ERC-1450 A compatible security token for issuing and trading SEC-compliant securities
ERC-1450 is a proposed Ethereum Improvement Proposal that defines a compatible security token for issuing and trading SEC-compliant securities. It is an ERC-20 compatible token that enables the issuance of tokens representing securities that comply with Securities Act Regulations CF, D, and A. The token facilitates the recording of ownership and transfer of securities sold in compliance with these regulations. The issuance and trading of securities is subject to the Securities Exchange Commission (SEC) and specific U.S. state blue sky laws and regulations. The proposal includes specifications for issuers and registered transfer agents, an ERC-20 extension, managing investor information, and handling lost access to addresses or private keys. The motivation behind ERC-1450 is the expansion of exemptions available to issuers and investors to sell and purchase securities that have not been registered with the SEC under the Securities Act of 1933. The proposal aims to provide a standard for security tokens that comply with legal requirements such as KYC and AML regulations, and the ability to lock tokens for an account and restrict them from transfer due to a legal dispute. ERC-1450 is one of several security token standards proposed recently, and its scope is kept as narrow as possible to avoid restricting potential use-cases of this base security token.
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ERC-1450 - A compatible security token for issuing and trading SEC-compliant securities
Simple Summary
ERC-1450
is an ERC-20
compatible token that enables issuing tokens representing securities that are required to comply with one or more of the following Securities Act Regulations: Regulation Crowdfunding, Regulation D, and Regulation A.
Abstract
ERC-1450
facilitates the recording of ownership and transfer of securities sold in compliance with the Securities Act Regulations CF, D and A. The issuance and trading of securities is subject to the Securities Exchange Commission (SEC) and specific U.S. state blue sky laws and regulations.
ERC-1450
manages securities ownership during issuance and trading. The Issuer is the only role that should create a ERC-1450
and assign the RTA. The RTA is the only role that is allowed to execute ERC-1450
’s mint
, burnFrom
, and transferFrom
functions. No role is allowed to execute ERC-1450
’s transfer
function.
Motivation
With the advent of the JOBS Act in 2012 and the launch of Regulation Crowdfunding and the amendments to Regulation A and Regulation D in 2016, there has been an expansion in the exemptions available to Issuers and Investors to sell and purchase securities that have not been "registered" with the SEC under the Securities Act of 1933.
There are currently no token standards that expressly facilitate conformity to securities law and related regulations. ERC-20 tokens do not support the regulated roles of Funding Portal, Broker Dealer, RTA, and Investor and do not support the Bank Secrecy Act/USA Patriot Act KYC and AML requirements. Other improvements (notably EIP-1404 (Simple Restricted Token Standard) have tried to tackle KYC and AML regulatory requirement. This approach is novel because the RTA is solely responsible for performing KYC and AML and should be solely responsible for transferFrom
, mint
, and burnFrom
.
Specification
ERC-1450
extends ERC-20
.
ERC-1450
ERC-1450
requires that only the Issuer can create a token representing the security that only the RTA manages. Instantiating the ERC-1450
requires the Owned
and IssuerControlled
modifiers, and only the Issuer should execute the ERC-1450
constructor for a compliant token. ERC-1450
extends the general Ownable
modifier to describe a specific subset of owners that automate and decentralize compliance through the contract modifiers Owned
and IssuerControlled
and the function modifiers onlyOwner
and onlyIssuerTransferAgent
. The Owned
contract modifier instantiates the onlyOwner
modifier for functions. The IssuerControlled
modifier instantiates the onlyIssuerTransferAgent
modifier for functions.
ERC-1450
must prevent anyone from executing the transfer
, allowance
, and approve
functions and/or implement these functions to always fail. ERC-1450
updates the transferFrom
, mint
, and burnFrom
functions. transferFrom
, mint
, and burnFrom
may only be executed by the RTA and are restricted with the onlyIssuerTransferAgent
modifier. Additionally, ERC-1450
defines the functions transferOwnership
, setTransferAgent
, setPhysicalAddressOfOperation
, and isTransferAgent
. Only the issuer may call the transferOwnership
, setTransferAgent
, and setPhysicalAddressOfOperation
functions. Anyone may call the isTransferAgent
function.
Issuers and RTAs
For compliance reasons, the ERC-1450
constructor must specify the issuer (the owner
), the RTA (transferAgent
), the security’s name
, and the security’s symbol
.
