Kayrouz & Associates advises sponsors and issuers on tokenisation documentation, governance frameworks, and investor rights structuring across UAE jurisdictions.
TLDR
- Token holder rights must be explicitly documented; there are no default statutory protections as there are for shareholders
- Distribution waterfalls should specify priority, timing, calculation methodology, and dispute resolution for allocation questions
- Ongoing disclosure obligations (reporting cadence, financial statements, material events) should match investor expectations and regulatory requirements
- Transfer restrictions, whitelisting, and AML protocols are both regulatory requirements and practical necessities
- Documentation typically includes subscription agreements, token terms, SPV constitution, disclosure memorandum, and platform/custody arrangements
Why Governance Documentation Matters More for Tokens
Shareholders in a company have statutory rights. Company law provides default protections: rights to financial statements, rights to vote on fundamental matters, minority oppression remedies, and so on.
Token holders do not have these protections unless they are explicitly granted.
A token is a contractual instrument. The rights attached to it are only the rights set out in the documentation. If the documents do not grant a right, the token holder does not have it.
This places significant responsibility on sponsors to design a rights framework that is:
- Fair and appropriate for the investment being offered
- Clear enough that investors understand what they are buying
- Enforceable in practice, not just on paper
- Compliant with regulatory requirements
Poor documentation creates disputes, regulatory issues, and reputational damage. Good documentation creates a foundation for successful capital raising and ongoing investor relations.
Token Holder Rights: What to Include
The rights attached to tokens vary depending on the structure, but most tokenised investment offerings address the following categories.
Economic rights
The core right: what share of economic value does the token holder receive?
This must specify:
- What revenues or proceeds are subject to distribution
- How distributions are calculated
- When distributions occur (frequency, triggers)
- Priority of distributions if there are multiple classes
Information rights
Token holders should receive periodic information about the project. Common provisions include:
- Quarterly or annual financial reports
- Notification of material events (disposals, refinancing, litigation, regulatory changes)
- Access to audited accounts (if applicable)
- Updates on project performance metrics
Transfer rights
Can token holders sell or transfer their tokens? Most structures permit transfer, subject to:
- Compliance with securities law transfer restrictions
- AML/KYC verification of the transferee
- Whitelist requirements (the transferee must be approved before transfer is processed)
- Right of first refusal or tag-along rights (less common but possible)
Governance and voting rights
Some structures grant token holders voting rights on specified matters. These might include:
- Approval of material asset disposals
- Changes to fee structures
- Amendments to waterfall mechanics
- Appointment of key service providers
Many structures grant no voting rights at all. This is a design choice, but it should be explicit.
Exit and redemption rights
How does a token holder exit the investment? Options include:
- Sale on a secondary market (if one exists)
- Periodic redemption windows (less common for project-linked tokens)
- Exit upon a liquidity event (sale of project, IPO of sponsor)
- Put options in specified circumstances
If tokens are illiquid and exit depends on sponsor discretion, investors need to understand this clearly.
Distribution Waterfalls
The waterfall specifies how cash flows from the project are distributed among participants. This is one of the most important parts of the documentation and one of the most common sources of disputes.
Typical waterfall structure
- Operating expenses and reserves
- Debt service (if the SPV has borrowed)
- Management fees and carried interest
- Preferred return to investors (if applicable)
- Return of investor capital
- Profit share between sponsor and investors
Key drafting considerations
Definitions matter. What counts as "net revenue"? Are unrealised gains included? How are expenses allocated? Ambiguity creates disputes.
Timing. When are distributions calculated and paid? Monthly, quarterly, annually? On a liquidity event only?
True-up mechanisms. If distributions are made based on estimates, how are reconciliations handled?
Reserves. Can the sponsor retain funds for reserves? How much discretion do they have?
Multiple classes. If there are different token classes (senior, junior, convertible), the priority and intercreditor mechanics must be clear.
Disclosure Requirements
Token issuers have disclosure obligations at two stages: at the time of offering and on an ongoing basis.
Offering disclosure
For regulated offerings (security tokens under DFSA, ADGM, or VARA frameworks), disclosure requirements are prescribed by the relevant rules. Even for exempt offerings, issuers typically prepare:
- Private placement memorandum or information memorandum
- Description of the project, sponsor, and structure
- Risk factors
- Financial projections (with appropriate caveats)
- Summary of token terms and rights
- Conflicts of interest disclosure
- Fee disclosure
Ongoing disclosure
Once tokens are issued, investors expect ongoing information. Regulatory requirements vary, but good practice includes:
- Annual audited financial statements of the SPV
- Quarterly management updates
- Notification of material events within a specified timeframe
- Performance reports against projections
The disclosure cadence and content should be specified in the documentation so investors know what to expect.
Transfer Restrictions and AML Controls
Tokenised securities are not freely tradeable. Transfer restrictions exist for both regulatory and practical reasons.
Securities law restrictions
Securities laws impose holding periods and transfer restrictions. For example, securities sold under certain US exemptions cannot be resold for specified periods without registration. Similar principles apply in other jurisdictions.
