An Essential Guide to the Legal Framework for Digital Shares
The Swiss DLT Act, which came into force on 1 February 2021, created the so-called ledger-based security (How Switzerland’s New Law on Distributed Ledger Technology May Reshape Securitization). This is based on a distributed electronic register (Distributed Ledger Technology, or DLT), on which shares or other digital assets can be displayed and administered.
Advantages of digital shares
Creating digital assets under the DLT Act facilitates secure and efficient processing of transactions, without the requirement for a central control point. In particular, the underlying blockchain technology resolves the double-spending problem.
In the analog world, uncertificated shares and other rights not linked to a physical object can be transferred multiple times – a difficult problem to resolve. In contrast, a DLT share purchaser can be certain that the seller has not already assigned the share to someone else.
Additionally, digital shares enable transfer restrictions and rights of sale or purchase, which are usually set out in shareholder agreements, to be programmed and executed automatically using smart contracts. Potentially, processes for increasing capital or dividend distribution could also be automated.
Finally, DLT securities should also make it easier for smaller companies, which previously had minimal access to capital markets, to raise capital and may also promote the creation of a secondary market for such assets.
The legal framework
The issue of digital shares requires a provision in the company’s articles of association. Alternatively, the board can be authorized to issue existing or new shares as ledger-based securities.
When introducing a securities ledger, companies must ensure that the relevant shares are only transferable using the digital register Additionally, shareholders must be able to inspect and dispose of their holdings without the company’s involvement.
The digital register must be suitably protected against unauthorized attacks and modifications. To protect technology neutrality, the law also permits technical solutions other than distributed ledger technology.
The statutory requirements for company formations or capital increases still need to be complied with when creating digital shares. Notarial authorization is also still required. Payment for digital shares is made in the usual way - either by cash or a contribution in kind. Capital can also be paid in a cryptocurrency. However, as only national currencies are considered cash, when depositing crypto, the increased requirements for a contribution in kind must be followed.
Finally, be aware that a public offer of digital shares requires publication of a prospectus in accordance with the Financial Services Act, if the offer is not just aimed at professional investors and the statutory thresholds are exceeded.
Protection against loss and theft
The law gives some protection against the illegal transfer of ledger-based securities, as the original owner may have a claim against an acquirer acting in bad faith. Otherwise, the principle protecting acquisition in good faith applies, meaning that ownership by a person who acquires a “stolen object” in good faith is protected.
Just like physical securities, digital securities can be declared invalid in the event of loss, using the relevant court procedures. An owner who can no longer access his or her digital shares can apply for a cancellation - for example, if the private key giving access to the digital assets has been lost.
The law also requires a company issuing shares as ledger-based securities to ensure that the digital ledger is correctly set up and functions smoothly. The company is therefore responsible for the integrity of the ledger and liable to shareholders who suffer losses due to technical faults.