How to Tokenize Private Company Shares Using Security Tokens?

Tokenization is transforming the way private companies raise capital and manage equity. By converting traditional assets into digital representations on the blockchain, tokenization opens up new avenues for capital, liquidity, and growth. However, despite the rapid growth of private equity assets, with over $10 trillion managed in 2023, a staggering 90% of private company shares remain illiquid, locked in long holding periods.

Blockchain technology, particularly through the use of security tokens, is transforming the way private companies’ shares are bought, sold, and traded. These digital tokens, backed by real-world assets, provide a seamless and compliant method for companies to raise capital. By utilizing blockchain’s decentralized nature, security tokens not only ensure transparency and security but also enhance the efficiency of capital-raising processes. 

Investors benefit from an accessible marketplace, where they can trade shares with confidence, knowing the system is regulated and secure.

In 2024 alone, over $25 billion in real-world assets have been tokenized, with private equity taking the lead. Major players like KKR are already reaping the rewards, having tokenized a $4 billion healthcare fund, lowering the minimum investment from $5 million to just $10,000.

In this blog, we’ll explore everything about private company share tokenization using security tokens, as this allows companies to access a wider range of investors and increases share liquidity. We’ve worked with numerous clients to create secure, compliant platforms that digitize private shares, ensuring they can be traded in a transparent and decentralized environment. By leveraging our expertise in blockchain technology and regulatory compliance, IdeaUsher can help you unlock new opportunities for growth and capital raising.

Key Market Takeaways for Tokenizing Private Company Shares

According to MordorIntelligence, the asset tokenization market is experiencing rapid growth, expected to reach USD 2.08 trillion by 2025 and USD 13.55 trillion by 2030, driven by a CAGR of 45.46%. This shift is reshaping how businesses and investors handle ownership and trading, particularly in the context of private company shares.

Source:  MordorIntelligence

Many companies are turning to security tokens for tokenizing private shares, recognizing the benefits this approach offers. Tokenization digitizes equity, making investor management and compliance more efficient, while expanding access to a global pool of investors. Security tokens enable fractional ownership, improve liquidity for traditionally illiquid private shares, reduce transaction costs, and speed up settlement through blockchain and smart contracts.

Top financial institutions like UBS, Goldman Sachs, JPMorgan, and KKR are actively exploring tokenization for private equity and fund shares. These firms are implementing blockchain-based strategies to digitize ownership, simplify compliance, and streamline trading. 

Platforms like Zoniqx are facilitating these efforts by providing tools for the entire lifecycle of equity tokenization, including onboarding, compliance, and automated corporate actions, all while ensuring regulatory alignment and a global reach.

Why Private Companies Are Tokenizing Shares Using Security Tokens?

From our extensive experience in building tokenization solutions for clients, we’ve noticed a few standout benefits that companies typically enjoy when tokenizing their shares. These advantages have proven to streamline operations and enhance the overall investment experience.

1. Directly Access Retail & Global Investors

We’ve observed that one of the biggest advantages for companies is the ability to reach a much broader investor base. By tokenizing shares, companies can engage not just institutional investors, but also retail investors from around the world, often with fractional ownership and lower minimum investment thresholds. 

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2. Streamlined Fundraising Process

Over time, we’ve seen how STOs simplify the fundraising process. Smart contracts automate much of the work, from investor onboarding and KYC checks to managing compliance. This results in a faster, more efficient process compared to traditional methods, which often involve lengthy documentation and multiple intermediaries.

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3. Reduced Fundraising Costs

Through our experience, we’ve seen firsthand how tokenization can significantly lower fundraising costs. By eliminating brokers, underwriters, and custodians, and automating key aspects of the process, companies save on fees. Research shows that tokenizing can reduce bond issuance costs by up to 90% and fundraising expenses by up to 40%, making it a much more cost-effective option.

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4. 24/7 Fundraising & Liquidity

What we’ve noticed is that tokenized platforms allow for continuous fundraising and liquidity. Unlike traditional methods with fixed trading hours, tokenized shares are accessible 24/7. This means companies can raise funds and investors can trade their tokens at any time, offering greater flexibility and market access.

