Equity Tokens And Shares: Similar But Not Quite So

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...