SEC Establishes Definitive Framework for Tokenized Securities, Categorizing Them into Two Primary Types

The US Securities and Exchange Commission (SEC) has issued new guidance to clarify the application of federal securities laws to tokenized securities. Released on January 28th by the Division of Corporation Finance, the Division of Investment Management, and the Division of Trading and Markets, this guidance distinguishes tokenized securities into two major categories: issuer-sponsored and third-party-sponsored. In the issuer-sponsored category, a tokenized security is defined as a financial instrument that qualifies as a 'security' and is represented as a crypto asset, with ownership records kept on one or more blockchain networks. The issuer or its agent utilizes distributed ledger technology (DLT) to ensure that transfers of the crypto asset on the network align with transfers in the official securityholder record. Issuers have the flexibility to offer securities in various formats, and a tokenized security may be deemed equivalent to its traditional version if the rights and privileges are 'substantially' similar. There are cases where an issuer might create a crypto asset that does not directly link to the master securityholder file but can facilitate off-chain ownership transfers. The second category involves third-party-sponsored tokenized securities, wherein entities not linked to the issuer tokenize another party’s securities, which may be categorized as custodial or synthetic. Custodial tokenized securities represent ownership interests in a company’s security and can have their records maintained on-chain or off-chain by a third party. Conversely, synthetic tokenized securities consist of linked securities and security-based swaps, offering exposure to an underlying security without conferring the rights from the original issuer. Security-based swaps issued as crypto assets are restricted to eligible contract participants unless they are registered with the SEC and traded on a national securities exchange. The guidance also reiterates that the classification and format of tokenized securities do not influence their treatment under federal securities laws, with the SEC available to assist market participants seeking clarity or preparing filings. This announcement aims to aid companies and investors in navigating the regulatory framework concerning tokenized securities while ensuring compliance with existing registration and disclosure mandates.