PPM Tokenization

Do You Need a PPM to Tokenize? Our Experienced Securities Lawyers Explain

Attorney Nick Oberheiden
Private Placement Memorandum
Team Lead

Tokenization involves a unique and complex blend of technological and legal issues. While tokenization and the blockchain technology behind it are gradually gaining mainstream acceptance, the legal issues involved with tokenization are not broadly understood—and there are two main reasons why.

First, tokenization typically involves unregistered security token offerings, and the laws and regulations governing these issuances are not well understood in general. While these laws and regulations have existed for decades—and nearly a century in some cases—as unregistered offerings have proliferated in recent years (involving both tokenized and traditional securities), we have seen an increasing number of noncompliant offerings and related U.S. Securities and Exchange Commission (SEC) enforcement actions. In many cases, noncompliance involves conducting an unregistered offering without a private placement memorandum (PPM).

Second, the SEC is yet to provide clear guidance on its framework for enforcing blockchain-related compliance. While the SEC has issued a Framework for ‘Investment Contract’ Analysis of Digital Assets (the “Framework”), it has also made clear that this Framework, “represents Staff views and is not a rule, regulation, or statement of the Commission.” As a result, companies that tokenize investments must work closely with their counsel to determine how the law applies—including both: (i) when a PPM is necessary; and, (ii) what terms and conditions are necessary in PPMs related to tokenized investment offerings.

Unregistered Tokenized Investments and PPMs

When it comes to determining whether a PPM is necessary for a tokenization offering or raising capital, the key question is whether the tokens involved constitute “securities” under federal law. As the SEC explains in its Framework, when it comes to tokenizations and other offerings involving digital assets:

“A threshold issue is whether the digital asset is a ‘security’ under [federal securities] laws. The term ‘security’ includes an ‘investment contract,’ as well as other instruments such as stocks, bonds, and transferable shares. . . . Both the [SEC] and the federal courts frequently use the ‘investment contract’ analysis to determine whether unique or novel instruments or arrangements, such as digital assets, are securities subject to the federal securities laws.”

As the SEC’s Framework goes on to explain, federal courts have generally held that, “an ‘investment contract’ exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” Thus, when it comes to tokenized offerings, the key issue often isn’t the tokenization itself, but rather the underlying investment structure.

This suggests a strong potential for tokenized offerings to qualify as securities under federal law, and companies—with the help of their legal counsel—are treating them as such in many cases. When the determination is made that a tokenized offering constitutes a securities offering, moving forward without registration often involves preparing a custom-tailored PPM.

Dr. Nick Oberheiden

Founder

Attorney-at-Law

Lynette S. Byrd

Former DOJ Trial Attorney

Partner

Brian J. Kuester

Former U.S. Attorney

Hon. Kevin McCarthy

55th Speaker, U.S. House of Representatives (ret.)

Government Consultant

Mike Pompeo

Of Counsel

Former U.S. Secretary of State

John W. Sellers

Former Senior DOJ Trial Attorney

Linda Julin McNamara

Federal Appeals Attorney

Nicholas B. Johnson

Former Prosecutor

Roger Bach

Former Special Agent (DOJ)

Chris J. Quick

Former Special Agent (FBI & IRS-CI)

Michael S. Koslow

Former Supervisory Special Agent (DOD-OIG)

Ray Yuen

Former Supervisory Special Agent (FBI)

How Our Securities and Blockchain Lawyers Can Help

At Oberheiden P.C., we work with companies that are at the forefront of tokenization. With our experience in both securities law and blockchain law, we are well-positioned to assist companies in all industries with digital asset compliance—including specifically compliance in federal securities regulations. If you have questions about PPMs, smart contracts, fractional ownership, and tokenization, our lawyers can provide assistance including:

Determining whether your company’s underlying investment fund structure constitutes an “investment contract” (and therefore a “security”) under federal law
Determining whether the underlying investment structure qualifies for a federal securities registration exemption
Determining which registration exemption your company should leverage based on the nature of its tokenized offering
Establishing compliance with all pertinent registration exemption requirements (i.e., the requirements for “safe harbor” protection under Rule 504 or Rule 506 of Regulation D)
Drafting a comprehensive and custom-tailored tokenization PPM that documents your company’s compliance and provides appropriate disclosures to prospective real estate investors

These are just examples. The legal issues involved with tokenization are both novel and complex—and they can be extraordinarily complex in some cases. Our lawyers have the experience and insights needed to help company owners and executives make informed and strategic decisions—including experience and insights gained working with the SEC as U.S. Attorneys and Assistant U.S. Attorneys at the U.S. Department of Justice (DOJ).

