Tokenized Securities Study Guide

Glossary

Blockchain A distributed database that stores a registry of transactions and records across a peer-to-peer network. Cryptocurrency A digital medium of exchange that uses cryptography to secure transactions and control the creation of additional units of cryptocurrency. ICO (Initial Coin Offering) A popular way to crowdfund by issuing new cryptocurrencies. Tokenized Securities A form of digital securities issued and traded on a blockchain platform. Immutable Ledger A database that cannot be altered after data is added. Smart Contract A self-executing contract that is stored on a blockchain and automatically executes when certain conditions are met. ERC20 Token Standard A common standard for creating tokens on the Ethereum blockchain. BITE Tokens are blockchain instruments that represent transferable equity and are a form of tokenized security. Qualification Authority An organization that verifies that a person or entity meets certain investment criteria. Whitelist A list of investors approved to participate in a tokenized securities offering. Blacklist A list of individuals or entities that are prohibited from participating in a tokenized securities offering. Escrow Account A third-party account that holds funds during a transaction until all necessary conditions are met. Private Placement Memorandum (PPM) A legal document provided to potential investors that outlines the terms of an investment opportunity. Subscription Agreement A legally binding agreement between an investor and the issuing entity that outlines the terms of the purchase of a tokenized security. Secondary Market A market where investors can buy and sell tokenized securities after they are issued. Trading Window A specific period of time that allows for the buying and selling of tokenized securities. Rights Bundle A collection of rights associated with a tokenized security that defines the rights and obligations of shareholders and the issuer. Rights Steps A sequence of steps that make up the entire workflow of a transaction (e.g., new issue, secondary transfer). First Refusal Right The right of first refusal by the company or other shareholders if a shareholder wishes to sell his or her shares at the same price. Same-Sell Right Gives an investor the right to sell some or all of his or her shares in the event that the company sells some or all of its shares. Valuation Estimator A tool used to estimate the value of a tokenized security based on various factors (e.g., current valuation, future valuation, time horizon). Vesting Schedule A mechanism that outlines the schedule for vesting ownership of a tokenized security over time.

Short Answer Questions

What are the main differences between tokenized and traditional securities?

Explain the role of an escrow account in a tokenized security offering.

How does the concept of an “immutable ledger” apply to tokenized securities?

Why do investors have to go through a qualification process before participating in a tokenized security offering?

What is the purpose of a PPM in the context of tokenized securities?

What role does the secondary market play in the tokenized securities ecosystem?

What is a trading window and why is it important for tokenized securities trading?

Give an example of a bundle of rights that a tokenized security can be associated with.

How can a valuation estimator help potential tokenized securities investors?

Describe the significance of the vesting schedule for tokenized securities.

Answer

Tokenized securities are a form of digital securities issued using blockchain technology, whereas traditional securities are held in physical certificates or electronically. This difference allows for increased transparency, automation, and access to liquidity.

An escrow account acts as a third party in the issuance of tokenized securities, holding investors’ funds and securities until all necessary conditions such as qualification and contractual agreements are met. This process ensures that transactions are secure and fair.

An immutable ledger means that the blockchain that records transactions cannot be altered after they are added. This ensures transparency and auditability of the ownership and trading history of tokenized securities.

The qualification process ensures that investors meet certain financial criteria that allow them to withstand the risks associated with private securities. This process complies with securities regulations and protects inexperienced investors.

The PPM provides important information about the tokenized security offering and the issuing entity, including financial statements, management team, and risk factors. It acts as a due diligence document for potential investors, helping them make an informed decision.

The secondary market allows investors to buy and sell tokenized securities after the initial offering, thereby providing investors with liquidity and exit strategies. It also facilitates price discovery and enables a wider range of investors to participate.

A trading window is a specific time period during which buying and selling of tokenized securities is permitted. This mechanism helps manage liquidity, prevent market manipulation, and ensure regulatory compliance.

Tokenized securities can be associated with bundles of rights such as voting rights, dividend rights, or preemptive rights to purchase future securities offerings. These rights are defined by the issuing entity and embedded in the smart contract of the tokenized security.

The valuation estimator helps potential investors assess the potential value of a tokenized security by considering current market conditions, historical data, and security-specific factors. It provides a benchmark for making an informed investment decision.

The vesting schedule of a tokenized security specifies the granting of ownership rights over time. It is often used to incentivize employees or founders and tie their ownership to the success of the company over time.