Finding the Holy Grail for the Securosys token
It’s early 2018, and our plans for an ICO are starting to become more tangible. Like many other companies out there, we’ve been contemplating issuing a utility token. The idea seems straightforward — all we have to do is to build and run some kind of a platform. In order to use the platform, you need to buy tokens. We could sell those tokens now as pre-payment. “Hey guys, it isn’t deferred revenue, it’s deferred service — essentially free money!”. The money raised through pre-payments wouldn’t affect our capital structure. This sounds simple until you start to consider all the consequences.
Let’s start with the platform. What kind of platform would it be? Must it have some version of blockchain in it? After reading countless ICO whitepapers requesting investments, this feels like a non-negotiable requirement. Can we come up with something? I just start to laugh — how many other companies got stuck at this step?
Now the cool thing is that we already offer a platform as a service at Securosys. It’s our Clouds HSM solution, on which we manage and operate HSMs, renting them out to our customers. Platform as a service. Now, let’s focus on the blockchain and crypto assets customers. If they were to keep their private keys on our Clouds HSM, then we’d fulfill most of the ICO investment requirements. Our Clouds HSM becomes part of the blockchain infrastructure, even though we don’t actually run a blockchain ourselves.
Accordingly, we could issue a utility token for customers to use on our platform, the Clouds HSM. They could pay for it using our tokens — or as they have done up to now, using fiat. Though this would make the process clearer, we’d simply be setting the exchange rate of our token to fiat, making our utility token redundant. It might be wielded to get a discount for the use of our Clouds HSM, but getting a little discount wouldn’t make a big difference. Moreover, the token’s exchange rate would be completely under Securosys control. This would make it completely uninteresting for an investor, considering such a token would never really appreciate in value. As an investor, I wouldn’t buy such a utility token.
Struggling with the utility token, we start to look around. We don’t have to go far: our friends at Modum have come up with an interesting scheme. The Modum token is a security token. It has dividend rights, which means that all dividends from Modum will be paid out to the token holders. All their shareholders have exchanged their dividend rights for some of the tokens. This is drastic. Could we implement something similar with Securosys?
Whilst considering this option, many thoughts shoot through my head. Would ICO investors go for it? Considering Modum’s successful ICO, they would. Can we live with it and defend it? Can we sell this or something similar to our existing investors? Would it be fair to them? And that’s where the snag sits. Modum is just starting out with their first prototypes, while we are already shipping products and have achieved first profitability. Our existing investors financed us when we were just starting out, and have supported us for over three years. They have to be rewarded for their loyalty, so we cannot just take that seniority bonus away from them. We need a solution more suitable to our company’s circumstances.
Heinrich Zetlmayer from BVV suggested that we issue a full security token: “Take a look at the Lykke tokens. Investors don’t just have the rights to dividends, they can also convert their tokens into shares.” This sounds like a reasonable alternative. He continues: “Interestingly, nobody has converted their tokens into shares.” Initially surprising, the reason for this becomes obvious very quickly: tokens can be traded on exchanges or over the counter (OTC). On the other hand, the selling of shares is restricted by the shareholders’ agreement. Moreover, a trading platform for private companies’ shares doesn’t really exist.
It’s become clear to us that we should issue a full security token, one that can be converted in company shares and has dividend rights. When we bring up our decision to drop the utility token, there is a collective sigh of relief to be heard. “We’ve seen the market move more and more towards security tokens,” confirms Michael Guzik. After we explain the token’s structure, even our lawyers jump on board. “This is something real and very interesting for contributors, as they participate in the success of Securosys and get a convertible right for equity,” confirms Ronald Kogens, our attorney from the law firm FRORIEP. So far ICOs, in particular utility token ICOs, provided contributors solely with certain future usage rights, if at all. Our lawyers also made it clear to us that we’d now have to publish a Prospectus, similar to what is done for an Initial Public Offering (IPO), because the token represents a financial instrument.
By issuing a security token that can be converted into shares and has dividend rights, we believe we found the Holy Grail for Securosys. Existing shareholders are rewarded for standing behind the company over the last four years, and our new token holders are implied shareholders of Securosys. In any exit event their tokens would be converted to company shares. Future investors won’t have to guess how much the tokens are worth since their value is already determined — something that would be much more difficult with utility tokens. We can keep a clear capital structure.
This concept even allows us to accommodate the traditional investors and funds that prefer shares to tokens. Some of these funds simply have not yet come around to adjusting their internal procedures and regulations for owning tokens and crypto coins, despite the fact that they would have much more flexibility if they wanted to divest their holdings. Right after minting their tokens, we can convert them into company shares.
While it now sounds simple, the whole process required a few more steps and problems solved. Since our tokens can be converted into shares, we had to reserve these shares in our capital structure. In Switzerland we did this by issuing conditional shares, which are now ready if token holders ever want to convert. Furthermore, according to Swiss law, a limited company has to hold a shareholders’ meeting every year and invite all shareholders with voting rights. Since we expect to have a few hundred, maybe thousands, of token holders, if everyone was to convert their tokens into shares, this would require us to rent out a rather large venue to hold our annual general assembly. Here the Swiss law again helped us avoid needlessly wasting funds on renting a stadium for such a meeting. Instead, we decided that only holders of large amounts of tokens would get regular shares. The rest would get participation rights, which are shares without voting rights. Having the option to get regular shares really pleased institutional investors, who insist on voting rights.
We believe that with this token structure we’ve found the perfect solution for Securosys. It’s not “free money”, like other constructs seem to be. Rather, it represents a justifiable slice of the company. It will help bring the company to the next level and, most importantly, it’s something we can stand behind.
