Frequently Asked Questions
Real Estate Tokenization
What is tokenization?
Tokenization is a new term used to describe the transformation of traditional equity units into asset-backed digital shares (tokens) represented on a blockchain. Tokenization is one way to securitize real assets, meaning to divide it into shares that you can sell/trade amongst investors. Commonly referred to as “security tokens”, these financial instruments can more specifically be described as blockchain-based smart-securities.
Why would someone tokenize real estate?
Tokenization adds several revolutionary capabilities and benefits to the way Real Estate equity can be managed. Most notably, tokenization enables digital transfer of real estate, highly efficient fractionalized direct ownership of real estate, and direct listability of real estate assets on global online exchanges.
Additionally, tokenization adds value to real estate dealings by improving investor/data management, increasing the speed of RE transactions, and by adding new liquidity possibilities for capital inflow to assets.
Are these deals done in cash or Bitcoin?
Deals can be done in both fiat (government issued currencies like USD, EUR, YUAN) and cryptocurrencies (like bitcoin, ETH). The General Partner (GP) or Issuing party of the tokens will have the ability to decide what currencies can be accepted from investors, and exactly how dividends/distributions can be paid.
Thanks to blockchain smart-contracts, the ability for capital in various FIAT and crypto currencies are easily intertradable electronically. This means so long as the GP approves, security tokens issued by VRE platform are capable of investments and payouts in a variety of currencies.
How can real estate owners, portfolio owners, and fund managers benefit from tokenization?
The primary benefits for issuers of real estate smart-securities are:
a) Improved liquidity due to blockchain capabilities enabling newfound frontiers of global capital to enter into private assets.
b) Improved investor & data management due to user-friendly interfaces like VRE Platform.
c) Improved costs and speed of real estate deals due to elimination of third parties, alongside the introduction of smart-contracts.
How can real estate investors benefit from tokenization?
The primary benefits for investors in real estate smart-securities are:
a) Increased tradability and liquidity due to the introduction of direct ownership and direct listability of assets.
b) Overall improved investment process due to optimized investor/data management.
c) Increased investment opportunities due to a decrease in barriers to entry via fractionalized real estate.
How does tokenization provide liquidity for real estate assets?
Improvement in liquidity can be thought of as the ultimate end goal and value add of tokenization. Transforming traditional real estate equity into digital smart-securities (security tokens) creates a significantly wider pool of potential investors. Tokenization creates the ability to accept and exchange capital swiftly, legally and on a global scale, from a wide variety of fiat (government issued currencies like USD, EUR, YUAN) and crypto (blockchain based like BTC, ETH) currencies. It is important to understand that tokenization is an additive process, and all traditional methods for capital to flow into real estate deals are still available.
Liquidity can also be achieved by borrowing against tokenized equities. Currently, funds are being set up that will make loans with tokenized equity as collateral.
Is tokenizing real estate legal?
Yes, Vertalo has built a platform where all aspects of the tokenization process are fully SEC compliant, from investor whitelisting to equity transactions. Typically, tokenized real estate abides by legal guidelines set forth by the JOBS act, which created regulatory frameworks for retail and accredited participation in exempt offerings under Regulation D, Regulation A+ and Regulation CF in the US. We have seen 506(c) Reg D offerings to be most common in smart-securities.
Who will be able to buy my tokenized real estate?
Currently, only investors that are accredited and approved by the GP will be able to invest in tokenized real estate. VRE is aligned with compliance platforms to automate the investor whitelisting process. The investor whitelisting process ensures KYC (know your customer), AML (anti-money laundering), and accreditation for all potential investors are verified. This process is done to ensure the investment practice is fully SEC compliant.
What if I don't want to bring on limited partners I've never met?
No problem! The GP or issuer will have the ability to clearly vet and approve or disapprove of all investors. A limited partner who is not approved by the GP will not be permitted to invest.
How do traditional REITs differ from a tokenized asset or fund?
The core differences can be categorized as follows:
- Unlike REITs, tokenized assets trade closer to NAV (Net Asset Value) and are not correlated to traditional equity markets.
- REITs are typically valued with many factors other than NAV, whileTokenized Real Estate valuations are completely based on the asset.
Introduction of New Capabilities:
- Ability to invest in pre-developed properties & development projects.
- Ability to invest in single properties rather than a pool of assets.
- Tradability - Tokens can be traded on a centralized or decentralized exchange 24/7/365, while REITs are only tradable during hours of market operation.
Efficiency, Cost, & Accessibility:
- Efficiency - Optimization of investor & data management built into one clean VRE portal for all steps of process, from issuance to secondary trading, to dividends.
- Cost - Tokens are easily transferable for a negligible network fee while transferring ownership of REIT shares involves intermediaries who charge high fees.
- Accessibility - Lower barrier to entry with minimum investments, REITS may typically require 25K investment or more, with tokenization users could buy $10 worth of a building.
Can you refinance an asset through tokenization?
While tokenization is not the same thing as refinancing, tokenization can be used as an effective alternative to refinancing. In the event a refinance is needed, a tokenization offering could be held to eliminate the existing debt obligation via capital provided by new investors.
Do I need prior knowledge of 'blockchain' to interact with tokenized assets?
No. Vertalo's platform has been built with a user friendly interface similar to that of an online bank account, with a goal of ease and simplicity for the user. With Vertalo no maintenance of wallets, private keys, or anything blockchain related is needed to issue or invest.
When dealing with digital real estate, who verifies the capital structure of the company so that investors can trust the integrity of the deal?
Investors do this by analyzing and understanding the cap table. The SEC requires the GP to provide a fully honest and compliant cap table. The GP can prove this cap table with an audit, for increased reputation. An asset with limited info and a non audited offering will probably not be as attractive. A GP may decide to not provide audited info, but the amount of real, verifiable info will be factors in asset valuation and interest.
Do all real estate assets being digitized need to have an SEC audit?
For a private placement the digitization process does not require an SEC audit. If a registered offering & capital raise is taking place an SEC audit will be required.
Are the restrictions on when holders can sell ownership once an asset is tokenized?
The rules regarding resales are the same for paper assets as they are for digital assets. If issued under REG D, there is a one year lockup period on trading. If strictly tokenizing existing ownership structures with no primary capital raise, there is no lockup restriction.
Are there more or less complications for an LP vs. a C Corp? How about individual assets, like single family homes?
The digital nature of the asset does not make a difference here, digital securities can represent ownership in any type of corporate structure.
Where can we see tokens trading currently in real time?
Vertalo maintains a growing list of trading venues comprised of ATS exchanges and broker dealers. Vertalo helps owners and investors get onboard to trading venues such as tZERO and Open Finance. Vertalo is constantly integrating with new trading venue partners to offer clients the most flexibility when listing their tokenized offerings.