Category: Compliance & Regulatory
Generated: 2026-04-04

Your client wants to tokenize their next fund. They have read the headlines about BlackRock's BUIDL and Franklin Templeton's on-chain money market fund, and they want to know if this works for a $50M real estate fund or a $30M private credit vehicle. They are asking you whether this is legally viable, what changes to their standard fund documents, and what new risks it introduces.

This guide is written for you. Not for your client, not for a general audience. For a securities attorney who needs to evaluate tokenized fund/platform) structures with the same rigor applied to any capital markets transaction.

The Legal Structure Has Not Changed

The first and most important point: tokenization does not create a new type of security. A tokenized fund interest is a security, full stop. It is an investment contract under the Howey test. It is subject to registration requirements under Section 5 of the Securities Act unless an exemption applies. The full body of federal and state securities law applies without modification.

What has changed is the form factor of the ownership record and the mechanism for enforcing transfer restrictions. The legal substance is identical. The operational layer is different.

This distinction matters because it means you do not need to develop an entirely new legal framework for your client's tokenized offering. Your existing fund formation expertise applies directly. The modifications are specific and contained.

SPV Architecture for Tokenized Funds

The standard structure for a tokenized fund mirrors conventional fund formation with one additional consideration: the relationship between the on-chain token and the legal ownership interest.

Single-SPV Model: The most straightforward approach. The fund entity (typically a Delaware LLC or LP) issues membership interests or limited partnership interests. Those interests are represented on-chain as security tokens. The token IS the interest, not a derivative of it. The operating agreement or LPA designates the blockchain record as the official ownership ledger, and the smart contract serves as the transfer agent.

Master-Feeder with Token Layer: For funds with both tokenized and non-tokenized investors, a feeder entity can accept tokenized subscriptions while a parallel feeder handles traditional subscriptions. Both feed into the same master fund. This lets sponsors offer tokenized access without forcing the entire investor base onto blockchain rails.

Series LLC Model: Delaware Series LLCs are increasingly used for tokenized offerings because each series can issue its own tokens with distinct compliance parameters. A sponsor running multiple deals can operate them under a single umbrella LLC with segregated liability, each series represented by a separate token contract.

The critical legal requirement across all models: the operating agreement or LPA must explicitly address the token's legal status. At minimum, the agreement should:

Token-as-Security Legal Wrappers

The "legal wrapper" is the document-level framework that connects the on-chain token to the off-chain legal rights it represents. Getting this right is essential.

Subscription Agreement Modifications: Your standard subscription agreement needs several additions for tokenized offerings. The subscriber must acknowledge that their interest will be represented as a digital token on a specified blockchain. They must agree to maintain custody of their private keys or use an approved custodial solution. The agreement should specify that transfer restrictions in the smart contract are binding contractual provisions, not merely technical features.

Token Terms Addendum: Many practitioners attach a separate addendum covering token-specific terms: the token standard being used, the blockchain network, upgrade and migration procedures, gas fee responsibility, and the process for forced transfers (discussed below).

Forced Transfer Provisions: This is a provision many attorneys overlook. Your operating agreement must grant the issuer (or the manager acting on its behalf) the authority to execute forced transfers in specific circumstances: court orders, regulatory requirements, estate proceedings, or correction of erroneous transfers. The smart contract must include a corresponding administrative function that allows the issuer to move tokens without the holder's signature. Without this, a court order to transfer securities cannot be executed on-chain.

Dividend and Distribution Rights: The token can facilitate automated distribution payments (typically via stablecoin), but the operating agreement must specify the distribution waterfall, timing, and payment mechanism. Smart contract-based distributions should be described as an authorized payment method in the fund documents.

Regulatory Safe Harbors and SEC Guidance

The SEC has not issued regulations specific to tokenized securities, but existing guidance and enforcement actions provide a clear framework.

The Framework for "Investment Contract" Analysis (April 2019): The SEC staff's framework confirmed that digital assets can be securities under Howey. For tokenized fund interests, this analysis is straightforward: they are securities. The framework is more relevant for determining when a token might NOT be a security, which is not the case for fund interests.

No-Action Letters: The SEC has issued a limited number of no-action letters relevant to digital securities:

These letters do not directly address tokenized fund interests, but they demonstrate the SEC's willingness to apply existing frameworks to blockchain-based instruments rather than creating new categories.