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5. Built-in Regulatory Enforcement

We’ve seen how the ability to program compliance directly into the smart contract has been a game-changer. This ensures that rules, such as investor eligibility and transfer restrictions, are automatically enforced, reducing the risk of human error or non-compliance. This built-in enforcement makes the process smoother and more secure for companies and investors alike.

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9. Automated Corporate Actions

Through our work with clients, we’ve found that automating corporate actions like dividend payments, voting rights, and cap table updates has streamlined operations. Smart contracts handle these tasks automatically, ensuring accuracy and reducing the administrative burden on companies, which can otherwise become quite complex and time-consuming.

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10. Real-time Cap Table Management

One of the major advantages we’ve seen is the use of blockchain to manage cap tables in real-time. With every transaction recorded on the blockchain, companies have an always-updated, immutable record of ownership. This eliminates the need for manual reconciliation and minimizes the risk of disputes, providing more reliable and transparent ownership management.

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11. Facilitating Secondary Market Trading

Through our experience, we’ve noticed that secondary market trading is a huge plus for both companies and investors. Although companies don’t directly manage the trading after issuance, being able to trade tokenized shares on regulated platforms gives investors an exit option and helps attract further investment. It increases liquidity and provides investors a clearer path to realizing value.

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12. Fractional Ownership

In many projects, we’ve seen that the ability to issue fractional ownership has been crucial, particularly for high-value assets or early-stage companies. By allowing smaller investment amounts, companies can raise funds from a larger number of investors, which creates flexibility and enables more people to get involved in the investment process.

Steps for Private Company Share Tokenization

We focus on helping private companies tokenize their shares using security tokens, allowing them to modernize their ownership structure. This approach enhances liquidity, simplifies shareholder management, and increases transparency. 

By leveraging blockchain technology, we help our clients reach a global investor base and optimize their equity structure. Here’s how we guide clients through the private company share tokenization process:

1. Strategic Decision and Planning

We begin by working with our clients to understand their goals for tokenization. Whether they’re looking to raise capital, increase shareholder liquidity, or modernize their equity management, we assess how tokenization can align with their objectives. Our team of experts ensures the approach is tailored to meet the unique needs of the business.

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2. Select a Blockchain Platform

We help our clients select the right blockchain platform for their tokenization needs. Whether it’s Ethereum, Polymath, or another suitable platform, we ensure it offers the scalability, security, and regulatory compliance necessary to issue and manage security tokens effectively.

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3. Legal Compliance and Structuring

Our legal team ensures that the entire tokenization process adheres to all relevant securities laws, including KYC and AML requirements. We work with our clients to structure the offering legally, often setting up a special purpose vehicle for efficient token issuance and investor management.

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4. Token Design & Smart Contract Development

Once we’ve established the legal and technical framework, we help design the security token’s attributes. This includes defining ownership rights, dividends, and any transfer restrictions. We also create custom smart contracts to automate issuance, ensure compliance, and manage token functions smoothly.

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5. Asset Valuation and Pricing

We collaborate with our clients to assess the value of their company and its assets. This process ensures that each token reflects the true value of the shares. Proper asset valuation helps determine the pricing strategy, ensuring that the tokenized shares are attractive and accessible to investors.

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6. Issuance of Tokens

With everything in place, we assist in issuing the security tokens on the chosen blockchain. The tokens represent shares in the company, and the smart contract manages their distribution to investors who pass the necessary compliance checks.

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7. Investor Onboarding and Compliance

Our team helps onboard investors by guiding them through the KYC/AML compliance process. This step ensures that only verified investors can purchase and hold tokenized shares, creating a secure and regulated environment for all parties involved.

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8. Secondary Market Listing (Optional)

If our clients wish to increase liquidity, we facilitate the listing of the tokenized shares on reputable security token exchanges or secondary markets. This step provides investors with an opportunity to trade tokens and provides liquidity for the company’s shareholders.

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9. Ongoing Reporting and Compliance Monitoring

After token issuance, we help our clients maintain transparency and compliance by setting up automated reporting systems. These systems ensure that all necessary financial updates and compliance checks are continuously met, with smart contracts handling key operations like dividend distribution.

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10. Dividend and Profit Distribution

We set up automated processes that allow our clients to distribute dividends and profits to token holders efficiently. Smart contracts handle the distribution, ensuring that payments are accurate, timely, and transparent, without the need for manual intervention.

