Transaction of Tokenized Shares on Ethereum: Leveraging the Liechtenstein Token Act with the Tokenization Solutions of Amazing Blocks
Tokenization is a trend that is just starting now. In several years, billions of assets will be tokenized. Amazing Blocks provides tokenization solutions for equity tokens, debt tokens and a variety of other tokens according to the Liechtenstein Token Act. In this article, we describe how “tokenized shares” — that is, shares of a legal entity in Liechtenstein — can be easily transferred within minutes. Notably, this does not concern tokens being traded on exchanges. We rather focus on company shares held by shareholders which, in turn, are sold and purchased by other or new shareholders. This is a very frequent process for changes in the ownership of the company when new investors join, restructuring takes place or team members receive shares. The goal of Amazing Blocks is to provide tokenization solutions that ease these processes and make them as efficient as possible: Specifically, this means that an ownership transfer is done within minutes without the need to physically visit the notary and get the approval.
Together with the law firm NÄGELE, we also provide a template for a Share Sale and Purchase Agreement which needs to be inline with the Liechtenstein Token Act such that “tokenized shares” are subject to the transaction.
The transfer of shares is nothing unusual. It happens regularly with startups and larger enterprises. A good example is a fundraising round of startups where “old” shareholders sell their shares to the newly joining investor.
Please note that this article focuses on the shareholders of a company. To be very clear, this article addresses the issuance of tokenized shares, their transfer and their administration. It discusses the Amazing Blocks “Issuer Tokenpad” that is illustrated in the red box in Figure 1. This needs to be separated from a “token sale” where assets are tokenized with the aim of being financed (e.g. machines, cash flow generating contracts, trademarks, real estate, cars). A “token sale” is a different process. The tokenization of such assets including the handling of larger groups of investors would be covered in the Amazing Blocks’ “Investor Suite”. This is illustrated in the second red box in Figure 1.
In case the shares of a Liechtenstein legal entity have been tokenized with the software of Amazing Blocks, the transfer of the “tokenized shares” is very easy. Of course, a Share Sale and Purchase Agreement needs to be signed between seller and purchaser to verify the transaction. Once this contract is signed, the transaction can be executed within minutes. By the way, stock markets or crypto exchanges function differently, such that an individual sale and purchase contract is not needed. More information on such secondary markets can be found here and here.
For our case, where “tokenized shares” of a legal entity are transferred from an existing owner to a new owner, (i) we rely on the tokenization solution of Amazing Blocks for the technical execution and (ii) we need a Share Sale and Purchase Agreement as a so-called instrument of transfer. This article has two goals: Firstly, we want to show how the Amazing Blocks’ tokenization solution works in reality and how it makes selling and purchasing shares much more efficient. Secondly, we want to document the process to help our clients understand it in detail and act accordingly.
A transfer of shares occurs if one shareholder seeks to sell his or her shares to somebody else who purchases these outstanding shares. This person can be an existing shareholder or a new shareholder. In the latter case, this could for example be a new investor joining a startup or a key executive receiving shares as part of his incentive scheme.
The transfer of tokenized shares or, in other words, the sale and purchase of company shares require the following steps:
- Legal name of the new shareholder
- Instrument of transfer (i.e., a sale and purchase contract for the shares)
- Identification of the new shareholder (i.e., the purchaser of the shares)
- Payment of the sale/purchase price
- Transfer of the tokens
- Reviewing the transaction
These steps are usually done over the course of several weeks.The duration is based on the premise that all involved parties agree on the Share Sale and Purchase Agreement. Upon signing the agreement, the transfer can be executed. The tokenization solution of Amazing Blocks integrates the technical execution and provides the perfectly fitting templates for the required contracts authored by the law firm NÄGELE. Therefore the process can be accelerated significantly. Also, a tokenized entity (e.g. PCC) is the perfect umbrella for the subsequent tokenization of assets. Amazing Blocks’ software is perfectly developed to cope with tokenizing all kinds of assets (e.g. machines, cash flow generating contracts, trademarks, real estate, cars) while for a tokenized asset equity tokens, debt tokens, participation rights as tokens or any mixture of these types of tokens should be issued. This is possible by seamlessly merging blockchain technology with the law (Liechtenstein Token Act).
