Case Study:
Tokenized Equity
May 9th 2019
To demonstrate its technical capabilities and the practical benefits of tokenization, Mt Pelerin tokenized 100% of its share-equity when it incorporated its company, Mt Pelerin Group SA, in Switzerland on September 27th 2018.
Objective
We wanted to sell a small part of Mt Pelerin's shares to the early supporters of the project, who wanted to contribute to its initial fund raising. Simpler forms of tokens could have been sold to them like most other ICOs and STOs, but we wanted the best for our community and offer them a product with a true value, direct ownership and a solid legal protection.
Sell a portion of startup equity
Entry ticket affordable to anyone
No intermediaries
Get a direct market valuation
Sell around the world
Direct and instant share transfer
Lowest fundraising cost possible
Respect Swiss regulation
Solution
The decision was taken to create a real tokenized share, the first share-token, where a token would be equal to a share in all aspects. The point was to give a token holder the same rights and the same level of legal protection as a traditional shareholder. It would be a radical upgrade from all the existing tokens simulating shares through private contracts between their issuer and their buyers, which provides little protection.
Concept
Linking a Security with a Token
The concept behind a tokenized security is to associate the security, in this case equity, with a token so that both are indissociable and cannot be transferred separately.
From a legal standpoint, the rationale here is to consider a security as a financial asset that is associated with a tradable support. Traditionally, this support has been paper and today the goal is to replace a piece of paper by a digital token.
Transfer without Written Form
Normally, Swiss law requires the written form for the transfer of a security, or in other words a paper with signatures on it. Obviously, this format is a problem if we want to enable the trading of tokenized securities by transferring tokens digitally.
The solution is to formulate the transfer of a security token as a transfer of contract sui generis. In such a case, the written form for the transfer is not required if the transfer is allowed under the terms of the relevant contract or if all the parties of the contract participate in the transfer.
The buyer of tokens during a token sale agrees to the tokenization and to the terms of transfer when purchasing the tokens. Subsequent buyers implicitly agree to these terms by purchasing tokens on the blockchain.
Steps
Here are the practical steps that were taken to tokenize Mt Pelerin's equity, and that can be followed to do the same for any limited company (société anonyme / Aktiengesellschaft) incorporated in Switzerland:
- The company issuing the shares must create or adapt its constitutive documents with specific clauses:
- Suppressing the right of the shareholders to receive certificated shares
- Delegating to the board the responsibility to adopt rules for the transfer of shares
- Preparation of the smart contracts of the token and the token sale
- Writing of the relevant sale materials (prospectus, etc.)
- Issuance of shares following the standard procedure, as defined by Swiss law
- Release of a board resolution to tokenize shares, stating that the company only recognizes token holders as owners of shares
- Going live with the token sale
- Receive payments from investors
- Distribute tokens to investors
- Setup a process for future token holders to register and identify, in order to exercise their shareholder rights.
Result
By December 15th 2018, Mt Pelerin had sold the 5% of shares that were available for sale for $2 million, to hundreds of investors big and small from around the globe. The demonstration that private equity could be democratized, disintermediated and made available to a large number of individuals without any financial barrier was a success.
Read the complete round up of Mt Pelerin's tokenized equity sale here.
