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Tokenised Equity: A Revolution for Traditional and New Capital Markets

Swiss Startup Alethena is the first company to successfully tokenise its entire share capital on the Ethereum blockchain. The company’s shareholders will thus be holding tokenised shares endowed with claimable rights, i.e. dividend and voting rights.

While the trend towards increasing regulation and, as a result, a decreasing number of IPOs and listed stocks on global exchanges remains unchanged, in the recent past, many startup projects have successfully funded themselves by issuing tokens on the blockchain. However, ever since the bursting of the Bitcoin Bubble in early 2018, the number of successful coin or token offerings has shrunken drastically. Apart from the stark price decreases, one of the main drivers for this development is reflected in the fact that an investment in said coins and tokens, in most cases, simply represents a donation (void of any legal claims for a potential investor). Furthermore, once invested, an investor cannot rely on any kind of fundamental data with respect to the development of the price.

Project financing for startups has become increasingly complicated, insofar as that many companies seek funding by privately issuing equity for professional investors while publicly offering coins or tokens to the community, thus creating a dual funding structure with differing stakeholders, in particular with respect to associated legal rights. Alethena, a provider specialised on the provision of due diligence services in the cryptocurrency industry, has found itself in a similar situation in early 2018. Having tried to seek funding by issuing a security token, the company was not able to successfully complete the round, given, due to the legal situation at the time, that it could not guarantee any form of claimable rights to professional investors.

Solving the aforementioned problem not only mandated a reasonable technical implementation but also demanded a reinterpretation of the legal position (see von der Crone, H., C., Kessler, F., J., Angstmann, L., 2018, Token in der Blockchain – privatrechtliche Aspekte der Distributed Ledger Technologie, SJZ 114/2018, p. 337). In a collective effort, together with Prof. Dr. Hans Caspar von der Crone and Christian Meisser’s law firm Lexr, a legal solution was developed which allows for the issuing of traditional registered shares as a standard ERC20 token on the Ethereum blockchain. In the process, for each share issued as an uncertified security, a given shareholder, instead of obtaining an entry on his bank deposit, receives a token on a so-called wallet.

To mitigate common risks with respect to ease of use, Alethena has implemented several technical features into its smart contract. Most noteworthy, a mechanism, allowing for a reclaim of shares in case of a loss of the associated private key, the password for the wallet (the substitute for the bank deposit). The legal implementation in the bylaws of the private limited company has been approved by both the cantonal as well as the national commercial register (EHRA). Lastly, to efficiently manage the company’s register of shareholders and capitalisation table, a cooperation with startup Ledgy was initiated. This has led to the development of a solution, which allows for the monitoring of token transactions (and thus also share transactions) to subsequent holders.

The currently implemented solution, both from a technical and legal viewpoint, is a basic version that can be applied, almost without limit, to any kind of uncertified securities and allows for future expansion to cover additional features. The target group encompasses not only startups but also non-listed companies which are interested in enabling fast tradability of their shares. Hence, also small to medium enterprises are able to raise capital in the market, make employee shares tradable and therefore unlock the liquidity premium or outsource certain projects and profit-centers into independent private limited companies.

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