Tokenized Fund Structures Under SEC Investment Company Rules

Tokenized fund structures — investment vehicles that issue blockchain-based security tokens representing fund interests rather than traditional paper-based limited partnership or LLC membership interests — face a layered regulatory framework under the Investment Company Act of 1940, the Investment Advisers Act of 1940, and the Securities Act of 1933. As of Q1 2026, tokenized fund products represent approximately 25% of all security token ATS trading volume, with BlackRock’s BUIDL fund ($1.87 billion AUM in tokenized money market fund shares on Ethereum via Securitize, commanding 45% of the tokenized treasuries market according to RWA.xyz) demonstrating that institutional-scale fund tokenization is viable within the existing regulatory framework. The broader RWA on-chain market reached $19.4 billion in early 2026, with tokenized treasuries totaling $7.4 billion and private credit representing 61% of tokenized assets.

Investment Company Act Framework

The Investment Company Act of 1940 regulates any entity that pools investor capital and invests primarily in securities. Fund vehicles that issue security tokens must either register as investment companies under the 1940 Act or qualify for an exclusion. The choice determines the fund’s operational flexibility, investor access, regulatory burden, and tokenization options.

Section 3(c)(1) — The 100-Investor Fund

The most common exclusion for tokenized private funds. Section 3(c)(1) excludes from investment company registration any issuer whose outstanding securities are beneficially owned by no more than 100 persons and that does not make (or propose to make) a public offering.

Token holder counting. Each wallet address holding fund tokens counts as one beneficial owner unless the wallet belongs to a “knowledgeable employee” of the fund manager or is held through a look-through entity (in which case each underlying investor counts). Smart contracts using ERC-1400 or similar standards can enforce the 100-holder cap at the protocol level, rejecting transfers that would breach the limit.

No public offering. The prohibition on public offerings aligns naturally with Reg D 506(b) (no general solicitation) and Reg D 506(c) (general solicitation permitted to accredited investors only). Token issuances under 3(c)(1) typically use Reg D as the Securities Act exemption.

Section 3(c)(7) — The Qualified Purchaser Fund

Section 3(c)(7) excludes issuers whose outstanding securities are owned exclusively by “qualified purchasers” — generally individuals with $5 million+ in investments or entities with $25 million+ in investments. There is no investor count limit.

Tokenization advantage. The absence of an investor count cap means 3(c)(7) funds can tokenize with fractional ownership accessible to an unlimited number of qualified purchasers, enabling broader secondary market participation. Smart contract-enforced transfer restrictions verify qualified purchaser status for each buyer through integration with the fund’s transfer agent records and identity verification infrastructure.

Higher investor threshold. The qualified purchaser standard is significantly higher than the accredited investor standard, limiting the eligible investor pool. However, for institutional fund products (private equity, venture capital, real assets) where the target investor already exceeds qualified purchaser thresholds, 3(c)(7) offers maximum flexibility.

Registered Investment Companies

Registered investment companies — mutual funds, closed-end funds, ETFs — can theoretically tokenize their shares, offering blockchain-based record-keeping and T+0 settlement for fund interests that currently settle on a T+1 basis through the NSCC.

BlackRock’s BUIDL fund, launched in March 2024 on Ethereum through Securitize, represents the highest-profile example of institutional fund tokenization. BUIDL operates as a tokenized money market fund investing in U.S. Treasury bills, offering institutional investors on-chain yield exposure with daily accrual and real-time transferability among whitelisted participants.

The SEC has not prohibited registered fund tokenization but has also not provided specific guidance on how blockchain-based share record-keeping interacts with the 1940 Act’s requirements for transfer agent registration, shareholder voting, and prospectus delivery.

Investment Adviser Registration

Fund managers operating tokenized funds must evaluate whether they are required to register as investment advisers under the Investment Advisers Act of 1940.