1. Legal name of the new shareholder
Of course the name of the new shareholder needs to be entered in the Share Sale and Purchase Agreement. Please find below a list of the information that is required. Most of these data points are required for the agreement itself. In addition to this, they need to be entered in the shareholder register of the Amazing Blocks’ software. Prior to the data compilation process, we have to retrieve all relevant data for both purposes (software and contract) in order to avoid double effort.
Information required by a shareholder in case it is a private individual:
- First name and last name
- Street, postal code, city, country
- Email and phone
- Date of birth and city of birth
- Ethereum wallet address
- IBAN bank account number, Bank name, country of bank, BIC code
Information required by a shareholder in case it is a company or organization:
- Company name
- Commercial register number and name of commercial register
- Street, postal code, city, country
- Legal representatives of the company (i.e., managing directors)
- Ethereum wallet address
- IBAN bank account number, Bank name, country of bank, BIC code
By the way, a traditional bank account (IBAN number) is required by existing rules in Liechtenstein because the tokenized shares might pay out a dividend at a later time. If the transaction shall be conducted, the receiving bank account must already be known now.
In case a new shareholder is purchasing the tokenized shares, he needs to be fully identified complying with Liechtenstein law (Step 3). This might take some effort. However, the Share Sale and Purchase Agreement can be signed simultaneously (see Step 2).
On the other side, in case the purchasing shareholder already owns some tokenized shares and is increasing his/her stake, the identification process (Step 3) is not required again.
2. Share Sale and Purchase Agreement — the “instrument of transfer”
The transfer of the tokens — that is, the tokenized shares — can only be executed if there is a valid “reason” for the transaction. This is called an “instrument of transfer”. Usually, this is the Share Sale and Purchase Agreement. The contract primarily includes the following information:
- Seller: Who exactly is selling the shares?
- Purchaser: Who exactly is buying the shares (maybe, a new shareholder)?
- Number of shares
- Price of the shares
The Share Sale and Purchase Agreement is a standard contract amended by some special rules to allow the applicability of the Liechtenstein Token Act (TVTG). Recall that Amazing Blocks’ software has been used to tokenize registered shares on the Ethereum Mainnet in line with the Liechtenstein Token Act. Recall that registered shares are shares that are assigned to one specific owner. They cannot be traded freely to others as it would be the case with bearer shares. The reason why Amazing Blocks relies on registered shares so far are compliance rules (e.g., anti-money laundry rules) which are easy to comply with in the case of registered shares.
Complying with all these requirements and perfectly integrating with Amazing Blocks’ tokenization solution, here is a contract template authored by the law firm NÄGELE. To illustrate this contract, see Figure 2.
This contract can be signed with DocuSign to ease the process. The signing parties are the selling shareholder and the purchasing shareholder. The Board of Directors of the company does not need to sign. Yet, the Board of Directors later on needs to apply Amazing Blocks’ software to help facilitate the transfer (see Step 5).
When signing the contract, it needs to be kept in mind that a Shareholder Agreement might be in place that restricts the transferability of shares (e.g. option rights for existing shareholders to purchase shares, tag along rules, drag along rules). In case such an agreement exists, of course, its rules need to be applied.
Once the contract is signed, two things can happen: First the tokenized shares can be transferred via Amazing Blocks’ software (Step 5). Second, the purchaser can pay for the shares and send the amount of money to the seller (Step 4).
3. Identification of the new shareholders (i.e., the purchaser of the tokenized shares)
In case the tokenized shares are transferred to an existing shareholder, this step is not required.
