Equity tokenization is the process of creating and issuing digital tokens that represent ownership shares in a company or organization. Equity tokens are a type of security tokens that are backed by real assets and subject to securities regulations.
Equity tokenization can offer several benefits for both issuers and investors, such as increased liquidity, lower costs, faster transactions, and broader access to capital markets. However, equity tokenization also involves some challenges and risks, such as legal uncertainty, technical complexity, and compliance requirements. In this article, we will explain what equity tokenization is and how it works in practice. We will also discuss a few examples of tokenized equity in the past years.
What is equity tokenization?
Equity tokenization is the conversion of equity shares into digital tokens that can be stored and transferred on a blockchain. Equity tokens are a form of digital securities that represent ownership rights and claims on the assets and profits of a company or organization. Equity tokens can be issued for both common and preferred shares, or either of them, depending on the issuer’s preferences and objectives. Equity tokens can have various features and characteristics, such as voting rights, dividends, liquidation preferences, and anti-dilution provisions, depending on the terms and conditions of the token offering.
How does equity tokenization work?
Tokenizing equity includes multiple crucial steps and involves several parties, such as the issuer, the tokenization platform, the investors, and the regulators. The following is a simplified overview of the equity tokenization process:
- The issuer decides to tokenize their equity and chooses a tokenization platform that provides the technical and legal infrastructure to create, issue, and manage equity tokens. The issuer also determines the type, amount, price, and terms of the equity tokens to be offered.
- The tokenization platform helps the issuer to design and develop the smart contracts that govern the creation, distribution, and functionality of the equity tokens. The tokenization platform also assists the issuer with the compliance and regulatory aspects of the token offering, such as KYC/AML, investor accreditation, and securities registration or exemption. Creating a prospectus might also be an important part of the process and you can find more detailed information about the Prospectus in the next section.
- The issuer launches the token offering and invites investors to participate. The investors register on the tokenization platform and undergo the necessary verification and due diligence processes. The investors then purchase the equity tokens using fiat or cryptocurrency, and receive the tokens in their digital wallets. The tokens are recorded on the blockchain as proof of ownership and can be transferred and traded on secondary markets, subject to the applicable restrictions and regulations.
- The issuer and the investors interact with the equity tokens through the tokenization platform, which provides the tools and services to manage and monitor the tokens. The issuer can update the token holders on the company’s performance, distribute dividends, conduct voting, and execute other corporate actions. The investors can access their token balances, view their rights and obligations, and exercise their options and preferences.
Prospectus
The role of prospectus in equity tokenization is similar to the role of prospectus in traditional securities offerings. A prospectus is a document that provides detailed information about the issuer, the tokens, the terms and conditions, the risks, and the rights and obligations of the token holders. A prospectus is required by securities regulators to ensure that investors have sufficient and accurate information to make informed investment decisions. It also helps the issuer to comply with the applicable securities laws and regulations in the jurisdictions where the tokens will be offered and sold.
However, equity tokenization also poses some challenges and differences for the preparation and distribution of prospectus. For example, equity tokenization may involve multiple jurisdictions, platforms, and intermediaries, which may create complexity and inconsistency in the disclosure and delivery of prospectus. Equity tokenization may also require the use of new formats and technologies, such as smart contracts, whitepapers, and websites, to communicate the information and terms of the token offering. Equity tokenization may also involve new types of risks and uncertainties, such as technical, legal, and regulatory risks, that need to be adequately addressed and disclosed in the prospectus.
Therefore, issuers who wish to tokenize their equity should carefully consider the role and requirements of prospectus in their tokenization project. They should consult with legal and financial advisors, as well as the relevant regulators, to ensure that their prospectus meets the standards and expectations of the investors and the authorities. They should also design and develop their prospectus in a clear, comprehensive, and accessible way, using the appropriate tools and channels, to attract and inform the potential investors.
Cryptix Tokenization can always support you along the way when it comes to Prospectus creation and other regulatory requirements. Find more information on our website and book the call with us to identify the needs and requirements for your project: https://tokenlaunchpad.eu.
What are some examples of equity tokenization?
Tokenizing equity is a relatively new and emerging phenomenon, but there are already some examples of companies and projects that have successfully tokenized their equity. Some of them are:
- Quadrant Biosciences: A U.S.-based biotechnology company that tokenized all of its equity in the form of Quadrant Token and offered 17 percent of its diluted equity via a token sale. It raised over $13 million through the issuance of common shares in digitized form at $1.25 per share [1].
- 22X Fund: A venture capital fund that tokenized the equity of 30 startups from the 22nd batch of 500 Startups, a leading accelerator program. It raised $22 million through the sale of 22X tokens, which represent a proportional share of the fund’s portfolio [2].
- Mt Pelerin: A Swiss fintech company that tokenized 5 percent of its equity in the form of MPS tokens and offered them to the public. It raised over $2 million through the sale of 500,000 tokens at CHF 5 each. The tokens grant the holders the same rights and benefits as ordinary shareholders, such as voting and dividends [3].
Equity tokenization is a promising innovation that can transform the way companies and organizations raise capital and distribute ownership. By creating and issuing digital tokens that represent equity shares on a blockchain, equity tokenization can offer several advantages, such as increased liquidity, lower costs, faster transactions, and broader access to capital markets. However, equity tokenization also involves some challenges and risks, such as legal uncertainty, technical complexity, and compliance requirements. Therefore, issuers and investors who wish to tokenize equity should carefully consider the goals and strategy of their tokenization project, choose a suitable tokenization platform, design and develop the equity tokens and the smart contracts, comply with the relevant securities laws and regulations, launch and market the token offering, manage and maintain the equity tokens and the token holders. Equity tokenization is still a nascent and evolving phenomenon, but it has the potential to revolutionize the future of finance and ownership.
[1] What Is Tokenized Equity? How Tokenized Stock Works, and Example: https://www.investopedia.com/terms/t/tokenized-equity.asp
[2] Tokenizing Equity: Benefits, Risks and Practical Considerations: https://www.dilendorf.com/resources/tokenizing-equity-benefits-risks-and-practical-considerations.html
