What legal means are there for tokenizing assets via blockchain in France?
The tokenization of assets, made possible by blockchain technology, has become a major topic of discussion in the world of finance and law. It enables real assets to be represented in the form of digital tokens that can be traded, bought and sold more easily than traditional assets. In France, the tokenization of assets raises a number of legal and regulatory issues. This article explores the main legal means of tokenizing assets in France: drafting a contract on future revenues, using a token/NFT digital asset, and issuing financial securities through a “société à capital fixe ou variable” or a “société de libre partenariat”.
Drafting a contract on future revenues
The first way to tokenize assets in France is to draw up a future income contract. This type of contract is based on the idea that investors buy rights to future income generated by an asset, rather than the asset itself. However, the Autorité des marchés financiers (AMF) treats these contracts as debt securities or financial securities, which must follow the procedure for public offerings of financial securities (see AMF decision – “Activité des plateformes de partage de revenus futurs (royalties) : qualifications juridiques et réglementations applicables“).
Issuers of these contracts must obtain the approval of the AMF and provide investors with a detailed prospectus. This procedure can be lengthy and costly, which may discourage some issuers from tokenizing their assets in this way. However, it is important to note that these regulations are designed to protect investors and ensure the transparency and fairness of financial markets.
Using a fungible or non-fungible digital token (NFT)
The second way to tokenize assets in France is to use a token-type digital asset, as defined in article L. 54-10-1 of the French Monetary and Financial Code. This approach makes it possible to avoid certain regulatory constraints associated with financial securities, provided that the token is not itself assimilated to a financial instrument. According to article L.552-2 of the French Monetary and Financial Code, a token is an intangible asset representing rights that can be issued, registered, retained or transferred by means of a shared electronic recording device (DEEP) enabling the owner of the asset to be identified, directly or indirectly.
When issuing tokens, a distinction must be made between utility tokens (granting a simple preferential right of use) and security tokens (granting a financial right over the issuer):
- Utility tokens, are digital tokens, give rise to a right of use, they should not be assimilated to a financial instrument under Article L. 54-10-1 of the Monetary and Financial Code and should be subject to token issuance regulations under Articles L552-1 of the French Commercial Code resulting from the Pacte law (ICO – Initial Coin Offerings)
- Security tokens are digital tokens which reproduce financial rights and can be assimilated to a financial instrument, and should be subject to the regulations governing the offering of financial securities (STO – Security Token Offering). Indeed, qualification as a financial instrument will exclude qualification as a digital asset in principle, and require application of the financial regulations applicable in the event of a public offering. Depending on the investment thresholds involved, either a Prospectus must be filed (Regulation 2017/1129 known as the “Prospectus Regulation”) or a summary information document (“DIS”) must be published, the content and dissemination of which are set out in Articles 212-43 to 212-47 of the RGAMF and in AMF Instruction 2018-07 of July 2018.
In particular, the AMF specified that “an STO refers to the issuance of financial instruments on a blockchain. In practical terms, an STO proceeds in the same way as an ICO. Only the rights attached to the tokens issued differ between the two types of operation: if the tokens can be qualified as financial instruments, the operation is an STO; otherwise it is an ICO (token issuance as defined by the Pacte law)”. See AMF – ETAT DES LIEUX ET ANALYSE RELATIVE A L’APPLICATION DE LA REGLEMENTATION FINANCIERE AUX SECURITY TOKENS
The nature of the token issued may be a fungible or non-fungible NFT (Non Fungible Token), and the issuance of tokens may fall within the scope of activities subject to registration as a digital asset service provider (“DASP“).
In order to tokenize an asset, it is not enough to issue tokens corresponding to the legal category of digital assets; the token itself and the underlying rights must be legally qualified to comply with financial regulations.
Issuance of financial securities by a société à capital variable or société de libre partenariat (SLP)
The third method for tokenizing assets in France is to issue share-type financial securities via a société à capital fixe or à capital variable, or a société de libre partenariat (SLP). Sociétés à capital variable and SLPs are more flexible legal structures than investment funds, enabling flexible capital and investment management. They can be used to issue tokenized shares on the blockchain.
The issuance and trading of share-based financial securities by a company must comply with the provisions of the French Monetary and Financial Code. Financial securities issued must be transmitted via a ” dispositif d’enregistrement électronique partagé ” (DEEP) or shared electronic recording device, as defined by Article L223-12 of the French Monetary and Financial Code. The DEEP is an electronic register that ensures the traceability and security of transactions carried out on the blockchain.
To issue share-type financial securities via a company, the issuer must also comply with the rules of governance and transparency applicable to companies. In particular, it must comply with investor protection provisions, also implying compliance with financial regulations.
Other legal avenues to explore, depending on the nature of tokenization projects
In addition to the three main methods mentioned above, it may be worth considering other legal means that could be relevant for tokenizing assets in France, depending on the nature and specificities of tokenization projects. In this section, we look at some of these alternatives and their legal implications.
- Share leasing contracts
A share leasing agreement, also known as a temporary share transfer agreement, enables a shareholder to temporarily transfer his or her voting and dividend rights to another investor, in exchange for a fee. This type of contract can be used to tokenize assets by assigning economic and voting rights to investors via the blockchain. However, as a matter of principle, the conditions set out in Articles L239-1 to L239-5 of the French Commercial Code must be complied with, as they make it complex to set up a share leasing agreement, notably the requirement for the lessee to be a natural person, or for the share leasing agreement to be registered.
- The croupier agreement treated as a hidden partnership
A croupier agreement is one whereby a partner in a company, known as the rider, agrees with a third party, the croupier, and without the consent of the other partners, to transfer all or part of his rights to the profits and losses associated with his status as a partner. This agreement usually takes the form of a hidden partnership.
- Issuing preference shares
Preference shares are financial securities that confer specific rights on their holders, such as special voting rights, priority dividend rights or preferential liquidation rights. These shares may be issued by a société anonyme, a société par actions simplifiée or a société en commandite par actions.
Tokenization through the issuance of preferred shares can create classes of partners representing rights in various underlyings, offering greater flexibility to investors and issuers. However, the issuance of preference shares must comply with the conditions and procedures laid down in the French Commercial Code and the French Monetary and Financial Code, particularly with regard to shareholder information and investor protection.
Compliance with the procedure for issuing preferred shares set out in Articles L. 228-11 to L. 228-20 of the French Commercial Code may prove complex, particularly in view of the need to appoint a special benefits auditor.
Conclusion
The tokenization of assets in France via blockchain is a booming topic that offers numerous opportunities for issuers and investors. However, this tokenization presents many legal risks, and it is essential to fully understand the different tokenization methods and the applicable legal rules.
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