What is an Equity token?

Token classification

Token classification is an important consideration when launching your offering because whether a token is an equity or debt security, or utility determines how it is both regulated and treated within the issuing jurisdiction.

According to ESMA, in terms of regulatory status, equity tokens are financial instruments and treated as securities.

What is an Equity token?

An equity token is a type of security token that functions as a traditional share, in either the underlying company, third-party asset or venture and takes its value from the company’s success or failure.

As with any stock purchase, holders literally own their given percentage of the total enterprise. They can also be entitled to a portion of the company’s profits and a right to vote on its future.  

The only significant difference between an equity token and a traditional share is the method of recording ownership. A traditional share is logged into a database and can be accompanied by a paper certificate. An equity token records corporate ownership on a blockchain.

Classes of share ownership  

Equity tokens, as shares of corporate ownership, can be divided up into classes. By default, all shares of equity in a company do not have a classification and are referred to as “common shares.”  Common shares divide earnings and voting power equally,  

Example:  If a company releases 100 equity tokens, each token entitles the holder to 1 percent of the earnings and 1 out of 100 votes.  

  • Ten tokens would entitle the holder to 10 percent of the earnings and 10 votes, and so on.

Apart from ordinary shares, common types are preference shares, non-voting shares, Class A shares, Class B shares, etc. (sometimes called "alphabet shares"), and shares with extra voting rights (sometimes called "management shares"). The share class system is infinitely flexible.  

Considering Class A and Class B shares, these classifications typically alter the voting rights of shares in the company.

Example:   Holding a Class-A equity token could entitle the holder to 10 votes per token, while a Class-B token could carry a 5-vote share and so on.  

A company can create as many stock classifications as it chooses, including some which get no votes at all.

A company may also assign to share classes what is called a “preferential dividend.” These receive their share of corporate profits in different amounts from the rest of a company’s investors.

Purchasers of an equity token need to be aware of these issues and particularly the potential for preferential dividends.  While uncommon, they mean that anyone who holds a preferential dividend will not only receive a greater percentage of corporate profits but also that they will get paid those dividends first. If a company which issues that kind of equity does not post a large dividend in a given quarter, common equity holders can end up getting nothing.

If you want to understand what makes a token valuable, we need to understand how assets are categorised and why this matters.

How are they offered?

Equity tokens are typically offered via an early seed round, a public offering of the token and public listing of the token on token exchanges.  When working as intended, this system will:

  • Allow investors to invest in companies relying on blockchain technologies while staying in compliance with the issuing jurisdiction regulator’s laws.

  • Allow entrepreneurs a model for funding new offerings.

  • Will allow regulators a framework for evaluating token offerings.

For the equity token model to work, three moving parts of the process must be in place.

  1. Investors must have ready access to reliable information about STOs.

  2. There must be trustworthy and knowledgeable brokers-dealers available to identify and sell these securities to qualified investors.

  3. There must be crowdfunding platforms that can cater to both retail and institutional investors while maintaining Know Your Customer/Anti-Money Laundering compliance.

10-second overview

Equity tokens are a subcategory of security tokens that represent ownership of an asset, such as shares in a company.

  • All equity tokens are securities tokens

  • An equity token typically implies control or ownership

Gabriele Teodoro