Regulatory assets under management (RAUM). Advisers managing $150 million+ in RAUM must register with the SEC. Advisers managing $25-$150 million generally register with their home state. The value of tokenized fund assets counts toward RAUM calculations — a fund manager with $100 million in tokenized fund interests and $60 million in traditional fund interests exceeds the SEC registration threshold.

Custody rule implications. Registered investment advisers are subject to Rule 206(4)-2, which requires client assets to be held by a qualified custodian. For tokenized fund interests, the qualified custodian must be able to custody the digital asset securities — either through traditional qualified custodian arrangements, special purpose broker-dealer custody, or integrated transfer agent models.

SAB 121 impact. Fund advisers that also serve as custodians of tokenized fund interests (a common arrangement for smaller fund managers) must account for custodied crypto-assets on their balance sheets under SAB 121, potentially triggering capital adequacy concerns.

Securities Act Compliance for Token Issuance

The issuance of tokenized fund interests constitutes a securities offering that must be registered under Section 5 of the Securities Act or qualify for an exemption.

Republic has facilitated multiple tokenized fund offerings under Reg A+ Tier 2, enabling retail investor access to fund interests that would otherwise be available only to accredited or qualified purchasers. The tradeoff is the SEC qualification process (3-9 months via Form 1-A) and ongoing reporting obligations.

Smart Contract Architecture for Tokenized Funds

Tokenized fund structures require smart contracts that implement fund-specific logic beyond basic transfer restrictions:

NAV-based pricing. Fund token transfers on the secondary market should reference the fund’s net asset value. Some implementations embed NAV oracles into the smart contract, enabling automated price discovery that prevents trades at material deviations from NAV. Others rely on ATS platform order books for price discovery, with NAV published periodically by the fund administrator.

Distribution automation. Fund distributions (income, capital gains, return of capital) can be executed through smart contract functions that automatically transfer stablecoin payments to token holders’ wallets proportional to their holdings. This eliminates the manual distribution process — identifying holders, calculating entitlements, initiating wire transfers — that creates operational burden for traditional fund administrators.

Redemption windows. Closed-end tokenized funds can implement programmable redemption windows through smart contracts, automatically enabling and disabling redemption functions based on predetermined schedules. This enforces fund liquidity management policies at the protocol level.

Capital call management. For draw-down fund structures (private equity, venture capital), smart contracts can manage capital call mechanics — notifying token holders of capital call obligations, tracking unfunded commitments, and enforcing default provisions for investors who fail to meet capital calls.

Regulatory Developments

The SEC’s approach to tokenized fund products is evolving rapidly. The Division of Investment Management issued a request for comment in late 2024 on the use of blockchain technology in fund operations, signaling potential rulemaking that could address: blockchain-based shareholder record-keeping, smart contract-automated compliance functions, T+0 settlement for fund interests, and the interplay between on-chain fund token records and traditional transfer agent obligations.

The FIT21 Act, if enacted, could further clarify the regulatory framework for tokenized investment products by establishing clear jurisdictional boundaries between the SEC and CFTC for fund vehicles holding both securities and commodities tokens.

Institutional Adoption Trajectory

The rapid growth of institutional tokenized funds — led by BlackRock’s BUIDL fund reaching $1.87 billion AUM by early 2026, tokenized by Securitize with institutional partners including Apollo, Hamilton Lane, KKR, VanEck, Morgan Stanley, ARK Invest, and BNY — has validated the regulatory and technical viability of tokenized fund structures. Securitize itself surpassed $4 billion in total tokenized AUM and announced a SPAC merger at a $1.25 billion valuation to go public, becoming the only platform with dual U.S. and EU digital securities licenses. Franklin Templeton’s BENJI fund (tokenized on Stellar and Polygon), WisdomTree’s tokenized funds, and Hamilton Lane’s tokenized private equity offerings have followed, creating a critical mass of institutional-grade tokenized products.

