This educational guide exploring Asset Fractionalization and Tokenization was created in conjunction with Templum, Inc. Templum provides next-generation capital markets infrastructure for alternatives and private securities.
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The concept of asset fractionalization has become increasingly popular as issuers and market participants seek to provide investors with new ways to access traditional asset classes. An exciting component of that growth has been a significant increase in fractional ownership platforms – with issuers bringing unique and sought-after opportunities to their investor base.
The scope of this opportunity is only limited by the creativity of the issuers and the assets they can source.
Asset fractionalization is a surprisingly straightforward process. Here are the high-level steps required to fractionalize your assets and raise investor capital:
- First, you must identify the assets to fractionalize such as art, precious metals, real estate, private equity or debt positions, etc.
- Second, you need to establish a holding company, such as an SPV (special purpose vehicle) or LLC/corporation. This company will take ownership of the asset(s) above.
- Third, you must establish a security offering construct for the holding company and finalize offering documentation – this will vary by the exemption utilized to raise capital from investors. This can include Reg D, Reg A+, Reg CF, etc.
- Fourth, the holding company will raise capital from investors by offering equity for sale.
- Your investors now own shares of the holding company with exposure to the underlying asset.
You Have Successfully Fractionalized An Asset – Now What’s Next?
While it is a remarkably simple process, an issuer must ensure it is following all applicable regulations and requirements. It is strongly recommended that firms engage regulated entities and legal counsel to assist in this process, but do you still need to tokenize?
What Is Tokenization And Is It Required To Fractionalize?
Considering the definition and demonstration of fractionalization, what role does tokenization play? With the rise of blockchain, many new market entrants automatically assume that tokenization is required to fractionalize. However, tokenization is merely a representation of the shares issued and never a requirement. Moreover, a security token cannot behave like a cryptocurrency due to regulations. Each situation is unique and there will be instances where tokenization makes sense and instances where it does not. There are no hard or fast rules but issuers should understand each.
There are very few components of tokenization/blockchain that can be utilized when dealing with securities, and because of these minimal applications, some issuers will not consider tokenization until there are clear efficiencies from the SEC.
When an issuer chooses to tokenize, they must incorporate it into the process with an additional step that must be completed by both the issuer and their providers. To achieve fractionalization with tokenization, the issuer must represent investors’ shares with a blockchain-based token/instrument.
In Summary, Asset Fractionalization Without Tokenization Is Possible But Each Case Is Unique
Asset fractionalization can be achieved both with or without tokenization. There are multiple offering structures possible that allow an issuer to fractionalize the ownership of unique assets, from collectibles to real estate. Tokenization can be used to represent the securities on the blockchain, however, it is never a requirement to fractionalize. Each issuer must evaluate which lane is a better fit for them.
Templum is situated at the nexus of the highly progressive private market and the traditional public market, enabling the issuance and trading of alternative assets. Regardless of whether your firm moves to fractionalize alternative assets via tokenization or without the key to unlocking real benefits lives with next-generation financial infrastructure.
Authored by Robert Nanni
This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.
Featured photo by Diana Edwards on Unsplash