The Ferraro Law Firm on Tokenized Equity: Innovation, Confusion, and the Growing Legal Grey Zone

As digital finance continues to evolve, so do the legal complexities that come with it. One of the most pressing issues now confronting investors, regulators, litigation attorneys, and business stakeholders alike is the rapid growth of tokenized equity—financial products that mimic traditional stocks but don’t offer the same rights or protections.

Recent events, including Robinhood’s promotion of OpenAI and SpaceX private equity tokens to European users, have spotlighted just how murky this space has become. In response, OpenAI publicly clarified that these tokens are not actual equity in the company—a move that revealed a deep disconnect between how tokenized securities are marketed and what they actually represent.

What Is Tokenized Equity?

Tokenized equity refers to digital tokens that represent exposure to the value of traditional assets, such as shares in a company or private equity holdings. Examples of assets that can be tokenized include different types of financial instruments like stocks, bonds, and real estate, as well as other types of assets such as intellectual property, art, and commodities. These tokens are often issued and traded on blockchain platforms or through intermediaries like crypto exchanges.

But unlike owning a real share of stock, token holders often do not gain the legal rights associated with equity ownership, which are typically available to holders of traditional equity. 

That includes:

• No voting rights
• No direct claims to company assets
• No access to financial disclosures
• No shareholder protections under existing securities law

Tokenized equity is similar in concept to owning shares issued during an initial public offering, but it differs in terms of legal rights and regulatory protections.

According to John Murillo of fintech company B2BROKER, tokenized equity holders may benefit from price appreciation—but lack any meaningful connection to the company’s governance or operations.

Understanding Tokenization: The Technology Behind the Trend

Tokenization is transforming the way companies and investors think about equity by converting traditional ownership rights into digital tokens. At its core, tokenized equity involves creating digital tokens that represent a stake in a company, with each token securely recorded on a blockchain network. This process leverages blockchain technology to ensure that every transaction—whether it’s the issuance, transfer, or settlement of tokens—is transparent, immutable, and secure.

A key innovation behind tokenized equity is the use of smart contracts. These self-executing contracts are coded directly onto the blockchain, automatically enforcing the terms and conditions of each transaction. This means that regulatory requirements, ownership rights, and other critical rules are built into the very fabric of the digital token, reducing the risk of human error or manipulation.

For companies, tokenization offers a streamlined way to raise capital and manage equity, opening the door to a broader pool of investors. For investors, the process provides enhanced security, faster settlement times, and greater transparency compared to traditional methods. As more businesses explore tokenized equity, the benefits of secure, efficient, and compliant transactions are becoming increasingly clear—making this technology a powerful tool for the future of corporate finance.

What the SEC Wants — and Why It Matters

The U.S. Securities and Exchange Commission (SEC) has been increasingly engaged in the conversation around tokenized financial assets. Under current leadership, the agency has expressed cautious interest in innovation, with SEC Chairman Paul Atkins stating:

“Tokenization is an innovation. And we at the SEC should be focused on how we advance innovation in the marketplace.”

Tokenized equity is subject to evolving regulatory oversight, which shapes how these assets are treated under the law.

Still, the SEC has yet to issue comprehensive regulatory guidance that addresses the legal gray area occupied by tokenized equity, including restrictions and challenges related to regulatory compliance, security, and investor protection. Until it does, the risk of retail investors being misled by the appearance of ownership will persist.

The Legal Risks for Investors

At The Ferraro Law Firm, we believe the rise of tokenized equity presents a number of serious legal risks for our clients and all clients we represent, especially for everyday investors:

• Misrepresentation: Many platforms and intermediaries blur the line between true equity and token exposure, creating confusion about ownership rights.
• Lack of Recourse: Without traditional shareholder protections, investors may have limited legal options if a company becomes insolvent or withholds returns.
• Regulatory Ambiguity: Inconsistent treatment across jurisdictions leaves investors exposed to unclear or unenforceable rights.
• Market Integrity: The unchecked marketing of tokenized securities may erode public trust in legitimate financial products.
• Contract Disputes: Breaches of contract and disputes over contractual obligations can expose parties to significant legal and financial risks.

Disputes over tokenized equity can lead to a lawsuit or multiple lawsuits, where parties may need to file or respond to legal documents, and the filing of these documents with the court is a critical step in the litigation process. These cases may proceed to trial, and settlements are often sought as a favorable outcome for clients. Both commercial litigation and business litigation are areas where our firm has significant expertise, representing clients in court and managing complex disputes involving parties and other parties such as shareholders, business partners, or third parties.

In litigation, attorneys seek to protect their clients’ interests, including protecting a company’s assets and reputation. Risks to a company’s equity, investments, and funds are heightened in tokenized equity offerings, and the ability to pay dividends or settlements can be affected. Intellectual property rights are also a key consideration in these offerings.

