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eip	title	author	discussions-to	status	type	category	created
1450	ERC-1450 A compatible security token for issuing and trading SEC-compliant securities	John Shiple (@johnshiple), Howard Marks <howard@startengine.com>, David Zhang <david@startengine.com>	https://ethereum-magicians.org/t/erc-proposal-ldgrtoken-a-compatible-security-token-for-issuing-and-trading-sec-compliant-securities/1468	Stagnant	Standards Track	ERC	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.

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.

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