How to Launch a Compliant Tokenized Real Estate Fund: A Cross-Border Blueprint
Tokenization promises practical advantages for real‑estate sponsors and investors: fractional participation, operational efficiency, and the possibility of controlled secondary liquidity. Those benefits only endure if the legal architecture is sound. This article outlines a conservative, cross‑border structure we see work in practice when implemented with discipline. It is presented as an anonymized, composite case study.
What tokenized equity means in law
In this context, a “security token” is simply the digital representation of a conventional security, either shares in an offshore fund portfolio or units in a U.S. feeder LLC. The token does not replace governing documents; it inherits them. Your Articles, Operating Agreement, and Subscription Agreements define rights and restrictions. The smart contract then reinforces those rules by allowing transfers only when the legal conditions are satisfied.
In practice, investors complete identity, residency, sanctions, and (for U.S. sales) accredited‑investor checks off‑chain. The platform approves wallets that pass those checks and places them on an on‑chain whitelist. Tokens move only between approved wallets, and attempts to transfer to unapproved addresses fail by design. This pairing, paper first, code second, turns policy into a control system and keeps the securities character of the instrument front and center.
The fund maintains traditional records even as it embraces digital rails. The offshore company’s official register of members remains the legal source of truth, and the U.S. feeder’s LLC ledger continues to govern ownership and transfers. Governing documents can acknowledge tokenized representation of interests, but they also make clear that investors hold a fund security, not a direct interest in the underlying property‑holding vehicles. That distinction preserves corporate formalities and reduces confusion about what tokenholders own.
A conservative entity architecture
A resilient architecture typically rests on an offshore master fund with ring‑fenced portfolios, a U.S. feeder for accredited domestic investors, and local special‑purpose entities for asset‑level isolation. Sponsors often select a British Virgin Islands Segregated Portfolio Company as the master because it can hold multiple segregated portfolios beneath one corporate umbrella. Each portfolio carries its own assets and liabilities, which reduces cross‑contagion and supports clean reporting as assets are acquired or sold. The structure helps investors focus on the exposures they intend to take while insulating the rest of the platform from a property‑specific issue.
Labeling matters in the BVI. If the fund does not offer investor redemptions on demand and operates on a closed‑ended basis, recognition as a Private Investment Fund (PIF) is the likely path. If the strategy is open‑ended, you would instead analyze the Private or Professional Fund regimes under SIBA. Either way, plan for a governance cadence investors recognize: appropriate board composition, an administrator or custodian, audits, and policies around valuation and safekeeping. These disciplines are not ornamental; they are core to investor protection and regulatory oversight.
A Delaware LLC commonly serves as the U.S. feeder. It aggregates accredited U.S. investors, invests into the offshore master, and is typically treated as a pass‑through for U.S. tax purposes unless otherwise elected. The feeder keeps domestic investors in a familiar wrapper, allows tailored U.S. disclosures, and helps ensure the offshore offering remains offshore. The white paper you provided also contemplates drafting choices that mitigate adverse tax classifications for U.S. investors; the conservative approach is to frame those effects as design‑dependent and coordinate them with tax counsel.
Each property sits in a local SPV organized in the jurisdiction where the asset is located. This adds a layer of liability insulation and simplifies title, financing, and eventual exit. Legal ring‑fencing at the asset level complements the statutory segregation inside the SPC, which in turn supports clearer reporting and cleaner disposals.
Raising capital lawfully - parallel lanes with no bleed
To reach both U.S. and non‑U.S. investors without a public registration, sponsors often run two offerings in parallel and keep them fully separated. In the United States, Rule 506(c) of Regulation D allows general solicitation if every purchaser is accredited and the issuer takes reasonable steps to verify status. Interests remain “restricted securities,” and the subscription documents should make those restrictions plain. Conservatively drafted smart contracts backstop the paperwork by refusing transfers to wallets that have not been verified as meeting the same eligibility criteria.
Offshore, Regulation S provides a safe harbor for offers and sales made outside the United States to non‑U.S. persons, with no directed selling efforts into the U.S. For equity of a domestic, non‑reporting issuer, a distribution‑compliance period typically runs for one year, during which resales to U.S. persons are prohibited absent registration or another exemption. Offer documents carry legends and investor representations that track these limits; the token logic mirrors them so that attempted transfers inconsistent with the restrictions do not execute. This is a straightforward way to align legal obligations and system behavior.
The modern integration framework expects clear separation. In practice that means distinct investor paths, geo‑fenced offshore marketing, and a firm rule that U.S. investors cannot subscribe directly to the offshore tranche and non‑U.S. investors do not enter through the U.S. feeder.
The white paper describes that separation and treats cross‑border publicity with care to avoid conditioning the U.S. market. Local law still applies in each non‑U.S. jurisdiction where you market, so the plan should include local private‑offering thresholds, any notice filings, and platform requirements.
Onboarding and operational controls that stand up in diligence
A conservative program does not cut corners on onboarding. Investors complete a subscription and KYC process that verifies identity, residency, and, where applicable, accredited status. Sanctions, politically exposed persons (PEPs), and adverse‑media checks run before admission. PEP status does not mean the person is sanctioned or barred from doing business. It means they present higher corruption/bribery risk, so you apply enhanced due diligence (EDD): verify identity carefully, obtain and assess source of funds and source of wealth, run adverse-media checks, document senior-management approval for onboarding, and monitor more closely on an ongoing basis. Firms typically continue to treat individuals as PEPs for a period after they leave office (commonly 12–18 months, sometimes longer), using a risk-based judgment.