Regulation ATS and Secondary Trading: If your client's tokenized securities will trade on a secondary market, that market must be registered as an Alternative Trading System under Regulation ATS or operate as a registered national securities exchange. Several ATS platforms now support security token trading. Your client's tokens should be designed to integrate with these platforms' compliance requirements.

Regulation SHO Considerations: For tokens that trade on a registered ATS, short sale regulations under Reg SHO may apply. The token standard and marketplace infrastructure must support locate and delivery requirements if short selling is permitted.

Custody and the Qualified Custodian Question

For fund sponsors who are also registered investment advisers (or who use one), the SEC's custody rule (Rule 206(4)-2 under the Advisers Act) requires that client assets be held by a qualified custodian. The question of whether a digital asset custodian qualifies has been a moving target.

The SEC's 2023 Staff Accounting Bulletin No. 121 (SAB 121) created significant challenges by requiring entities that custody crypto assets to record corresponding liabilities on their balance sheets. While the political and regulatory landscape around SAB 121 has evolved, counsel should verify the current status and ensure that any custodial arrangement for tokenized fund interests satisfies the qualified custodian requirement.

For self-directed custody (investors holding their own private keys), the fund documents should clearly allocate the risk of key loss to the investor and specify that the fund has no obligation to restore access to lost tokens beyond the forced transfer provisions described above.

State-Level Considerations

While Rule 506 preempts state registration, several state-level issues require attention:

State Securities Administrator Scrutiny: Some state regulators have been more aggressive than the SEC in scrutinizing digital asset offerings. Wyoming, on the other hand, has enacted legislation specifically accommodating digital securities (W.S. 34-29-101 et seq.). Fund formation jurisdiction and the locations of your investors will determine which state regimes apply.

Wyoming DAOs and Digital Asset Law: Wyoming's Decentralized Autonomous Organization Supplement (W.S. 17-31-101 et seq.) and its digital asset custody framework may be relevant for certain fund structures, particularly those with governance mechanisms implemented on-chain.

Delaware Blockchain Amendments: Delaware amended the Delaware General Corporation Law in 2017 (SB 69) to permit corporations to use blockchain technology to maintain their stock ledger. While this applies to corporations rather than LLCs, it reflects Delaware's receptivity to blockchain-based ownership records.

Blue Sky Notice Filings: As noted in our Reg D compliance guide, state notice filings remain required. On-chain transfer restrictions should incorporate jurisdictional checks to prevent transfers into states where filings are pending.

Tax Considerations Your Client Will Ask About

While tax advice falls outside the scope of securities counsel, your clients will ask about it, and the basics are relevant to fund structuring:

Tokenized fund interests receive the same tax treatment as their non-tokenized equivalents. An LLC membership interest represented as a token is still taxed as a partnership interest (assuming the entity has elected or defaults to partnership taxation). The token format does not create a constructive exchange or realization event.

However, if the fund later migrates tokens to a different blockchain or replaces the token contract, there is an open question about whether the migration constitutes a taxable exchange. Conservative practice is to structure migrations as contract upgrades that maintain continuity of the interest rather than issuance of a new instrument. This should be addressed in the operating agreement.

Practical Advice for Evaluating Platforms

When your sponsor client asks you to evaluate a tokenization platform/platform), these are the questions that matter:

  1. Does the platform's token standard support the transfer restrictions your offering requires?
  2. Can you review and verify the smart contract code that enforces compliance?
  3. Does the platform maintain forced transfer capability for court orders and regulatory actions?
  4. How does the platform handle smart contract upgrades, and what approval mechanism governs them?
  5. Is the platform's compliance logic modular enough to accommodate your offering's specific requirements (investor limits, holding periods, jurisdictional restrictions)?
  6. What is the platform's track record with SEC-registered offerings or Reg D/Reg S placements?

Why Commertize for Mid-Market Sponsors

Commertize was purpose-built for the fund structures your mid-market clients are actually running. Family offices, boutique sponsors, and emerging managers raising $20M to $200M do not need the institutional overhead of platforms built for billion-dollar issuances. They need compliance infrastructure that works, legal wrappers that hold up under scrutiny, and a platform team that understands fund formation as well as they understand blockchain engineering.

Every compliance control described in this guide is implemented natively in the Commertize platform. We welcome counsel review of our smart contract logic, our document frameworks, and our compliance architecture. The due diligence process should be rigorous. We built for that expectation.

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