99% of the companies offering a security token in the Netherlands will explore this legal structure — Therefore, it matters. On a global level, we are currently exploring the vast implications of the forthcoming security industry. tokens are expected to disrupt finance and access to capital because companies and start-ups will be empowered to . token Security turn to the crowd for funding While building the ecosystem, together with other companies in the Netherlands, I stumbled upon a particular exception in Dutch law. Many issuers could leverage this exception in the near future, which is according to some and according to others. very good very bad In this post, I will shed lights on both perspectives, but before we dive in, you need a little bit of corporate and legal context. Creating freely exchangeable security tokens Two of the most significant value-adds security tokens offer in comparison to ‘normal securities’ are the so-called and . liquidity market depth Definition by Investopedia Naturally, you would want to leverage these aspects of security tokens as an issuer because it gives a lot of value to your investors and therefore makes it easier for you to raise funds. Imagine you own a Limited Liability Company (LLC), incorporated in the Netherlands and you would like to sell some equity in order to grow your LLC (in the Netherlands it is called a B.V.). You are allowed to offer shares of the B.V. to the general public, but these shares are only . This means that tokenizing shares of a B.V. directly provide the liquidity and market depth which make security tokens so valuable. You would be able to offer and sell your tokens though, but these will not be freely tradeable on exchanges after your offering. freely transferable via a notarial deed does not As often frequent in corporate law, you can utilize other legal structures which will grant you the rights to achieve your goal: the issuance of a super liquid security token. A ‘Stichting administratiekantoor’ is a legal form (foundation) which is not attractive to entrepreneurs in the first place, because of the many legal requirements attached to it. The STAK is a legal construction that . So, if you transfer all the shares of your B.V. to the STAK, the STAK can create two types of certificates: one with governance rights and one with economic rights — see the image below: (STAK) splits economic and governance rights of a share Using the STAK to convert your shares into two distinct certificates is valuable for three reasons: Certificates that represent economic ownership are freely tradable without notarial deed. Economic ownership certificates can also include rights to profit. The certificates effectively split economic rights from governance rights, allowing the issuer to keep control of the direction of the company while sharing the economic rights with the crowd. The next step is to tokenize the economic ownership certificates: You transfer the shares of your B.V. to a STAK, convert your shares into certificates, and you tokenize them. This will provide your investors with a freely tradeable token that represents in your company. real value So far, so good right? Nothing exceptional about this process. Before you may start offering these tokens to the public, you must be certain that the tokens are owned by . This is why KYC and AML procedures exist. “legit owners” Security tokens and KYC and AML compliance Know Your Customer (KYC) and Anti-Money Laundering procedures are made to prevent bad actors, such as criminals and terrorists, from making their illegally gained proceedings appear legal or financing their malicious acts. This applies to roughly every jurisdiction globally. Security issuers must therefore always be aware of those who own their security and where their financial means come from — Similarly, must have a whitelist of “KYC and AML compliant” people, and entities that are allowed to own their security tokens. security token issuers This is where it comes… Photo by @usinglight Owners of certificates, issued by the STAK, do not have to be identified… In other words, KYC and AML procedures do not apply to the people buying, owning or trading security tokens that represent the economic ownership certificates we discussed earlier. Legally, the KYC and AML procedures when the shares were transferred from the B.V. to the STAK: In that process, the B.V. must be aware of who the owners of the STAK are and where they get their money from. already took place When buying assets, like shares in a BV, you must be registered at the Dutch chamber of commerce. Contrarily, you can buy certificates from a STAK, anonymously, without registering at the Dutch chamber of commerce. The owners of the STAK may decide procedures for the owners of their certificates. This could be similar to “regular” KYC and AML procedures, but the owners can also decide that solely a , thereby enabling issuers to make the process of acquiring a security token as convenient as possible. One could argue that this is good because it fosters the of the security token industry. However, one could also say that this leads to and as we have seen in the early days of ICOs. what suffices as KYC and AML name and e-mail address suffice adoption shady processes scams One loophole — Two perspectives To publish this post, I was particularly inspired, by a short discussion that occurred at a security token event in Eindhoven, the Netherlands. Two individuals who are both engaged in providing pre- and post-STO services shared their distinct visions on the matter. In short: Herman Vissia, CEO/founder of , is in favor of the ability of STAK owners to determine their own KYC and AML rules. He argues that an issuer should not be bothered by laws that would the process of acquiring a security token. He believes that to the security token industry in the first place. Finally, he argues that many KYC and AML procedures are based on a lot of paranoia caused by the media and the way they represent the news about terrorists and criminals, for instance. He estimates the of a malicious actor buying in on security tokens . Herman says this applies to investments If an issuer is accepting more than that amount, he should perform thorough KYC and AML procedures. Byelex unnecessarily toughen adoption is essential chance negligible below €15.000 Mohan Rao, CEO/co-founder of KRG and project lead at , argues that companies involved in STOs should be focused on , rather than . He believes that rushing for adoption now, will yield in the . Even if the chance of malicious actors investing in security tokens is negligible, we should not allow it. We are currently on the verge of getting regulatory buy-ins on the formation of this new industry. If we rush now, by using sketchy loopholes in the law, we stand a chance of messing it up for all the . We do not want to replay the saga of we have seen in the ICO era. tokenise.eu being the best being the first bad results future issuers to come in the future scams and junky projects Conclusion For as far as you are concerned, I agree with the latter argument that states we should not rush to adoption while neglecting a solid legal foundation. I do believe that there is still a lot for us “security token fanatics” to figure out. I imagine there are many more national jurisdictions that provide unique conditions for this new industry. Fact is that: Many of these loopholes have never been prominent, because there was never a way to make assets as liquid as now, via security tokens and blockchain technology. I am curious to see how this and many other instances worldwide will evolve and I would be happy to discuss and explore the possible scenarios together. Feel free to connect with me on or Telegram: @adriaan_vmc. Linkedin

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