Only after the investor passes these controls does the platform whitelist the investor’s wallet address, enabling the token delivery. If circumstances change. for example, a sanctions list update, the platform can suspend or remove the wallet from the whitelist while the issue is resolved. The process is technology‑assisted but policy‑driven, and it reserves space for manual review in edge cases.
Compliance continues after admission. The U.S. feeder provides the expected U.S. tax reporting to domestic investors. The BVI vehicle follows its filing and audit obligations and, as a cross‑border entity, participates in FATCA and CRS reporting through the administrator. Subscription documents explain all transfer restrictions in plain language and secure investor acknowledgments. The smart contract serves as a first‑line control; the legal review of any secondary transfer remains the last word.
The Investment Company Act and the Advisers Act - decide early and encode the decision
In the United States, private funds typically avoid registration under the Investment Company Act by relying on Section 3(c)(1) or 3(c)(7). The former caps U.S. beneficial owners; the latter limits the investor universe to qualified purchasers. Counting rules and potential look‑through can apply when entities invest through entities, so the operating documents and the platform should include hard stops that prevent admissions or transfers that would push the fund over a threshold. Maintaining a real‑time count, and embedding it into the transfer logic, keeps structure and code aligned.
If the manager gives investment advice for compensation, analyze registration under the Investment Advisers Act or an available exemption, such as the private fund adviser exemption with Exempt Reporting Adviser filings, or the foreign private adviser route. Make that decision before you publish marketing materials, because it influences fee terms, disclosures, and the way you describe the program to the market. The white paper’s framework anticipates this analysis and integrates it with the entity design.
Tax: design for clarity rather than assumptions
The BVI offers tax neutrality at the fund‑entity level for non‑BVI‑source income, which helps avoid an extra layer of tax leakage for cross‑border programs. U.S. investors often prefer a domestic feeder treated as a pass‑through unless otherwise elected, because it simplifies reporting on their side. That said, one point merits care: using a U.S. LLC feeder does not, by itself, eliminate the possibility of passive foreign investment company (PFIC) exposure for U.S. investors if the offshore master is a foreign corporation that would be a PFIC. Mitigation depends on the master’s classification and elections, the potential use of a U.S. corporate blocker in some designs, or investor‑level elections, each with tradeoffs. Coordination with U.S. tax counsel belongs in the first mile of the project plan, not the last.
Secondary liquidity: stage it, control it, and keep the gates
Liquidity can be a feature, not a promise. During the relevant distribution‑compliance period and any contractual lock‑ups, secondary transfers are either prohibited or permitted only within a narrow, compliant lane. After those periods, offshore holders may access non‑U.S. venues subject to local law and platform rules. Resales to U.S. persons still require registration or an exemption such as Rule 144 or Rule 144A, and any U.S. marketplace activity must occur through appropriately registered intermediaries. The whitelist remains in force, the buyer undergoes the same checks as a primary purchaser, and counsel can require representations or opinions before the contract permits the transfer. This is how you open a controlled path to liquidity while preserving the private‑offering posture.
Common failure modes and how this design addresses them
Integration risk appears when offshore marketing conditions the U.S. market or when investor paths blur. The separation described here, U.S. investors through the U.S. feeder only, non‑U.S. through the offshore tranche only, careful handling of publicity, reduces that risk and aligns with current integration principles. Another recurring issue involves counting U.S. beneficial owners under Section 3(c)(1). The program addresses it by tracking owner counts continuously and preventing any transfer that would breach the threshold. A third involves whitelisting discipline. The structure treats “no whitelist, no mint, no transfer” as a first principle rather than a patch after launch. Finally, property‑level liabilities should not ripple through the platform; local SPVs and the SPC’s segregated portfolios limit the blast radius of a single asset problem. These are conservative controls, and they are deliberate.
Bringing it together
Tokenization does not sidestep the law. It encodes it. A conservative structure begins with clear entity choices and offering paths, continues with disciplined onboarding and transfer controls, and evolves into a controlled approach to liquidity. Documents define the rights; systems enforce the rules; operations keep records current and investors informed. When you design the legal architecture before you publish a deck or deploy code, the rest of the program, filings, onboarding, monitoring, secondary flow, and audits, falls into place.
If you are evaluating a tokenized real‑estate vehicle, take the time to align entity form, offering exemptions, investor eligibility, and transfer mechanics. That alignment reduces regulatory friction, improves diligence outcomes, and gives investors a clear story about how the instrument works. The result is not only compliant; it is durable.
If you would like help designing a tokenized fund that fits your assets, your investors, and your jurisdictions, De Silva Law Offices can assist with entity structuring, offering exemptions, on‑chain guardrails, and investor onboarding, end to end. Engaged clients receive a tailored Tokenized Fund Legal Readiness Checklist as part of our structuring work.
Important disclaimers: This article is general information, not legal or tax advice, and may be considered Attorney Advertising. Reading it or contacting us does not create an attorney–client relationship. Outcomes depend on specific facts and jurisdictions.
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Sources:
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