In a nutshell, tokenisation is one way to securitize real assets.
To securitize an asset means to divide it into shares that you can sell to investors. In the same way, to “tokenise” an asset is to divide it into shares, or “tokens”, that represent a predefined share of the underlying asset. They are therefore often called “security tokens”.
These tokens are secured through the immutability of blockchain technology, and they’re tradeable exchanges or Alternative Trading Systems (ATS).
CREATING A NEW REAL ESTATE TOKEN
When an asset owner decides to tokenise a property, an Ethereum-standard (ERC20) real estate token (also called a security token) is created to represent shares of the property. The total value of all tokens will be equivalent to the total value of the securitized asset. Let’s look at a simple example.
Suppose you want to tokenise a 100,000 sq ft property that’s worth $30M. A simple way to divide the property into shares is to offer one share for every square foot. So you would divide the property into 100,000 shares, each representing one square foot of the property and valued at $300.
Alternatively, you could divide the property into square inches, in which case each token would be worth $2.08. You might choose this option to make your project accessible to a wider range of investors. Of course, you could also choose to limit the share offering to a certain percentage of the asset – say 20%, to retain majority ownership while raising funds for a new wing or renovations, for example.
The next step is to sell the tokens to investors.
THE SECURITY TOKEN OFFERING (STO) PROCESS
The initial sale of a security token is typically called a security token offering (STO). It’s also sometimes called a tokenised security offering (TSO) or a tokenised asset offering (TAO). But no matter what term you use, the result is the same.
Please note: An STO is not the same thing as an initial coin offering (ICO).
ICOs offer investors a token, but this token doesn’t necessarily represent ownership in the underlying asset or company. In many cases, the tokens sold are called “utility tokens” because they only have value on the company’s platform. Buyers are therefore “investing” to support the project and with the hope that, as the platform grows, the value of the tokens will increase.
STOs are distinct from ICOs because the tokens sold (security tokens) represent ownership in a real asset. STO investors know the real value of the underlying asset they’re buying and benefit from any future price appreciation in the asset.
Some asset owners choose to sell their tokens via a crowdfunding campaign. For example, we worked with Indiegogo to launch the Aspen Coin, which represents fractional ownership in the St. Regis Aspen Resort. This campaign successfully raised $18M.
Another option is for asset owners to market and sell their tokens on their own. The best part about STOs is there’s no one way to do them. Asset owners are in complete control of how they want to market their STO.
LISTING TOKENS ON AN EXCHANGE
Once tokens are created and sold to investors, they need to be listed on an exchange so investors can trade their tokens. There are not many listing options out there, but the list keeps growing.
Many of the most popular cryptocurrency exchanges are in the process of obtaining regulatory approval to list security tokens. Another option is to partner with an Alternative Trading System (ATS): These are FINRA-registered institutions that sometimes partner with tokenised security asset owners to list security tokens and provide their investors with access to a liquid secondary market. Our ATS partner is Templum Markets.
Keep in mind that a single token can be listed on multiple exchanges.