Is Tokenized Real Estate a Security? US Regulations Explained

Real estate tokens are almost always classified as securities under US law. This guide explains the regulatory framework governing tokenized real estate offerings in the United States and why most tokenized real estate offerings are treated as securities.

The Howey Test

The US Supreme Court's 1946 Howey decision established the test for determining whether something is a security:

An investment is a security if it involves:

1. An investment of money
2. In a common enterprise
3. With an expectation of profits
4. Derived from the efforts of others

Real estate tokens typically meet all four criteria, making them securities subject to SEC regulation.

Securities Act Requirements

Under the Securities Act of 1933, securities must either be:

1. Registered with the SEC - A full registration (like an IPO) with extensive disclosure requirements
2. Exempt from registration - Qualify under one of several exemptions

Most tokenized real estate offerings use exemptions due to the cost and complexity of full registration.

Common Exemptions

Regulation D

The most commonly used exemptions for tokenized real estate.

Rule 506(b)

• Unlimited capital raise
• Up to 35 non-accredited investors (with sophisticated knowledge)
• No general solicitation or advertising allowed
• Accredited investors only if using general solicitation

Rule 506(c)

• Unlimited capital raise
• Accredited investors only (must be verified)
• General solicitation and advertising permitted
• Verification of accredited status required (not self-certification)

Key Requirements:

• Form D filing with SEC within 15 days of first sale
• State blue sky notice filings
• Appropriate investor disclosures

Regulation A+ (Tier 2)

A "mini-IPO" that allows offerings to both accredited and non-accredited investors.

Tier 2 Features:

• Raise up to $75 million per year
• Open to all investors (with investment limits for non-accredited)
• SEC qualification required (Form 1-A)
• Ongoing reporting requirements
• State registration preempted

Investment Limits (Non-Accredited):

• Greater of 10% of annual income or net worth

Ongoing Requirements:

• Annual reports (Form 1-K)
• Semi-annual reports (Form 1-SA)
• Current event reports (Form 1-U)

Regulation CF (Crowdfunding)

For smaller offerings through registered crowdfunding platforms.

Key Features:

• Raise up to $5 million per year
• Must use registered funding portal or broker-dealer
• Open to all investors (with investment limits)
• Form C filing required
• Annual reports required

Investment Limits (Non-Accredited Investors): Based on annual income and net worth:

• If either income OR net worth is less than $124,000: Greater of $2,200 or 5% of the lesser of income/net worth
• If both income AND net worth are $124,000 or more: 10% of the greater of income/net worth (max $124,000 per year)

Regulation S

For offerings made outside the United States to non-US persons.

Requirements:

• No directed selling efforts in the US
• Offers and sales made outside the US
• Restrictions on flowback to US markets
• Often combined with Reg D for US and non-US investors

Distribution Compliance Period:

• Category 1 (non-US issuers, no US market interest): No required holding period
• Category 2 (reporting foreign issuers): 40-day distribution compliance period
• Category 3 (US issuers, non-reporting): 1-year distribution compliance period for equity securities
• During this period, offers and sales can only be made to non-US persons offshore
• Hedging transactions involving US securities are prohibited during the compliance period

Accredited Investor Qualifications

To qualify as an accredited investor (individuals):

Income Test:

• $200,000 individual income in each of the past two years, expecting the same in current year, OR
• $300,000 joint income with spouse in each of the past two years

Net Worth Test:

• $1 million net worth (excluding primary residence)

Professional Certifications:

• Series 7, 65, or 82 license holders

Knowledgeable Employees:

• Employees of private funds investing in that fund

Broker-Dealer Requirements

Platforms that facilitate securities transactions must either:

• Register as a broker-dealer with the SEC and FINRA
• Partner with a registered broker-dealer
• Operate as a funding portal (Reg CF only)

Broker-dealers have obligations including:

• Suitability requirements
• Best execution
• Anti-money laundering compliance
• Record-keeping
• Capital requirements

Transfer Agent Requirements

A transfer agent maintains records of security ownership and processes transfers. For tokenized securities:

• Transfer agents must register with the SEC
• Digital transfer agents specialize in blockchain-based securities
• They maintain the "golden record" of ownership
• Required for compliance with transfer restrictions

Rule 144: Resale Restrictions

Important for Investors: Rule 144 restrictions significantly impact your ability to sell tokenized real estate investments. Most tokenized offerings have mandatory holding periods during which you cannot sell your tokens, even if the platform offers a secondary market.

Rule 144 governs the resale of restricted and control securities. For tokenized real estate, this is critical for understanding when and how investors can sell their tokens.

Holding Period Requirements:

• Securities acquired in Reg D offerings: 6-month or 12-month holding period before resale
• If the issuer is a reporting company (files with SEC): 6-month holding period
• If the issuer is not a reporting company: 12-month holding period

Conditions for Resale Under Rule 144:

• Adequate current public information about the issuer must be available
• For affiliates: Volume limitations apply (1% of outstanding shares or average weekly trading volume)
• Manner of sale requirements for equity securities
• Filing of Form 144 if sale exceeds 5,000 shares or $50,000

Implications for Tokenized Securities:

• Most Reg D tokenized offerings require a 12-month hold (non-reporting issuers)
• Smart contracts often enforce these restrictions automatically via whitelists
• Secondary market access is typically restricted during the holding period
• Even after the holding period, resale may be limited to other qualified investors

Important Note: Rule 144 provides a "safe harbor" for resales but does not require its use. Consult securities counsel for specific situations.

Secondary Trading

Trading of tokenized securities is heavily regulated:

Alternative Trading Systems (ATS)

• Registered with the SEC
• Operated by registered broker-dealers
• Must file Form ATS
• Subject to SEC and FINRA oversight

Compliance Requirements:

• Ongoing KYC/AML verification
• Transfer restriction enforcement
• Reporting obligations
• Investor eligibility verification

State Securities Laws (Blue Sky)

In addition to federal requirements:

• Preemption: Rule 506 and Reg A+ Tier 2 offerings preempt state registration
• Notice Filings: Many states still require notice filings and fees
• Reg CF: State requirements vary

Anti-Money Laundering (AML)

Platforms must comply with AML requirements:

• Bank Secrecy Act compliance
• Customer Identification Program (CIP)
• Suspicious Activity Reports (SARs)
• Currency Transaction Reports (CTRs)
• OFAC sanctions screening

Recent Developments

The regulatory landscape continues to evolve:

• SEC enforcement actions against unregistered offerings
• Guidance on digital asset securities
• Proposals for updated accreditation standards
• ATS modernization discussions
• State-level regulatory initiatives

Compliance Best Practices

For investors:

• Verify platform registration status
• Confirm offering exemption compliance
• Understand your investor qualification
• Review all offering documents
• Maintain records of investments

For issuers:

• Engage qualified securities counsel
• Choose appropriate exemption
• Implement robust KYC/AML procedures
• Maintain proper documentation
• File required regulatory forms
• Provide ongoing disclosures

Key Takeaways

• Real estate tokens are securities subject to SEC regulation
• Most offerings use exemptions like Reg D, Reg A+, or Reg CF
• Accredited investor status opens more investment opportunities
• Secondary trading requires proper licensing and compliance
• State laws may impose additional requirements
• The regulatory framework continues to evolve
• Always verify platform and offering compliance before investing