Equity Token includes digital assets that are financial investments, and classified as a “securities” or its equivalent under applicable laws. This classification could vary by jurisdiction. Tokens whose intrinsic characteristics are inherently unique to financial instruments. These intrinsic characteristics include, for example, equity ownership in a company, an interest in a fund, as well as structured debt, loans, and dividend rights.
However, not all financial instruments are “securities” in every jurisdiction. For example, under U.S. law, loans may not always qualify as securities, and, similarly, profit interests in a partnership may not always qualify as a security, particularly if each holder of the profit interest equally and substantially/meaningfully participates in governance rights.
In addition, some investment tokens can represent financial or commodity derivatives or insurance products that are not classified as securities.
Some jurisdictions may apply securities or financial instrument regulations to tokens whose intrinsic characteristics are not purely those of a financial instrument. For example, as discussed above, in the United States, the SEC could consider a utility token to be a “security” if, among other things, the token is sold to capitalize a business and in a manner that would cause any reasonable buyer to purchase the tokens as a passive financial investment and not a product for consumption or use.
The SEC could approach general payment tokens in the same way, if their initial sales are marketed and sold substantially as a financial investment or if they are solely viewed as a speculative store of value, the SEC may view those tokens as “securities”.
Delaware Approves Tracking of Stock Ownership on Blockchain
The Delaware Blockchain Amendments, which revised Delaware’s General Corporation Law to authorize the use of distributed ledger technology for the issuance and transfer of shares eliminated the requirement of a central authority to maintain the stock ledger, and with it certain risks of human error related to the issuance and transfer of shares.
Specifically, the Amendments clarified that a Delaware corporation may issue shares and maintain its stock ledger on a blockchain through smart contract, without the need for a single central officer or agent (e.g., the corporate secretary or transfer agent) to serve as the recorder and clearing house for all issuances and transfers. Using a Blockchain to record stock ownership would allow the corporation to quickly and easily figure out all its current shareholders, as well as who owned shares at any point in the company’s history. This is particularly noteworthy, because even though Delaware is a small state, the majority of all corporations in the US are based in Delaware.
One recent article describes ERC-884, a draft Ethereum token specification designed to represent equity in any Delaware corporation. Each of these tokens represent a single unnumbered share. Issuers maintain a private database (off the blockchain) that records the name and physical address of the token’s owner as well as the Ethereum address corresponding to the token. Token owners are whitelisted and have their identity verified. Shareholders who lose their private key, or otherwise lose access to their tokens, can cancel their tokens and have them reissued. Thus, although the ERC-884 is designed to transfer shares of stock, the share ownership information is captured in an off-chain database.
California Senate Bill 838: Corporate Records, Articiles of Incorporation, Blockchain Technology
This bill would authorize, until January 1, 2022, a corporation or a social purpose corporation that does not have outstanding securities listed on the New York Stock Exchange, the NYSE Amex, the NASDAQ Global Market, or the NASDAQ Capital Market, a provision authorizing records administered by or on behalf of the corporation in which the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each of those stockholders, and all issuances and transfers of stock of the corporation to be recorded and kept on or by means of blockchain technology, provided that all of the following requirements are met:
- The encrypted information in the records can be decrypted and converted into a clearly readable format within a reasonable period of time.
- The records can be used to prepare the list of shareholders.
- The records can be used to record information required to be included on stock certificates.
- The records can be used to record required transfers of stock.
- Reasonable restrictions upon the right to transfer or hypothecate shares of any class or classes or series, but no restriction shall be binding with respect to shares issued prior to the adoption of the restriction unless the holders of such shares voted in favor of the restriction.
- The names and addresses of the persons appointed to act as initial directors.
Equity Token Offering
This is a mode of raising funds for any company that involves the issuance of Equity Tokens on blockchains. These tokens can be issued in both public and private placements and can be conducted through any regulatory entity in its parent country. For example, in the United States, a public fund raise through the JOBS Act’s Regulation A+ Improvement Act crowdfunding rule, could raise a maximum of $50-M from the public, non-accredited amateur investors included.
The Equity Token Offering (ETO) process is similar to any share issue by any other company that is not blockchain related. However, the platforms that conduct this process are different. The process below shows a step by step way of conducting an Equity Token Offering for any company which begins with a campaign to investors (vary by jurisdiction and regulations) informing them of the company’s move to offer Equity Tokens.
- Select an Equity Token Platform
- Select an Alternative Trading System (ATS)
- Commercial Terms
- Private Placement (Accredited Investors)
- Public Offering
- Shareholder’s Community