Frequently Asked Questions

The valuation process is the same for traditional finance as it is for tokenization. As such, the valuation process is overseen by accredited, independent third-party appraisers to ensure fair market valuations that align with regulatory requirements.

‍

Likewise, legal ownership of the underlying real estate asset remains with the asset holder/issuer post-tokenization. Token holders only have an ownership stake or enforceable economic interest in the performance of the asset. Token holders do not have governance rights in the decision making of the company or title to the physical property itself. Additionally, the specifics around legal ownership depend on the structure and regulations in play. For instance, with a Reg D offering the issuer retains full control and ownership.

‍

With a Reg A+ offering, a neutral third party might hold the deed. We work closely with clients to structure issuances in a compliant manner that meets their needs.

Yes, clients have the flexibility to tokenize just a portion or tranche of a real estate asset instead of the entirety. This arrangement is actually fairly common because it allows an issuer to access capital through tokenization while still retaining decisionmaking for the property. We can tokenize any percentage of an asset, whether 10%, 50% or 90%. This modular approach provides flexibility to meet a client's specific capital needs and strategic objectives.

Tokenization offers several benefits compared to traditional financing methods. Tokenized real estate democratizes access to real estate investments by allowing smaller retail investors to participate with smaller minimums.

‍

Tokenization fundamentally improves the efficiency of real estate transactions by providing new liquidity options and eliminating illiquidity discounts baked into deals. This means issuers get better returns on their investments through more efficient operation. The process of tokenization additionally streamlines admin through smart contracts and blockchain-based record keeping. Costs will vary based on factors like asset value.

‍

With each subsequent recurring tokenization, the costs decrease. There are also third party costs like legal, escrow, brokerage fees. While not always cheaper than traditional financing, the goal is to access new capital sources and add liquidity.

There are a variety of corporate structures we can facilitate tokenization under, depending on the project's specific nature and requirements. Most commonly we see LLCs, LPs, onshore corporations, and offshore entities used. For funds, an LP or LLC structure tends to be preferred. We work with clients and their legal counsel to determine optimal compliance-driven structures that align with their goals.

One major difference is that tokenized dividends are automated and programmatically and transparently distributed on the blockchain. Absent tokenization, dividends have traditionally relied on manual calculations and bank wires which can cause delays.

‍

With tokenization, dividends are sent instantly to investor wallets in the form of stablecoins. This streamlines dividend payments, reduces costs, and brings transparency to the distribution process through on-chain reporting. Tokenized dividends are also more flexible - issuers can pay distributions in time-based increments (for example, dividends could be paid daily, weekly or monthly rather than quarterly or annually) or in capital-based increments (for example, dividends could be paid when the dividend distribution pool is over $1m).

‍

Overall, these features position tokenized dividend distributions as a more efficient system than traditional dividend distributions with benefits for both issuers and investors.

Regardless of who you are, the Upside platform simplifies the process of operation On the investor side, our platform provides a seamless onboarding experience including KYC/AML checks. We simplify the accreditation process and make it easy for investors to connect their wallet, fund a project, and manage their portfolio.

For exchanges, we establish technical integrations that enable secondary trading. We also explore business development opportunities to get our client's tokens listed on platforms that align with their investor base. Throughout the process, we focus on compliant, integrated experiences across initial investors, as well as stakeholders who might participate in a tokenization from the secondary market.

Yes. Upside has done tokenization projects for a wide variety of offering types, including those to retail investors and accredited or qualified investors. The ability to democratize access depends on properly structuring the offering in a compliant way. We advise clients on the best approach to align with their goals and requirements around investor access.

Once the asset begins generating dividends, distributions are handled seamlessly on the blockchain in the form of stablecoins sent automatically to investor wallets. Distribution are able to be configured at time-based intervals (e.g. monthly, quarterly, annually) or capital-based intervals (e.g., $500k, $1m, etc.) in the way that best aligns with the client’s preferences and asset performance. Smart contracts encode the dividend policy, so payments execute reliably and transparently per the encoded logic. This automated approach reduces administrative workload compared to manual dividend payments.

