Experienced Tokenization Team
Do you need legal assistance with your tokenization project? Do you have plans to tokenize a piece of real estate or other asset but are unsure of the federal compliance obligations? If so, then you need a comprehensive compliance evaluation by a team of tokenization attorneys.
If you developed and launched a tokenization project involving securities without being registered with the SEC or exempted, you can face significant penalties, disgorgement orders, reputational orders, and injunctions.
Don´t let this happen to you without getting in touch with an experienced attorney today. At Oberheiden, P.C., our team of tokenization attorneys can guide you through the tokenization process.
Our attorneys can conduct a thorough review of your project to determine whether you have any federal filing, registration, or disclosure obligations under federal law.
Do not risk a federal investigation. Put Oberheiden, P.C. on your side today.
What is Tokenization?
Real estate tokenization refers to digital shares of real estate that are stored on blockchain technology. Tokenization is transferring fractionalized shares of the real estate into tokens.
This creates ownership interests by way of security tokens that each represent an interest in the real estate being tokenized.
In addition to the actual piece of real estate being tokenized, debt interests to property can also be tokenized and subsequently represented by tokens.
Because tokenization projects involve blockchain technology, the tokens cannot be altered, changed, or modified. This increases the security and transparency of transactions. It also provides for a more liquid secondary market.
The idea is that every individual who owns a token owns a fractional piece of the underlying piece of real estate.
What is an Example of Real Estate Tokenization?
A perfect example of real estate tokenization is selling a house. You want to sell your house to a buyer. Traditionally, this would involve hiring a real estate agent to find one buyer that is willing to pay the purchase price.
The buyer would typically pay a down payment of 20-30% and finance the remainder with a mortgage from a lending institution.
Tokenization of real estate eliminates the traditional entry barriers of buying a house and financing it. With tokenization, if a buyer pays 10% of the purchase price, they own 10% of the property.
The process of tokenization means that many buyers are purchasing fractional pieces of ownership of the property.
Tokenization eliminates the need to rely on third-party intermediaries. It also facilitates greater access to capital and allows basically anyone to participate in the real estate industry.
5 Tokenization Considerations
Before launching a real estate tokenization project, be sure to consider these five points:
1. Your real estate tokenization project will likely involve an STO, which is an offering of security tokens and therefore must be registered with the SEC or exempted.
Tokenized real estate is typically offered and sold to investors in an STO in cases where the tokenized asset satisfies the SEC´s definition of a “security.”
The STO would generally mention that the real estate is being tokenized will be sold in fractionalized shares and then transferred and stored on the blockchain, which would create a permanent record of the transaction.
The SEC and courts use a four-pronged test for determining whether a particular token is an “investment contract” or “security.”
The test is called the Howey Test:
- An investment of money,
- In a common enterprise,
- With the expectation of projects, and
- Derived solely from the efforts of others.
All of the above four factors must be satisfied in order for the token to be a security. If it is a security, it must be registered with the Commission or exempted.
Of course, many individuals will not go through the registration process but will instead opt for an exemption for their token offering. Several exemptions are available, including Regulation CF, Regulation S, and Regulation D.
2. Tokenization of real estate lowers the entry barriers to real estate investment and participation.
Tokenization offers benefits to individuals and small businesses that traditional real estate transactions were unable to offer. Tokenization can be extremely beneficial to individuals and businesses.
Examples of these benefits include providing greater investment opportunities, automation of transactions, faster transaction speed, more innovation, and increased ease in transactions.
Also, because the tokens are stored on blockchain technology, there is greater transparency. The keys are not stored with the company or any centralized authority but are instead decentralized.
Using blockchain technology enhances security, reduces data breaches and cyber-attacks, and provides for greater transparency and visibility of transactions.
In order to achieve these benefits, it is important that your tokenization project complies with all federal obligations. If you need advice about which obligations apply to you and your project, give our team of tokenization attorneys a call today.
3. Tokenization facilitates capital and market formation to all investors.
The real estate industry is perhaps one of the largest sources of value in the world. It is also one of the industries that is the hardest to participate in.
Real estate has traditionally been limited to the wealthy, large businesses, venture capitalists, and institutional investors. Retail investors and small businesses have generally been excluded from participating in the real estate industry.
Tokenization changes the game by allowing retail investors and small businesses to purchase fractionalized shares of a larger piece of real estate, thus enabling ownership without having to worry about the high costs of engaging in real estate deals.
Now, when an issuer tokenizes a piece of real estate, the investors of the fractionalized shares can include individuals and companies of all sizes and wealth.
4. Tokenization of real estate assets can be a complicated process, requiring the experience and knowledge of a tokenization attorney.
Tokenization of real estate is a multi-step process. There may be federal compliance obligations at every stage of the process.
The company will need to decide which asset they want to tokenize and how many tokens they plan to issue and at what price.
Other specific details they will need to consider include the terms of the issuance, the targeted shareholders, the terms of the tokenization contract, and an evaluation of the legal and regulatory environments.
Lastly, the types of contracts and agreements that the issuer will need drafted and enforced can be very complicated.
The possible regular requirements are numerous and can differ from tokenization project to tokenization project. An experienced tokenization attorney should be consulted.
5. Projects involving the tokenization of real estate may involve federal compliance obligations in addition to the SEC registration and disclosure issues.
In addition to the STO issues, if the token is a security, they will need to be registered or exempted. If the issuer has a specialized platform to offer and sell the tokens or facilitate trading, the platform may need to be registered as an exchange.
The individuals involved may need to be registered and regulated as investment advisers or broker-dealers in certain circumstances.
If the issuer plans to act as an intermediary between payments to other parties, the issuer may need a special license to do so under FinCEN rules and the BSA. Also applicable under the BSA include requirements to implement strong KYC policies and procedures for investors seeking to purchase a token.
Offering security tokens may also obligate the issuer to comply with anti-fraud provisions and consumer protection laws.
Of course, STOs will also have multiple tax implications and create new income reporting requirements for the issuing companies.
Retaining appropriate and experienced legal counsel to advise you on these issues is the best preparation, defense, and step a company can take before they launch their tokenization project.
Need Advice with Tokenization?
More and more people are participating in tokenization projects. Tokenizing real estate eliminates the entry barriers to an area—real estate—that was traditionally open only for the wealthy.
That said, tokenization projects easily implicate the federal securities laws as well as various BSA requirements such as AML or KYC.
It is therefore critical to have a thorough compliance review of your tokenization plans before you officially launch your tokenization project.
At Oberheiden, P.C., we have the team needed to conduct this thorough review in order to evaluate whether you may have potential federal compliance obligations.
Do not wait to speak to an experienced tokenization and blockchain attorney. Contact us today for a free consultation.