During the structuring of a financial product, we consider legal and commercial aspects in order to create a product well-suited for the investor base you want to target. As a starting point, out-of-the-box templates for an equity-like participation right and other assets that have been used in previous issuances are used and adapted to your specific needs.
Structuring a digital security has a number of special cases that need to be handled. For you to get a better understanding of these cases, we have put together this checklist.
Name: The name serves as a human-readable identification of your digital security on the blockchain. Computer programs identify your security by a unique identified - the address.
Symbol: The three or four-digit symbol is used to identify the digital security on the blockchain even more quickly. It's therefore often used instead of the complete name. Allowed characters are uppercase letters [A...Z] as well as [0...9].
Using the calculation factor, you determine what value an unit of the digital security should represent. In the simplest case, one unit corresponds exactly to one unit of the underlying asset. The calculation factor, in this case, is 1. The higher the calculation factor, the more digital securities you can issue.
A lock-up period is often defined when securities are issued. During this period, it is technically ensured that your digital securities cannot be transferred between investors. Thus you have the possibility to enter the primary market alone without the influence of investors.
Define the rights that each investor should be entitled to. All rights and obligations under the asset contract shall be represented by the tokens on the Ethereum blockchain.
The rights under the asset contract are not represented by a security or certificate and the investor shall not be entitled to claim securitization.
Payment scenarios must be defined that correspond to the list of current owners of the digital security that can be queried from the blockchain at any time.
If the rights of the asset contract are no longer valid, the tokens will be burned (destroyed). For example, if a bond is paid back, the tokens will be destroyed because there is no claim any longer. In the case of dividend payments, however, the tokens are not burned because the claims still persist.
In case investors lose access to their private key and the recovery mechanism fails, it often makes sense to incorporate terms that govern under which circumstances the issuer will be allowed to use the technical possibility of re-issueing the digital securities to a new wallet of the investor.
In the case of a hard fork, the issuer can technically decide which part of the network to use. You can define more detailed off-chain governance structures for such a case in the asset contract.
Smart contracts can be updated by the issuer due to security reasons. You can define more detailed off-chain governance structures for such a case in the asset contract.
The content of the asset contract will be set out in the smart contract underlying the assets. You should include the address of the smart contract within the asset contract.
The content of this asset contract and of all its amendments should be stored in public immutable storage where it can be retrieved by a cryptographic hash of a file with such content. The investor should have access to the asset contract and all amendments by inspecting the smart contract which is publicly available on the Ethereum blockchain.
Tokens representing the rights under the asset contract are freely transferable and all rights and obligations from this contract can only be transferred by means of transferring at least one token.
These are certainly the most important topics you need to discuss with your lawyer while structuring the asset contract. If you have any further questions we can forward your request to experienced law firms that have extensive knowledge of both the legal framework and the concrete technical requirements.