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DCIPs/EIPS/eip-1450.md

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Adding EIPs website fork with some Gem Updates
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---
eip: 1450
title: ERC-1450 A compatible security token for issuing and trading SEC-compliant securities
author: John Shiple (@johnshiple), Howard Marks <howard@startengine.com>, David Zhang <david@startengine.com>
discussions-to: https://ethereum-magicians.org/t/erc-proposal-ldgrtoken-a-compatible-security-token-for-issuing-and-trading-sec-compliant-securities/1468
status: Stagnant
type: Standards Track
category: ERC
created: 2018-09-25
---
# 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](https://www.sec.gov/smallbusiness/exemptofferings).
## Abstract
`ERC-1450` facilitates the recording of ownership and transfer of securities sold in compliance with the [Securities Act Regulations CF, D and A](https://www.sec.gov/smallbusiness/exemptofferings). 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](https://www.sec.gov/spotlight/jobs-act.shtml) 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](https://www.occ.treas.gov/topics/compliance-bsa/bsa/index-bsa.html). Other improvements (notably [EIP-1404 (Simple Restricted Token Standard)](https://github.com/ethereum/EIPs/issues/1404) 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:
```solidity
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:
```solidity
/**
* 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)](./eip-884.md) which states that SEC requirements are out of scope. [EIP-1404 (Simple Restricted Token Standard)](https://github.com/ethereum/EIPs/issues/1404) 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](https://github.com/StartEngine/ldgr_smart_contracts/tree/master/test).
## Implementations
A reference implementation is available at [https://github.com/StartEngine/ldgr_smart_contracts](https://github.com/StartEngine/ldgr_smart_contracts).
## Copyright Waiver
Copyright and related rights waived via [CC0](../LICENSE.md).