What it means
A normal share is recorded in a register kept by the company or its agent, and held through brokers and clearing systems. With tokenization, a digital token on a blockchain is linked to the share, and the ledger keeps a record of who holds the token.
Transfers can be made quickly, at any time of day, and settlement can occur at the same moment as the trade. There are different legal models.
In some, the token is the share itself, and the company's official register is the blockchain. In others, a custodian holds the real shares and issues tokens that represent them, so the token holder relies on the custodian to honour the claim.
The potential benefits are faster settlement, lower administrative costs and the ability to split ownership into small pieces. This could make it easier for private companies to offer shares to a wider group of investors and for investors to buy small amounts.
Round-the-clock transfers could also help investors in different time zones. The risks are significant.
Rules on securities differ by country, and a token that is not properly structured may not give the holder the voting or dividend rights they expect. Trading volumes can be low, which makes prices volatile and exits difficult, and technical problems such as lost wallet keys can cause permanent loss.
For finance teams, tokenized equity raises practical questions about records, tax and control. The company still needs a reliable shareholder register, must follow securities and anti-money-laundering rules, and must decide how dividends and voting will work.
Auditors will want to know how ownership is verified, and tax advisers will want to know where each holder is resident. This is an evolving area, and the details change as regulators issue guidance.
Anyone considering buying or issuing tokenized equity should take legal advice in the relevant country before committing money.
In practice
Real-world examples.
Example
A private technology company wants to offer shares to a larger group of small investors without a costly listing. It issues tokenized equity through a regulated platform, which lets investors buy as little as $100 worth of shares.
Example
A real estate developer issues tokens that each represent a small share in a company that owns an office building. The finance team keeps the legal register up to date and pays dividends to token holders through their digital wallets.
Example
An investor in another country buys tokenized shares of a listed company through a broker that holds the underlying shares. The investor checks the terms carefully to understand that the broker, not the company, is responsible for honouring the token.
Formula
Calculation
Ownership percentage = tokens held / total tokens in issue x 100
Value of holding = tokens held x value per token
A company has issued 1,000,000 tokens, each representing one share. An investor holds 5,000 tokens, and each share is valued at $40.
Ownership percentage = 5,000 / 1,000,000 x 100 = 0.5%.
Value of holding = 5,000 x 40 = $200,000.
If the company later issues another 250,000 tokens, the investor's ownership falls to 5,000 / 1,250,000 = 0.4%, which shows dilution works the same way as with ordinary shares.Case study
Seen in the real world.
Lakeshore Robotics is an illustrative, fictional start-up that wanted to raise $3 million from many small investors. A traditional share offering would have cost a large share of the money in legal and administrative fees.
The finance director chose a regulated platform that issues tokenized equity. Investors passed identity checks, received digital tokens linked to ordinary shares, and could transfer them to other approved investors.
The illustrative offering raised $3 million from 1,200 investors, an average of $2,500 each. The company still had to keep a formal shareholder register and report to regulators, and the director warned the board that low trading volumes meant investors could not always sell quickly. She also asked the platform to explain in writing how dividends, voting and any future share issues would be handled, so that investors would not be surprised later.
Watch out
Common mistakes.
- Assuming a token always gives the same rights as an ordinary share, when the rights depend on the legal structure.
- Believing tokenized shares are always easy to sell, when trading volumes can be very low.
- Ignoring the loss risk from technical problems, such as lost wallet keys or hacked platforms.
Questions
People also ask.
Is tokenized equity the same as cryptocurrency?
No, because it represents ownership of a company's shares and is subject to securities law, while a cryptocurrency is generally a different type of digital asset.
Do token holders get dividends and votes?
It depends on the legal structure, so holders should check whether the token gives direct rights or only a claim on a custodian.
Why would a company tokenize its equity?
It may want faster settlement, lower administrative costs, and the ability to reach more investors with smaller investment amounts, although it still has to meet the same securities law duties as with ordinary shares.
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