Data security is paramount, requiring robust processes for securing and keeping sensitive data secured throughout the tokenization lifecycle. Direct participation in tokenized equity allows investors to engage without intermediaries, but both experienced and interested investors face risks, especially in the early stages of this technology and when relying on blockchain systems.

As attorney Tyler Yagman of The Ferraro Law Firm recently told Cointelegraph:

“I believe it’s reasonable to expect that incidents like the ‘OpenAI Token’ event will happen again, where retail investors are marketed tokenized securities in a way that creates material confusion.”

Yagman also emphasized that while the underlying technology is promising, it must be accompanied by strong legal safeguards:

“Tokenized equities integrate multiple functions of a securities marketplace into a single technology. But without regulation, they risk democratizing confusion instead of access.”

Voting Rights and Tokenized Equity: Rethinking Shareholder Power

The rise of tokenized equity is prompting companies to rethink how shareholder voting rights are managed and exercised. By issuing digital tokens on a blockchain, companies can offer shareholders a more direct, secure, and transparent way to participate in corporate governance. Each token can be programmed to carry specific voting rights, allowing shareholders to cast their votes on key company decisions—such as board elections or major transactions—through a tamper-proof digital process.

This approach not only streamlines the voting process but also reduces the risk of fraud, errors, or manipulation that can occur with traditional paper-based or manual systems. Blockchain technology ensures that every vote is securely recorded and easily auditable, giving shareholders confidence that their interests are being accurately represented.

Moreover, tokenized equity allows for greater flexibility in structuring voting rights. Companies can issue different classes of tokens, each with varying levels of voting power, to better align with the interests of diverse shareholder groups. This innovation in corporate governance helps ensure that all parties have a fair and efficient way to influence the direction of the company, while minimizing risk and enhancing the overall security of the process.

A Brief History of Tokenized Finance

Tokenization began as part of the broader blockchain movement, promising to digitize real-world assets (RWAs) and make investing more accessible. Tokenization has changed the way companies raise funds and launch a fund, enabling new digital methods for capital formation. Early adopters focused on real estate, art, and commodities. More recently, the focus has shifted toward tokenizing publicly traded stocks and private equity, giving rise to decentralized trading platforms and synthetic exposure products that offer new investment opportunities.

Crypto exchanges like Kraken and Bybit now offer access to over 60 tokenized equities, and firms like Coinbase are seeking SEC approval to expand into this space. Tokenized equity is often represented by crypto coins and stored in digital wallets, providing a secure and decentralized alternative to traditional shares. Meanwhile, partnerships such as the one between Centrifuge and the S&P Dow Jones Indices are working to bring institutional legitimacy to tokenized markets.

Yet, legal infrastructure hasn’t kept up, leaving investors caught between financial innovation and regulatory inertia.

Market Trends: Where Is Tokenized Equity Headed Now?

The landscape for tokenized equity is rapidly evolving, with more companies and investors recognizing the advantages of digital tokens for raising capital and managing ownership. Startups and small to medium-sized enterprises (SMEs) are at the forefront of this movement, leveraging tokenized equity to access new funding sources and offer fractional ownership to a wider range of investors.

One of the most significant trends is the growing demand for digital assets and security tokens, which provide a regulated and secure way to represent ownership in a company. These digital tokens enable companies to efficiently manage equity transactions, while offering investors new opportunities to diversify their portfolios with fractional ownership of high-value assets.

As the market matures, we are seeing innovative applications of tokenized equity, from real estate and private equity to entirely new asset classes. The ability to securely transfer and settle ownership rights using blockchain technology is attracting both traditional and digital-native investors, driving further adoption. With ongoing advancements in regulatory frameworks and technology, tokenized equity is poised to become a mainstream tool for companies seeking to raise capital and for investors looking to participate in the future of digital assets.

What The Ferraro Law Firm Is Doing in This Space

The Ferraro Law Firm is closely monitoring the rise of tokenized securities and the legal fallout that may result from misleading or ambiguous practices. Our firm brings decades of litigation experience, as well as extensive resources and capabilities, to complex, high-stakes financial disputes—including those that involve novel or emerging technologies.

In the absence of clear regulation, litigation is often the only path to accountability. That’s where The Ferraro Law Firm steps in.

Whether you are:

• An investor who feels misled by a tokenized equity offering
• A financial professional navigating risk disclosures
• A legal partner seeking co-counsel in digital asset litigation

The Ferraro Law Firm is ready to engage, protecting clients’ interests in tokenized equity disputes.

Final Thoughts: Accountability Must Lead Innovation

Tokenized finance is here to stay. But as new products flood the market, we must ensure they are governed by laws that protect—not exploit—investors. Until regulators catch up, the legal system remains a critical safeguard.

These are not isolated incidents. And The Ferraro Law Firm is committed to leading the legal response.

📖 Read the Cointelegraph article:
https://cointelegraph.com/news/investor-beware-tokenized-equity-regulatory-grey-zone