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11. Governance and Voting Rights

For clients who wish to offer governance rights to their token holders, we implement smart contracts that enable secure, transparent voting. This feature allows token holders to participate in company decisions, with all votes and outcomes automatically recorded on the blockchain.

Cost of Tokenizing Private Company Shares Using Security Tokens

By adopting a cost-effective strategy, we help our clients tokenize their private company shares with security tokens, making the process simple, efficient, and tailored to their needs. We aim to keep costs low while ensuring high-quality results.

Phase 1: Preparation and Legal Structuring

Cost Item	Cost Range
Asset Selection and Evaluation	$0 – $2,000
Legal Due Diligence and Regulatory Compliance (Basic)	$5,000 – $15,000
Legal Due Diligence and Regulatory Compliance (Intermediate)	$15,000 – $30,000
Legal Due Diligence and Regulatory Compliance (Complex)	$30,000 – $40,000+
KYC/AML Vendor Integration (Basic)	$500 – $2,000
KYC/AML Vendor Integration (Advanced)	$2,000 – $5,000
Securities Filing Fees	Varies

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Phase 2: Technological Implementation

Cost Item	Cost Range
Blockchain Protocol Selection	$0 – $1,000
Smart Contract Development (Basic)	$2,000 – $8,000
Smart Contract Development (Intermediate)	$8,000 – $20,000
Smart Contract Audit (Basic)	$2,000 – $7,000
Smart Contract Audit (Intermediate)	$7,000 – $15,000
Issuer Wallet and Custody Solution (Self-Custody)	$100 – $500
Issuer Wallet and Custody Solution (Third-Party Custodian)	$500 – $5,000

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Phase 3: Issuance and Post-Issuance Management

Cost Item	Cost Range
Primary Offering (STO Platform Fee – Basic)	$500 – $5,000
Primary Offering (STO Platform Fee – Intermediate)	$5,000 – $15,000
Marketing and Investor Outreach (Basic)	$0 – $5,000
Establish and Maintain a Share Register	Included in platform fees
Facilitate Secondary Market Trading	$0 – $5,000
Ongoing Management and Corporate Actions (Annual/Recurring)	$2,000 – $8,000+ per year
Platform Maintenance/Subscription	$1,000 – $5,000 per year
Legal & Compliance (Annual Review)	$1,000 – $3,000 per year
Blockchain Transaction Fees (Gas Fees)	$50 – $500 per year
Custody Fees (if applicable)	0.1% – 0.5% of AUM or flat fee

This is just an estimate of the costs involved in private company share tokenization. The total estimated cost typically ranges from $10,000 to $100,000 USD, depending on the complexity and specific requirements. For a more accurate quote tailored to your needs, feel free to reach out to us for a free consultation.

Factors Affecting the Cost of Tokenizing Private Company Shares Using Security Tokens

The development cost for tokenizing private company shares is shaped by several key factors that are specific to this process, setting it apart from other types of asset tokenization. Here are the main factors that influence the cost of tokenizing private company shares using security tokens:

Existing Shareholder Agreements and Corporate Governance

Private companies typically have complex shareholder agreements with clauses like pre-emption rights, drag-along/tag-along rights, and unique voting structures. Tokenizing these shares means ensuring these agreements are accurately reflected in smart contracts, which can be a detailed and customized process.

Illiquid Nature of Underlying Asset

Private company shares are usually illiquid, and tokenization aims to address this by improving liquidity. However, the market for private security tokens is still in its early stages. Additional costs may arise from efforts to enhance liquidity, such as working with market makers or creating secondary trading platforms, which is not a typical issue for liquid assets.

Maintaining Off-Chain Legal Nexus

While the tokens are stored on a blockchain, they represent ownership of real-world company shares. This means there must be a strong legal connection between the on-chain tokens and the company’s off-chain corporate records, like the share register. This requires ongoing legal attention to ensure consistency and enforceability, adding to the overall costs.

Small Investor Base vs. Public Offerings

Private companies usually focus on a smaller group of accredited or sophisticated investors. While this makes marketing simpler, it often requires more personalized investor relations and customized legal agreements. These bespoke elements can drive up costs compared to public offerings, which tend to involve more standardized processes.

