Dilendorf Law Firm advises on all aspects of formation, governance and operation of tokenized funds, including hedge funds, private equity funds, venture capital funds and real estate funds.

Fund tokenization is a process of creating a digital asset (token) to represent digital asset securities, i.e., tokenized limited partnership (“LP”) interest.

All operations, such LP token issuance, investor subscription, redemption, and secondary-market trading, are managed via blockchain smart contracts without any physical paperwork.

Fund Tokenization Brochure

Services Related to Formation and Operation of Tokenized Funds

Developing a fund’s strategy and structure:

• Assisting clients with selecting and establishing optimal onshore and offshore (Cayman Islands/BVI) fund tokenization structures;
• Guiding fund sponsors and investment advisers with selecting suitable fund formation structures in compliance with the U.S. securities laws, including:
  • Regulation D/S of the Securities Act of 1933
  • Section 3(c)(1) funds / Investment Company Act of 1940
  • Section 3(c)(5) real estate funds / Investment Company Act of 1940
  • Section 3(c)(7) / Investment Company Act of 1940
  • Investment Advisers Act of 1940
• Implementing the chosen fund structure and preparing all the necessary documentation;
• Preparing private offering memorandum and subscription documents;
• Advising on foreign and US investor qualifications;
• Advising on AML/KYC compliance.

Types of Tokenized Funds

• Real Estate Funds;
• Art Funds;
• Healthcare, Life Science and Biotech Funds;
• Precious Stone Funds; and
• Collectible Funds (Sneakers, Classic Cars, Wine, Whiskey)

Fund Tokenization Benefits Include

• Access to a global pool of capital;
• All operations, such LP token issuance, investor subscription and redemption, are managed via blockchain smart-contracts, without any physical paperwork;
• Increased liquidity;
• Simplified digital management of significant number of investors via smart contracts;
• Automated and transparent governance, voting and compliance using smart contracts on blockchain.

Key Considerations: Technology

All of the key tokenization practices must be maintained via blockchain smart-contracts, including:

• Selecting blockchain for a security token issuance, e.g., Avalanche, Algorand, Ethereum, etc.
• KYC/AML/Accreditation process
• Token issuance with a compliance protocol
• Maintaining cap table
• Secondary trading integration
• Reporting and investor management
• Managing token lifecycle (communications with investors, cap table managment, secondary trading restrictions).

Fund token issuers must structure each offering very carefully to take into account various pitfalls presented by securities regulations, AML/KYC requirements and current investment and governance restrictions. Heightened global liquidity may present additional operational complications, for example, with secondary market re-sales and maintaining capitalization tables.

Some of the other major considerations that should be acknowledged and addressed by emerging tokenized fund managers are that security tokens may by subject to limitations on re-sale, number of investors, investor solicitation and acceptance, tradability on secondary markets in the US and foreign jurisdictions, etc.

We help our clients efficiently navigate the web of challenges arising throughout formation, governance and operation of tokenized funds.  Contact Dilendorf Law Firm for a consultation.

Resources:

• Tokenization of Assets is Disrupting the Financial Industry
• Engaging on Fund Innovation and Cryptocurrency-related Holdings
• Digital Assets and The Future of Finance
• Bank Secrecy Act/Anti-Money Laundering – FDIC
• Tokenized Security & Commercial Real Estate – MIT Digital Currency Initiative
• From Initial Coin Offerings to Security Tokens – Stanford Law School
• Private Equity and Blockchain: New Infrastructure or New Asset Class? – Harvard Law School
• Initial Crypto-asset Offerings, Tokenization, and Corporate Governance – Columbia Law School
• Potential for Cryptocurrency to Fund Investment in Sustainable Real Assets – Duke University