Tokenization records ownership of an asset, or of an interest in an entity that owns an asset, as digital tokens on a blockchain. It does not change the legal nature of what is sold. As SEC Commissioner Hester Peirce wrote in a July 9, 2025 statement, “Tokenized securities are still securities.” This article explains what that means in practice, using one hypothetical net lease example.
Understanding Tokenization and Its Impact
At its core, tokenization involves the digital representation of real-world assets on a blockchain. These assets can range from tangible properties like real estate and art to intangible ones like intellectual property and securities. Splitting an interest into many small units allows fractional ownership, but who may buy still depends on securities law, as the worked example below shows.
Worked Example: One NNN Property, Tokenized (Hypothetical)
The following is a hypothetical illustration, not a real offering. A sponsor forms a Delaware limited liability company (LLC) that buys one single-tenant net lease property. The LLC holds the deed and is the landlord under the lease. The LLC sells membership interests to investors and records each investor’s interest as tokens on a blockchain. What an investor owns is an interest in the LLC, not the building: under the Delaware Limited Liability Company Act, an LLC interest is personal property and “a member has no interest in specific limited liability company property” (6 Del. C. § 18-701). The investor’s rights to distributions, reports, votes and transfers, and the sponsor’s fees and authority to sell or refinance the property, come from the LLC’s operating agreement, the offering documents and the Delaware Limited Liability Company Act, not from the token’s code.
Suppose the LLC sells the interests under Rule 506(c) of Regulation D. That rule allows general advertising, but every purchaser must be an accredited investor and the LLC must take reasonable steps to verify that status (17 CFR 230.506(c)(2)). For an individual, accredited status includes net worth over $1 million, not counting the primary residence, or income over $200,000 ($300,000 jointly with a spouse or spousal equivalent) in each of the two most recent years with a reasonable expectation of the same this year (17 CFR 230.501(a)(5) and (6)). Interests bought in a Rule 506 offering cannot be resold without registration or an exemption (17 CFR 230.502(d)). Because this LLC is not subject to SEC reporting requirements, the Rule 144 resale safe harbor would require holding the interests for at least one year (17 CFR 230.144(d)(1)(ii)). On top of those rules, the example’s operating agreement requires the sponsor’s consent to any transfer, and the token’s code blocks transfers to wallets the sponsor has not approved. This is general information about the rules, not legal advice.
The Role of Blockchain Technology
A blockchain is a shared digital ledger. The National Institute of Standards and Technology describes blockchains as “tamper evident and tamper resistant digital ledgers implemented in a distributed fashion (i.e., without a central repository) and usually without a central authority” (NIST IR 8202, Blockchain Technology Overview, 2018). In the example, the blockchain records which wallet holds each token.
Smart contracts are programs stored on a blockchain that run automatically when set conditions are met. In the example, the token’s smart contract enforces the transfer restrictions and could also be used to send distributions. Code can contain flaws, and a flaw can be exploited before anyone steps in. In its 2017 report on The DAO, which sold DAO Tokens to investors, the SEC described how on June 17, 2016 an attacker began diverting approximately 3.6 million ETH, about one third of the total ETH The DAO had raised, by using a flaw in its code (SEC Exchange Act Release No. 81207, July 25, 2017). Before investing, ask whether the token contract has been independently reviewed, who can pause or change it, and what the operating agreement says happens if the code and the documents disagree.
Tokenization does not remove securities intermediaries. A trading platform that brings together buyers and sellers of securities and operates as an alternative trading system must register as a broker-dealer and file Form ATS with the SEC (17 CFR 242.300(a) and 242.301(b)(1) and (2)). Any savings in cost or settlement time depend on the specific platform and should be confirmed in its disclosures.
Secondary-Market Liquidity and Custody
Back to the example. Even after a resale exemption becomes available, an investor who wants to sell needs an eligible buyer and, unless the sale is negotiated privately, a lawful trading venue that has agreed to list the token. The sponsor may never arrange such a venue, and a venue that lists the token may have few buyers. Plan for the possibility of holding the interest until the LLC sells the property, and check whether the operating agreement gives the sponsor a right to buy interests back and at what price.
Custody has two layers. In the example, the LLC holds the deed and the property’s bank accounts, so investors rely on the sponsor’s controls over that money. The tokens sit in digital wallets controlled by private keys. NIST notes that if a user loses a private key, “any digital asset associated with that key is lost, because it is computationally infeasible to regenerate the same private key” (NIST IR 8202). Because the investor’s rights come from the LLC’s records and operating agreement, check whether the agreement lets the LLC cancel and reissue tokens after a lost key. If a platform holds the tokens for the investor, the investor also depends on that firm’s security and solvency. Other risks can arise when an unaffiliated third party that holds securities issues its own tokens tied to them; Commissioner Peirce noted that purchasers of such third-party tokens “may face unique risks, such as counterparty risks” (SEC statement, July 9, 2025). Ask who keeps the official register of members and what happens to it if the platform shuts down.
A blockchain makes recorded entries hard to alter, but it does not verify that the information entered is true, establish legal title to an off-chain asset, or prevent fraud on its own; those protections depend on the legal structure, custody and the people operating the system.
What Tokenization Does Not Change
A token is only as strong as the legal rights behind it. Before buying a tokenized real estate interest, check what the token legally represents (an equity interest, a debt claim or a contractual right), whether it is offered as a security and under which exemption, what transfer restrictions apply, who holds custody of the underlying asset and the token keys, what happens if the smart contract fails or the platform shuts down, and whether there is an active, lawful secondary market. A tokenized offering may be limited to accredited investors, and its tokens may be resold only under limited conditions.
Tokens Sold by Creators and Communities
Tokens are also used outside traditional assets, for example non-fungible tokens (NFTs) that artists and other creators sell directly to buyers, and projects in which a group pools money to buy an asset together. The same legal question applies. In its report on The DAO, the SEC summarized the Supreme Court’s test: an investment contract, which is a security, is “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others” (SEC Exchange Act Release No. 81207, citing SEC v. W.J. Howey Co., 328 U.S. 293 (1946)). Whether a particular token is a security depends on the facts and circumstances, “regardless of the terminology used.”
The Future of Tokenization in Investment
Regulatory frameworks around tokenization are still evolving, and issues related to investor protection, market stability, and the integration of digital and traditional financial systems need to be carefully managed.
Tokenization may make some assets easier to divide, record and transfer, but its benefits depend on the legal rights, custody arrangements and markets behind each token. Investors should evaluate a tokenized offering the way they would any private investment: the asset, the sponsor, the legal structure, the fees and the realistic exit.