These institutional entries bring market-making capabilities, custody infrastructure investment, and secondary market liquidity that smaller tokenized funds cannot generate independently. The institutional trajectory suggests that tokenized fund structures will become a standard component of asset management infrastructure rather than a niche blockchain application, with Reg D 506(c) serving as the primary exemption for accredited investor distribution and Reg A+ enabling retail access for qualified offerings. For the SEC Crypto Task Force’s approach to modernizing fund regulation, see our analysis. For broker-dealer requirements for distributing tokenized fund interests, see our guide.

Tokenized Fund Distribution and ATS Infrastructure

The distribution infrastructure for tokenized fund interests has matured significantly through 2025-2026:

tZERO tokenized mutual fund distribution. In December 2025, tZERO received FINRA approval to act as a retailer of tokenized mutual funds — the first FINRA-approved pathway for retail distribution of tokenized fund interests through an ATS platform. This approval creates a new distribution channel for fund managers seeking to reach tZERO’s investor base, complementing the traditional broker-dealer distribution model. tZERO’s near-24/7 trading capability (23.5 hours per day since December 2025) enables fund token trading outside traditional market hours.

Agora cross-platform distribution. The January 2026 Agora ATS-to-ATS connector between tZERO and North Capital enables tokenized fund interests to be traded across both platforms, aggregating liquidity from both investor bases. For tokenized funds that currently list on a single ATS, cross-platform connectivity could significantly improve secondary market trading volumes and reduce bid-ask spreads.

Republic-INX combined platform. Republic’s April 2025 acquisition of INX for $60 million created a combined platform with both primary distribution capability (Republic’s 3.5 million retail investors and Reg A+ expertise) and secondary trading infrastructure (INX’s registered ATS and exchange). For tokenized fund managers, this combined platform offers end-to-end distribution — from initial Reg A+ or Reg D offering through Republic to secondary trading on INX’s ATS.

DTC fund token settlement. The December 11, 2025 SEC no-action letter allowing the DTC to operate tokenization services on permissionless blockchains could eventually enable tokenized fund interests to settle through DTCC infrastructure. For registered fund products (mutual funds, ETFs), DTC settlement would integrate tokenized shares with the existing NSCC fund settlement infrastructure, enabling distribution through traditional brokerage channels alongside blockchain-native ATS trading. The H1 2026 pilot and H2 2026 planned public launch will determine whether DTC integration provides a viable pathway for mainstream fund tokenization.

GENIUS Act and fund distributions. The GENIUS Act’s stablecoin framework, if enacted, would establish regulated payment rails for automated fund distributions. Smart contract-automated distributions — income payments, capital gains, return of capital — currently use platform-specific stablecoin arrangements. A federal stablecoin framework would standardize these distribution mechanics, reducing operational costs for fund administrators and providing investors with regulatory certainty about the stablecoin payments they receive.

Crypto Task Force fund guidance. The SEC’s Crypto Task Force has signaled interest in modernizing fund regulation for blockchain-native vehicles. The Division of Investment Management’s late 2024 request for comment on blockchain technology in fund operations — covering blockchain-based shareholder record-keeping, smart contract compliance, and T+0 settlement — may lead to formal rulemaking that addresses the regulatory gaps fund managers currently navigate through no-action letters and staff guidance.

For the ATS platform comparison analyzing fund token listing requirements, see our comparisons section. For real estate fund tokenization specifically, see our dedicated analysis. For FINRA rules applicable to fund token distribution, see our regulatory guide. For enforcement actions involving tokenized fund products, see our tracker. For the SEC’s Investment Company Act guidance, see SEC Division of Investment Management.

As the SEC’s Crypto Task Force continues its series of six industry roundtables throughout 2025 and 2026, the regulatory pathway for tokenized fund structures is becoming increasingly defined, with the landmark DTC no-action letter of December 11, 2025 establishing critical infrastructure precedent for permissionless blockchain settlement of registered securities.