Concept

Equity tokenization is a type of tokenization in which the ownership value (and any associated rights) represented by a certain equity (equity holdings, equity stake)- per se, a reflection of value stored in tangible and/ or intangible assets- is converted into, and represented by, digital tokens on the blockchain to enable digital ownership, transfer, and storage of the rights embedded in the equity. The issued digital tokens, per se, represent ownership shares or interest in a venture (a company) and entitle token holders to enjoy the rights assigned to equity holders in proportion to token holdings. A tokenized equity refers to a stake of ownership in a company or asset that is represented by means of digital tokens on a blockchain. Equity tokenization involves creating and issuing crypto coins or digital tokens that are represented as equity shares in a company (collection of assets) or individual assets. Similar to traditional stocks or shares, these coins or tokens are digital representation of equity stake except that tokenized equity is not in a certificate form or accounting entry. Basically, tokenized equity is a form of security that is issued as a digital token programmable and secured by cryptography.

Issuance

Equity tokenization is the digitization of ownership rights that is effected by mans of on-chain issuance. The issuance of tokenized stock (or other types of equity holdings) takes place in a process similar to that of an initial public offering (IPO) and capital raising in traditional finance. However, it combines the capabilities of fund mobilization with the power of blockchain technology and digital tokens, in the crypto space, to increase flexibility and speed of the issuance process. Tokenization is a smooth way to raise capital (long term capital as embodied in equity) through issuance of shares in the forms of digital assets, such as a crypto coin or token. Tokenized equity is a form of tokenized asset whose underlying is a share of a listed company. When purchasing a stock token, the digital coin or token will be credited to the buyer’s blockchain-hosted account. Trading and transferring of equity shares on a blockchain is much more flexible as a means of raising funds. Other benefits include low cost and wider participation base that allows for direct participation of interested investors.

Token offerings

Investors purchase tokenized stocks through security token offering (STO)-  an offering that involves issuing security tokens to users and investors in the market. Similar to an initial public offering (IPO) in the field of investing and investment banking, an STO (security token offering) revolves around issuing divided shares (units) in an asset or venture or project (a financial security or share of stock in an IPO, and a token in the case of STO). Tokens, per se, represent assets and are listed on networks/ platforms in a process similar to conventional offering. An STO is a type of public offering whereby tokenized securities (tokenized digital securities), also known as security tokens, are sold on a security token exchange or similar venues. Transactions are validated and maintained using a blockchain virtual ledger. STO was introduced as a means by which tokens remain compliant with applicable laws and rules for securities (given that certain regulatory guidelines classify tokens as securities). This type of coin offering is quite similar to an initial coin offering (ICO) but is particularly compliant with securities regulations in the place of issue and offering of the tokens. STOs are issued subject to certain regulatory and legal obligations for issuing and selling of equity (equity interest) in the issuer.