Legal Considerations for Tokenizing Private Company Shares

Private company share tokenization offers benefits like liquidity and global access but comes with significant legal and regulatory challenges. Navigating securities laws, tax implications, and investor protection regulations is crucial for compliance. Let’s understand these considerations in detail.

1. Securities Laws: Navigating Global Regulatory Frameworks

For private company share tokenization, it is critical to recognize that security tokens are often classified as securities under the law. This classification requires adherence to various regulatory frameworks, which differ by jurisdiction. Depending on the region in which the tokens are offered, issuers must ensure that their token offerings meet the corresponding legal requirements.

Key Regulatory Frameworks

Here’s a breakdown of the most important regulatory bodies and regulations across some key jurisdictions:

Jurisdiction	Regulatory Body	Key Regulations
United States	SEC (Securities and Exchange Commission)	Reg D (506c), Reg S, Reg A+, Reg CF
European Union	ESMA (European Securities and Markets Authority)	MiFID II, Prospectus Regulation
Singapore	MAS (Monetary Authority of Singapore)	Securities and Futures Act (SFA)
Switzerland	FINMA (Financial Market Supervisory Authority)	DLT Act, Banking Act

Compliance Strategies for Issuers

To navigate these regulations effectively, consider the following strategies:

• Private Placement Exemptions (Reg D, Reg S): Ideal for offerings that are restricted to accredited or qualified investors.
• Security Token Offering Prospectus: For public offerings, a comprehensive prospectus similar to an IPO filing is necessary.
• Licensed Trading Venues: Security tokens must be offered and traded on regulated platforms to ensure compliance (e.g., tZERO, INX).

Pro Tip: Always consult with a securities lawyer well-versed in blockchain and token offerings to ensure that the tokenization process is fully compliant with the applicable regulations.

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2. Tax Implications: Understanding the Impact of Tokenization

Tax considerations are an essential part of tokenizing securities. Both the issuer and investors must be aware of the potential tax liabilities that may arise throughout the lifecycle of a tokenized asset. It is important to note that different jurisdictions have varying approaches to how tokenized securities are treated for tax purposes.

Key Tax Considerations for Issuers and Investors

• Capital Gains Tax: Investors may be subject to capital gains tax when selling tokenized shares at a profit. The tax rate varies depending on the holding period and local tax laws.
• Withholding Tax: If tokenized shares offer dividends or interest payments via smart contracts, withholding tax might apply in certain jurisdictions.
• Stamp Duty or Transfer Taxes: Some regions may impose taxes on the transfer of tokenized securities, similar to traditional stock transactions.
• VAT/GST: Typically, Value Added Tax or Goods and Services Tax does not apply to the transfer of securities but should be verified locally.

Tax-Efficient Structuring Tips

• Choose the Right Jurisdiction: Selecting a jurisdiction with a favorable tax regime (such as Switzerland, Singapore, or Gibraltar) can significantly reduce the tax burden.
• Blockchain-Based Tax Reporting Tools: Tools like TokenTax and Lukka help issuers and investors track transactions, capital gains, and tax liabilities.
• Consult with Experts: It’s highly advisable to work with tax professionals who have expertise in cryptocurrency and tokenized assets to ensure tax compliance and identify opportunities for tax efficiency.

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3. Investor Protection & Disclosure Requirements

Investor protection is a cornerstone of securities regulation, and this extends to security token offerings. Regulators mandate that issuers provide comprehensive disclosures to ensure investors have a clear understanding of the risks and rights associated with their investments. This requirement aligns with traditional securities law, such as IPO filings, and helps maintain transparency in the market.

Mandatory Disclosures for Security Token Offerings

To protect investors and meet regulatory requirements, issuers must include certain key information in their offering documents:

• Company Financials: These should be audited and up-to-date if required by law.
• Risk Factors: Investors need to be informed about the risks related to the investment, such as market risk, regulatory risk, and technology-related risks.
• Token Rights: The rights associated with the tokens should be clearly outlined, including voting rights, dividends, and redemption terms.
• Lock-up Periods & Transfer Restrictions: These terms must be disclosed to prevent unauthorized transfers and protect the integrity of the offering.

