8. Defining Token Rights

🔍 What This Step is About

Selecting the rights associated with a token is crucial for defining investor benefits, legal classification, and financial obligations. Token rights determine what investors receive in return for their investment and how they can exercise control, claim profits, or exit their investment.

By establishing clear token rights, issuers ensure:

✅ Legal compliance with securities regulations.

✅ Investor confidence through well-defined financial returns.

✅ A structured investment model aligned with market expectations.

Different token rights apply based on whether the token represents equity, debt, revenue-sharing, or asset ownership.

📌 Key Considerations When Selecting Token Rights

✅ 1. What Are Token Rights?

Token rights define what an investor is entitled to when they purchase a tokenized asset. These rights can include profit distribution, governance participation, and redemption privileges.

📌 Common Token Rights:

✔ Dividends – Share in company profits.

✔ Voting Rights – Participate in governance.

✔ Liquidation Proceeds – Claim assets in case of company dissolution.

✔ Fixed Income Payments – Receive stable returns like bond interest.

💡 Why It Matters:

✔ Establishes a fair and transparent tokenized investment model.

✔ Helps classify the token as a security or other financial instrument.

✔ Attracts investors by offering clear financial incentives.

✅ 2. Choose the Right Token Rights Structure

Different tokenized assets offer different financial and governance rights. Carefully selecting the appropriate set of rights ensures compliance and market appeal.

🔹 Profit & Income-Based Rights

📊 What It Is:

Gives investors a share of profits, revenue, or fixed payments over time.

📌 Types & Use Cases:

✔ Dividends – Token holders receive a percentage of company profits.

✔ Fixed Income Payments – Like bonds, provides scheduled interest payouts.

✔ Revenue Sharing – Investors earn a portion of the company’s total revenue, regardless of profit.

✔ Profit Sharing – Investors receive a share of net income rather than total revenue.

💡 Why It Matters:

✔ Attracts income-focused investors who seek steady returns.

✔ Aligns token holders with company performance, increasing long-term investor commitment.

🔹 Redemption & Exit Rights

📊 What It Is:

Allows investors to redeem or convert their tokens under specific conditions.

📌 Types & Use Cases:

✔ Redemption at Face Value (Maturity) – Debt tokens can be redeemed for their original value when they mature.

✔ Redemption at NAV (Net Asset Value) – Tokens can be redeemed at current market value, aligning with asset performance.

✔ Conversion to Equity – Tokens convert into company shares upon reaching a predetermined milestone.

💡 Why It Matters:

✔ Provides exit strategies for investors, reducing risk.

✔ Ensures fair value realization for investors looking to redeem or convert their holdings.

🔹 Governance & Investor Control Rights

📊 What It Is:

Gives token holders a say in business decisions or liquidation preferences.

📌 Types & Use Cases:

✔ Corporate Voting Rights – Investors participate in company decisions (board elections, financial policies).

✔ Liquidation Proceeds – Investors receive a portion of remaining assets if the company dissolves.

✔ Liquidation Preference – Investors are prioritized above other shareholders in case of insolvency.

💡 Why It Matters:

✔ Increases investor trust in decision-making processes.

✔ Helps institutional investors participate in governance.

📌 Why This Step is Important

✔ Ensures Legal Clarity – Clearly defined rights help classify tokens correctly (equity, debt, revenue-sharing).

✔ Aligns Interests – A well-structured token balances issuer needs and investor protections.

✔ Enhances Marketability – Transparent, investor-friendly tokens attract more institutional and retail investors.

✔ Provides Predictability – Investors know exactly what they are entitled to and under what conditions.

By defining token rights upfront, issuers avoid legal uncertainty, create investor trust, and build a scalable financial model.

🚀 Actions: How to Complete This Step

🔹 Step 1: Identify which token rights fit the asset type and investment structure.

🔹 Step 2: Verify that selected rights comply with securities laws in relevant jurisdictions.

🔹 Step 3: Document investor rights clearly in the token offering agreement.

🔹 Step 4: Implement rights enforcement mechanisms via smart contracts or legal contracts.

🔎 Example: How This Works in Real Life

Scenario: You are tokenizing equity in a tech startup.

✅ Profit Rights: Offer Dividends to token holders based on company profits.

✅ Governance Rights: Grant Voting Rights so investors can influence key business decisions.

✅ Exit Rights: Include Conversion to Equity, allowing token holders to convert into common stock when the company reaches a certain valuation.

📌 Final Decision: By defining these rights upfront, you enhance investor trust while ensuring full compliance with securities regulations.

🛠 Checklist: Make Sure You Have

✅ Defined which financial rights (dividends, revenue-sharing, fixed payments) apply to token holders.

✅ Determined whether token holders have governance rights (voting, liquidation preference, board influence, etc.).

✅ Verified that selected rights comply with financial regulations.

✅ Documented rights clearly in smart contracts and legal agreements.

📌 Final Thought: Carefully selecting token rights ensures that security tokens are compliant, appealing, and structured to align with investor expectations. By designing clear profit-sharing, governance, and exit rights, issuers create an investor-friendly, transparent, and legally secure tokenized asset. 🚀