How to tokenize your business equity: A step-by-step guide

Key takeaways

• Tokenized equity allows for easier trading, enhancing liquidity and providing more flexibility for both businesses and investors.
• By dividing equity into smaller digital tokens, you enable fractional ownership, making it accessible to more investors.
• Blockchain technology breaks down geographic barriers, opening your business to a global pool of investors.
• Blockchain ensures secure and transparent ownership records, reducing fraud risks and increasing trust among investors.

Tokenization enables you to transform your business ownership into digital tokens that can be exchanged, sold or shared on a blockchain, replacing conventional stock or equity shares. It’s an exciting shift that offers investors better access, security and liquidity.

This article will guide you on how to tokenize your business equity.

What is tokenized equity?

Let’s define tokenization first before moving on to the next steps. To put it simply, tokenization is the process of transforming real-world assets (RWAs), such as stocks, into digital tokens using blockchain technology. 

When equity — meaning ownership in a business — is transformed into digital or crypto tokens, it becomes tokenized equity. These tokens act as digital shares, similar to how traditional stock is bought and sold on exchanges. The key difference is that with tokenized equity, transactions are recorded on a blockchain, ensuring transparency, security and immutability.

Just like buying shares of a listed company or during an initial public offering (IPO), you now own digital tokens instead of physical shares. These tokens can be stored in a digital wallet and traded, and the blockchain keeps track of every transaction. 

Here’s how tokenized equity differs from traditional stock ownership:

But why is tokenized equity important?

Tokenized equity is important because it opens up new ways for businesses to raise funds and for investors to get involved, even if they don’t have enough capital to buy full shares.

The chart below illustrates the projected growth of RWAs and tokenized assets markets from 2023 to 2030. While RWA is forecasted to reach $1.67 trillion, tokenized assets could surge to $10.9 trillion, showcasing tokenization’s transformative impact across sectors.

Now that you’re familiar with the fundamentals of tokenized equity, let’s break down the steps involved in the process.

Step 1: Understand blockchain and tokenization

If you’re unfamiliar with the concept, it’s crucial to first understand what blockchain is and how tokenization works. Consider blockchain as a very transparent and secure public ledger that is visible to all yet nearly impossible to alter.

As mentioned, tokenizing equity is the process of creating digital tokens that represent ownership in a company backed by real-world shares or assets. You might be wondering: Why not just mint a token?

Minting a token involves generating a cryptocurrency or digital asset, which has no legal connection to a real-world asset and may have no inherent value. So, a company could mint a token and call it “equity,” but without proper backing, it’s essentially meaningless.

Now the question arises: How do you verify whether a token represents a tokenized equity or is merely a minted token?

Tokenized equity represents legally compliant tokens, which can be verified through various methods:

• Regulatory filings: Official documents, such as a prospectus, are filed with financial authorities to confirm the tokens represent real equity.
• Issuer verification: The company issuing the tokens has a verified, legitimate identity and often works with trusted platforms.
• Blockchain metadata: The token has onchain data that links it to the issuing company and specifies how many shares it represents.
• Cap table transparency (company’s share registry): A real-time cap table tracks the ownership of these tokens, showing who owns what and how much.
• Third-party custody: A licensed custodian holds the actual shares backing the token, ensuring that the tokens are redeemable for real equity.

In contrast, memecoins usually derive value from hype, speculation and community support but lack legal backing and do not offer tangible ownership in a company or any intrinsic value.

Step 2: Choose the right blockchain platform

Choosing the appropriate blockchain platform is the next step after you comprehend how tokenization operates. Token creation is supported by a number of platforms, each with unique advantages:

• Ethereum: Token standards like ERC-20 and ERC-721 are supported by this tokenization platform. Ethereum has a robust ecosystem, but when the network is congested, transaction costs might increase.
• Polkadot: If you’re considering multichain interoperability for your tokenized firm, Polkadot could be your best fit.
• Tezos: Known for its lower costs and focus on scalability, Tezos offers a cost-effective option for businesses exploring blockchain solutions.
• Solana: If you intend to manage a lot of transactions, Solana is an appealing option due to its quick transaction processing feature and affordable fees.
• Hadron: Platforms like Hadron by Tether bridge traditional assets and blockchain, enabling the tokenization of stocks, bonds and commodities. These platforms make asset management more efficient and compliant while creating new investment opportunities for businesses and individuals in a transparent and accessible way.

