More and more real estate and, in some cases, companies are being tokenized in order to offer investors and issuers advantages over traditionally securitized securities. The digitization and dematerialization of securities has now also arrived in the shipping industry. The Hamburg-based investment company New Shore Invest specializes in the financing of ships via tokens. In the interview, one of the founders, Hanno Tamminga, explains the advantages of tokenizing ships and how the market can be classified from an investor’s perspective.
The interview is first in the Cryptocompass edition published in July 2020.
How did you get the idea to use tokenization for ships as well?
The idea of crowdfunding for that shipping We already had to develop in 2016. We were and continue to believe that classic crowdfunding in the form of subordinated loans, ie debt-based investments, does not fit the “ship” asset class. Firstly, we find that a fixed rate of interest with no possibility for the investor, from a positive development of the Shipping– / Charter markets, for which the asset class is not appropriate. Second, one would Investment in the form of a subordinated loan from investors do not benefit from the tonnage tax, according to which the tax burden on profits is less than 1 percent for investors.
We have therefore considered how we can benefit from the advantages of an equity-based investment (ie no “capped” interest) as well as the tonnage tax benefit. Through initial detours we finally came up with the tokenization of limited partner shares and were the first to do so Germany managed to tokenized limited partner shares using a securities information sheet (WIB) approved by BaFin new-shore-invest.de to be able to offer publicly.
Are the benefits of tokenizing ships the same as real estate or business?
The tokenization of real estate is mostly a so-called subordinated bond. Although the providers advertise that the investor participates “like a co-owner” in increases in the value of the property, the investor is actually not the owner of the property. This is different with our tokenized limited partner shares. The investor acquires equity. Part of the ship therefore belongs to him. He therefore also participates 100 percent – and not, as with some tokenizations in the real estate sector, only partially (for example 80 percent) – in positive market developments, i.e. increases in the value of Assets. In contrast to the previous STOs in the real estate sector, an investor becomes the real “co-owner” of the ship with us.
So if it is “real equity”, shouldn’t you also have an annual general meeting as with classic stock corporations?
Yeah right. The project company will hold at least one general meeting every year. Unlike at general meetings, however, this does not take the form of a face-to-face event, but only online in our investor portal. Investors will be informed in good time before a shareholders’ meeting takes place, and of course in which period they can cast their votes. Of course, this is also purely online, which means that no one has to fill out a ballot and then throw it in the mailbox.
What kind of ships are you tokenizing?
We have focused on ecological ships from niche segments. The choice of the current project fell on the so-called coaster segment, which is system-relevant for the European exchange of goods and handles around 60 percent of intra-European trade in goods. The existing ships in this segment are outdated. 67 percent of the existing fleet is over 15 years old, with an average lifespan of ships of around 25 to 30 years. In addition, there are hardly any new construction orders. With the RHAS 5 we offer a modern and economical new building, which due to many technical innovations, for example around a third less fuel consumption, will be superior to existing ships and is also an absolute pioneer from an ecological perspective. The ship’s CO2 emissions at delivery in early 2022 will be 16 percent below the maximum permitted for 2025.
What should investors pay attention to when investing in ships? How big are the default risks?
Ship investments – like tokenized real estate investments – are entrepreneurial investments that involve considerable risks. This is simply due to the nature of one investment in kind. As with real estate, the ship must be “rented” regularly, that is, chartered out. If rental or charter income is not received, the forecast returns cannot be paid. For ships, too, there is therefore a risk of a partial or total loss of the invested capital. We want to convey ship investments for what they are: a risky investment opportunity with an attractive return. Because an above-average return for investors (in the current project almost 7 percent after taxes) is of course also offset by a corresponding risk. However, there is no obligation to make additional payments.
Investors wishing to invest in ships should therefore not only consider the attractive return, but also the associated risk. Ship investments alone are certainly not used for old-age provision. Rather, they are the profitable component of a diversified portfolio.
Does the ship market suffer a lot from Corona? How is the market situation to be assessed here?
The effects of the corona crisis on the shipping market in general are of a different nature. The tanker market, as was widely reported in the press, benefited greatly from the decline in global demand for crude oil in the short term. On the other hand, reduced trading volumes are particularly noticeable in the container segment, particularly between Asia and Europe. However, we are relaxed about the earnings situation of RHAS 5. For one thing, the new building will not be delivered until early 2022 when the majority of experts assume that we will have overcome the economic consequences of the corona crisis. Furthermore, the RHAS 5 is used exclusively in intra-European goods traffic and is used in a revenue pool with four identical sister ships, which, despite the corona crisis, have already been chartered for three years to the industry leader in this freight market, Wilson ASA. This means that the RHAS 5 already has a 4/5 income security for the first years of operation, which speaks for the quality and strong demand of this type of ship.
You advertise that investors also benefit from a tonnage tax. What do you mean with that?
Strictly speaking, the “tonnage tax” is not a tax, but a method of determining profits and a privilege of German merchant shipping. The result of using this profit determination method is that an investor only has to pay taxes of less than 1 percent pa based on his subscription amount – regardless of the actual economic result of the project company, i.e. the ship, and also regardless of the actual amount of the distributions flow to the investor.
In comparison to capital gains tax, this can be very important. In order to be able to offer a pictorial comparison, we have a tonnage tax calculator that shows the difference in tax burden when applying capital gains tax vs. Tonnage tax shows, built.
How do you solve the safekeeping of Security Token? Do you offer the safekeeping of the tokens or is that optional for investors?
We offer investors who want to create a wallet as part of the drawing in our investor portal, among other things, to store the wallet data encrypted (PGP encryption) on our server. Of course, we never have access to the decrypted data or private key. The investor can access the encrypted data at any time in the investor portal and decrypt it using the password he has assigned. In addition, of course, we also offer investors to use their existing wallet.
What is your outlook for establishing security token offerings in the shipping industry over the next three to five years?
Although ship investments were previously traded on secondary market platforms, the market was very illiquid due to the structure and cumbersome transfer. The tokenization opens up the enormous potential to form a very liquid secondary market, which, similar to a stock market, finds the fair value of the token and thus the ship value, similar to the market capitalization of exchange-traded companies, through the intelligence of the market. For this reason, investors receive quarterly reports on business developments via the investor portal, so that they can keep up to date with the value of their investments. For the liquidity and price formation in a future secondary market, such information obligations as exist in public companies are essential.
The tokenization makes it possible, for example, to release company shares to a broad market in a cost-effective and small-scale manner. The tokens are technically uncomplicated, cost-efficient and can be traded and transferred within a few seconds. In our view, an STO plays the role of an IPO and is also affordable for small and medium-sized companies, which thereby have access to the capital market.
The contribution Ahoy tokenization! Investment opportunities on the high seas first appeared on BTC-ECHO.