: Disclaimer This material is intended for general information purposes only and does not constitute legal advice. The Tokenization: Introducing How Real Estate Can be Tokenized Generally, the process of tokenization may be compared with securitization. Both convert low-liquidity real world assets into high-liquidity financial instruments, with the key difference being the method of conversion and medium of operation. Tokenization turns low-liquidity assets into enabling fractionalization, trading and compliance by design powered by the functionalities of (DLT) and (DeFi) ecosystem. highly-liquid digital tokens Distributed Ledger Technology Decentralized Finance In practice, real estate tokenization refers to the process of securitizing the real estate assets in a (SPV) and tokenizing an instrument issued by the SPV (e.g. shares, bonds, derivatives, etc.) in the form of digital tokens which are offered to investor in a (STO). Special Purpose Vehicle Security Token Offering The Jurisdiction The choice of jurisdiction for the and conduct of the offering is a crucial piece of the puzzle as it determines the applicable law and regulatory constraints. The ability to tokenize certain financial instruments (e.g. shares, bonds, derivatives, etc.) is determined by the applicable corporate and securities laws, therefore, the chosen jurisdiction must allow to compliantly represent these instruments with digital tokens. tokenization vehicle In many jurisdictions, the main obstacles for tokenization of these instruments are typically archaic processes and outdated requirements, such as the requirement for notarization to effectuate transfer of rights, non-recognition of digital shareholder registers, and legal uncertainty with respect to enforceability of . smart contracts The following is a (non-exhaustive) that avoid these pitfalls either through introduction of dedicated digital asset legislation or targeted removal of obstacles to tokenization: list of suitable jurisdictions United States (Delaware, Wyoming, California) EU/EEA (Germany, France, Spain, Denmark, Luxembourg, Liechtenstein, Estonia, Malta, Portugal) Switzerland UAE (Dubai, Abu Dhabi) Asia (Hong Kong, Singapore, Malaysia) Africa (Nigeria, South Africa, Mauritious) Offshore (BVI, Bermuda, Cayman Islands, etc.) The Structuring Structure your tokenization according to your goals The design of the legal structure will depend on the specific goals of the offering and legal constrains of the chosen jurisdiction. If real estate assets are located in another jurisdiction from the tokenization vehicle, then such assets must be securitized in a separate local (SPV) which is wholly owned by the tokenization vehicle. This is necessary due to complexities of direct ownership of foreign real estate and for liability purposes. special purpose vehicle The following is a (simplified) illustration of the typical structure The structure of the tokens itself depends on the business model of the issuer, but most commonly real estate is tokenized either through digital equity shares or bonds issued by the SPV. for linking the tokens with shares or bonds varies from jurisdiction to jurisdiction, however, it typically involves an amendment of the articles of association (bylaws) of the company, issuance of board resolution, and preparation of investor agreements. The legal process Technology integration should also be conducted in parallel with the legal process by onboarding a tokenization platform. The Listing A short definition of primary and secondary investment offering In a , investors are purchasing shares (stocks) directly from the issuer. However, in a , investors are purchasing shares (stocks) from sources other than the issuer (employees, former employees, or investors). primary investment offering secondary investment offering Listing on an exchange for primary or secondary offering Pending on your tokenized asset, you might benefit from listing on an exchange such as RealEstate.Exchange (RE.X). In order for listing tokenized securities an issuer would need to complete the following steps: Structuring and securitisation of real estate assets in an Special Purpose Vehicle SPV Tokenisation of equity or bonds issued by the SPV Go through a KYB verification and technical onboarding process Comply with financial promotion legislation depending on the type and scope of the offer The last point warrants additional attention, if an offering is directed towards retail investors it would generally require of an EU member state. However, for certain issuers and types of offerings, a full prospectus would be inappropriate because of the time, cost and complexity involved in the approval process. An alternative is to relay on one of the following exceptions: a prospectus approved by a relevant financial authority The total size of the offer in the Union is below EUR 8 million (applicable in Germany and includes retail investors) Offer is directed solely to qualified investors Minimum investment/ticket size is EUR 100,000 In case of the offer under EUR 8 million on , the issuer would need to comply with the requirements set out by the German Federal Financial Supervisory Authority (BaFin). RE.X In particular, such issue would need to prepare a short (WIB) and file it with BaFin, more information can be found . 3 page Securities Information Sheet here Start a Conversation With Me I’ve been working as a journalist, educator and filmmaker for years, and then I fell down the rabbit hole. I will happily engage in any tokenization, blockchain or real estate discussion. I am also interested in productivity, AI-creation tools for art and culture. This article outlines the legal aspects of tokenizing assets on a blockchain using real estate as an example. It is created by , Legal Counsel at DigiShares | Digital Securities & STO, and , Marketing Manager at RealEstate.Exchange. Volodymyr Havrylyuk-Yensen Emil Holtemann