Choose a blockchain based on your business’s requirements, taking into account factors such as transaction speed, scalability and total cost.

Step 3: Legal and regulatory compliance

This is when things start to become a little trickier. Your company will probably be governed by securities laws and other legal frameworks if you tokenize shares. Legal professionals must be consulted before tokens are issued to ensure your offering conforms with local regulations. 

Here are the important things to consider:

• Securities laws: Tokenized equity is regarded as a security in the majority of jurisdictions. You must ascertain whether you will be required to register your token or if you are eligible for an exemption, as it is subject to the same regulations that regulate stocks and shares.
• KYC/AML compliance: Know Your Customer (KYC) and Anti-Money Laundering (AML) checks are necessary for the majority of token offerings. This ensures that your investors are honest and not engaged in illicit activity.
• Tax implications: Each jurisdiction has a different tax approach for tokenized equity. To learn how to record and handle taxes associated with your token, speak with a tax adviser.

Step 4: Develop the token

Now that the legal foundation has been established, you may begin developing your token. This stage entails configuring a smart contract on the blockchain platform of your choice. A self-executing contract having the conditions of the agreement encoded directly into the code is called a smart contract.

Here’s what you’ll need to add to the smart contract:

• Token name and symbol: Select a name, “MyCompanyToken,” and a symbol, “MCT,” for your token.
• Total supply: Determine the number of tokens that will be accessible. For instance, you may issue 1 million tokens, each of which would represent a specific proportion of the stock in your business.
• Rules of ownership: Describe the representation of ownership. Will your tokenholders have voting rights or be eligible for dividends? The smart contract must specify this.
• Rules for transfers: Establish rules for ownership transfers, including lock-up times or limitations on token sales.

Work with experienced blockchain developers to ensure your smart contract is secure and functions as intended.

Step 5: Set up your digital wallet

To handle and keep your token after it has been produced, you will require a digital wallet. Wallets come in two primary forms:

• Custodial wallets: Your wallet is managed by a third party, such as a wallet provider. Despite their ease of use, these wallets might not provide as much protection as non-custodial wallets.
• Non-custodial wallets: You are in charge of the private keys in these wallets, which increases security but also means you are accountable for keeping them safe.

You could use a multisignature wallet, which requires several parties to approve a transaction, for extra protection. 

Step 6: Token distribution

It’s time to distribute your token now that you have it developed. Your tokenized equity can be distributed in a few ways:

• Initial token offering (ITO): This is comparable to an IPO, in which you raise money by selling tokens to the general public or individual investors.
• Private sale: In this scenario, you sell tokens straight to a few chosen investors, such as accredited investors or venture capitalists.
• Employee distribution: As part of an equity pay plan, you may also offer tokens to staff members so they can own stock in the organization.

Ensure to follow any regulatory guidelines for these offerings, such as KYC/AML requirements.

Step 7: Set up a secondary market

To provide liquidity for your tokenized equity, consider enabling investors to trade tokens on a secondary market. You have the options below:

• Create your own DEX: Build your own decentralized exchange (DEX) for trading tokens, offering full control over the process.
• Collaborate with an existing exchange: Partner with an already established exchange to list your token, expanding accessibility for investors.
• Establish liquidity pools: Integrate liquidity pools on decentralized finance (DeFi) platforms to allow users to trade tokens without a centralized exchange.
• List on specialized asset tokenization platforms: Some platforms focus specifically on tokenized assets, offering a space for trading and increasing liquidity.

Did you know? The market value of commodity-backed tokens reached $1.1 billion in 2024, marking significant growth in the tokenization of traditional commodities, such as gold, oil and other valuable resources.

Step 8: Monitor and maintain the token

Following the tokenization process, it’s critical to monitor your token. This involves making sure that the smart contract keeps functioning properly and that all transactions are transparent. 

Inform your investors on a regular basis on the state of the business and any modifications to the token.

Why should you tokenize your business equity?

There are various advantages to tokenizing your business’s equity.

• Liquidity: Tokenized equity is easily exchanged, in contrast to traditional equity in a private corporation. This implies that even if your business isn’t publicly traded, investors will have more flexibility in buying and selling shares.
• Fractional ownership: You can divide your equity into smaller portions, allowing more investors to participate without having to purchase an entire share.
• Access to a global investor pool: Blockchain technology allows investors from around the globe to invest in your company, overcoming conventional territorial restrictions.
• Transparency and security: Because of the nature of blockchain technology, ownership records are safe, publicly accessible and immutable. This offers clear proof of ownership and lowers the risk of fraud.

Did you know? As of November 2024, the market for tokenized assets is valued at $186 billion, marking a 32% increase so far this year.

Real-world applications of tokenized equity

Here are some examples of tokenized equity in practice: 

• UBS Asset Management: UBS Asset Management launched its first tokenized investment fund, the UBS USD Money Market Investment Fund Token (uMINT), in November 2024. Built on Ethereum’s blockchain, this money market investment offers clients institutional-grade cash management solutions. Tokenholders can access high-quality money market instruments within a risk-managed framework.
• Backed: In July 2024, Backed launched tokenized equities like bMSFT (Microsoft), bGME (GameStop), bMSTR (MicroStrategy), bTSLA (Tesla) and bGOOGL (Google), allowing non-United States investors to access S&P 500 companies onchain. These tokens are backed by the corresponding stocks, offering a seamless, decentralized alternative to traditional stock trading.
• Enegra: In 2019, Enegra tokenized its equity to enhance liquidity, provide automated compliance, and reduce transaction costs using Tokeny’s T-Rex platform. With real-time cap tables and low administrative costs, Enegra’s investors benefit from seamless, compliant transactions. By leveraging Polygon’s infrastructure, they achieved fast, feeless token transfers, improving overall liquidity and access.

What are the risks of holding tokenized equity?

Here are the key risks of holding tokenized equity:

• Regulatory uncertainty: Tokenized equity operates in a largely unregulated space, with unclear rules and potential changes in the regulatory landscape, which could impact the security and legality of holdings.
• Technology risks: Blockchain infrastructure can experience bugs, vulnerabilities or downtime, potentially affecting the accessibility or integrity of tokenized assets.
• Market liquidity: While tokenized equities may offer greater liquidity, they are still new and may face limited trading volume, reducing the ease of buying or selling.
• Security risks: While blockchain is secure, the risk of hacks, theft or loss of private keys can lead to a loss of access to tokenized assets.
• Volatility: The value of tokenized assets could be highly volatile, influenced by both the cryptocurrency market and the traditional equity market.
• Issuer risk: The underlying company behind tokenized equity may face financial or operational risks, which could affect the value of the tokenized stock.
• Custody and control: Holding tokenized equity often requires self-custody, meaning the investor is responsible for securing their tokens, with no third-party protection like traditional brokerage services.
• Lack of investor protections: Traditional stocks come with certain protections, such as shareholder rights and dispute resolution mechanisms, which may not be fully available for tokenized equity holders.

Proceed with caution

Tokenizing your business’s equity offers numerous benefits, including increased liquidity and access to international investors. While the process can be complex, breaking it down into manageable steps — like understanding blockchain, selecting the right platform, ensuring legal compliance, creating the token and distributing it — can simplify things.

For a successful tokenization process, it’s crucial to consult with blockchain, legal and financial experts. By following these steps, you can create a more accessible, transparent and liquid business model, unlocking new opportunities for funding.