Equity Token

An equity token is a blockchain-based digital representation of traditional equity, conferring legal ownership rights to the holder. These rights are typically encoded into a smart contract and can include:

• Voting rights on corporate governance
• Dividend entitlements for profit sharing
• Claim on assets in the event of liquidation Unlike utility tokens, their value is directly tied to the financial performance and valuation of the issuing entity.

Most equity tokens are classified as security tokens and are subject to securities regulations like the SEC's Regulation D, Regulation A+, or Regulation S in the United States. Issuance requires compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) rules. Platforms facilitating trading must be registered as Alternative Trading Systems (ATS) or similar regulated venues.

Through smart contracts, equity tokens enable programmable equity features that are not possible with traditional paper shares. This allows for:

• Automated dividend distributions triggered by predefined conditions
• On-chain voting mechanisms for shareholder proposals
• Dynamic cap table management with transparent ownership records
• Custom vesting schedules and transfer restrictions enforced by code.

By tokenizing equity, traditionally illiquid assets like private company shares can be traded on security token exchanges 24/7. This enables fractional ownership, allowing investors to purchase small portions of high-value equity. This democratizes access to private market investments and can reduce the liquidity premium typically demanded by early-stage investors.

It is critical to distinguish equity tokens from other digital assets:

• Utility Tokens: Provide access to a product/service (e.g., FIL for Filecoin storage).
• Governance Tokens: Confer voting rights within a decentralized autonomous organization (DAO) but typically no claim on assets or profits (e.g., UNI for Uniswap).
• Equity Tokens: Represent legal ownership and financial rights in a traditional business entity, blending blockchain efficiency with established corporate law.

Investment funds tokenize their limited partnership (LP) interests, representing shares in a fund's underlying portfolio of companies or assets.

• Streamlines capital calls and distributions via smart contracts.
• Provides enhanced transparency into fund performance and holdings for token holders.
• Reduces administrative overhead associated with traditional fund administration and transfer agents.

Equity tokens can embed voting rights and dividend entitlements directly into the token's smart contract logic.

• Enables on-chain voting for corporate decisions, increasing participation and auditability.
• Dividends can be distributed automatically to token holders' wallets in stablecoins or native tokens.
• This creates a transparent and efficient mechanism for exercising ownership rights, a core feature of digital securities.

Equity tokens are subject to securities laws (e.g., SEC Regulation D, Regulation S, Regulation A+). Notable examples include:

• Blockchain Capital (BCAP): One of the first SEC-qualified tokenized venture funds.
• SPiCE VC: A tokenized venture capital fund providing liquidity for early-stage investments.
• Aspen Coin (ASPEN): Tokenized ownership of the St. Regis Aspen Resort, issued via an SEC-registered Regulation D offering.

An equity token is a digital security that confers ownership rights, such as equity shares, profit participation, or voting power, in a legal entity. Its issuance and trading are subject to securities regulations (e.g., SEC in the US, MiCA in the EU). Unlike utility tokens, their primary purpose is investment, not access to a network.

These tokens combine traditional finance with blockchain mechanics:

• On-Chain Ownership: Shareholder registry is maintained on a blockchain.
• Programmable Rights: Voting, dividends, or transfer restrictions can be automated via smart contracts.
• Fractional Ownership: Enables micro-investments in high-value assets.
• Enhanced Liquidity: Potential for 24/7 trading on compliant Security Token Exchanges (STOs).

Equity tokens are used to digitize various forms of ownership:

• Startup Funding: Companies raise capital via a Security Token Offering (STO).
• Real Estate: Tokenizing ownership of properties for fractional investment.
• Venture Capital: Funds tokenize their LP interests for secondary market liquidity.
• Private Equity: Representing shares in private companies on a blockchain ledger.

Built using token standards that embed compliance logic. The most common is the ERC-1400 standard suite on Ethereum, which supports:

• Document management for legal prospectuses.
• Restricted transfers to comply with KYC/AML and investor accreditation.
• Granular control over token partitions and behaviors. Other standards include ERC-3643 and Polymesh's native security token framework.

Issuance is governed by securities laws like the U.S. Securities Act. Common compliance pathways include:

• Regulation D: Private placements to accredited investors.
• Regulation A+: Mini-IPO for public offerings up to $75M.
• Regulation S: For offerings to non-U.S. investors. Compliance is often enforced by Transfer Agents and embedded into the token's smart contract logic.

Notable Examples:

• tZERO: A regulated trading platform for security tokens.
• INX Limited: Issued an SEC-registered security token for its own trading platform.
• RealT: Fractionalizes and tokenizes U.S. real estate properties. Key Infrastructure: Platforms like Polymesh, Securitize, and TokenSoft provide end-to-end solutions for issuance, compliance, and lifecycle management of equity tokens.

In the United States, the Howey Test is the primary legal framework used by the SEC to determine if an asset is a security. An equity token is almost always considered a security because it represents an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. This classification triggers a full suite of securities regulations, including registration requirements or finding an applicable exemption.

Issuers typically avoid costly full SEC registration by using exemptions:

• Regulation D (Reg D): Allows private placements to accredited investors.
• Regulation A+ (Reg A+): A "mini-IPO" for public offerings up to $75M, open to non-accredited investors.
• Regulation S (Reg S): For offers and sales made outside the United States. Compliance with these rules dictates who can invest, disclosure requirements, and resale restrictions (lock-up periods).

A critical requirement for compliant equity tokens is the use of a SEC-registered transfer agent. This entity maintains the official record of ownership (the cap table), validates transfers to ensure they comply with securities laws (e.g., investor accreditation, holding periods), and manages corporate actions like dividends or stock splits. On-chain smart contracts alone are not sufficient for legal compliance in this role.

For most private offerings, issuers must verify that investors are accredited (meeting specific income or net worth thresholds). This process is part of broader Know Your Customer (KYC) and Anti-Money Laundering (AML) obligations. Platforms facilitating equity token sales must integrate robust identity verification systems to screen investors against sanctions lists and prevent illicit financing.

Trading equity tokens on a secondary market requires the platform to be a registered broker-dealer and operate an Alternative Trading System (ATS). An ATS is a regulated venue for matching buyers and sellers of securities. Operating without proper licensing exposes the platform and its users to significant legal risk from the SEC and FINRA.

Beyond regulation, technical security is paramount. Flaws in the smart contract code governing the token can lead to irreversible loss of funds or unauthorized issuance. Furthermore, custody solutions for security tokens must meet a higher standard than typical crypto wallets, often requiring institutional-grade, insured custodians that can demonstrate control procedures acceptable to regulators.