Luxembourg: Equity Tokens And Shares: Similar But Not Quite So

Last Updated: 1 October 2019
Article by Alvaro Garrido Mesa

A digital world calls for digital assets. Investors' interest in equity tokens as a new way to invest and get ownership in a company is on the rise. As traditional stock or shares, equity tokens are subject to specific legal considerations if they are to be issued under Luxembourg law.

What are equity tokens?

Several European and national authorities, including the EBA and ESMA, have expressed their view in respect of the classification of digital assets (also referred to as crypto-assets or tokens) into different categories, taking into account the specific features pertaining and common to each digital asset. Frequently recognised digital asset categories, as described in a recent working paper published by the Luxembourg House of Financial Technology in collaboration with several Luxembourg law firms, consist of the following:

  • security-like digital assets, which are usually designed to represent an equity or debt claim towards primarily (the assets of) the digital asset issuer, offering their holders benefits similar to those of equity or debt instruments;
  • utility digital assets, which are usually designed to give access (rights) to a service or product provided (or to be provided) by an organization or ecosystem (in most cases related to the entity creating the digital assets); and
  • payment digital assets, which serve as an alternative means of payment generally accepted by third parties.

Broadly speaking, equity tokens would be security-like digital assets representing an ownership interest in a company, which is typically materialized in the form of stock or shares. In practice, the main goal of a company issuing equity tokens is to give investors/shareholders a certain amount of digital assets representing an ownership interest in such company.

This new investment mechanism has raised a lot of interest among investors as it intends to attach traditional equity rights (such as entitlement to a dividend or voting rights) to digital assets, thereby allowing investors to benefit from the advantages of distributed ledger technology ("DLT").

A substitute for shares?

Given that equity tokens are intended to be a digital representation of shares, the opening question is whether a company could issue equity tokens that would grant a tokenholder the exact same rights as a shareholder.

To answer this question, one first has to determine whether a company can issue new shares in the form of equity tokens. Luxembourg law does not specifically foresee this possibility (nor does it forbid it), but it should be noted that a recent amendment to the modified Law of 1 August 2001 on the circulation of securities, clarified that DLT can be used for the purpose of transferring securities, including in the form of digital assets. However, neither the CSSF (Luxembourg's supervisory authority) nor the country's legislators have come up with any specific legislation related to the issuance of securities or digital assets on a distributed ledger. Legal clarification by the authorities around this question would be very helpful.

Given the legal uncertainty surrounding the issuance of digital assets, and the limitation around issuing new or future shares by way of issuing equity tokens, the next consideration would be around equity tokens that would represent already existing shares in the company. This would imply creating an additional instrument (the equity token), which would necessarily have a distinct existence from the share to which it gives rights, and would confer rights on the share that could be transferred without the consent of the shareholder.

In view of the distinct existence of the equity tokens, another legal consideration would be around the method of recording ownership. The ownership of a traditional share is typically recorded in the shareholders' register of the company if it is in registered form, or with a custodian in case of a bearer or dematerialized share, while the ownership of an equity token would fundamentally be recorded on a distributed ledger. There are ongoing initiatives to merge both registers, in order to have both instruments linked and registered solely using DLT, thus facilitating the task of recording ownership.

To sum up

In essence, in view of the current legal challenges associated with the issuance of equity tokens, it can be concluded that, for the time being, an equity token could constitute a representation of the beneficial interest in a share, having its own rights attached to it, and as such it would be an instrument different from a share. This would explain why, besides a couple of recent experiments under the initiative of certain EU authorities, the adoption of equity tokens and their implementation in the legal framework has yet to be developed.

Finally, other legal considerations could be examined, such as the qualification of equity tokens as securities or the attachment of equity rights (e.g. dividends, share premium, share classes, voting rights, etc.) to digital assets, but these are discussions for another time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions