Comprehensive Guide to Compliance for Tokenization of Equity in Non-Public Companies

Original Author: Lawyer Shao Jiadian

What is equity tokenization?

“Stock Tokenization” refers to the conversion of company shares (equity) into digital tokens issued on the blockchain, with each token representing ownership similar to traditional shares. In other words, you no longer hold a paper stock certificate but instead hold equity tokens recorded on the chain. These tokens can be electronically managed, transferred, and traded.

This concept emerged during the blockchain wave in the late 2010s. In 2016, Overstock.com became the first publicly traded company to issue stock via blockchain; during the ICO frenzy of 2017-2018, many believed that “Security Token Offerings” (STOs) would become the next trend. Startups like Harbor raised tens of millions of dollars in funding, attempting to enhance the liquidity of private equity through blockchain. However, due to the lack of a mature compliance market and trading infrastructure, early implementation was slow.

By 2025, equity tokenization has transitioned from experimentation to reality. Robinhood partnered with Bitpanda to allow European investors to buy and sell US stocks 24/7; Kraken and Coinbase are also exploring stock tokenization business under a compliant framework.

By mid-2025, the global market value of tokenized stocks is expected to be around $424 million, but the growth momentum is astonishing—some analysts predict it may exceed $1 trillion in the future. It is transitioning from a fringe innovation to the core of mainstream capital markets.

The Significance of Equity Tokenization: Making “Equity” Smarter

Whether for investors or issuers, the appeal of equity tokenization lies in one word: efficiency. It makes the capital market more open, more automated, and more transparent.

Benefits for investors:

• Liquidity: Tokens can be traded on a digital platform open for 24 hours, and private placements are no longer “locked.”
• Fragmented Investment: Allows high-priced stocks to be split into very small units, lowering the entry threshold.
• On-chain Transparency: All transactions and changes in ownership are permanently recorded on the blockchain, traceable and auditable.
• Global Access: Investors from all over the world can participate in the same round of financing as long as it is permitted by their jurisdiction.

Benefits for enterprises:

• Global Fundraising: Companies can access a wider pool of investors through tokenization.
• Automatic Compliance: Smart contracts can directly write regulatory requirements such as KYC, lock-up periods, and transfer restrictions into code, achieving “compliance is code.”
• Operational Efficiency: The shareholder register is automatically updated; dividends, voting, and stock splits can all be executed on-chain.
• Cost Saving: Reduces fees for brokers, registration, clearing, etc., leading to faster settlement and less capital occupation.

In short: equity tokenization is not about evading regulation, but rather about digitizing compliance.

Global Regulatory Landscape

The key to the implementation of equity tokenization lies not in technology, but in regulation. There are significant differences in attitudes across various jurisdictions, but the trend is consistent: they are recognized as securities and managed under the existing framework.

• United States

The SEC views tokenized stocks as traditional securities. If the tokens represent ownership or dividend rights, they must be registered or issued under an exemption (such as Reg D, Reg CF, Reg A+, etc.).

In the United States, secondary trading is typically required to take place on national securities exchanges registered with the SEC or on approved ATS, and the matching, brokerage, and custody entities must also possess the appropriate licenses and compliance capabilities.

In short: Tokenizing equity in the United States still follows the complete securities issuance process, but the medium has been replaced with on-chain tokens.

• European Union

The EU has included tokenized stocks under the definition of “financial instruments” in MiFID II, applying the same rules as for traditional stocks.

The regulatory attitudes of different countries vary slightly; for example, Germany's BaFin requires the submission of a complete securities prospectus unless exempted.

The DLT Pilot Regime, effective from 2023, allows compliant institutions to trial blockchain-based securities trading and settlement within a “sandbox,” marking the EU's proactive embrace.

• Singapore

The Monetary Authority of Singapore (MAS) adopts a “technology-neutral” principle:

If a token essentially represents shares or securities, it is regulated under the Securities and Futures Ordinance.

Issuance must comply with the requirements of the prospectus or applicable exemptions, and the trading platform must be approved.

MAS also has a regulatory sandbox for innovative companies to test tokenized securities issuance in a controlled environment. For example, in the international project “Project Guardian”, MAS collaborates with multiple regulatory agencies to explore use cases for tokenized bonds, funds, and more.

Overall, Singapore is one of the jurisdictions with the clearest compliance path and the most open pilot atmosphere.

• United Arab Emirates (UAE)

The Financial Services Regulatory Authority (FSRA) of the Abu Dhabi Global Market (ADGM) officially recognizes tokenized stocks as securities; Dubai's VARA is also developing a virtual asset framework.

All tokenized issuance or trading platforms must operate under a license, and KYC/AML and investor protection standards are consistent with traditional securities.

The UAE is becoming the Web3 financial center of the Middle East.

• Hong Kong

The Hong Kong Securities and Futures Commission (SFC) has clarified that tokenized stocks fall under the category of securities as defined by the Securities and Futures Ordinance. Any Security Token Offering (STO) aimed at investors in Hong Kong must comply with the full securities issuance or exemption requirements; institutions distributing or facilitating tokenized securities must hold a Type 1 (Securities Trading) license.

In addition, the SFC regards tokenized equity as a “complex product” under the Securities and Futures Ordinance. In practice, it is mostly distributed to professional investors; if retail access is intended, it must meet the requirements of a complete prospectus, licensing, suitability, and disclosure, the regulatory attitude is relatively cautious.

Structural Design: Technology is just the appetizer, the legal framework is the main course

Tokenization is not as simple as “going on-chain.” The key is: how to legally structure the token to correspond to real equity. In practice, there are mainly three solutions:

1. Legal Wrapper Model

The actual shares of the company are held by an intermediary entity (SPV or trust), which then issues tokens representing the corresponding rights.

Token holders have the right to benefit from SPV, thereby indirectly holding equity in the company.

Advantages: Compatible with existing legal systems, high investor awareness.

2. Native Token Model

The company directly registers its shares on the blockchain, and the tokens themselves serve as equity certificates.

The advantage is a simple structure and complete on-chain implementation, but it is only feasible in jurisdictions that recognize the legal status of “digital shares” (such as Switzerland and Liechtenstein).

Currently still belongs to a minority of cases.

3. Hybrid Mode

The traditional shareholder register is still legally retained, but is mirrored on the blockchain.

Companies can use a professional equity tokenization platform to maintain the cap table in real time, automatically execute dividends and governance.

Most startup projects tend to adopt this approach to balance legal certainty with operational convenience.

Custody and Wallet: Balancing Freedom and Compliance

Another core decision is: Who holds the tokens?

1. Self-custody: Investors manage their wallets themselves; enterprises need to embed logic such as whitelisting, locking, and geographic restrictions in the contract.

The advantage is decentralization, the disadvantage is high compliance complexity.

2. Custodied: Tokens are held by licensed institutions (banks, brokers, trusts). The platform is responsible for KYC/AML, whitelisting, transaction monitoring, and reporting, suitable for projects that wish for secondary circulation or retail openness.

Projects aimed at retail investors and secondary circulation typically find that qualified custodians/platform custodians are more likely to meet regulatory expectations; if self-custody + whitelist is adopted, the mandatory requirements and acceptability of “qualified custodians” in the target jurisdiction should still be assessed.

Shareholder Registry and Smart Contract Management

The core issue that equity tokenization must address is: how to ensure that the on-chain records are consistent with the legal shareholder register.

Some jurisdictions (such as Switzerland) have allowed the blockchain itself to serve as a legal share register; other areas require a mirrored register to be kept internally by the company.

There are now dedicated blockchain Cap Table management systems in the market that can automatically sync each token transfer to the ledger and prevent over-issuance or unauthorized transfers through smart contracts.

Common technical standards such as the ERC-1400 series (designed for security tokens) support compliance features like identity identification and transfer restrictions.

Companies should also design a remedy mechanism for lost private keys (such as reissuing tokens after verifying identity) to prevent investors from “losing shares when losing the chain”.

Real Case Studies and Best Practices

Exodus (USA) is the most representative success story to date.

In 2021, the company raised approximately $75 million through a tokenized offering of common stock under the SEC Reg A+ framework, attracting over 6,000 investors.

Exodus has become the first tokenized equity issuance project in the United States to receive regulatory approval by registering a prospectus, managing the transfer agent registry, and establishing a lock-up period before circulating on the approved platform.

Other success factors include:

• Hire legal and compliance advisors as soon as possible;
• KYC and whitelist mechanism enabled from day one;
• Plan the secondary market circulation channels in advance (ATS or sandbox platforms);
• Maintain transparent communication with investors, managing token holders like shareholders.

Conclusion: The Future of Financing, Written on the Blockchain

The tokenization of equity in 2025 marks the deep integration of traditional finance and blockchain technology. It provides startups with new fundraising channels, a global network of investors, and automated compliance infrastructure.

Of course, there are still challenges: compliance thresholds, regulatory uncertainty, and investor education. But the trend is irreversible - equity will be digitized, financing will be globalized, and compliance will be procedural.

Future IPOs, mergers and acquisitions, and even employee stock incentives may all be carried out in the form of tokens. Entrepreneurs who start to understand and layout equity tokenization as early as 2025 will gain an advantage in the next round of capital transformation.