KYC/AML Compliance

Security token issuers must implement KYC and AML protocols to prevent illegal activities like money laundering and fraud. This includes using identity verification platforms, such as Onfido and Jumio, to authenticate investor identities. Additionally, issuers must ensure that investors meet specific qualifications, particularly for Reg D offerings, which are restricted to accredited investors.

Smart Contract Automation: Many security token platforms use smart contracts to automate compliance tasks, such as blocking unauthorized transfers and ensuring that only accredited investors are eligible.

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4. Ensuring Full Legal Compliance

Ensuring legal compliance throughout the tokenization process is vital for avoiding potential penalties or reputational damage. The following steps are essential for maintaining compliance from start to finish:

Step 1: Engage a Securities Lawyer

A securities lawyer with expertise in blockchain law will guide you through the complex process of structuring your token offering in line with relevant securities laws.

Step 2: Partner with a Compliant Tokenization Platform

Working with reputable platforms like Securitize, Tokeny, or Polymath helps ensure that your token offering is compliant from the outset. These platforms provide regulatory-ready infrastructure, including pre-built smart contracts that help automate investor whitelisting and manage restrictions.

Step 3: File Necessary Regulatory Documents

Issuers must submit relevant forms and filings:

• SEC Form D (U.S.): For private placements, issuers must file this form with the SEC to claim an exemption from registering with the commission.
• Prospectus (EU/UK): If the token offering is public, a comprehensive prospectus must be filed with the appropriate regulatory body.

Step 4: Use Licensed Custodians & Exchanges

Tokens should be traded on regulated exchanges like tZERO or Archax, which ensure that trading complies with local regulations and provides security for investors.

How Security Tokens Enhance Liquidity & Compliance in Private Markets?

Security tokens enhance liquidity in private markets by enabling 24/7 global trading and fractional ownership, allowing broader access to investors. They also streamline compliance by automating KYC/AML checks and transaction records through smart contracts, reducing manual processes. Let’s discuss this in detail.

1. Liquidity for Traditionally Illiquid Assets

Private company shares have traditionally been among the most illiquid assets, often locked away for years with no secondary market access. Security tokens offer a solution by:

• 24/7 Global Trading on Regulated Exchanges: Unlike traditional markets with fixed hours, tokens can trade on security token exchanges (STOs) like tZERO, INX, or Archax. Blockchain technology enables round-the-clock trading, opening up access to global investors, overcoming the geographic limitations of traditional stock exchanges.
• Fractional Ownership Expands the Investor Base: Security tokens break down large equity stakes into smaller, tradable portions. For example, a $1 million share can be divided into 10,000 $100 tokens, allowing diverse investor groups to participate, including family offices, smaller accredited investors, and employee ownership plans.

For example, a startup might allow early employees to sell portions of their vested equity without waiting for an IPO. A European real estate firm tokenized a €50M property, enabling 500 investors to purchase fractions starting at €10,000, creating immediate liquidity for an otherwise stagnant asset class.

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2. Automated Compliance: The Game Changer

Security tokens simplify compliance processes, reducing the need for extensive legal teams and manual paperwork by leveraging:

• Smart Contract-Enforced Rules: Smart contracts can automatically enforce investor verification (KYC/AML checks) and restrict transfers based on lock-up periods or jurisdictional regulations. Additionally, they can handle dividend distributions, paying investors directly through programmable stablecoin payouts.
• Real-Time Audit Trails: Every transaction is immutably recorded on the blockchain, providing regulators with real-time access to verify compliance without the need for manual audits.

For example, the SEC can instantly verify that token holders meet accreditation requirements, vastly simplifying the auditing process.

Compliance Feature Comparison:

Compliance Feature	Traditional Method	Tokenized Solution
Investor Accreditation	Manual paperwork	Embedded in smart contract
Trade Settlement	2-3 days (T+2)	Instant (T+0)
Record Keeping	Spreadsheets & emails	On-chain immutable ledger

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3. Lower Costs & Faster Transactions

Tokenization reduces the costs and delays inherent in traditional private equity transactions:

• Eliminating Costly Intermediaries: Security tokens remove the need for intermediaries like transfer agents, brokers, and custodian banks. Smart contracts can handle ownership records, dividend payments, and corporate actions, significantly reducing administrative costs by up to 60-80%.
• Lightning-Fast Settlement: Traditional private share transfers often take weeks due to paperwork and approval processes. With tokenized shares, settlements happen instantly (T+0) on the blockchain.

