Tokenization of Early-Stage Equity: Benefits and Regulatory Trends

Introduction

“Tokenization came to the forefront during 2017-18, with the emergence of initial coin offerings. Since then, the tokenization of assets has evolved into one of the most prominent use-cases of distributed ledger technologies.” ¹

While tokenized markets are in their infancy, experiments around CBDCs have rekindled policymakers’ interest in tokenization.² For instance, last year, the Bank for International Settlements (BIS) released a paper called “Finternet: the financial systems of the future”, arguing that “tokenized financial assets could ease many of the bottlenecks that exist in the current financial system”.³ Not too long after that, the deputy governor of RBI acknowledged that tokenized assets “have compelled policymakers to remain on their toes”.⁴ In fact, experiments by central banks around the world, including RBI’s CBDC pilots, have renewed interest in tokenization in financial markets.

This article attempts to further discourse on tokenization in India, in line with global trends. This article will discuss tokenization of an asset class that has significant potential for growth,⁵ namely early-stage equity.

This article would first attempt to underline essentials of “tokenization”, and thereafter, recognizing that there is ample literature on benefits and risks associated with tokenization of financial assets generally, it will briefly touch upon the impact of tokenization on early-stage equity. Most importantly,  this article will attempt to briefly touch upon the regulatory framework relevant to tokenization in India, along with a few references of the regulatory trends overseas.

Elements of Tokenization

“Tokenization” has been associated with various meanings in several contexts. While there is no globally accepted definition of what constitutes “tokenization”,⁶ from our reading of the literature on the topic, we gather that a consensus is developing on the essentials that underline tokenization of real-world assets:⁷

1. Tokenization involves the issuance of tokens that represent rights or interests in the asset underlying the transaction.

2. These tokens are typically issued and recorded on distributed ledgers, and may also be transacted on such ledgers (although the technologies underpinning such transactions may vary).

3. The underlying asset that is subject to tokenization exists off-chain, leading these tokens to be often called “digital twins”.

Impact of Tokenization on Early-Stage Equity

Today, India is the world’s third-largest startup with over 1.58 lakh government recognized startups as recorded in January 2025.⁸ Initiatives like Startup India aimed at encouraging the entrepreneurial ecosystem and digital initiatives like the digital public infrastructure (DPI) have helped the number of startups grow 100-fold from around 500 in 2016 to 1,59,157 as of January 15, 2025. Startups also ended up raising 20% more funds in 2024 compared to the previous year, amounting to a cumulative USD 141 billion in funding between 2014 and 2023 across different stages of funding.⁹ This reflects strong investor confidence in the startup ecosystem in India. 

However, access to the share cap table of startups is generally limited to investment funds and high-net worth individuals. Additionally, equity capital of investors in these startups is not typically traded on stock exchanges and remains illiquid. Therefore, intermediaries are undertaking several efforts to make private equity more accessible. For instance, some intermediaries enable incorporation of "roll-up vehicles", where small-ticket investors contribute to the capital of a special purpose vehicle, and the vehicle in turn funnels such investments to a startup's share capital. On the other hand, several platforms that directly intermediate the purchase and sale of unlisted shares have mushroomed in India recently. These platforms typically enable such transactions by purchasing these shares from the existing shareholders and selling them to the buyers (by issuing necessary instructions to the depository participants to credit the buyer’s demat account with such shares).¹⁰

With this context, it is clear that there is a strong investor demand for India’s thriving startup ecosystem. Tokenization has the potential to address this demand and as argued in several studies,¹¹ address challenges that illiquid financial assets (such as early-stage equity) face.

Tech behind Tokenization

Tokenization of early-stage private equity of startups involves the use of cryptography for the issuance of digital representations of ownership interests as tokens. These tokens are typically created, stored and recorded on immutable ledgers. The tokens are employed as a symbol of fractional ownership interest in the startup and may have specific rights assigned to them, such as voting rights, dividend payments, or other governance settings. The process begins with defining the shape and characteristics of the tokens, including their total supply, method of distribution, and any unique usage rules. Smart contracts—programmable logic that runs automatically—can then be deployed to oversee the issuing, transferring, and handling of these tokens. These smart contracts can ensure all transactions comply with set rules, like who can hold or exchange the tokens.

Utilizing immutable ledgers ensures that every transaction is preserved in a secure and tamper-evident manner with an auditable history of the transfer of ownership. Where regulations permit, this minimizes the need for traditional middlemen like transfer agents or registrars, rendering functions like cap table management more streamlined and reducing the cost of administration. Besides, tokenization can also enable startups to offer fractional ownership, lowering the bar for entry for investors who don't have the means to invest in a big block of equity. This gives broader access to more prospective investors who could be in different geographies or demographics guided by their jurisdiction’s regulations.

