blockimmo — a strong legal framework ensuring highest investor protection
When Bastiaan Don (blockimmo AG) mandated us and asked us to act as legal advisors for his project, he set the bar extremely high: He asked us to develop a legal structure for blockimmo based on the following pre-requisites:
- First and foremost, legally ensure the highest degree of investor protection.
- Second, the token representing real estate investments should be designed in a way as close as possible to the underlying asset of real value (e.g. an apartment building).
- Last but not least, the security token offering (STO) should be in accordance with all potentially applicable regulations.
“Keeping in mind that it will take several years to move a nation’s existing Land Register (Cadaster) on the Blockchain I was looking for the most solid legal structure to ensure that this temporary form of centralization is as secure as possible for Real Estate investors” — Bastiaan Don, Founder and Managing Director of blockimmo AG. “We can’t go from zero to 100% Blockchain-based at once. Together with MME and Bank Frick, I’m extremely pleased with the rock-solid structure we have built to ensure the highest investor protection while we keep on working on the ultimate goal — bringing the Land Register on-chain”.
We have analyzed all available legal forms in Switzerland and came to the conclusion that for blockimmo, a purely Swiss based approach would not be sufficient. In our view, a fund structure provides the highest degree of investor protection as long as the structure is set up in a highly regulated jurisdiction.
Although initial efforts have already begun, there are still no real crypto funds in Switzerland. We found what we were looking for in a suitable strong jurisdiction in the proximity of Switzerland. Therefore, in the Blockchain-Friendly country Liechtenstein, we have implemented an «umbrella fund» which enables separate investments in «sub-funds».
Why is that important? Each property will be tokenized and financed respectively. That means a new security token offering (“STO”) is carried out for each property, and individual tokens are issued. The investor is therefore free to choose which property to invest in.
Why does this structure ensure highest degree of investor protection? The establishment of the chosen fund requires approval of the competent regulatory authority (FMA). Compared to other legal forms which do not require approval of regulatory authorities such as the formation of a corporation or a company with limited liability, this is by far a higher hurdle to overcome: The regulator needs to approve the fund’s bodies such as the management and custodian.
Amongst others, for every STO a detailed prospectus must be prepared and submitted for approval. From an investor’s perspective, a prospectus is an efficient mean to provide transparency and to enlighten potential risks related to an investment. The fund will be supervised not only during its creation phase but also after — continuous ongoing supervision is ensured.
Close relationship between token and underlying:
Token holders are directly entitled to the underlying sub-funds. There is no dilution. The fund is registered in the land registry as owner of the respective property. This is rock solid as now trusteeship or a similar «auxiliary construct» is needed. By the way: There are currently ongoing discussions with land registries to allow token holder to be recorded in the land register. blockimmo is at the forefront of these discussions.
It is not only possible to invest in properties but blockimmo offers via crowdsale 20% of the equity of its «real estate platform». As the «real estate platform» gets monetized by the above described investments in properties, this is a fantastic opportunity from a commercial perspective. The STO of the «real estate platform» is legally designed in a way that every token holder is directly entitled to the equity of blockimmo AG (which is a Swiss based stock corporation). Learn more of the STO details of blockimmo.
Full regulatory compliance:
The competent financial authorities of Switzerland and Liechtenstein have approved in non-action letters the envisaged endeavor (in August 2018 / December 2018).
To sum up, from a legal and regulatory perspective, blockimmo was a challenging and demanding project. But it was worth all efforts: blockimmo is a very well thought through real estate application which efficiently uses advantages of smart contracts, provides a true customer experience and promises interesting (and realistic) returns to investors.