The Legal and Regulatory Challenges of Tokenising Startup Equity

Is the UK the right place to do it?

The Battle for Clarity.

Tokenisation is increasingly being discussed as a new way for startups to raise capital. By representing ownership rights digitally on blockchain infrastructure, investments could potentially become easier to manage, faster to settle and more accessible to a wider pool of investors.

In our experience, for many founders however, the first questions are not technical. They are practical.

Q. Does tokenisation actually make sense for our business and what do we want to achieve?

Q. Who would be allowed to invest?

Q. What regulations apply?

Q. And is the UK the right place to structure something like this?

These questions matter because while the technology behind tokenisation may be relatively straightforward, the legal and regulatory landscape surrounding it is far more complex. Any founder considering tokenisation as part of a fundraising strategy quickly discovers that the real challenge is not building the technology. It is navigating the financial and corporate frameworks that govern investment markets.

Understanding those frameworks is the starting point.

Tokenisation does not remove existing financial law

One of the most common misconceptions in the startup ecosystem is that tokenisation creates a new financial system outside traditional regulation.

In reality, it does not.

In most jurisdictions, including the United Kingdom, if a digital token represents ownership in a company or rights to financial returns, it will generally be treated in the same way as traditional securities. The technology used to represent the asset may change, but the legal obligations surrounding that asset remain.

This means startups exploring tokenised fundraising must still consider the same regulatory areas that apply to traditional investment structures. These include securities regulation, financial promotion rules, investor eligibility requirements and corporate governance obligations.

Tokenisation may modernise the infrastructure of capital markets, but it does not replace the legal systems that underpin them.

Key regulatory considerations in the UK

The UK has one of the most established financial regulatory systems in the world. While that can create complexity for new financial structures, it also provides trust and a strong legal foundation for investment markets.

At the centre of this system sits the Financial Services and Markets Act 2000 (FSMA). Many activities connected with investment markets fall within this framework. These include arranging deals in investments, advising on investments, safeguarding client assets and operating trading venues.

If a tokenised fundraising structure involves any of these activities, the organisations facilitating them may require authorisation from the Financial Conduct Authority. For early stage tokenisation projects, this is often where the first structural challenges appear. Digital securities infrastructure frequently intersects with regulated financial services.

Financial promotion rules introduce another important consideration. In the UK, investment opportunities generally cannot be freely marketed to the public unless strict regulatory requirements are met. Instead, offers are usually directed toward professional investors, high net worth individuals or certified sophisticated investors.

This means that even if tokenisation allows investments to be technically accessible worldwide, promotion rules still limit how those opportunities can be communicated and to whom they can be offered.

Corporate law and shareholder registers

Corporate law adds a further layer of complexity. Under the Companies Act, ownership of shares in UK companies must be recorded in the company’s statutory shareholder register. This register remains the authoritative legal record of ownership.

Because of this requirement, many tokenised equity models operate using a dual structure. The blockchain token represents the economic rights or digital representation of ownership, while the official company register remains the legally binding record of shareholders.

Maintaining alignment between these two systems is essential for compliance with company law.

Custody, compliance and investor protection

Tokenised investment structures also raise questions around custody, compliance and investor protection. If tokens are stored, managed or transferred through platforms on behalf of investors, additional regulatory requirements may apply.

These can include obligations relating to safeguarding client assets, anti money laundering checks and investor disclosure rules. While these protections are designed to maintain trust in financial markets, they inevitably increase the operational complexity of digital investment platforms.

For founders, this reinforces an important reality. Tokenisation may change the infrastructure of capital markets, but the responsibility to protect investors remains unchanged.

A regulatory environment that is evolving

Despite these challenges, the UK is actively exploring how distributed ledger technologies can be integrated into financial markets.

One of the most significant initiatives is the Digital Securities Sandbox, which allows firms to test the issuance, trading and settlement of digital securities using distributed ledger technology within a controlled regulatory environment. Included alongside this, regulators continue to support financial innovation through the Innovation Pathway.

These initiatives operate to guide and allow companies developing new financial technologies to engage, with regulators while refining their business models.

Together, the programmes signal a regulatory approach that aims to encourage innovation while maintaining financial stability.

The UK’s growing legal foundation for digital assets

Recent legal developments have also strengthened the UK’s foundations for digital asset markets.

New legislation has clarified that digital assets can be recognised as property under English law and while adoption and testing of models increases, this starts to provide greater legal certainty around ownership rights and helps support the enforceability of digital asset structures.

Combined with the UK’s established legal system and deep financial markets, these developments position the country as an important jurisdiction in the development of tokenised finance.

What about other jurisdictions?

Because regulatory frameworks are still evolving, some tokenisation projects explore international jurisdictions when structuring digital investment platforms.

Countries such as Switzerland, Singapore, Liechtenstein and the United Arab Emirates have introduced dedicated frameworks for digital assets and tokenised securities. In some cases, these jurisdictions offer clearer licensing structures or more specialised digital asset legislation.

However, operating internationally introduces new challenges around cross border compliance, investor protections and legal enforceability. For many companies, the choice of jurisdiction ultimately becomes a balance between regulatory flexibility and market credibility.

Six key questions before pursuing tokenised fundraising

For founders exploring tokenisation as part of a future fundraising strategy, it can be helpful to separate two sets of questions. The first are strategic questions founders should ask themselves. The second are questions that should be discussed with legal and regulatory advisers.

Three questions founders should ask themselves

Q. Does tokenisation genuinely improve how we raise capital?

Tokenisation should address a real problem rather than simply add technological complexity. Founders should consider whether digital ownership structures offer meaningful advantages compared with traditional equity fundraising.

Q. Who are our likely investors and how will they access the opportunity?

Different categories of investors operate under different regulatory frameworks. Founders should consider whether tokenisation aligns with the type of investors they intend to attract.

Q. Could our company benefit from digital ownership structures in the long term?

Businesses that anticipate global investor communities or future secondary trading activity may benefit more from digital ownership infrastructure than those pursuing simpler capital strategies.

Three questions to ask your legal advisers

Q. How would the token be classified under financial regulation?

If a token represents shares, profit participation or investment rights, it will typically be treated as a security or investment instrument under existing law.

Q. How can the investment legally be promoted and to whom?

Financial promotion rules determine how investment opportunities can be marketed and which investors may participate.

Q. Which regulated entities or permissions are required to support the structure?

Activities such as arranging investments, operating trading venues or safeguarding investor assets may require regulatory authorisation.

A moment of transition

The broader financial system is entering a period of transition. Governments, regulators and financial institutions are increasingly exploring how digital infrastructure can modernise the way assets are issued, traded and managed.

For startups, this shift may eventually create new pathways to capital. Tokenisation has the potential to improve transparency, efficiency and accessibility within private markets. But its success will ultimately depend not just on technological innovation, but on how effectively it integrates with the legal and regulatory systems that underpin global finance.

For founders exploring these possibilities, the most valuable starting point is not the technology itself. It is understanding the structures, rules and partnerships required to make tokenised investment work responsibly within modern capital markets.

Disclaimer:

This article is provided for general information only and does not constitute legal, financial or investment advice. The regulatory treatment of tokenised assets and digital securities varies by jurisdiction and continues to evolve. Readers should seek independent professional advice before making any financial, legal or regulatory decisions.