Along with issues related specifically to PPMs and tokenization, we are able to assist with other securities law and blockchain law matters as well. We also represent companies and individuals facing scrutiny from the SEC, and we have helped numerous clients favorably resolve high-stakes investigations without facing civil or criminal charges.

Why to Choose Oberheiden P.C. for U.S. Tokenization Compliance

Whether you are tokenizing real estate assets, tokenizing digital assets, or working on any other type of tokenized investment offering, it is critical that you address the legal issues involved before you begin soliciting accredited investors. As noted above, this will involve preparing a PPM in many cases. If you need a PPM for a tokenized investment offering, here are just some of the reasons to choose Oberheiden P.C.:

1. Our Experience with Federal Securities Compliance Enforcement

As mentioned above, several of our attorneys came into private practice after handling securities fraud enforcement matters alongside the SEC as U.S. Attorneys and Assistant U.S. Attorneys. We are familiar with the SEC’s enforcement practices and priorities, and we understand the types of mistakes and oversights that tend to get unregistered securities issuers into trouble.

2. Our Focus on Securities Law and Blockchain Law

Securities law and blockchain law are two core areas of our federal practice. We have extensive experience assisting companies with unregistered securities offerings involving PPMs, and we assist technology companies, real estate investing and partnerships, and a wide range of other clients with tokenization and other blockchain-related matters.

3. Our Custom-Tailored Approach to PPM Drafting and Compliance

In everything we do, we take a custom-tailored approach focused on meeting our client’s specific legal needs as cost-effectively as possible. This includes drafting custom-tailored PPMs for tokenized securities offerings. Our lawyers can explain everything you need to know about federal compliance for unregistered securities offerings, and then we can assist with making sure your company has the documentation it needs to establish compliance and withstand scrutiny from the SEC if necessary.

FAQs: Tokenization, PPMs, and the SEC—What Company Owners and Executives Need to Know

Do I Need a PPM for Tokenization?

While the short answer is, “It depends,” a PPM will be necessary for tokenization in many cases. If a tokenized investment offering qualifies as an “investment contract” under federal law, then the issuer must comply with the federal requirements for issuing securities—which means either registering with the SEC or qualifying for a registration exemption. Since registration simply isn’t feasible or practical in many cases, qualifying for a registration exemption is often the most prudent approach. Although a PPM isn’t strictly required when conducting an unregistered offering, a PPM is a highly effective tool for establishing compliance, and PPMs have become the standard for conducting most types of unregistered offerings./p>

Do I Need a PPM for Tokenized Real Estate?

Companies seeking to offer real estate tokenization investments will need to engage a law firm to prepare a PPM in many (if not all) cases. As they are typically structured, tokenized real estate investment trusts generally qualify as “investment contracts” under federal law. This means that they trigger federal securities compliance obligations—and, in order to avoid registering with the SEC, issuers must comply with the requirements for conducting an unregistered securities offering. Drafting a custom-tailored PPM is an important part of this process.

Does the SEC Regulate Tokenization?

Yes, the SEC regulates tokenization—specifically, tokenization that involves the issuance of “investment contracts” as defined by federal law. To mitigate their risk of facing SEC scrutiny (and to ensure that they are prepared to withstand SEC scrutiny when necessary), companies that offer tokens must work closely with experienced counsel to ensure that they are giving due consideration to federal securities law and anti-money laundering compliance.

How Do I Get a PPM for Tokenization?

If you need a PPM for a tokenized investment offering, you will want to engage a law firm that has specific experience in the areas of securities law and blockchain law. At Oberheiden P.C., we have extensive experience in both of these areas; and, if your company needs a PPM for tokenization, we can prepare a custom-tailored document that meets your company’s specific legal and regulatory needs.

What Are the Risks of Tokenizing Without a PPM?

When a tokenized offering constitutes an “investment contract” under federal law, the risks of tokenizing without a PPM can be substantial. Not only can this expose the issuer to substantial liability in civil investment fraud litigation, but it can expose the issuer (and its owners and executives) to SEC enforcement action as well.

Schedule a Complimentary and Confidential Consultation at Oberheiden P.C. Today

If you need to know more about the federal securities law implications of tokenization, we invite you to get in touch. To discuss your company’s need for a PPM with a senior attorney at Oberheiden P.C. in confidence, please call 888-680-1745 or request a complimentary consultation online today.