By leveraging such advanced technologies, early-age startups can create an efficient, safer, and more accessible financing process. The ability to tokenize ownership can increase liquidity through secondary trading on private platforms or marketplaces designed to serve tokenized equity (if permitted by regulations). It can improve the ability of early-stage investors to exit positions over more traditional equity models that usually have limited liquidity until an acquisition or IPO event. Overall, tokenization through immutable ledger technology offers a transformative model for early-stage startups to raise capital and structure ownership while broadening their investor base.

Indian Regulatory Framework

Legal frameworks have been identified as one of the major challenges that impact scaling of tokenized markets.¹² In India, there is no specific legislation intended to exclusively regulate the tokenization of early-stage equity capital. However, any effort to tokenize early-stage equity investments cannot operate in a vacuum and will have to be carefully evaluated (and structured, if feasible) considering the existing regulatory framework.

The regulatory framework that is likely to apply to any effort to tokenize early-stage equity capital would consist of India’s securities law, company law, advertisement norms, anti-money laundering law, and income tax law. This regulatory framework would extend to the following: 

1. issuance of tokens or invitation to offer to investors.
2. storage or custody of tokens on ledgers.
3. operation of secondary markets for such tokens.

Any attempt at tokenizing equity or creating a secondary market for tokenized equity deserves an evaluation of the securities regulator’s jurisdiction. Courts have in the past held that the securities regulator’s jurisdiction does not typically extend to shares of a private limited company, given that such shares lack “free transferability” due to restrictions specified in their articles of association.¹³ Under the existing framework, for any tokenization attempt to give the token holders appropriate ownership rights, it is highly likely that an amendment to the articles of association will be required. Whether an amendment to the articles and subsequent creation of a secondary market for such tokens takes away the “freely transferable” nature of such tokenized shares, is an argument that is yet to be explored or adjudicated upon by Indian courts.

Additionally, early-stage equity is typically raised on a private placement basis in India. Under India’s current law, a private company cannot offer its securities to more than 200 investors on a private placement basis. If at any point in time, a private company wishes for the number of its members to exceed 200, it needs to become a public company. As for the form in which these shares are issued, each private company and public company in India is required to issue “dematerialized” shares held by depositories. One exception to this dematerialization requirement is for “small companies”, which are companies with paid up capital and turnover not exceeding INR 4 Crore and INR 40 Crore, respectively.

At this juncture, it is worthwhile to note that securities held by depositories are fungible,¹⁴ and one may argue that depositories may significantly benefit from benefits associated with tokenization. Presently, investors transact with the depository through a depository participant. In an ideal scenario, tokenization has the potential to make depository participants redundant. In fact, Indian depositories are no strangers to the use of distributed ledgers. Depositories are mandated by the securities regulator to use distributed ledger technology (or similar technologies) for the purposes of monitoring covenants in relation to the issuance of debt securities.¹⁵

Global Trends

Globally, policymakers have taken a keen interest in the tokenization of equity. Jurisdictions can be segregated into the following categories depending on their policymaking initiatives:

1. Jurisdictions that have put in place frameworks that exclusively deal with the tokenization of real world assets (including financial assets such as equity capital) or amended their existing regulatory frameworks to promote tokenization of equity. Qatar, Switzerland, Germany and France are good examples of these jurisdictions. Within Qatar’s framework, entities may issue “investment tokens”, which are defined to mean tokens that represent rights in permitted securities (such as shares)¹⁶ – paving regulatory pathways for tokenization of share capital and offering related regulated services. These regulated services include arranging custody for investment tokens and operating exchanges for investment tokens. Switzerland,¹⁷ France¹⁸ and Germany¹⁹ amended their existing legal frameworks to allow the use of distributed ledgers to record the issuance of unlisted equity instruments.
2. Jurisdictions such as US,²⁰ UK²¹ and Singapore,²² that have issued guidance on the status of tokenized equity within existing regulatory frameworks applicable to securities or digital assets.
3. Jurisdictions without any regulatory initiatives or developments for tokenized equities, such as India.

Conclusion 

India’s startup economy stands to gain much from tokenization, which can offer a more inclusive and accessible way to raise capital, unlock value through a wider pool of investors, and streamline transactions. More recently, the International Financial Services Authority of India released a consultation paper to seek comments on tokenization of real-world assets,²³ highlighting that Indian policymakers have started to grasp the benefits associated with tokenization, the way policymakers around the world have.