AML and KYC requirements
UAE regulations require licensed virtual asset service providers to implement AML controls. For token issuers, this means:
- KYC verification of all initial subscribers
- Ongoing monitoring for sanctions and adverse media
- KYC verification of transferees before transfers are processed
- Suspicious transaction reporting
For more on AML requirements, see our article on AML compliance for UAE and DIFC fintech.
Whitelisting
Most tokenised security structures use whitelists: only approved wallet addresses can hold the tokens. Transfers to non-whitelisted addresses are blocked by the smart contract.
This creates a practical workflow:
- Potential transferee applies to be added to whitelist
- Issuer or transfer agent conducts KYC
- If approved, transferee's wallet is whitelisted
- Transfer can proceed
This process adds friction but is necessary for compliance. The documentation should specify how whitelisting works, how long it takes, and what happens if approval is refused.
Dispute Resolution and Enforcement
How are disputes between token holders and the issuer resolved?
Governing law
The documentation should specify governing law. Common choices for UAE structures include:
- DIFC law (for DIFC-incorporated SPVs)
- ADGM law (for ADGM-incorporated SPVs)
- English law (familiar to international investors)
- UAE federal law (less common for sophisticated structures)
Dispute resolution mechanism
Options include:
- DIFC Courts
- ADGM Courts
- Arbitration (DIAC, LCIA, ICC, DIFC-LCIA)
- Dubai Courts (less common for international investors)
The choice depends on investor expectations, enforceability considerations, and cost.
Enforcement practicalities
Token holders have contractual claims. Enforcing those claims requires:
- Clear documentation of the breach
- Access to a competent forum
- Ability to enforce judgments or awards against SPV assets
The SPV should have sufficient assets or recourse to make claims meaningful. A shell SPV with no assets is not a useful target for claims.
Smart Contracts and Legal Documentation
A common misunderstanding: smart contracts replace legal documentation.
They do not.
Smart contracts can automate certain functions: distributions, transfer restrictions, voting mechanics. But they cannot:
- Create legal obligations (the legal contract does that)
- Resolve ambiguities or disputes
- Adapt to unforeseen circumstances
- Override regulatory requirements
The correct approach is:
- Legal documentation defines the rights and obligations
- Smart contracts implement specified functions
- The legal documentation governs if there is a conflict
- Override mechanisms exist for errors or regulatory requirements
Documentation should specify the relationship between smart contract code and legal terms, and who has authority to modify smart contracts if necessary.
Feasibility Checklist
Before finalising documentation for a tokenised offering, sponsors should confirm:
- Token holder rights are clearly defined (economic, information, transfer, governance, exit)
- Distribution waterfall is unambiguous (priority, timing, calculation, reserves)
- Offering disclosure is compliant with applicable regulatory requirements
- Ongoing disclosure obligations are specified (frequency, content, format)
- Transfer restrictions comply with securities laws in relevant jurisdictions
- AML controls are implemented (KYC, whitelisting, monitoring)
- Governing law and dispute resolution are specified
- Smart contract relationship to legal terms is documented
- Override and amendment mechanisms are in place
- Service provider arrangements (platform, custody, transfer agent) are documented
Common Pitfalls
Ambiguous economic definitions
"Net revenue" or "distributable cash" must be precisely defined. Sponsors and investors often have different assumptions about what these terms mean.
No mechanism for governance updates
Projects evolve. Documentation should include amendment mechanisms for operational matters, while protecting investors on fundamental terms.
Over-reliance on smart contracts
Automating distributions does not eliminate the need for governance. What happens when inputs are wrong? When the smart contract has a bug? When circumstances change?
Insufficient disclosure
Investors in tokenised assets have high expectations for transparency. Meeting those expectations builds trust; failing to meet them creates problems.
Ignoring secondary market realities
If tokens are intended to trade, the documentation must accommodate trading: transfer mechanics, price discovery, regulatory requirements for trading venues.
Underestimating enforcement complexity
A claim against a BVI SPV holding a UAE asset, with investors in multiple jurisdictions, is not simple to enforce. Structure should consider practical enforceability.
What We Typically Scope
Documentation engagements for tokenised offerings typically include:
Core transaction documents
- Token subscription agreement
- Token terms and conditions
- SPV constitutional documents (articles, shareholder agreements)
- Management and services agreements
Disclosure documents
- Private placement memorandum / offering memorandum
- Risk factors and investor disclosures
- Summary term sheet
Operational documents
- AML/KYC procedures
- Whitelist management protocols
- Distribution calculation and payment procedures
- Reporting templates and cadence
Platform and custody
- Tokenisation platform agreement
- Custody arrangements
- Smart contract specification and audit requirements
Scope depends on the complexity of the structure, regulatory requirements, and investor base. We provide fixed-fee estimates for defined documentation packages.
Book a Consultation
If you are preparing documentation for a tokenised offering and need support on governance design, investor rights structuring, or disclosure requirements, contact our corporate team.
We advise sponsors, issuers, and platforms on tokenisation documentation across DIFC, ADGM, and Dubai mainland.
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