With traditional real estate investment, the difficulty in obtaining secondary liquidity from your investment results in properties being sold at a so-called illiquidity discount. With tokenization, after the private sale is completed and tokens are transferred, they are able to be resold in fractional amounts through security token exchanges. By integrating with regulated alternative trading systems where the tokens can be traded, tokenized real estate projects are able to leverage a larger universe of opportunities than traditional security issuances. We also advise clients on token mechanics like lock-up periods and volume restrictions that impact liquidity. Overall liquidity is enhanced through access to global online capital and fractional ownership compared to traditional illiquid real estate investments.

The investor onboarding and AML/KYC process is designed to be simple, seamless and familiar. Investors create an account and go through standard KYC and AML checks integrated through our third party partner. This is similar to opening any online investment account. Then, depending on the type of issuance, we also handle accreditation through our application as well. Once approved, investors can easily start investing in tokenized real estate opportunities.

Different crypto and web3 projects tokenize different types of rights and interests. At Upside, the way we have optimized projects toward simplicity. As such, tokenizations on the Upside platform confer economic rights to the performance of the underlying real estate asset. We do not confer voting and governance rights or direct legal ownership to the property. While token holders will benefit from the economic performance of a project, the issuer maintains legal ownership of the underlying asset.

Tokenization can provide upfront access to capital after the completion of a successful private sale raise. Once the tokens are issued, funds can be released to the client using an escrow structure which is built directly into the Upside platform. This normally takes 4-6 months from start to finish for the initial raise. Follow on raises can be done much quicker. So while not instant, tokenization provides more expedient access to growth capital compared to traditional financing.

Trading can be open to both accredited and non-accredited investors depending on how the offering is structured. For example, Reg D offerings require accredited investors, so secondary trading would be limited in that case. But if done under Reg A+, then trading could be to the broader market of retail investors. The exchanges themselves also have AML/KYC requirements that traders must satisfy. So while limitations may apply, we aim to provide the maximum flexibility to ensure a successful issuanc

The tokens are designed to be as freely tradable as legally and technically possible. Once investors have access to their tokens in their personal wallets and after any lock-up period expires, tokens will be tradeable to other investors who qualify to trade them. Tokens can then be transferred peer-to-peer or traded on supported secondary exchanges and trading platforms that we integrate with. These regulated venues provide access to liquidity and price discovery. However, large block trades may still occur OTC given the early stage of security token adoption.

Secondary market liquidity for real estate security tokens is evolving quickly as adoption increases. Platforms like INX, tZERO, Securitize, and Archax provide regulated venues for secondary trading. However, large trades may still occur OTC while secondary marketplaces continue to mature.

Each tokenization is going to require compliance with the relevant authorities. Typically, the relevant authorities include some combination of a securities regulator, a regulator who deals strictly with business entities, and all relevant tax authorities. In the United States, the Securities and Exchange Commission (SEC) is one of the most important regulatory authorities for determining who is able to invest in a tokenization and when they can trade tokens.

‍

The SEC has a number of different laws and exemptions for securities offerings that enable different types of issuers to solicit different types of people to invest in different types of investments. For example, under Reg D 506(c) offerings, only accredited investors are able to participate and each participating investor is subject to a one-year lockup before they are able to trade their interest on secondary markets.

‍

Such trading restrictions are encoded in the smart contracts based on both regulatory requirements as well as any additional client preferences. Close collaboration with legal counsel ensures we remain compliant across jurisdictions.

Each situation is going to be a little bit different with regards to taxation. However, there are some commonalities that relate to tax-specific complexities in real estate tokenization. First, this is not legal or tax advice. We recommend that everyone related to a real estate tokenization consult with legal tax professionals. Second, at a basic level, tokenization will not change the tax implications of the issuance of a real estate security. So both investors and issuers will face a similar set of constraints that they face normally. Our team can provide more detailed guidance on the tax and control implications tailored to a client's specific project.

The regulatory landscape for tokenizations is dependent on the type of tokenization involved, the location of the project, and the location of the investors. By nature of being a security, security tokens are going to be dealt with much differently than non-security tokens, e.g., utility tokens, stablecoins, etc.

‍

Each country and municipality will have an applicable framework for incorporation and securities that projects will need to comply with. Additionally, many jurisdictions have regulations related to non-citizens investing in local residential properties. For example, Switzerland has a law that prohibits non-Swiss, non-resident investors from investing in residential properties in Switzerland.