Authors

‍Swastik Sharma is a lawyer associated with Spice Route Legal.

Shilpi Saksena is the research and insights lead at rootVX.

Updated as of 6th March, 2025.

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^Disclaimer

^{This article is for informational purposes only. While every effort has been made to ensure the accuracy and reliability of the information presented, the data obtained through research may vary across sources and its accuracy, reliability, or completeness is not guaranteed. The insights shared in this report reflect the information available to us at the time of writing.}

^{The statements made herein shall not be construed as legal advice, and we express no opinions on any law or the legal feasibility of any practice. The benefits listed here may be relevant only from an economical and technological perspective. The existing regulatory framework may continue to limit the benefits. Indian laws are continuously evolving and may change after the date of this article. We disclaim all liability and responsibility with respect to the statements made herein.} 

^{The views expressed herein are personal views of the authors and do not necessarily reflect the views of their employers, associates or any other stakeholder. Any claims, projections, or forward-looking statements are speculative and should not be interpreted as guarantees of future outcomes.}

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Bibliography

¹  Kaousar Nassr, I. (2021), “Understanding the tokenisation of assets in financial markets”, OECD Going Digital Toolkit Notes, No. 19, OECD Publishing, Paris, https://doi.org/10.1787/c033401a-en. 

² OECD (2025), “Tokenisation of assets and distributed ledger technologies in financial markets: Potential impediments to market development and policy implications”, OECD Business and Finance Policy Papers, No. 75, OECD Publishing, Paris, https://doi.org/10.1787/40e7f217-en.

³ Agustín Carstens and Nandan Nilekani (2024), “Finternet: the financial system for the future”, No. 1178, BIS Working Papers, Monetary and Economic Department, https://www.bis.org/publ/work1178.htm

⁴ Shri M. Rajeshwar Rao (2024) “RBI: Navigating 90 Years of Legacy, Regulation, and Aspiration”, opening remarks delivered at the “High-Level Policy Conference of Central Banks in the Global South” organised by the Reserve Bank of India, Mumbai https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=23063: “The biggest disruptive change that has occurred in the world is usage of technology. This has definitely made our life easier in unprecedented ways, but it has also led to growth of an entire ecosystem which thrives upon this massive outreach. Advent of new processes backed by block-chain, and AI/ ML, new products like tokenized assets, and new entities like BigTechs/FinTechs have compelled policymakers to remain on their toes. We do not want to stifle such progressive practices, but we must provide suitable guardrails to ensure systemic stability. The quest to find the balance between innovation and prudence is thus going to be a challenge.”

⁵  P Peridis (2023), “Securitisation in the era of Blockchain: Credit funds, CLOs, Tokenisation, and the question of investor protection and financial stability”, European Banking Institute Working Paper Series 2023, No. 154, http://dx.doi.org/10.2139/ssrn.4571188. 

⁶ Financial Stability Board (2024), “The Financial Stability Implications of Tokenisation”, https://www.fsb.org/2024/10/the-financial-stability-implications-of-tokenisation/. 

⁷ Kaousar Nassr, I. (2021), “Understanding the tokenisation of assets in financial markets”, OECD Going Digital Toolkit Notes, No. 19, OECD Publishing, Paris, https://doi.org/10.1787/c033401a-en; Financial Stability Board (2024), “The Financial Stability Implications of Tokenisation”, https://www.fsb.org/2024/10/the-financial-stability-implications-of-tokenisation/; P Peridis (2023), “Securitisation in the era of Blockchain: Credit funds, CLOs, Tokenisation, and the question of investor protection and financial stability”, European Banking Institute Working Paper Series 2023, No. 154, http://dx.doi.org/10.2139/ssrn.4571188; and OECD (2025), “Tokenisation of assets and distributed ledger technologies in financial markets: Potential impediments to market development and policy implications”, OECD Business and Finance Policy Papers, No. 75, OECD Publishing, Paris, https://doi.org/10.1787/40e7f217-en.

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¹⁰  The securities regulator has recently expressed reservations against this model for shares that are proposed to be listed and shares of unlisted public companies (while omitting reference to shares of private companies from its press release). Please see Securities and Exchange Board of India (2024), “Transaction in Securities of Unlisted Public Limited Companies on Electronic Platforms”, PR No. 34/2024, https://www.sebi.gov.in/media-and-notifications/press-releases/dec-2024/transaction-in-securities-of-unlisted-public-limited-companies-on-electronic-platforms_89416.html

