By Robert Nanni
The concept of asset fractionalization has become increasingly popular as issuers, and market participants, seek to provide investors with new ways to access traditional asset classes. An exciting component of that growth has been a significant increase in fractional ownership platforms – with issuers bringing unique and sought-after opportunities to their investor base. The scope of this opportunity is only limited by the creativity of the issuers and the assets they can source.
Asset fractionalization is a surprisingly straightforward process. Here are the high-level steps required to fractionalize your assets and raise investor capital:
You have successfully fractionalized an asset!
While it is a remarkably simple five-step process, an issuer must ensure it is following all applicable regulations and requirements. It is strongly recommended that firms engage regulated entities and legal counsel to assist.
Considering the definition and demonstration of fractionalization, it still begs the question, what role does tokenization play? With the rise of blockchain, many new market entrants incorrectly assume that tokenization is required to fractionalize. Because there is so much misleading information on the internet from providers who only deal with asset tokenization, it is not surprising that this is a common misconception. Tokenization is merely a representation of the shares issued and never a requirement. Moreover, a security token cannot behave like a cryptocurrency due to regulations. There are very few components of tokenization/blockchain that can be utilized when dealing with securities, and because of these minimal applications, many issuers will not consider tokenization until there are clear efficiencies from the SEC.
If an issuer chooses to tokenize, they must incorporate it into the process and, a final and sixth step would be completed by the issuer and their providers. To achieve fractionalization with tokenization, the issuer would be required to represent investors’ shares with a blockchain-based token/instrument.
Tokenization is typically the final stage in the process after an issuer has completed its capital raise. Some issuers may choose to create the tokens prior to selling the shares to investors. However, they will need to hold them in escrow until the capital raise is finished – the overall process does not change significantly.
The reality is that security tokenization not only adds an additional step, but it can also introduce a host of complexities and costs that are otherwise avoided should an issuer choose the direct fractionization route. These include, but are not limited to:
Tokenization creates greater inefficiencies and costs in a process where it is otherwise unnecessary to fractionalize an asset. Tokenization is not required to fractionalize assets, or achieve greater liquidity, better price discovery, and democratization of alternative assets.
Templum is situated at the nexus of the highly progressive private market and the traditional public market, enabling the issuance and trading of alternative assets. Regardless of whether your firm moves to fractionalize alternative assets, the key to unlocking real benefits lives with next-generation financial infrastructure.