In this article, we present a 12-Step Legal Compliance Checklist for The Tokenization of Real World Assets (RWAs), developed collaboratively by the Legal & Compliance teams of InvestaX and IX Swap. This is an all-encompassing reference manual that offers issuers a non-exhaustive legal compendium of frequently asked questions regarding the tokenization of RWAs, providing a roadmap to legally compliant RWA tokenization for issuers.

For detailed explanations about the checklist and/or to access our Advisory & Consulting Service for real world asset tokenization, please contact our team.

Why Compliance Matters In Asset Tokenization?

Real world assets, once tokenized, become RWA tokens on the blockchain. RWA tokens fall under the digital asset category and are often classified as securities. Therefore, a robust legal compliance framework is necessary to ensure that RWA token offerings, trading, and custody meet regulatory requirements. 

Throughout RWA token life cycle, tokens and associated intermediaries, such as tokenization advisers, platforms, trading platforms, and custodians, are subject to securities regulations to protect investors and ensure market integrity. 

The regulatory framework for digital assets in general is still evolving and varies by jurisdiction. While some regions adapt existing securities laws to digital assets, others create new regulations specifically for digital assets. Therefore, it is important for issuers to note that this 12-step checklist serves as a general guide for RWA token offering compliance and does not encompass specific jurisdictional regulations.

Legal Compliance Checklist for The Tokenization of Real World Assets

Step 1: Perform Due Diligence on Issuer 

• Background Check: Conduct background checks on the issuer, its related corporations, directors, executive officers, and controlling shareholders.
• Financial Performance: Review the issuer's financial performance, including historical financial statements, financial projections, and cash flow management.
• Enhanced Due Diligence: Typically for emerging market issuers with controversial or restricted types of asset dealings.

Step 2: Legal Structure of the Issuer

• Type of Legal Structure: Define the type of vehicle/company that will be issuing the RWA tokens.
• Qualification: Depending on the jurisdiction/ applicable laws, determine whether the company may qualify as any other types of vehicle (e.g investment fund).
• Registration and License Requirements: Determine if the Company has to obtain any regulatory approvals or obtain licenses to issue/offer/manage/trade RWA tokens. There are many different types of licenses such as securities license, custodian license, fund management license, etc. 

Step 3: Real World Asset (RWA) Evaluation

• Asset Eligibility: Determine the type of assets, such as Real estate, Fine Arts, Commodities, Precious Metals. Ensure that the asset is eligible for tokenization and complies with relevant regulations.
• Asset Risk Assessment: Assess risks associated with asset ownership and ensure that the necessary safeguards are or can be put in place.
• Ownership Rights Verification: Verify the ownership rights of the asset and ensure that all necessary documentation is in order.
• Market Value Assessment: Determine the market value of the asset and its potential to offer returns on investment.

Step 4: Determine the Token Structure

• Token Specifications: Determine the token structure, including the type of token (security token, utility token, etc.), whether they will be fungible or non-fungible and the token standard to be used (like ERC20 or ERC721), and other essential characteristics of the token.
• Blockchain Network: Decide between public and private blockchain, and then the specific blockchain network, such as Ethereum, Polygon, or Base.
• Token Rights: Define the rights embedded into the RWA token. For example, it could bear interest, have a dividend right, include voting rights, etc.

Step 5: Identify the type of Investors and Their Qualifications

• Type of Investors: To determine whether the target audience for the offering is accredited investors, retail investors, sophisticated investors. 
• Qualifications of Investors: Define whether only duly authorized and pre-approved investors will be allowed to hold and transfer the RWA token, along with the inclusion of relevant KYC and AML rules and policies, as well as any other applicable compliance or regulatory matters.

Step 6: Custodian 

• Types of Custodian Services: There are many different types of assets in the world and how they are handled and regulated are widely different. Evaluate the custodian's services, such as asset management, trade processing, and asset servicing, to ensure they meet the needs of the RWA.
• Fees and Charges: Check the custodian's fees and charges to ensure they are reasonable and transparent.
• Custodian insurance coverage: Check the custodian's insurance coverage to ensure they are protected against potential losses or damages.
• Custodian’s scalability: Assess the custodian's scalability to ensure they can handle the RWAs growth and increasing asset values.