An investor can sell tokenized shares and receive funds within minutes, compared to the weeks or months it would typically take in traditional markets.

Challenges of Tokenizing Private Company Shares Using Security Tokens

Over the years, we have assisted numerous clients in tokenizing their private company shares, and through this experience, we’ve gained deep insight into the challenges that can arise. Our approach is to address these challenges with effective solutions to ensure a smooth process for our clients and their investors.

1. Liquidity Fragmentation Across Exchanges

Unlike public stocks, which are traded on centralized exchanges such as Nasdaq, security tokens often face liquidity issues due to fragmentation across multiple trading platforms. This makes it difficult for investors to buy or sell tokens easily.

Solution:

• We recommend listing tokens on regulated security token exchanges with strong liquidity, such as Securitize Markets and Archax. 
• These platforms provide the necessary infrastructure to facilitate smooth trading. In addition, where legally permissible, we integrate AMMs to create decentralized liquidity pools. 
• To further boost investor interest, we run investor relations campaigns specifically targeted at accredited investors, increasing demand and, consequently, liquidity.

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2. Valuation & Pricing Challenges

Private company shares lack the same price discovery mechanisms as public stocks, making the process of valuing tokenized shares complex and sometimes uncertain.

Solution:

• To ensure accurate and fair valuations, we collaborate with trusted third-party valuation firms prior to tokenization. This independent valuation provides a credible basis for the token’s price. 
• Additionally, we implement oracle-based price feeds (e.g., Chainlink) to facilitate dynamic pricing of the tokens, ensuring they reflect real-time market conditions. 
• To prevent market manipulation, we structure vesting schedules and lock-ups that ensure a balanced and controlled supply of tokens in circulation.

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3. Investor Onboarding & Custody Compliance

Security tokens require verified investor identities, which can slow down the fundraising process and add complexity to compliance efforts.

Solution

• To streamline the onboarding process, we integrate KYC and AML verification services from top-tier providers like Onfido and Trulioo. This allows for fast, automated verification of investor identities. 
• For secure custody, we partner with qualified custodians such as Anchorage and Fireblocks to ensure safe storage of the security tokens. 
• We also use whitelisting smart contracts to restrict token transfers only to approved wallets, which adds an extra layer of compliance and security.

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4. Tax & Accounting Complexities

The tokenization of private company shares triggers complex tax obligations. These include capital gains tax, withholding taxes, and various reporting requirements across multiple jurisdictions, creating a challenge for both investors and issuers.

Solution:

• To simplify tax compliance, we leverage blockchain analytics tools such as TokenTax and Lukka, which provide automated tax reporting solutions. These tools help ensure accurate, up-to-date tax documentation for investors.
• Additionally, we structure tokens under favorable tax jurisdictions such as Switzerland or Singapore, which offer tax-advantaged frameworks. 
• For greater transparency, we integrate smart contracts that can generate real-time tax documentation, making it easier for investors to manage their obligations.

Conclusion

Private company share tokenization offers increased liquidity, access to global investors, and enhanced transparency, all while maintaining regulatory compliance. By turning your shares into digital assets, you open the door to fractional ownership and new funding opportunities. Our company brings the expertise, advanced technology, and legal support to ensure your tokenization journey is smooth, secure, and compliant with all necessary regulations, helping you unlock your business’s full potential.

Looking to Tokenize Private Company Shares Using Security Tokens?

At Idea Usher, we understand the challenges of illiquid shares and limited access to investors. That’s why we specialize in helping companies like yours tokenize private equity using blockchain-powered security tokens. This innovative approach opens the door to a global pool of investors, 24/7 trading opportunities, and ensures seamless compliance every step of the way, giving you the freedom and flexibility to grow your business.

Why Choose Us?

• 500,000+ Hours of Expertise – Our team of ex-FAANG/MAANG developers crafts secure, scalable tokenization solutions.
• End-to-End Compliance – From legal structuring to smart contract deployment, we ensure everything is compliant.
• Proven Results – Explore our success stories and see how we’ve transformed private equity for businesses like yours.

Transform your private shares into tradable assets—faster, smarter, and fully compliant. Let us help you take the next step!

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