Tokenizing is one of the hottest topics at the capital markets right now and with the authorization of the first security token offerings by the national supervising authorities the subject is picking up speed. BaFin, the competent authority in Germany, already approved two security prospectuses for security token offerings and it is just a matter of time until more will follow. However, the approved prospectuses were related to blockchain based bonds that grant the investors return and repayment claims. But would it also be possible to issue blockchain based stocks? If so, investors would not only be able to profit from the issuing companies business success but could also determine the company’s fate by executing their voting rights at shareholder meetings. Such equity tokens would turn investors into shareholders. So, can stocks be emitted as blockchain tokens according to German law?
MUST STOCKS IN GERMANY BE ISSUED AS PAPER DOCUMENTS?
According to German law, stocks do not necessarily have to be issued as paper documents. Registered shares can be also created by a mere declaration of the shareholders within the shareholders agreement when a stock company is founded. In order to be recognized by the company as shareholder of registered shares it is however necessary that the new shareholder gets listed in the share register of the company instead of the old shareholder. This registry includes information such as the name and address of the shareholder, the date of birth, the amount and serial numbers of the shares the shareholder holds. The shareholder can only execute his rights with legal effect vis-á-vis the company if he is registered. Bearer shares on the other hand are shares that grant rights and claims to its holder. They can only be issued if the right of the shareholder to demand issuance of individual share certificates is excluded in the shareholder agreement. Furthermore, a global certificate of the issued shares has to be kept with either a securities depository bank, an authorized central securities depository (CSD) or a comparable security depository according to foreign law. The decisive factor for the question whether bearer shares can be issued in the form of an equity token under German law is therefore if the global certificate has to be a paper document or not.
WHAT IS A GLOBAL CERTIFICATE?
The German Securities Deposit Act (DepotG) defines global certificates as securities that evidence in writing a multitude of rights which could be individually certified in securities of the same kind. The wording of this definition leaves almost no room for interpretation. An “evidencing in writing” without a paper document seems hardly possible. If the Securities Deposit Act would instead use the word “representation”, a global certificate in the form of a smart contract token would at least hypothetically be possible. As it stands with the current wording of the law, a paper document is unavoidable for creating a global certificate. Issuing bearer shares in form of a blockchain token without a global certificate in paper form is therefore currently impossible under German law.
ARE REGISTERED SHARES IN THE FORM OF AN EQUITY TOKEN A POSSIBILITY?
Uncertified (in this case meaning “not in paper form”) registered shares can, according to German law, be transferred by simple assignment and therefore theoretically with nothing more than a handshake to the new shareholder. As long as the transfer by assignment can be displayed by a smart contract on the blockchain, the issuance of equity tokens that represent uncertified registered shares is generally possible. In order to be recognized as a shareholder by the issuing company, the shareholder has to be registered with the share registry of that company. It would therefore be useful if the smart contract would not only settle the issuing and transferring of the token but also automatically run the company’s shares register on the blockchain. A problem with a blockchain based shares register is however that the former shareholders have the right to demand that their personal data is erased from the shares register once they have sold their shares. If the register is blockchain based, a complete deleting of the data from the blockchain would be impossible, due to the unforgeable and uneditable technology of the blockchain. This general problem, which is also controversially discussed with regards to the European General Data Protection Regulation (GDPR), massively complicates a blockchain based shares register.
Attorney Lutz Auffenberg, LL.M. (London)