Shareholder Rights

The right to participate in corporate governance decisions, such as electing the board of directors or approving major corporate actions. Tokenization enables:

• On-chain voting via smart contracts for transparent, auditable governance.
• Delegated voting where token holders can assign their voting power.
• Fractional voting proportional to token ownership, even for micro-stakes. Example: A DAO structure for a tokenized real estate fund allowing holders to vote on property acquisitions.

Rights to the financial benefits of ownership, primarily dividends and distributions. Tokenization automates and fractionalizes these flows.

• Dividend Distributions: Programmable smart contracts can automatically distribute profits to token holders' wallets.
• Capital Distributions: Rights to proceeds from asset sales or company liquidation.
• Royalty Streams: For asset-backed tokens (e.g., music royalties, IP), revenue can be split automatically. This replaces manual dividend processing with transparent, on-chain execution.

The right to receive timely financial and operational information about the issuer. Tokenized systems can enhance this through:

• On-chain reporting: Key metrics and audit reports can be published to an immutable ledger.
• Automated disclosures: Smart contracts can trigger notifications for material events.
• Regulatory compliance: Platforms can programmatically ensure disclosures meet jurisdictions like Regulation D or Regulation A+ requirements. This increases transparency and reduces information asymmetry between issuers and investors.

The right to sell or transfer ownership of the security. Tokenization redefines this by enabling:

• Secondary market liquidity: Trading on alternative trading systems (ATS) or decentralized exchanges (DEXs) with compliance layers.
• Programmable restrictions: Transfer agents are replaced by smart contracts that enforce holding periods (e.g., Rule 144) or verify accredited investor status.
• Global accessibility: Potentially broader investor base compared to traditional private placements. The key challenge is balancing liquidity with regulatory compliance on-chain.

The right of existing shareholders to maintain their proportional ownership by purchasing new shares before they are offered to outsiders. In a tokenized context:

• Smart contract offerings: Rights offerings can be executed automatically, with tokens representing the right to purchase.
• Automated allocation: Contracts can calculate and allocate purchase rights based on snapshot of holdings.
• Expiration and settlement: Unclaimed rights can be automatically canceled or redistributed per the smart contract's coded terms. This automates a traditionally manual and paperwork-intensive corporate action.

In preferred equity structures, the right to be paid before common shareholders in the event of a liquidation, sale, or dissolution. Tokenization allows for:

• Coded waterfall: Smart contracts can automate the distribution of proceeds according to a predefined liquidation waterfall.
• Multiple series: Different token classes (e.g., Series A, Series B) can have their preferences hard-coded.
• Transparent execution: All stakeholders can verify the payout logic and amounts on-chain. This is a critical feature for tokenized venture capital and private equity investments.

Tokenized shareholder rights often include on-chain voting to approve proposals, elect governing bodies (like a DAO council), or modify protocol parameters. This is typically executed via a governance token, where voting power is proportional to stake. Key mechanisms include:

• Snapshot Voting: Off-chain, gas-free signaling.
• On-chain Execution: Binding votes that trigger smart contract functions.
• Delegation: Token holders can delegate voting power to representatives.

These are the rights to receive a share of the protocol's profits or assets. In decentralized finance (DeFi), this is often realized through:

• Fee Distribution: A portion of protocol-generated fees (e.g., trading, lending) is distributed to token holders.
• Buybacks & Burns: Using revenue to buy and permanently remove tokens from circulation, increasing scarcity.
• Dividend-like Mechanisms: Direct distribution of stablecoins or other assets to qualifying wallets, though tax and regulatory treatment varies significantly.

Blockchain-native systems provide unprecedented transparency but must still ensure timely, structured access to material information. Key considerations include:

• On-chain Analytics: All transactions and treasury movements are publicly verifiable.
• Proposal Transparency: Governance forums (e.g., Discourse, Commonwealth) for pre-vote discussion.
• Financial Reporting: Regular, verifiable reports on treasury status, revenue, and expenses, often published via decentralized storage (IPFS, Arweave).

To enforce rights off-chain and interface with traditional legal systems, many projects establish a legal wrapper. Common structures include:

• Decentralized Autonomous Organization (DAO) LLC: A limited liability company (often in Wyoming or the Cayman Islands) owned by the DAO, providing legal personhood.
• Foundation: A non-profit entity (common in Switzerland, Singapore) that holds assets, employs developers, and represents the protocol.
• Smart Contract Limitations: Pure on-chain governance lacks legal recourse; a wrapper bridges this gap for contracts, litigation, and tax compliance.

The primary compliance challenge is whether the token constitutes a security under regulations like the U.S. Howey Test. If a token grants profit-sharing rights derived from the efforts of others, it risks being classified as an investment contract. Projects mitigate this by:

• Functional Utility: Emphasizing the token's use within the protocol (e.g., for staking, payments).
• Decentralization: Achieving sufficient decentralization so no central party's efforts are essential for profit.
• Regulatory Sandboxes: Engaging with specific jurisdictions that provide clearer frameworks for tokenized rights.

Enforcing on-chain rights in off-chain courts presents unique challenges. Emerging solutions include:

• On-chain Arbitration: Using decentralized dispute resolution platforms like Kleros or Aragon Court.
• Multi-sig Governance: Requiring a threshold of trusted signers to execute sensitive actions (e.g., treasury disbursements).
• Upgradeable Contracts: Including proxy patterns or timelocks to allow for bug fixes or governance decisions, balancing flexibility with security against malicious changes.

The quantified influence a token holder has in a governance system, typically calculated as a function of the number of tokens held or staked. Mechanisms include:

• One-token-one-vote: Simple, but can lead to plutocracy.
• Quadratic Voting: Voting power increases with the square root of tokens committed, reducing whale dominance.
• Delegated Voting: Token holders can delegate their voting power to experts or representatives.

The process by which a DAO or protocol governs its shared pool of assets, typically consisting of native tokens and other cryptocurrencies. Shareholder rights are exercised through votes on treasury allocation for:

• Grants and funding for ecosystem development.
• Liquidity provisioning and market operations.
• Protocol-owned liquidity strategies to enhance stability.

The formalized workflow for enacting changes in a decentralized organization. A typical process includes:

• Temperature Check: An informal poll to gauge community sentiment.
• Formal Proposal: A detailed, on-chain proposal with executable code or specific directives.
• Voting Period: A defined window where token holders cast votes.
• Timelock & Execution: A mandatory delay after voting for security, followed by automated execution if quorum and majority are met.

The rights of a token holder to the financial benefits generated by a protocol, analogous to dividends or buybacks in traditional equity. These are often realized through:

• Fee Distribution / Revenue Sharing: A portion of protocol fees is distributed to stakers or token holders.
• Token Buybacks and Burns: Using protocol revenue to reduce token supply, increasing scarcity.
• Staking Rewards: Earning yield for securing the network or delegating voting power.

The ability of a participant to liquidate their stake or position. In decentralized systems, this is typically frictionless through open market sales on DEXs or CEXs, contrasting with the restricted liquidity of private company shares. The concept of a rage quit in some DAOs allows members to withdraw a proportional share of the treasury upon dissenting from a passed proposal.