Fund structuring – Issuing tokens in a fund

Private Equity Insight/Out #1 | The Mighty Crypto

by Yannick Arbaut, Counsel, Allen & Overy

Tokens will be a more advanced form of dematerialised securities, presumably even offering greater transparency and security.

Initial Coin Offerings (“ICOs”) have made recent headlines in the news, some successful ICOs raising millions in record times. This has sparked an obvious interest in the venture capital and startup sectors, but also with fund managers. Structuring a Luxembourg investment fund raising money through token sales is a tempting new opportunity; there are however a number of considerations to be taken into account and still some uncertainties.

All about securities

The principle here is for a fund to issue tokens or coins in consideration for fiat currencies (or potentially virtual currencies). “Are these tokens securities or not?” is the first question that comes to mind. When tokens are issued in the context of a fund, they will likely and should qualify as securities and should, from a legal perspective, be treated as any other security. Tokens will be a more advanced form of dematerialised securities, presumably even offering greater transparency and security. The offering is not a typical ICO but rather a token sale, to the extent that the tokens will be asset-backed and the consideration paid in exchange for the tokens will be used to make investments in accordance with the fund’s investment strategy. The resulting questions are then similar to those which other types of funds face, but with the added complexity of the distributed ledger technology and its resulting legal uncertainties (for example, regarding the register of “securities”).

What about fund rules and restrictions?

Luxembourg alternative investment funds, whether subject to regulatory supervision or not, are subject to a number of rules that apply in other sectors as well such as AML/KYC requirements, eligible investor or marketing restrictions, to name only a few. Structuring a fund issuing tokens means that some of these requirements will need to be complied with in the blockchain world. How do you identify token holders? Permissioned blockchains limiting and identifying the parties who can transact may be a solution. Cooperation between the fund’s service providers and selected regulated exchanges (who perform AML/KYC) may be another. Only pre-identified and eligible investors are granted access and can then freely acquire or sell their tokens. Regulators could even be granted full access to the blockchain resulting in greater transparency. Permissioned blockchains do not solve all issues, but the issue of anonymity can be solved to a certain extent.


Tokens may be tradable 24/7, offer security, traceability and greater transparency than typical securities. Exchanges may offer liquidity to the tokens, even for funds with rather illiquid underlying assets. A number of uncertainties remain though for which there are no clear cut solutions. Some will be solved by first movers, and others will require legal or regulatory clarifications, although EU regulators seem to have adopted a rather passive approach with messages to caution firms and investors.