Step 7: Payment

• Currency of Reference: If applicable, describe whether other currencies and/or cryptocurrencies are accepted for subscribing to the RWA token, and how exchange rates are calculated.
• Payment Methods: Define the payment methods accepted for investors to subscribe to the token (including any applicable delay, validation of the order, refund policy, fees, etc).

Step 8: Legal Documentation for Investors

• Token Purchase Agreement: The token purchase agreement clearly outlines the terms and conditions of the investment, information on risks, token sale roadmap, disclaimers and disclosures, the token allocation, and the rights and obligations of the investor.
• Investment Memorandum: Include a detailed description of the token, ticker name, features, number of tokens available for sale, the token price, token rights, the token distribution plan, risk disclosures and benefits etc.

Step 9: Market the Offering

• Marketing Restrictions: Thoroughly research the marketing and advertising regulations in the jurisdictions where the token offering will be promoted.
• Marketing Strategy: Develop a marketing strategy to promote the RWA token sale to potential investors. This may involve social media marketing, email campaigns, PR, and other promotion tactics.

Step 10: Licensing

• Primary Offering: Ensure that the broker-dealers involved to facilitate the primary offering/listing/RWA token sale, like InvestaX and IX Swap, are licensed to do so.
• Secondary Trading On Exchanges: Ensure that the centralized or decentralized trading avenues for RWA tokens are also duly licensed, for example, IX Swap’s RWA decentralized exchange called the IXS DEX.

Step 11: Investment

• Investor Due Diligence: Implement the required due diligence measures on investors. Know Your Customer (KYC) enables effective verification of the identity of investors, and allows the issuer to obtain the relevant data necessary to do business with a given person. Anti Money Laundering (AML) is a set of regulations and procedures created to prevent money laundering and other illegal activities by specific entities carrying out these activities.
• Making the Purchase: Once investors pass the KYC requirements, they may then make a purchase and then can store RWA tokens in digital wallets such as Metamask or Coinbase Web3 wallets.

Step 12: Ongoing Management of RWAs

• Investor management: Record and manage investor contributions and any changes.‍
• Distributions: A key tenet of RWA tokens is they provide tangible returns to investors, backed by the underlying RWAs. The details and process for distributions are programmable and embedded into the token and smart contracts.

To download the PDF version of the checklist, please click here.

For detailed explanations about the checklist and/or to access our Advisory & Consulting Service for real world asset tokenization, please contact our team.

About The Authors Of The Checklist

InvestaX is a one-stop shop for real-world asset (RWA) tokenization. InvestaX provides Tokenization Advisory & Consulting services to guide issuers through all stages of RWA tokenization and a Singapore-licensed Tokenization SaaS Platform that enables issuers to legally tokenize assets and launch their RWA token offerings to global investors. 

For service inquiries, please contact us here.

IX Swap operates a RWA token marketplace and the world's first automated market maker for RWA and security tokens, bringing regulatory compliance and liquidity to the forefront of the DeFi and RWA space. By utilizing cutting-edge blockchain technology such as automated market making (AMM), liquidity pools, DeFi, and decentralized exchange (DEX), IX Swap aims to level the playing field for investors and open up a wider range of investment opportunities for all to participate in. 

For service inquiries, please contact IX Swap here.

Related Resources

[Blog post] Tokenizing Real World Assets - An 8- step checklist for Issuers

[Blog post] 8-Factor Checklist To Choose The Right Asset Tokenization Platform

[Webinar recording] Navigating Regulations and Legalities In Real World Asset Tokenization

Disclaimer

Please be advised that InvestaX is not a law firm and does not provide legal advice. 

The information contained herein is based on assumptions, experience, as well as research, and is not intended to constitute any investment, legal, accounting, tax or other advice of any kind from InvestaX. InvestaX does not provide any representation, warranty, or other assurance of any kind with respect to the accuracy, completeness, or suitability of the information provided herein. Under no circumstances shall InvestaX have any liability to you/the reader for any loss or damage of any kind incurred as a result of the use or reliance on the information provided herein.

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