Editor's note, 2026: This article was originally published in October 2022 on Medium. It has been updated here with notes on regulatory developments and a revised section on the two-token architecture based on subsequent implementation experience. The core framework remains unchanged.
I almost built this for someone else's business. In early 2022, I was working through the legal and structural groundwork for a tokenization project for a specific enterprise — running due diligence, mapping the regulatory landscape, and drafting the early framework for what a legally compliant token offering for a real-world operating business might look like. The project did not proceed. The business itself was not a good candidate for tokenization.
But the structure I had built was sound. I had developed something I did not find elsewhere in the blockchain legal literature: a framework for non-equity tokenized investment that is fully compliant with U.S. securities law, backed by the actual income of a real operating business, and accessible to a far broader investor base than traditional securities offerings permit. I called it the Enterprise Backed Dividend Token, or EBDT.
The Problem with Most Crypto Tokens
The majority of token offerings fall into one of two structural failures. First: The Utility Token Misnomer. Hundreds of projects raised capital by issuing tokens labeled "utility tokens" — instruments purportedly providing access to a product or platform rather than representing an investment. The "utility" label was designed to avoid securities regulation: if the token is not an investment, the theory goes, it is not a security, and the offering does not require SEC registration or FINRA compliance.
This theory has not held up. The Howey test — the Supreme Court's four-factor test for whether something is a security — does not care what you call the instrument. If investors purchase a token with an expectation of profit derived primarily from the efforts of others, it is a security, regardless of the utility framing. The SEC has made this clear in enforcement actions against major token issuers, and the litigation record is now extensive.
Second: Pure Speculation Tokens. Many tokens have no claim to any underlying value — they are speculative instruments whose price is driven entirely by market sentiment and social media attention. These instruments create no productive economic activity that would support a return to anyone.
What an EBDT Is
An Enterprise Backed Dividend Token is a security token. Full stop. The EBDT framework starts by accepting securities classification and building a compliant structure from there. An EBDT is: (1) a tokenized, non-equity interest in the income stream of a real-world operating enterprise; (2) compliant with applicable securities laws from the outset — SEC registration or applicable exemption, FINRA compliance, and all local filing requirements; (3) backed by actual enterprise revenue, not speculative future value; (4) dividend-paying — token holders receive payments tied to the enterprise's actual operations; and (5) blockchain-enabled to permit broader investor access, lower compliance costs, and secondary market functionality.
The investor proposition is straightforward: you hold an EBDT, the underlying enterprise generates revenue, a contractually specified portion flows to token holders as dividends. The token is not equity — holders do not vote, do not receive shares, and do not have ownership rights. It is a dividend-bearing instrument, legally analogous to preferred stock or a bond, but enabled by blockchain infrastructure.
The Two-Token Architecture
The EBDT structure requires two tokens, and understanding why is essential to understanding how it works.
Token 1: The Security Token (the EBDT itself). This is the dividend-bearing instrument. It is issued through a fully compliant securities offering — either registered with the SEC or offered under an applicable exemption (Regulation D, Regulation A+, or Regulation S for non-U.S. investors). It cannot be freely traded without restrictions. Securities law requires that transfers comply with applicable holding periods: a Reg D security token must be held for at least twelve months before resale and may only be transferred to accredited investors during that period.
Token 2: The Platform/Utility Token. This is a genuinely functional utility token — not a disguised security. Its purpose is to power the blockchain infrastructure through which dividends are distributed, secondary market transactions are recorded, and investor compliance is verified. The two-token architecture separates the investment function from the infrastructure function cleanly. This separation is not cosmetic — it serves a genuine operational purpose. The utility token, properly designed, does not bear investment characteristics and does not trigger securities classification through genuine structural design, not through legal argument.
Legal Compliance Architecture
SEC Compliance: The offering must be registered or qualify for an exemption. For most EBDT projects at launch, Regulation A+ is the most useful pathway — it allows raises of up to $75 million per twelve-month period and permits marketing to non-accredited investors. For larger offerings or institutional investor bases, Regulation D provides a faster but more restricted path. Regulation S covers non-U.S. investors.
FINRA: If the offering involves a broker-dealer in the distribution, FINRA oversight applies. Structuring the offering correctly — including which parties handle distribution and in what capacity — is essential from the outset.
California Blue Sky Laws: California has its own securities regulations under the Corporate Securities Law of 1968. Coordination between federal exemptions and California qualification requirements is non-negotiable. Getting this wrong creates liability that compounds.
KYC/AML: Blockchain does not eliminate Know Your Customer and Anti-Money Laundering obligations. They apply to the offering and to secondary market transactions. The compliance architecture must include identity verification and transaction monitoring.
Tax: Dividend payments from EBDTs are taxable income. The structure of the underlying enterprise — LLC, C-corp, partnership — affects how dividends are taxed at both the enterprise and investor level. International investors trigger withholding tax considerations. Tax counsel should be engaged alongside securities counsel from the outset.
The 2026 Regulatory Update
When I wrote the original version of this article in 2022, the regulatory environment for security tokens was unsettled in several important respects. Since then, the regulatory posture has clarified in two directions. First: increased enforcement against non-compliant offerings has made clear that the "utility token" framing is no longer a viable strategy for avoiding securities classification. Second: the SEC has shown increasing openness to properly structured security token offerings. The compliance path is more established today than it was in 2022. That is good news for EBDT projects. The bar for "properly structured" has only gotten higher.
For legal counsel on tokenization, security token offerings, or blockchain-based financial structures, Bay Legal, PC is available at BayLegal.com.
Jayson R. Elliott is a California attorney with experience in blockchain law, securities structuring, and digital asset regulation. This article does not constitute legal advice. Attorney advertising: prior results do not guarantee similar outcomes. Securities law is highly fact-specific; consult qualified legal and financial counsel before undertaking any securities offering.