‍

In addition to these, there are laws related to white collar crime. Know-your-customer (KYC), anti-money laundering (AML) and accreditation verification requirements must be satisfied as well. All of these different rules and regulations will have their own ongoing reporting and disclosure standards. Our team will work hand-in-hand with your counsel and securities attorneys to ensure the requirements of your specific projects are represented in the tokenization architecture used in our smart contracts.

For real estate tokenizations, we primarily mint tokens using the ERC-1404 security token standard to incorporate built-in regulatory and investor protection compliance features. The smart contracts that we use for our projects are flexible and have been audited for use on all EVM-compatible blockchains. This means we have the ability to launch tokens on Ethereum mainnet, Polygon, Arbitrum, Solana, Algorand, and others.

Like with any securities issuance, the price per share – or in the case of tokenized real estate – the price per token is set ahead of time in a similar way that you would price shares in a company. The client has flexibility in determining the number of tokens to issue and the price per token for their real estate asset at launch. Cost per token is a function of the valuation, capital raise goal, and token issuance strategy. Upside provides guidance but ultimately the final decision will be left with the client.

Tokenization introduces new avenues to overcome illiquidity discounts and enable issuers to leverage a liquidity premium in their deals Tokenization in real estate enables a secondary market where tokenized interests in a project may be traded more efficiently. Automated smart contracts enable customizable liquidity options like redemption rights for issuers and investors for different deal phases.

The full end-to-end tokenization process typically comprises four main phases spanning 3-6 months:

1. Planning - Due diligence for legal and corporate structure, drafting investment documents, performing valuation, coordinating service providers.
2. Token deployment - Technical development of smart contracts and token mechanics on the blockchain.
3. Capital raise - Fundraising efforts for private sale, executing investor onboarding, accepting funds, issuing tokens.
4. Ongoing management - Providing investor relations support, distributions, and management. We also typically encourage clients to pilot tokenizing a single property before committing to a larger portfolio.

Tokenization involves representing some type of real estate interest as a set of digital tokens whose rights are stored on a blockchain. These tokens act as programmable shares - they mirror the underlying economics, cash flows, voting rights, etc. of a real asset. We use ERC-1404 compliant tokens using smart contracts to encode a client's investment terms and automate distributions.

As a real estate developer/investor, key benefits of tokenization include:

• Reducing illiquidity discount in real estate deals
• Increasing liquidity by fractionalizing ownership interests
• Facilitating secondary market trading and price discovery
• Lowering the barrier to entry for smaller investors, expanding your capital pool
• Simplifying and automating administrative tasks like distributions
• Enhancing transparency into fundraising and asset performance via the blockchain
• Accessing retail, international and crypto investors
• Streamlining and accelerating the capital raising process
• Unlocking the value of existing assets that are cash flowing or complete
• Maintaining control over day-to-day operations and management
• Improving visibility and reporting to attract investors

Our advisory fees typically start at $25K plus 1% of the tokenized raise amount. This covers our end-to-end advisory services across planning, token development, execution, and ongoing management. With each subsequent recurring tokenization, costs decrease. There are also third party expenses like legal, escrow, brokerage fees.

We aim to provide flexibility by tying fees to milestones based on capital needs. Additionally, use of our global investor network has additional related costs that are associated with them that are going to be unique for each client.

While specific clients remain confidential under NDA as many are still in process, we are proud to have successfully helped tokenize over $1 billion in value across a range of businesses issued to over 1.5 million token holders.

‍

We have also engaged in numerous security tokenizations, including the Republic Note, which was issued to over 5000 token holders in more than 120 different jurisdictions. These projects demonstrate our extensive experience guiding clients through the end-to-end tokenization process from launch to secondary trading.

‍

As more clients finalize their raises and enter the market, we look forward to sharing their stories and successes. Please reach out for more details on past projects within the bounds of our confidentiality agreements.

Any tokenization is going to be an interdisciplinary or multidisciplinary endeavor. Real Estate Tokenizations are no different. Our team has a robust mix of experience touching on all the disciplines involved in real estate tokenizations, including in: real estate, finance, technology, and blockchain.

‍

Key team members have previously worked as VP of Engineering at Nasdaq Private Market, at major real estate firms, management consulting and audit firms, and even Editor in Chief of the MIT Computational Law Report.

‍

On the tokenization side, our engineers and blockchain experts have been building blockchain-based platforms since 2014, with Upside beginning in 2016. The combined real estate and tokenization experience enables us to provide clients unparalleled service and forward looking advice throughout the process.