¹¹ Guggenberger, T, Schellinger, B, von Wachter, V et al. (2024),  “Kickstarting blockchain: designing blockchain-based tokens for equity crowdfunding”, Electron Commer Res 24, 239–273, https://doi.org/10.1007/s10660-022-09634-9, Cao, G (2024), “Startup Financing: Token vs Equity”, https://doi.org/10.48550/arXiv.2402.04662; Roth, Jakob and Schär, Fabian and Schöpfer, Aljoscha (2019), “The Tokenization of Assets: Using Blockchains for Equity Crowdfunding”, http://dx.doi.org/10.2139/ssrn.3443382; P Peridis (2023), “Securitisation in the era of Blockchain: Credit funds, CLOs, Tokenisation, and the question of investor protection and financial stability”, European Banking Institute Working Paper Series 2023, No. 154, http://dx.doi.org/10.2139/ssrn.4571188.

¹²  Financial Stability Board (2024), “The Financial Stability Implications of Tokenisation”, https://www.fsb.org/2024/10/the-financial-stability-implications-of-tokenisation/; OECD (2025), “Tokenisation of assets and distributed ledger technologies in financial markets: Potential impediments to market development and policy implications”, OECD Business and Finance Policy Papers, No. 75, OECD Publishing, Paris, https://doi.org/10.1787/40e7f217-en.

¹³ Bhagwati Developers Private Limited v. Peerless General Finance and Investment, (2013) 9 SCC 584; and Dahiben Umedbhai Patel and others v. Norman James Hamilton, (1983) 85 Bom LR 275.

¹⁴  S 9, Depositories Act, 1996.

¹⁵ SEBI circular (2021), “Security and Covenant Monitoring Using Distributed Ledger Technology”, https://www.sebi.gov.in/legal/circulars/aug-2021/-security-and-covenant-monitoring-using-distributed-ledger-technology_51855.html. 

¹⁶ Rule 2.1.1, Qatar Investment Token Rules 2024, https://qfcra-en.thomsonreuters.com/sites/default/files/net_file_store/QFCRA_15114_VER1.pdf. 

¹⁷ CMTA (2024), “STANDARD for the tokenization of shares of Swiss corporations using the distributed ledger technology”, https://cmta.ch/content/bad08d0c80bfa0cf1d5c84cae7fa8d59/cmta-standard-for-the-tokenization-of-equity-securities-en.pdf; Bundesgesetz zur Anpassung des Bundesrechts an Entwicklungen der Technik verteilter elektronischer Register, https://www.fedlex.admin.ch/eli/oc/2021/33/de. 

¹⁸ France Order No. 2017-1674 of December 8, 2017 relating to the use of a shared electronic recording device for the representation and transmission of financial securities, https://www.legifrance.gouv.fr/loda/id/JORFTEXT000036171908; France Order No. 2016-520 of April 28, 2016 related to promissory notes (minibons), https://www.legifrance.gouv.fr/dossierlegislatif/JORFDOLE000032469642/; Article R. 211-9-7 of the Monetary and Financial Code, France Decree No. 2018-1226 of December 24, 2018 relating to the use of a shared electronic recording device for the representation and transmission of financial securities and for the issue and transfer of minibons, https://www.legifrance.gouv.fr/loda/id/JORFTEXT000037852460.

¹⁹ Deutsch Bundestag (2023), “Bundestag billigt das Zukunfts­finanzierungs­gesetz”, https://www.bundestag.de/dokumente/textarchiv/2023/kw46-de-zukunftsfinanzierungsgesetz-976556. 

²⁰ US Securities and exchange commission, Framework for “Investment Contract” Analysis of Digital Assets, https://www.sec.gov/about/divisions-offices/division-corporation-finance/framework-investment-contract-analysis-digital-assets; and Division of Trading and Markets, U.S. Securities and Exchange Commission Office and General Counsel, Financial Industry Regulatory Authority, “Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities”, https://www.sec.gov/newsroom/speeches-statements/joint-staff-statement-broker-dealer-custody-digital-asset-securities.

²¹ Financial Conduct Authority (2019), “Guidance on Cryptoassets”, https://www.fca.org.uk/publication/policy/ps19-22.pdf.

²² Monetary Authority of Singapore (2017), “A Guide to Digital Token Offerings”, https://www.mas.gov.sg/regulation/explainers/a-guide-to-digital-token-offerings.

²³ International Financial Services Authority of India (2025), “Regulatory Approach Towards Tokenization of Real-World Assets”, https://ifsca.gov.in/Viewer?Path=Document%2FReportandPublication%2Fregulatory-approach-towards-tokenization-of-real-world-assets26022025100615.pdf&Title=Regulatory%20Approach%20towards%20Tokenization%20of%20Real-World%20Assets&Date=26%2F02%2F2025