Issuer Owned
ERC-1450
must specify the owner
in its constructor, apply the Owned
modifier, and instantiate the onlyOwner
modifier to enable specific functions to permit only the Issuer’s owner
address to execute them. ERC-1450
also defines the function transferOwnership
which transfers ownership of the Issuer to the new owner
’s address and can only be called by the owner
. transferOwnership
triggers the OwnershipTransferred
event.
Issuer Controlled
IssuerControlled
maintains the Issuer’s ownership of their securities by owning the contract and enables the Issuer to set and update the RTA for the Issuer’s securities. ERC-1450
‘s constructor must have an IssuerControlled
modifier with the issuer specified in its ERC-1450
constructor. IssuerControlled
instantiates the onlyIssuerTransferAgent
modifier for ERC-1450
to enable specific functions (setPhysicalAddressOfOperation
and setTransferAgent
) to permit only the Issuer to execute these functions.
Register Transfer Agent Controlled
ERC-1450
defines the setTransferAgent
function (to change the RTA) and setPhysicalAddressOfOperation
function (to change the Issuer’s address) and must restrict execution to the Issuer’s owner with the onlyOwner
modifier. setTransferAgent
must emit the TransferAgentUpdated
event. setPhysicalAddressOfOperation
must emit the PhysicalAddressOfOperationUpdated
event.
ERC-1450
must specify the transferAgent
in its constructor and instantiate the onlyIssuerTransferAgent
modifier to enable specific functions (transferFrom
, mint
, and burnFrom
) to permit only the Issuer’s transferAgent
address to execute them. ERC-1450
also defines the public function isTransferAgent
to lookup and identify the Issuer’s RTA.
Securities
ERC-1450
updates the transferFrom
, mint
, and burnFrom
functions by applying the onlyIssuerTransferAgent
to enable the issuance, re-issuance, and trading of securities.
ERC-20 Extension
ERC-20
tokens provide the following functionality:
contract ERC20 { function totalSupply() public view returns (uint256); function balanceOf(address who) public view returns (uint256); function transfer(address to, uint256 value) public returns (bool); function allowance(address owner, address spender) public view returns (uint256); function transferFrom(address from, address to, uint256 value) public returns (bool); function approve(address spender, uint256 value) public returns (bool); event Approval(address indexed owner, address indexed spender, uint256 value); event Transfer(address indexed from, address indexed to, uint256 value); }
ERC-20
is extended as follows:
/** * ERC-1450 is an ERC-20 compatible token that facilitates compliance with one or more of Securities Act Regulations CF, D and A. * * Implementations of the ERC-1450 standard must define the following optional ERC-20 * fields: * * name - The name of the security * symbol - The symbol of the security * * Implementations of the ERC-1450 standard must specify the following constructor * arguments: * * _owner - the address of the owner * _transferAgent - the address of the transfer agent * _name - the name of the security * _symbol - the symbol of the security * * Implementations of the ERC-1450 standard must implement the following contract * modifiers: * * Owned - Only the address of the security’s issuer is permitted to execute the * token’s constructor. This modifier also sets up the onlyOwner function modifier. * IssuerControlled - This modifier sets up the onlyIssuerTransferAgent function modifier. * * Implementations of the ERC-1450 standard must implement the following function * modifiers: * * onlyOwner - Only the address of the security’s issuer is permitted to execute the * functions transferOwnership, setTransferAgent, and setPhysicalAddressOfOperation. * onlyIssuerTransferAgent - Only the address of the issuer’s Registered Transfer * Agent is permitted to execute the functions transferFrom, mint, and burnFrom. * * Implementations of the ERC-1450 standard must implement the following required ERC-20 * event to always fail: * * Approval - Should never be called as the functions that emit this event must be * implemented to always fail. * * Implementations of the ERC-1450 standard must implement the following required * ERC-20 functions to always fail: * * transfer - Not a legal, regulated call for transferring securities because * the token holder initiates the token transfer. The function must be implemented to * always fail. * allowance - Not a legal, regulated call for transferring securities because * the token holder may not allow third parties to initiate token transfers. The * function must be implemented to always fail. * approve - Not a legal, regulated call for transferring securities because * the token holder may not allow third parties to initiate token transfers. The * function must be implemented to always fail. * * Implementations of the ERC-1450 standard must implement the following optional * ERC-20 function: * decimals - Must return '0' because securities are indivisible entities. * * Implementations of the ERC-1450 standard must implement the following functions: * * mint - Only the address of the issuer's Registered Transfer Agent may create new * securities. * burnFrom - Only the address of the issuer’s Registered Transfer Agent may burn or * destroy securities. */ Contract ERC-1450 