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Legal Structure of the security token offerings (STO) in Europe

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship. Any legal structure of any public offering of securities depends on the jurisdiction where the company (SPV) is registered. Therefore, we recommend you to consult a local lawyer about the possibilities of the jurisdiction where you want to register your SPV (special purpose vehicle). TokenizEU has competence either in-house or via partners in Estonia, Liechtenstein, Luxembourg, Malta, Netherlands and in Switzerland.

Many of the companies planning on doing an STO have to decide on the type of security they’re going to issue. Mostly, it’s a question of whether you’re going to tokenise shares (equity token) or a debt instrument (a bond-type token). Due to the fact that regulations haven’t really caught up with the blockchain technology, there are several (regulatory) technicalities and nuances that come up when you actually think through the (regulatory) details of the offering (dependent on the jurisdiction). For example, some countries allow the management of the company to keep the registry of all the shareholders, while some require registration (via notary) of the shareholders in the business registry.

For example, let’s say you want to tokenise a private limited company in Estonia. PLC is a hugely popular type of legal entity for both Estonians and Estonian e-residents. In theory, you can tokenise a private limited company shares in Estonia. However, once the token holders would like to trade their tokens, then it’s a notarised transaction — every time you want to sell a share (equity token) or buy a share (equity token) in the Estonian PLC, you would need to go to the notary. This, as you can already understand, is not a feasible option. We have a solution to this problem, but let’s quickly talk about tokenised bonds as well.

Tokenised bonds are easier to issue and trade, and we actually think that the bond market is the one that STOs will disrupt first. Bonds are registered in the depositories (central securities depository, credit institutions, investment firms). Bonds aren’t very popular, at least not in the retail market, and most people wouldn’t know how to buy one even if they wanted to. STOs will simplify this considerably.

If the bond isn’t a familiar term for you, here’s a definition from Investopedia:

“Most simply, bonds represent debt obligations — and therefore are a form of borrowing. If a company issues a bond, the money they receive in return is a loan and must be repaid over time. Just like the mortgage on a home or a credit card payment, the repayment of the loan also entails periodic interest to be paid to the lenders. The buyers of bonds, then, are essentially lenders. For example, if you have ever bought a government savings bond, you became a lender to the government. “

Bond is still security and the issuer has to follow all the related laws in place for issuing securities. Bond can be structured in a way that the payments are tied to the company performance and revenue, i.e it does not have to be a fixed interest that you as an issuer will have to pay to the investors. Don’t forget though, the risks you are minimising for yourself are then bore by the investor, which in turn will lower the attractiveness of the offering and a chance of having a successful raise. Bond can be convertible, i.e the investors can, after 10 years, convert the bond into a specified amount of company shares.

Now, let’s come back to the workaround that I referred to. It’s called depositary receipts.

Depositary receipts

First, let’s look at the definition of a depositary receipt from Investopedia:

“A depositary receipt (DR) is a type of negotiable (transferable) financial security that is traded on a local stock exchange but represents security, usually in the form of equity, that is issued by a foreign publicly listed company. The DR, which is a physical certificate, allows investors to hold shares in equity of other countries. “

The definition by Investopedia is (probably) not 100% correct in terms of Estonian legislation. A private limited company can also issue depositary receipts (we’re still discussing this with the regulator, though, to have full certainty). Side note: Token is a depositary receipt (DR) in case it proves the ownership of the security. If it does not prove the ownership of the security, but only provides certain rights to the owner of the DR, like the right to become the owner of the security or the right to receive benefits from the underlying security (dividends in case of a share, or interest payments in case of a debt obligation/bond), then technically, the legal definition of this security may not be a “depositary receipt”, but the so-called “other security” within the regulatory framework of Estonia and MiFiD II directive. Which will be the correct term is decided by how it’s written and described in the prospectus.

Going forward, we’ll use the term “depositary receipt” (DR) to describe the STO structure using DRs as tokens.

In many ways, the depositary receipts capture the essence of a security token. No one really says today that tokens are shares, its rather “tokens represent shares”, and the same applies to the depositary receipts. Hence, tokens are depositary receipts by nature, just on the blockchain. And this eliminates the problem we have today with registering the tokens in the central securities depositary. It’s just technically not possible, at least currently.

In a nutshell, here’s the whole process and the solution.


  • Token as a share (of a public limited company) cannot be registered in the CSD. It’s technically not possible.


A depositary receipt can represent a share or a debt instrument (bond). DR can be registered in the CSD, and can be traded on the secondary markets.

On a very high level, the process is as follows:

  1. Company issues shares to the custodian

In this structure, the custodian fulfils a technical function. For example, take voting rights. Formally, the custodian is the holder of the shares and could vote. However, via contractual terms and obligations, the custodian can’t vote without collecting “instructions” from the investors. And all of this can be automated — which we’re doing at TokenizEU.


Hope this was helpful in understanding one of the ways to structure the security token offerings in the EU (and specifically, in Estonia). If you have any feedback, feel free to hit us up at If you see any obvious flaws in our thinking, we’d be very glad to hear from you! Oh, and by the way, we’re still interested in finding more industry experts to become partners of TokenizEU.

TokenizEU is a security token issuance platform managed by Comistar. We help to structure security token offerings and comply with the regulations in the European Union, as well as issue tokens and enable investors to participate in the offerings. To enable non-EU residents to participate in the offerings, we support creating SPVs (special purpose vehicle) in the European Union through Estonian e-residency program.



Business, tax & legal, licensing and a lot more. All posts are written by Comistar professionals around the world. Doing business in Estonia, Switzerland, Finland and the US.

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