If the tokenized shares are transferred to a new shareholder, the identity of the person or company/organization needs to be fully proved according to Liechtenstein law. To put it in a nutshell, we have to prove the identities of a private individual if he or she becomes a shareholder. The same is true in case the new shareholder is a company or organization. In that case, both the legal representatives of the organization (the managing directors, the CEO etc.) and the ultimate beneficial owners (UBOs) also need to be fully identified.
We described the process of identifying future shareholders elsewhere and emphasized that it is a lengthy process which might involve several forms and documents. The effort to identify persons is easier, whereas the effort to identify organizations is more complicated.
In case a company/organization becomes the new shareholder, we also have to identify (i) all managing directors (as legal representatives) and (ii) all UBOs of the company. UBOs are the private individuals that own a company. If we have many UBOs the process can become quite lengthy.
Amazing Blocks provides some templates for gathering that data of the shareholders, their legal representatives and their UBOs.
4. Payment for the shares
Once the Share Sale and Purchase Agreement has been signed by both the seller and the purchaser, the payment can be executed: the purchaser sends the amount of money to the seller. The amount of money to be transferred is the number of tokenized shares to be transferred multiplied with the price for each tokenized share.
5. Transfer of the tokenized shares
Once the Share Sale and Purchase Agreement has been signed and once all identification information is available (Step 3), the tokenized shares can be transferred using the tokenization software of Amazing Blocks. By the way, transferring the tokenized shares is not dependent on the payment (Step 4) so that these two steps can be done in parallel and independently.
The transfer of the tokenized shares consist of the following steps:
- 5.1 Adding the new shareholder to the investors register of Amazing Blocks software
- 5.2 Whitelist the wallet addresses of the seller and the purchaser in the Amazing Blocks software
- 5.3 Generate the name hash in the Amazing Blocks software
- 5.4 Transfer the tokenized shares initiated by the seller
Regarding 5.1, the new shareholder — be it a new person or company — has to be added to the investor register in the Amazing Blocks tokenization software (see Figure 3). This needs to be done by the Board of Directors (of the company whose shares are transferred). All relevant data of a shareholder has been compiled already (see Step 1 in the beginning of the article).
Of course, in case the purchasing shareholder is already in the investor registry of the company, he or she does not have to be added. This can be the case, if an existing shareholder purchases shares to increase his or her stake in the company.
Recall that the Board of Directors is automatically mandated to do this. The seller and the buyer needed to agree on the transaction in their Share Sale and Purchase Agreement. A specific decision or confirmation by the Board of Directors is not required.
Regarding 5.2, the Ethereum wallet addresses of the purchaser and the seller need to be whitelisted in the Amazing Blocks software (see Figure 4). This step takes a couple of seconds and is required since the tokenized shares are in fact registered shares. They can therefore not be freely transferred to any other Ethereum wallet. Rather, only whitelisted Ethereum wallets can send and receive the tokenized shares. Both the sending wallet address and the receiving wallet address need to be added to the whitelist such that the tokens can be transferred later on. Maintaining the list of authorized Ethereum wallets (i.e., the whitelist) is done by the Board of Directors.
Regarding 5.3, the name hash of the purchasers identity has to be generated within the Amazing Blocks software (see Figure 4). Again, this step takes a couple of seconds. As we are in fact transferring tokenized registered shares, they actually need to be registered for the new purchaser. In the past, when shares were printed on paper, the name of the shareholder was printed on these paper documents. Tokens are immaterial. Therefore, printing is not possible. To still “register” the shares for the purchaser, Amazing Blocks’ software adds a name hash to the token. This acts as an identification of the purchaser “printed” on the “tokenized shares”.
Regarding 5.4, the tokenized shares can be transferred. Everything is now prepared. The transfer of the tokenized shares needs to be initiated by the seller. He transfers the tokens through his wallet software (e.g. MetaMask). The seller (i.e., the person sending the tokens) needs to make sure that he has enough ETH on his wallet to pay the required gas fees. This is needed to enable the transaction. If, then, the seller initiated this transaction and if Ethereum processes this transaction, the purchaser has received the tokenized shares in his wallet.
