7. Establish a Legal Entity for Token Issuance
What's inside
Before issuing tokenized assets, a legal entity must be established to:
Separate liabilities – Protects personal and corporate assets.
Ensure compliance – Meets regulatory and reporting requirements.
Protect investors – Provides a structured legal framework for ownership rights.
Choosing the right legal entity type and jurisdiction impacts tax efficiency, compliance costs, and investor trust. The decision depends on where the business operates, where investors are located, and the level of legal protections required.
Why Issuers Need a Legal Entity
Tokenized assets represent real-world investments, so they require a formal corporate structure to:
Hold assets legally – Ensures clear ownership and investor protection.
Manage regulatory risks – Some jurisdictions require a registered business for token issuance.
Enhance investor trust – A properly structured company reassures investors about financial security and governance.
Choosing the Right Entity Type
The type of entity chosen determines how the STO is structured, taxed, and regulated.
Domestic Incorporation (US, EU)
Establishing a company within a highly regulated market such as the United States or the European Union.
Best for:
Companies targeting institutional investors in regulated markets.
STOs following SEC (USA) or MiCA (EU) compliance frameworks.
Businesses requiring strong legal standing and investor protections.
Offshore Incorporation (Cayman Islands, BVI, Liechtenstein)
Setting up an entity in a tax-friendly jurisdiction with flexible corporate laws.
Best for:
STOs targeting global investors with minimal geographic restrictions.
Businesses seeking lower tax obligations and regulatory burdens.
Companies needing cost-efficient structures with easier reporting requirements.
SPV vs. SPC: Which Structure to Use?
Depending on the complexity of the tokenized assets, issuers may choose between a Special Purpose Vehicle (SPV) or a Segregated Portfolio Company (SPC).
Special Purpose Vehicle (SPV)
An SPV is a single-asset legal entity created for a specific tokenized project.
Best for:
Tokenizing a single real estate property, investment fund, or business asset.
Risk isolation, ensuring financial losses do not affect other assets.
Companies seeking simpler compliance with fewer regulatory requirements.
Why It Matters
Easier to manage since each SPV is independent.
Protects investors by keeping financial risk separate from other assets.
Segregated Portfolio Company (SPC) / Series LLC
An SPC or Series LLC is a multi-asset structure, allowing issuers to create multiple segregated portfolios under one legal entity.
Best for:
Businesses managing multiple tokenized assets (e.g., real estate, funds, commodities).
Companies needing flexible risk management across different projects.
Investment funds offering fractionalized ownership in multiple asset classes.
Why It Matters
Each portfolio is legally separate, preventing risk from affecting other assets.
More complex to set up but ideal for scaling multiple security token projects.
Offshore vs. Domestic Jurisdiction Evaluation
Before deciding where to incorporate, issuers must evaluate legal, financial, and market factors:
Key Considerations:
Tax Benefits: Offshore jurisdictions often provide 0% capital gains taxes, while domestic incorporation (e.g., US, EU) may have investor tax incentives.
Compliance Costs: Offshore structures have lower regulatory burdens, but may face stricter scrutiny from U.S. and EU investors.
Market Perception: Some investors prefer regulated jurisdictions (EU, US), while others seek offshore flexibility (Cayman, BVI).
Legal Protections: Consider whether the jurisdiction has strong investor protections, financial reporting requirements, and asset security laws.
Why It Matters
Different jurisdictions offer trade-offs between compliance, tax efficiency, and investor confidence.
Issuers must align legal structures with long-term business goals.
Why This Step is Important
Ensures Compliance – Protects issuers from legal risks in tokenized asset issuance.
Optimizes Tax & Costs – Offshore jurisdictions reduce financial burdens, while regulated markets enhance investor confidence.
Attracts Investors – A well-regulated corporate structure ensures market acceptance and institutional participation.
By choosing the right legal entity, issuers create a secure, compliant, and scalable foundation for their security token offering (STO).
How to Complete This Step
Step 1: Decide whether domestic or offshore incorporation aligns with business goals.
Step 2: Choose between an SPV (single-asset) or SPC (multi-asset) structure based on the project scope.
Step 3: Evaluate compliance, tax benefits, and investor perception of each jurisdiction.
Step 4: Register the entity in a jurisdiction that supports security token issuance.
Example: You are launching a tokenized investment fund with multiple real estate assets.
Legal Entity: You establish a Segregated Portfolio Company (SPC) in the Cayman Islands.
Tax & Compliance: The jurisdiction offers 0% capital gains tax and a flexible regulatory structure.
Risk Management: Each property is held in a separate portfolio, preventing financial risks from affecting other investors.
Investor Confidence: The Cayman SPC structure is widely used for fund management, reassuring global investors.
Establishing the right legal entity and jurisdiction is a critical step in launching a successful and compliant tokenized asset offering. Whether using an SPV for a single project or an SPC for multi-asset management, issuers must align their legal structure with regulatory standards and investor expectations.
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