Clear enforceable rights: With the Tokenization of Shares, the tokenholders are the shareholders with all the rights that the Swiss Code of Obligations confers to shareholders (dividend and voting rights, anti-dilution provisions, rights to liquidation proceeds, information rights etc.) The abundance of case law and legal doctrine gives a high degree of legal certainty.
Transferability: Tokenized shares provide all the convenience of a tokenized asset. No burdensome digital (or even wet) signature is required. Shareholders can easily transfer the shares peer-to-peer, and the shares can potentially be listed on a token exchange. This enables the shareholders of startups and small and medium-sized enterprises to unlock the so-called liquidity premium of shares (up to 25% of market value). Also, the management of shares for the company is simplified as the share register is updated automatically. This reduces the cost for, e.g., for employee stock plans, significantly.
Quick & low cost process: The entire process of tokenizing shares can be done in weeks. As shares have been issued for decades, the legal process as well as the regulatory and tax consequences are clear. There is no need to obtain a FINMA no-action letter or tax ruling.
Low fees: The fees for the transfer of tokenized assets are only the gas-cost of the underlying Ethereum blockchain.
Attraction of investors: Inclusion of professional investors such as venture capitalists and family offices.
Valuation: More accurate and fair asset valuations in the venture capital and private equity market.
What are the benefits of the Tokenization of Shares?
For whom is the "Tokenization of Shares" most suited?
Start-up companies and small- to medium-size enterprises, that wish to raise funds or increase their capital, enhance tradeability of their shares, simplify the management of their shareholding structure or get access to capital markets.
Utility Tokens and Share Tokens share the fundamental aim of companies to obtain funding for their project. The key difference is what the investors get in return for their investment:
Utility tokenholders are by definition not endowed with any enforceable claims on the profits or success of the company. The token gives tokenholders simply a right or the technical ability to use a certain blockchain application (that often does not exist at the time of investment).
The Tokenized Shares framework equates shareholders and tokenholders, thus endowing them with enforceable rights, including dividend and liquidation rights, towards the underlying company.
What is the difference between Utility Tokens and Share Tokens?
What's the legal basis for the Tokenization of Shares?
After thorough analysis of leading scholars and consultation with the Federal Office for the Commercial Register, we have established a secure and compliant legal solution. For the critical open question of the written form requirement for the tansfer of uncertificated securities (as which tokenized shares qualify), three levels of safety are included: First, a convincing case can be made that the transfer does not require written form if the issuer (here the company) agrees to the transfer, and such agreement is implicit if the company issues the shares as a token. Secondly, in case that would not hold, we have included a system where the company actually agrees to each individual transfer when the tokenholder requests entry in the shareholder register. As a third safeguard, the first buyers sign a written blanket assignment that the company could use to establish the tokenholders as the shareholders even in case a Swiss court would not agree with the leading scholars on the transferability of tokenized shares.
Is the Tokenization of Shares only possible in Switzerland or will other countries start exploring this option, too?
The methodology and offering suggested by LEXR and Alethena is currently only employable in Switzerland, however research is being conducted on its application in other jurisdictions.
Which blockchain is used by LEXR & Alethena for the Tokenization of Shares?
For our first Tokenized Shares projects, we used the Ethereum Blockchain. Other blockchains such as NEO, EOS, Bitcoin or others can also be deployed.
What is the difference between other Security Tokens and Share Tokens?
Security tokens come in many shapes: In simplified terms, any token that is bought by investors with the expectation of a profit qualifies as a security token. As such, share tokens are one form of security tokens. However, there are countless other structures of security tokens with different levels of complexity and investor rights. A typical security token would promise tokenholders some percentage of the future profits of the company - however, these are often paid out if certain conditions are met that are outside of the control of tokenholders. Major issues with such security tokens include:
No enforceable rights: They rights of tokenholders can often be circumvented easily by the shareholders. E.g., if the payout to tokenholders is linked to the payout of dividends, the shareholders can simply vote no on a dividend payment and do a share buyback can be done instead, with the same economic benefits for shareholders but without payout to tokenholders.
Legal uncertainty: When shares and security tokens coexist, the status of tokenholders is in many cases unclear: Do they have any anti-dilution protection in subsequent financing rounds? What happens in case of a sale or liquidation of the company?
Complexity: Valuing the shares of companies is complex enough - given the often complex and legally uncertain structure of security tokens, many professional investors will not invest.
For these reasons, a share token offering is the cleaner, faster and more secure solution in almost all cases.
What if I lose my private key?
Tokenized Shares are held on accounts which can only be accessed with the correct cryptographic key. While systems exist that facilitate handling of keys, a situation where a private key is lost can still occur which means that the corresponding shares can never be transferred again. To mitigate this risk, the company can decide to maintain a degree of central control over the shares (thus moving away slightly from the decentralized character). If this is not desired, the smart contract can be implemented in such a fashion that users can claim “lost” shares back after staking a collateral which will be lost in case of a malicious claim.
What rights does the tokenholder have?
The tokenholder is the shareholder. When enrolled in the share register, the tokenholder can enforce its voting and dividend rights and all other legal shareholder rights in the same way as traditional shareholders.
Are there special tax aspects regarding the Tokenization of Shares?
Tokenized Shares are taxed in the same way as normal shares are. In Switzerland, this implies that capital gains are tax-free for natural persons, but dividends are subject to income tax. Furthermore, wealth tax is owed on the share capital.
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