If the purchaser, for example, wants to see the purchased tokenized shares in his MetaMask wallet or on another wallet, the smart contract address of the token needs to be added as “custom token”. An explanation to do this in MetaMask can be found here, if needed.
Example: The smart contract for the “tokenized shares” of Amazing Blocks AG is 0xe89671bb6c950cd2d7c5d981c132d3a7294908e5, so it is this very address that has to be added as “custom token” in MetaMask.
6. Reviewing the transaction
Once the transaction has been processed by the Ethereum blockchain, the transfer of the tokenized shares can be inspected on the Ethereum mainnet; for instance on Etherscan. As an example, the share distribution of Amazing Blocks AG can be inspected here (see Figure 5). This Figure shows the distribution of tokenized shares among the shareholders. Clicking on the Ethereum addresses below the pie chart allows the user to investigate how the share distribution changed over time. The legal names (that is, the identities) of the persons that own the tokenized shares is — as usual on Ethereum — not shown. Ethereum has been developed with pseudonymous transaction data and a pseudonymous ledger.
Transaction from one shareholder of Amazing Blocks AG to another shareholder can also be inspected as can be seen here (see Figure 6). This Figure indicates that 100 tokens — to be precise, 100 tokenized shares of Amazing Blocks AG as a legal entity — have been transferred from one shareholder to another shareholder. This transaction happened on October 22, 2020. By the way, it was the first transaction of tokenized shares according to the Liechtenstein Token Act ever. Another similar transaction can be seen here.
In this article, we have described how “tokenized shares” — that is, shares of a legal entity in Liechtenstein — can be easily transferred within minutes. Importantly, this did not concern tokens being traded on exchanges. Rather, our article focused on company shares held by shareholders and then being sold and purchased by other or new shareholders. This is a very frequent process for companies whose ownership changes when new investors join, when restructuring takes place or when team members get shares.
Please note that this article concerned the shareholders of a company. To be very clear, this article addressed the issuance of tokenized shares, its transfer and its administration. It concerns the “Issuer Tokenpad” of Amazing Blocks (see Figure 1). This needs to be separated from a “token sale” where assets are tokenized and should be financed (e.g. machines, cash flow generating contracts, trademarks, real estate, cars). The tokenization of such assets including the handling of larger groups of investors is covered by the “Investor Suite” of Amazing Blocks.
The goal of Amazing Blocks is to provide tokenization solutions that ease this process and make it as efficient as possible: Specifically, this means the ownership transfer is done within minutes while no physical visit at a notary is required. Tokenization is a trend that is just starting now. In several years, billions of assets will be tokenized. Amazing Blocks provides tokenization solutions for equity tokens, debt tokens and other types of tokens according to the Liechtenstein Token Act.
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Amazing Blocks offers a tokenization solution that enables its clients to tokenize various assets according to the Liechtenstein Token Act (software-as-a-service). The software covers both the issuance of tokens and investing in tokens. It suits the needs for tokenizing all kinds of assets (e.g. machines, cash flow generating contracts, trademarks, real estate, cars). Imagine that some asset should be tokenized. For this asset various tokens would make sense: Equity tokens, debt tokens, participation rights as tokens, ownership tokens, or any mixture of these tokens. The software of Amazing Blocks helps issuers to handle multiple assets and to issue multiple tokens for these assets. This is possible by integrating blockchain technology with the law (that is, the Liechtenstein Token Act). At the core, there is the “digital legal entity in Liechtenstein” based on “tokenized shares” which allows a very efficient foundation, a very efficient operation of the company and, thus, an efficient and flexible possibility to tokenize assets. This should now make a wide variety of tokenization projects possible, because the costs for tokenization are significantly reduced.
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