7. Defining the Token Type

Once an asset is identified, valued, and proven to be fully backed, the next step is to define how it will be represented as a token. The type of token issued determines investor rights, financial obligations, and regulatory classification.

By selecting the correct token type, issuers ensure:

1. Compliance with securities regulations.

2. Clarity for investors on ownership rights and financial returns.

3. A structure that aligns with the asset’s characteristics and business model.

Each token type has different legal, financial, and structural implications, making it critical to choose the right model before launching the tokenized asset.

---

What is a Token Type?

A token type defines what the digital asset represents and the rights attached to it.

Common token types include:

• Equity tokens - Represent ownership in a company or asset.

• Debt tokens - Represent loans, bonds, or structured financial products.

• Revenue-sharing tokens - Grant investors a portion of generated income.

• Asset-backed tokens - Represent physical commodities like gold, oil, or real estate.

Why It Matters

• Helps issuers structure investor returns and governance rights.

• Determines whether the token is classified as a security.

• Ensures compliance with financial regulations based on its characteristics.

---

Choose the Right Token Type

Different token types allow issuers to design investment opportunities that align with their business strategy, investor needs, and regulatory obligations.

1. Equity-Based Tokens

   1. Represents ownership in a business or asset, granting voting rights, dividends, or profit-sharing.

   2. Types & Use Cases:

      1. Common Stock Token – Represents company shares with voting rights and dividends.

      2. Preferred Stock Token – Grants dividends and liquidation priority but no voting rights.

      3. LLC Membership Token – Represents ownership in an LLC, with rights to profits and governance.

   3. Why It Matters:

      1. Aligns with traditional equity investments while making ownership more liquid.

      2. Appeals to investors looking for growth and dividend-based returns.

2. Debt-Based Tokens

   1. Represents a loan, bond, or structured debt agreement, where investors receive fixed returns.

   2. Types & Use Cases:

      1. Convertible Debt Token – Starts as debt but can convert into equity at a later date.

      2. Loan Note Token – A fixed-income investment with scheduled repayments and interest.

      3. Corporate Bond Token – Represents a company-issued bond with periodic interest payments.

   3. Why It Matters:

      1. Ideal for companies seeking debt financing without giving up equity.

      2. Provides predictable returns for risk-averse investors.

3. Revenue & Profit-Sharing Tokens

   1. Grants investors a percentage of revenue or profits generated by an asset or business.

   2. Types & Use Cases:

      1. Income-Sharing Token – Tied to predictable revenue streams like royalties.

      2. Revenue-Sharing Token – Investors receive a fixed percentage of company revenue.

      3. Asset Participation Token – Fractional ownership in an asset with income benefits.

   3. Why It Matters:

      1. Aligns investor returns with business performance.

      2. Useful for businesses that do not want to issue stock but need alternative financing.

4. Asset-Backed & Commodity Tokens

   1. Represents physical assets that can be fractionalized and traded as tokens.

   2. Types & Use Cases:

      1. Gold or Precious Metal Token – Backed by stored physical commodities.

      2. Real Estate Token – Represents ownership or rental income from property.

      3. Commodity Token – Enables fractional investment in oil, agriculture, or minerals.

   3. Why It Matters:

      1. Makes traditionally illiquid assets accessible to a global market.

      2. Creates new investment opportunities for physical commodities.

---

Why This Step is Important

• Customization – Enables issuers to structure investments based on their business model.

• Compliance – Ensures the token type fits within regulatory frameworks.

• Investor Clarity – Clearly defined tokens increase investor confidence.

• Flexibility – Different token models suit various asset classes and industries.

By selecting the right token type, issuers can design their offering to maximize appeal, security, and investor trust.

---

🚀 Actions: How to Complete This Step

🔹 Step 1: Identify the best token type for your asset (equity, debt, revenue-sharing, or asset-backed).

🔹 Step 2: Verify if the chosen token structure complies with securities laws.

🔹 Step 3: Determine investor rights and financial obligations for the token model.

🔹 Step 4: Record the token type and issuance structure for regulatory and investor documentation.

🔎 Example: How This Works in Real Life

Scenario: You want to tokenize a private equity investment in a tech startup.

✅ Equity-Based Token – Issue Common Stock Tokens to investors, allowing fractional ownership.

✅ Debt-Based Token – Offer Convertible Debt Tokens that can convert into equity later.

✅ Revenue-Sharing Token – Instead of giving up equity, distribute profits through revenue-sharing tokens.

📌 Final Decision: You choose to issue Convertible Debt Tokens to attract early-stage investors while keeping ownership flexible.

🛠 Checklist: Make Sure You Have

✅ Identified the correct token type based on the asset and investor goals.

✅ Verified the regulatory classification of the chosen token structure.

✅ Defined investor rights (voting, dividends, revenue-sharing, etc.).

✅ Recorded the token issuance details for compliance and investor transparency.

📌 Final Thought: Selecting the right token type ensures a legally compliant, investor-friendly, and scalable tokenized asset offering. By choosing between equity, debt, revenue-sharing, or asset-backed tokens, issuers can create custom investment opportunities that maximize both liquidity and investor appeal. 🚀