset that would not be accessible to them otherwise.

As a corollary, issuing Tokens opens new doors on pools of potential Investors that are not on the radar in the first place

Structure and Process

The following simplified flow depicts the tokenisation system:

Fundraising through tokenisation

What assets can be tokenised?

As per the definition, any cash-generating asset could be tokenised. Having said that, the Originator needs to estimate the demand for the Tokens before incurring unnecessary expenses. There is no cast-in-stone rule to size the Demand. It depends on the quality of the underlying assets, the tends in the market, the flavour of the month, luck... Even cryptocurrencies that did not have any underlying asset to support them did sell at some point. It seems that the hype is now abating.

However, as a rule of thumb, the higher the quality of the underlying asset, the higher the potential demand; and the easier the business model to explain, the better.

Natural candidates for tokenisation are:

  1. Renewable energy plants generating easy to predict cash flows
  2. Real estate promotions and leaseholds
  3. Loans from blue-chip companies and public entities

What kind of Rights can be purchased?

When it comes to designing a Token, one's imagination is the limit, however, most Tokens will fall into two asset classes:  equity or debt.

Equity Tokens are similar to equity shares. Token holders become in a way shareholders of the Tokenisation Vehicle, which in turn, shall own an equity share in the Originator's company.

Debt Tokens are similar to corporate bonds. Token holders become creditors of the Tokenisation Vehicle, which in turn, shall pledge the Originator's assets.

Given that the Tokenisation is done through a Tokenisation Vehicle, the Originator's assets can easily be enhanced by bringing into scope, other investors and/or lenders.

Tokens can be segmented into tranches, each tranche bearing a different risk profile to appeal to different investor profiles, similar to a traditional securitisation process.

Tokenisation Vehicle

The Vehicle used to issue the tokens is typically a fund set up in a jurisdiction that will allow its marketability and is fiscally friendly. The structure will depend on the jurisdiction but it is generally achieved through a SICAV (PIF, SIF, AIF...)¹.

In our diagram, we have depicted an SCC PLC¹, a Securitisation Vehicle incorporated in Malta that allows us to issue Cells (compartments with distinct balance sheets and income statements) to segregate Originators. Generally, when applied to a single Originator, Cells can provide a similar operational result to that of a Fund, with fewer regulations and at a cheaper price.

Blockchain and Exchange

Tokens do not need DLT technology per se, however, it is a "nice-to-have" feature because it can be used to enhance pre-trade information and match Token buyers with sellers. Technology helps automate the due diligence process and handle a large number of investors through smart contracts. As a corollary, the minimum investment ticket can be lowered to appeal to small retail investors.

By putting the Token on an Exchange, we enable a secondary market, which creates liquidity for Token holders. As a corollary, Tokens are easier to sell on the primary market because investors are no longer constrained to hold their investment until the Token matures.

A Token is no more than a Digital Share or Bond Certificate, sold on a Web portal, that can be acquired online from any location.

In Summary

Fundraising through Tokenisation shares many similarities with other alternative ways of raising money such as securitisation and crowdfunding.

However, it presents a series of advantages :

  1. Potentially lower regulations constraints depending on the structure chosen, resulting in lower setup cost and higher flexibility in the design of the security.
  2. Smaller ticket sizes, flexible design and global coverage give access to a wider pool of potential investors
  3. Process automatisation through digital technologies enables scale-ups.
You may also be interested in reading: Andra Capital collects over $500 million for fund
GLossary of terms:
  • DTL: Distributed Ledger Technology
  • SICAV: Société d'Investissement à Capital Variable -> an open-ended collective investment scheme
  • PIF: Public Investment Fund
  • SIF: Specialised Investment Fund
  • AIF: Alternative Investment Fund
  • SCC PLC: Securitisation Cell Company

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