Since the approval of the first security prospectus for a security token offering on the German market, the issuance of tokenized securities has become an interesting alternative to the issuance of traditional, paper-based securities. Security token offerings are a technical milestone for the capital markets. They eliminate e.g. the need for depository banks, which are a mandatory requirement for traditional security offerings in Germany. Furthermore, they bring the investment product closer to the investor by allowing him or her to directly take custody of the tokens by storing them in a self-controlled wallet. In addition, security token offerings also allow trading and transferring the tokenized investment product without the need of an intermediary. The needs of investors that either prefer their tokens being safeguarded in professional custody or that are obligated to take that route are also satisfied since the introduction of crypto custody services as a financial service at the beginning of this year. Nevertheless, tokenization in general is still in its early stages in Germany. It will take time and pioneering projects until the infrastructure of the capital markets truly open up to adopt these new products. For example, there is still no regulated trading segment for tokenized securities at an authorized security exchange. Security token trading therefore takes place outside of security exchanges. This circumstance potentially leads to massive problems with regards to trading security tokens which can be solved by an acceptance feature.

The long-established, Hamburg based shipping company Vogemann issued the Greenshiptoken (GST) this month. GST is a security token that includes an acceptance feature according to its token terms. The acceptance feature solves the problem that arises from the fact that GST tokens will not be transferred on the secondary market via a security exchange or any other centralized marketplace, but instead immediately and directly between investors. The problem with this arrangement from a civil law point of view is that rights that stem from the security, especially the repayment and interest claims, will always have to be transferred collectively with the tokens. The German civil law ensures for paper-based debt securities that the right from the paper follows the right at the paper. The owner of a debt security in paper form is therefore legally always the owner of the claims that stem from that security as well. The German civil law currently does not allow a comparable legal fiction for tokenized debt securities.

Therefore, the transfer of security tokens and of rights that are connected to them has to be specifically regulated by the underlying token terms. Since the rights in question are claims, they can legally only be passed on from the seller to the purchaser via assignment to the purchaser. Legally this requires an assignment contract. According to German law, an effective contract requires two components, an offer and an acceptance related to the offer. At this point the decentral nature of blockchain solutions results in a technical problem. Even though the transfer of a blockchain token is actively initiated by the owner – in this case the seller – of the token, the recipient – the purchaser of the token – normally has no option to actively confirm the acceptance of the token. Blockchain tokens are simply added to the blockchain address of the recipient without the recipient being required to take any action whatsoever. Therefore, the offer to transfer a token and the rights connected to the token can be seen in the initiation of the blockchain transaction by the owner, but there is no visible action of the recipient that could legally be qualified as an acceptance of that offer. The acceptance feature solves this problem and ensures that the transfer of a security token will only be included in the underlying blockchain, if the recipient actively confirms the acceptance of the token and the connected rights.

The acceptance feature ensures that the rights connected with the security token will be passed on from the seller to the purchaser in the legally required form of an assignment contract. The absence of a legally effective acceptance of the offer poses the danger that the token could be transferred to the purchaser without the associated rights as set out in the token terms. These rights would then remain with the previous owner of the tokens while the security token would be transferred. The acceptance feature therefore enables the legally effective transfer of security tokens and their associated rights on the secondary market. Security tokens that can only be traded over centralized marketplaces do not necessarily need an acceptance feature, because the seller as well as the purchaser place a trading order which can be viewed as an offer respectively as an acceptance. But as long as such marketplaces do not exist for security tokens the acceptance feature is a valid way to ensure the legally effective transfer of security tokens and the associated investor rights.

Attorney Lutz Auffenberg, LL.M. (London)

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