Verification of Economic Rights and Conditional Ownership
In some tokenization cases, the issuer does not own the underlying asset outright but instead holds economic rights tied to it. These rights may grant the issuer control over revenue streams, extraction rights, or conditional ownership based on specific agreements.
Proper verification of economic rights and conditional ownership ensures that investors receive legitimate, enforceable claims over the tokenized asset and its financial benefits. It also ensures regulatory compliance and prevents fraudulent or misleading token offerings.
Key Considerations
Ensures Investor Protection – Validates that token holders receive enforceable rights.
Prevents Misrepresentation – Ensures issuers do not tokenize assets without proper legal standing.
Secures Asset Transfer Agreements – Protects investors from last-minute changes in ownership.
Defines the Scope of Tokenized Rights – Establishes clear legal and financial boundaries.
Types of Economic Rights and Conditional Ownership
Asset-Linked Economic Rights
Some issuers do not own the physical asset but hold economic rights related to it, such as:
The right to extract natural resources from a mining site, oil field, or forest.
The right to harvest agricultural products from a specific land plot.
The right to collect rental income or a share of revenue from a real estate portfolio.
What to Check?
The legal agreement granting these rights (e.g., concession, lease, profit-sharing agreement).
The duration and conditions under which the rights apply.
Any government or third-party approvals required to exercise the rights.
What Can Go Wrong?
The rights are temporary or revocable. If the government or asset owner can revoke the rights at any time, investors may lose access to revenue.
Restrictions on transferability. Some rights cannot be legally transferred to third parties (i.e., token holders).
Environmental or regulatory restrictions. Some mining or agricultural concessions require compliance with environmental laws, which may limit the issuer’s ability to generate returns.
Example: A mining company in Mongolia tokenizes its iron ore extraction rights from a government concession. The issuer must ensure that:
The government concession allows third-party financial participation.
The agreement covers the full intended period of the tokenized investment.
All necessary environmental and legal approvals are in place.
Income-Based Economic Rights
In some cases, issuers tokenize revenue streams rather than the physical asset itself. Examples include:
Tokenizing rental income from a portfolio of real estate properties rather than the properties themselves.
Tokenizing a profit-sharing agreement in a business.
What to Check?
Clear legal agreements defining how revenue will be shared with investors.
Regulatory classification – revenue-sharing agreements may be classified as securities.
Duration, termination clauses, and renewal conditions.
What Can Go Wrong?
The property owner changes the revenue-sharing terms. Without a secure contract, investors may receive lower returns than expected.
Legal classification as a security. Some revenue-sharing models require full securities registration.
The business underperforms. If revenue is too low, investors may not receive the expected yield.
Example: A hotel chain in Dubai tokenizes a share of its rental income from various properties. Instead of selling ownership in the hotels, the issuer offers token holders a percentage of net rental income. The revenue-sharing agreement is structured to ensure that investors receive quarterly payouts from the profits.
Raising Funds for Asset Acquisition
Some issuers tokenize an asset before they own it in order to raise capital for its purchase.
What to Check?
The current owner’s proof of ownership (title deeds, business registration).
A legally binding agreement ensuring that the current owner will sell the asset upon completion of the fundraising.
Clear documentation confirming that the asset is unencumbered (no unpaid loans or liens).
What Can Go Wrong?
The asset owner backs out. If the current owner refuses to sell, the issuer may not be able to fulfill their obligations to investors.
The asset is already encumbered. Outstanding mortgages or legal claims could prevent the purchase.
Regulatory restrictions on foreign ownership. Some countries restrict the purchase of assets by foreign-controlled entities.
Example: A real estate developer in Spain is raising funds to purchase and renovate a beachfront hotel. The current hotel owner signs a contract agreeing to sell the property to the issuer once fundraising is complete. A legal team verifies that the hotel has no outstanding debts or liens.
Best Practices for Verifying Economic Rights and Conditional Ownership
Obtain Legally Binding Documentation – Ensure that all agreements granting economic rights are legally enforceable.
Engage Legal Experts – Work with attorneys to validate contracts and ownership structures.
Confirm Asset Transferability – If purchasing an asset, ensure that it can be legally acquired after fundraising.
Disclose Risks to Investors – Clearly communicate any limitations on economic rights.
Align with Regulatory Requirements – Ensure that tokenized economic rights comply with financial regulations.
By carefully verifying economic rights and conditional ownership, issuers can create a legally sound tokenization structure, protecting both themselves and their investors.
Last updated
Was this helpful?