FKBR Quick Take: Tokenizing Private Offering Securities
The FKBR Quick-Take series explores trending legal topics to provide quick answers to common questions. In this edition, our Corporate & Securities team discusses the tokenization of private offering securities.
A private offering is the sale of securities (such as shares of stock, LLC membership interests, notes, etc.) without registering the offering with the U.S. Securities and Exchange Commission (the “SEC”), typically conducted pursuant to an exemption under the Securities Act of 1933 (the “Securities Act”), most commonly under Regulation D. In a private offering, securities are often sold to a limited number of investors and are subject to transfer restrictions. A private security is a security that is sold in a private offering.
Tokenization of securities refers to the process of representing ownership of securities as a digital token recorded on a blockchain. The token serves as a digital representation of the underlying security.
On January 28, 2026, the SEC’s Division of Corporation Finance, Division of Investment Management, and Division of Trading and Markets released a statement on tokenized securities (the “Statement”). According to the Statement, a tokenized security is a financial instrument enumerated in the definition of “security” under the federal securities laws that is formatted as or represented by a crypto asset, where the record of ownership is maintained in whole or in part on or through one or more crypto networks.
Quick Takes
1. What does it mean to “tokenize” a private security?
To “tokenize” a private security means to represent ownership of a security issued in a private offering, or otherwise not registered with the SEC, as a digital token recorded on a blockchain. The token does not change the legal character of the underlying security, including its transfer restrictions or regulatory treatment. It serves as a digital representation of the underlying security issued by the company.
2. What is the regulatory stance in the Statement regarding tokenized securities?
The position in the Statement is clear: tokenization does not change the application of the federal securities laws. A “tokenized security” is still a security if it falls within the statutory definition of a security. Representing a security as a crypto asset or recording ownership on a blockchain does not alter its regulatory status.
The Statement also discusses:
a. Issuer-sponsored tokenization. This is where the company or issuer integrates blockchain technology into its shareholder record-keeping system in connection with issuing tokenized securities.
b. Third-party tokenization. This is where an unaffiliated party creates a token that represents either:
i. A custodial interest in the underlying security (a tokenized security entitlement); or
ii. A synthetic exposure instrument (such as a linked security or security-based swap).
Essentially, tokenization is not a regulatory workaround. Market participants, including companies, must analyze the structure of the instrument and ensure it complies with federal securities laws.
3. Does tokenization automatically create liquidity for private offering securities?
No. Tokenization does not automatically make private offering securities liquid. Even when a security is represented as a digital token, it remains subject to the same regulatory restrictions.
4. What are some misconceptions about tokenized private offerings?
a. Tokenization changes the legal status of securities. It does not. The technological format does not alter the nature of the underlying security.
b. Tokenization eliminates regulatory compliance. Securities laws still require compliance with registration or exemption provisions. According to the Statement, regardless of the format in which a security is issued, the Securities Act requires that every offer and sale of a security must be registered with the SEC unless an exemption from registration is available.
c. Tokenization makes private securities liquid. As mentioned above, tokenization does not automatically make private securities liquid.
d. Tokenization guarantees broader investor access. Private offerings, particularly offerings exempt under Rule 506(b) or (c) of Regulation D, remain subject to investor eligibility standards (e.g., accredited investor requirements). Tokenization does not expand who may legally invest.
5. What should issuers or companies keep in mind when tokenizing private securities?
a. Securities law compliance still applies. Tokenizing private securities does not eliminate the requirement for a valid exemption from registration. Transfer restrictions, resale limitations, and anti-fraud obligations remain applicable.
b. Transfer controls. While smart contracts may be used to automate transfer restrictions and holding period requirements, such technological solutions must be carefully designed to align with the legal framework governing restricted securities.
c. Disclosure and risk factors. Tokenization introduces new risks, including technological risk, cybersecurity risk, smart contract vulnerabilities, and platform dependency. These should be clearly disclosed.
d. Third-party platform consideration. If a third-party platform is involved in issuance, custody, or trading, issuers should evaluate regulatory status, operational resilience, bankruptcy risk, and contractual allocation of liability.
This is an overview of tokenizing private offering securities and is not intended to be comprehensive. Each transaction is unique and will require its own review and analysis. This article is intended for general information purposes and should not be construed as legal advice.
If you have questions or would like more insights on the topic discussed in this edition, please contact any of the following members of our Corporate & Securities team:
Lynne Bolduc, Partner (lbolduc@fkbrlegal.com)
Ikechukwu Ubaka, Associate (iubaka@fkbrlegal.com)