is Owned, IssuerControlled { /** * The constructor must implement a modifier (Owned) that creates the onlyOwner modifier * to allow only the address of the issuer (the owner) to execute the transferOwnership, * setTransferAgent, and setPhysicalAddressOfOperation functions. The construct must also * implement a modifier (TransferAgentControlled) that creates the onlyIssuerTransferAgent * modifier to allow only the address of the issuer’s Registered Transfer Agent to execute * the functions transferFrom, mint, and burnFrom). */ constructor(address _owner, address _transferAgent, string _name, string _symbol) Owned(_issuer) TransferAgentControlled(_transferAgent) public; /** * Specify that only the owner (issuer) may execute a function. * * onlyOwner requires the msg.sender to be the owner’s address. */ modifier onlyOwner(); /** * Specify that only the issuer’s transferAgent may execute a function. * * onlyIssuerTransferAgent requires the msg.sender to be the transferAgent’s address. */ modifier onlyIssuerTransferAgent(); /** * Transfer ownership of a security from one issuer to another issuer. * * transferOwnership must implement the onlyOwner modifier to only allow the * address of the issuer’s owner to transfer ownership. * transferOwnership requires the _newOwner address to be the address of the new * issuer. */ function transferOwnership(address _newOwner) public onlyOwner; /** * Triggered after transferOwnership is executed. */ event OwnershipTransferred() /** * Sets the transfer agent for the security. * * setTransferAgent must implement the onlyOwner modifier to only allow the * address of the issuer’s specify the security’s transfer agent. * setTransferAgent requires the _newTransferAgent address to be the address of the * new transfer agent. */ function setTransferAgent(address _newTransferAgent) public onlyOwner; /** * Triggered after setTransferAgent is executed. */ event TransferAgentUpdated(address indexed previousTransferAgent, address indexed newTransferAgent); /** * Sets the issuers physical address of operation. * * setPhysicalAddressOfOperation must implement the onlyOwner modifier to only allow * the address of the issuer’s owner to transfer ownership. * setPhysicalAddressOfOperation requires the _newPhysicalAddressOfOperation address * to be the new address of the issuer. */ function setPhysicalAddressOfOperation(string _newPhysicalAddressOfOperation) public onlyOwner; /** * Triggered after setPhysicalAddressOfOperation is executed. */ event PhysicalAddressOfOperationUpdated(string previousPhysicalAddressOfOperation, string newPhysicalAddressOfOperation); /** * Look up the security’s transfer agent. * * isTransferAgent is a public function. * isTransferAgent requires the _lookup address to determine if that address * is the security’s transfer agent. */ function isTransferAgent(address _lookup) public view returns (bool); /** * transfer is not a legal, regulated call and must be implemented to always fail. */ transfer(address to, uint tokens) public returns (bool success); /** * Approval does not have to be implemented. This event should never be triggered as * the functions that emit this even are not legal, regulated calls. */ event Approval(address indexed tokenOwner, address indexed spender, uint tokens); /** * allowance is not a legal, regulated call and must be implemented to always fail. */ allowance(address tokenOwner, address spender) public constant returns (uint remaining); /** * approve is not a legal, regulated call and must be implemented to always fail. */ approve(address spender, uint tokens) public returns (bool success); /** * Transfer securities. * * transferFrom must implement the onlyIssuerTransferAgent modifier to only allow the * address of the issuer’s Registered Transfer Agent to transfer `ERC-1450`s. * transferFrom requires the _from address to have _value tokens. * transferFrom requires that the _to address must not be 0 because securities must * not destroyed in this manner. */ function transferFrom(address _from, address _to, uint256 _value) public onlyIssuerTransferAgent returns (bool); /** * Create new securities. * * mint must implement the onlyIssuerTransferAgent modifier to only allow the address * of the issuer’s Registered Transfer Agent to mint `ERC-1450` tokens. * mint requires that the _to address must not be 0 because securities must * not destroyed in this manner. * mint must add _value tokens to the _to address and increase the totalSupply by * _value. * mint must emit the Transfer event. */ function mint(address _to, uint256 _value) public onlyIssuerTransferAgent returns (bool); /** * Burn or destroy securities. * * burnFrom must implement the onlyIssuerTransferAgent modifier to only allow the * address of the issuer’s Registered Transfer Agent to burn `ERC-1450`s. * burnFrom requires the _from address to have _value tokens. * burnFrom must subtract _value tokens from the _from address and decrease the * totalSupply by _value. * burnFrom must emit the Transfer event. */ function burnFrom(address _who, uint256 _value) public onlyIssuerTransferAgent returns (bool); }
Securities Exchange Commission Requirements
The SEC has very strict requirements as to the specific roles that are allowed to perform specific actions. Specifically, only the RTA may mint
and transferFrom
securities.
Implementers must maintain off-chain services and databases that record and track the Investor’s name, physical address, Ethereum address, and security ownership amount. The implementers and the SEC must be able to access the Investor’s private information on an as needed basis. Issuers and the RTA must be able to produce a current list of all Investors, including the names, addresses, and security ownership levels for every security at any given moment. Issuers and the RTA must be able to re-issue securities to Investors for a variety of regulated reasons.
Private Investor information must never be publicly exposed on a public blockchain.
Managing Investor Information
Special care and attention must be taken to ensure that the personally identifiable information of Investors is never exposed or revealed to the public.
Issuers who lost access to their address or private keys
There is no recourse if the Issuer loses access to their address to an existing instance of their securities. Special care and efforts must be made by the Issuer to secure and safely store their address and associated private key. The Issuer can reassign ownership to another Issuer but not in the case where the Issuer loses their private key.
If the Issuer loses access, the Issuer’s securities must be rebuilt using off-chain services. The Issuer must create (and secure) a new address. The RTA can read the existing Issuer securities, and the RTA can mint
Investor securities accordingly under a new ERC-1450
smart contract.
Registered Transfer Agents who lost access to their address or private keys
If the RTA loses access, the RTA can create a new Ethereum address, and the Issuer can execute the setTransferAgent
function to reassign the RTA.
Handling Investors (security owners) who lost access to their addresses or private keys
Investors may “lose” their credentials for a number of reasons: they simply “lost” their credentials, they were hacked or the victim of fraud, they committed securities-related fraud, or a life event (like death) occurred. Because the RTA manages the Issuer’s securities, the RTA may authorize ownership related changes of securities (as long as they are properly notarized and verified).
If an Investor (or, say, the Investor’s heir) loses their credentials, the Investor must go through a notarized process to notify the RTA of the situation and supply a new Investor address. From there, the RTA can mint
the “lost” securities to the new Investor address and burnFrom
the old Investor address (because the RTA knows all Investors’ addresses).
Rationale
The are currently no token standards that facilitate compliance with SEC regulations. The closest token is ERC-884 (Delaware General Corporations Law (DGCL) compatible share token) which states that SEC requirements are out of scope. EIP-1404 (Simple Restricted Token Standard) does not go far enough to address SEC requirements around re-issuing securities to Investors.
Backwards Compatibility
ERC-1450
maintains compatibility with ERC-20 tokens with the following stipulations:
function allowance(address tokenOwner, address spender) public constant returns (uint remaining);
- Must be implemented to always fail because allowance is not a legal, regulated call for a security.
function transfer(address to, uint tokens) public returns (bool success);
- As the token holder initiates the transfer, must be implemented to always fail because transfer is not a legal, regulated call for a security.
function approve(address spender, uint tokens) public returns (bool success);
- Must be implemented to always fail because approve is not a legal, regulated call for a security
function transferFrom(address from, address to, uint tokens) public returns (bool success);
- Must be implemented so that only the Issuer’s RTA can perform this action
event Approval(address indexed tokenOwner, address indexed spender, uint tokens);
- Does not have to be implemented. Approval should never be called as the functions that emit this event must be implemented to always fail
Test Cases
Test cases are available at https://github.com/StartEngine/ldgr_smart_contracts/tree/master/test.
Implementations
A reference implementation is available at https://github.com/StartEngine/ldgr_smart_contracts.
Copyright Waiver
Copyright and related rights waived via CC0.
Adopted by projects
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