Tokenizing Mineral Rights
A sponsor came to me with a mineral deal and a securities memo written for a different asset class. He had assembled royalty interests across several counties and wanted to tokenize them as co-ownership instead of fund interests. The memo walked through Howey, concluded that recorded co-owners sharing in production were not passive investors in a common enterprise, and recommended proceeding without an exemption.
The analysis was competent. It was also irrelevant, because Congress settled mineral interests in 1933 and you never get to Howey.
That’s the most common structuring mistake I see in mineral tokenization, and it comes from importing the real estate playbook. In real estate, whether a fractional interest is a security is a genuine question that turns on facts. In minerals, the statute names the instrument.
The deal we will follow
To make this concrete, assume a program with facts close to what I actually see.
A sponsor spends eighteen months buying non-participating royalty interests from fourteen separate mineral owners in Reeves County, Texas. The interests sit under producing Delaware Basin wells operated by three different operators. In total the sponsor assembles six hundred forty net royalty acres at a cost of nine point two million dollars, and conveys everything into a single member LLC by recorded deed.
The plan is to issue twenty thousand tokens at five hundred dollars each, distribute royalty revenue monthly, target an 8% annual yield, and let the tokens trade freely on a public chain. The marketing line is that a buyer can own a piece of the Permian for five hundred dollars.
Every instinct the sponsor has says this is co-ownership. The interests are real property. They were conveyed by deed and recorded at the county. Each token holder will share in production revenue the same way the fourteen original owners did.
Follow that program through the analysis and watch where it breaks.
Congress answered this in the text of the Securities Act
Section 2(a)(1) of the Securities Act defines a security to include a fractional undivided interest in oil, gas, or other mineral rights. It sits in the list alongside stock, notes, and investment contracts as its own enumerated category.
The Exchange Act reaches the same interests through its coverage of participations in them. The Investment Company Act uses nearly identical language in its own definition of security.
Notice what that means procedurally. Howey is the test courts apply to decide whether something unnamed in the statute is an investment contract. When the instrument you’re selling appears by name in the definition, the investment contract analysis is beside the point. You don’t argue about managerial efforts or common enterprise. You’re selling an enumerated security.
Apply it to the program. The moment six hundred forty net royalty acres becomes twenty thousand transferable units, the sponsor has created fractional undivided interests in mineral rights and offered them. That is the enumerated category, by its own terms. The recorded deed into the LLC, the real property character of the interests, and the fourteen arms length purchases that preceded it are all true, and none of them reaches the question.
Sponsors find this hard to accept because the real estate analogy feels so close. Mineral interests are real property in Texas and most producing states. They are conveyed by deed, recorded at the county, and severable from the surface. Every instinct says the co-ownership argument should work the way it sometimes does for a tenancy in common in a building.
It doesn’t, because Congress singled out mineral fractions on purpose. The abuse in view in 1933 was exactly this one: promoters carving up leases and royalties and selling the pieces to the public.
Where the argument has actually worked
There is a genuine limiting principle, and it’s worth understanding precisely, because it’s the only place the argument has ever worked.
Not every fractional undivided mineral interest is a security. The interests are securities when the seller created the fractions by splitting a larger interest for the purpose of offering them. That reading comes from the statute’s own definition of issuer, which describes the owner of a mineral right who creates fractional interests in it for public offering. Courts have applied it for decades. Where the owner of a fractional working interest conveys that entire interest whole to a single buyer, no fractional undivided interest has been sold within the meaning of the Act.
The escape hatch is the sale of a whole interest, not a carved one.
Now put the program against it. Had the sponsor sold the entire six hundred forty acre royalty position to one institutional buyer in a single conveyance, no fractional interest would have been created and the analysis would look very different. Selling twenty thousand pieces of it is the precise opposite of that transaction.
This is the point sponsors find hardest, so it’s worth stating plainly. The act that creates the security is the same act that creates the token. Splitting is what tokenizing means. No version of a tokenized mineral offering avoids the statute, because there is no way to tokenize without carving.
I have yet to see a mineral tokenization structure where this comes out differently, and I don’t expect to. That’s useful to learn early. It moves the work off a characterization fight you will lose and onto exemption selection, which is a solved problem. The same lesson recurs across asset classes: the label a sponsor puts on an instrument rarely determines the rights or obligations that attach to it.
The category is broader than oil and gas
Sponsors working in hard rock minerals, lithium, or sand sometimes assume this is an oil and gas rule. The statutory phrase is oil, gas, or other mineral rights, and the last three words carry weight.
State definitions are broader still, and they matter because blue sky law applies independently. Florida’s securities rule, for example, defines fractional undivided interest in oil or gas rights to include landowner royalty interests, overriding royalty interests, working interests, participating interests, and oil or gas payments. That sweep covers essentially every economic interest a mineral owner can carve out.
Our program holds non-participating royalty interests, which deserve specific mention because they’re the favorite candidate for tokenization. An NPRI holder receives a share of production revenue with no right to lease, no right to bonus, no right to participate in operations, and no cost obligation. It’s the purest passive mineral interest there is. Fractionalize one and you’ve created something that is a security under the enumerated category and would satisfy Howey independently if anyone needed to run it. The sponsor picked the one mineral interest with the weakest possible argument.
Why the working interest alternative rarely helps
The one mineral structure where a real argument exists is the working interest, and it’s narrower than sponsors hope.
Courts have long recognized that an interest giving the holder genuine managerial power over the venture can fall outside securities treatment, because the holder isn’t relying on the efforts of others. Some working interest and joint operating arrangements have been analyzed this way. The power has to be real: the ability to make operating decisions, approve authorizations for expenditure, and meaningfully influence the outcome.
Suppose the sponsor restructures and tokenizes working interests instead. Each token now represents one twenty thousandth of a working interest. Ask whether that holder can approve an authorization for expenditure on a recompletion. They cannot, in any practical sense, and building a structure where twenty thousand wallets vote on operations would make the wells unoperable.
Worse, the restructure hands retail buyers something they did not want. A working interest carries its share of drilling costs, plugging and abandonment obligations, and environmental liability. A royalty interest doesn’t. A five hundred dollar token that comes with a future capital call for plugging is a product nobody understood at purchase, and the suitability review that should have caught it becomes the first document the plaintiff’s lawyer requests.
The Investment Company Act problem that metals programs avoid
Minerals diverge sharply from other commodity-adjacent tokenization here, and the divergence is expensive to find late.
The Investment Company Act includes fractional undivided interests in oil, gas, or other mineral rights within its definition of security. So our LLC, which holds carved royalty interests acquired from fourteen prior owners, is holding investment securities on its balance sheet, and the 40% threshold becomes a live question rather than an academic one. Sponsors coming from bullion or agricultural programs, where the underlying is plainly not a security and the threshold never engages, arrive at minerals expecting the same result and don’t get it.
The distinction worth drawing carefully is between owning mineral acreage outright and holding carved fractional interests in someone else’s. A vehicle that takes fee title to mineral acres sits differently from one that buys fractional royalty interests created by others. That difference deserves analysis in the specific structure. Resolve it before the vehicle starts acquiring, because the remedy afterward is restructuring.
Now watch the two problems collide. If the LLC relies on an exclusion that caps beneficial owners at one hundred, the program has already promised twenty thousand tokens on a public chain with free transferability. Those two facts cannot both survive. The feature the sponsor is selling is the feature that destroys the exclusion the vehicle depends on, and no subscription agreement fixes it, because the token itself permits the transfer that breaks the cap.
Practical friction that has nothing to do with securities law
Mineral tokenization carries mechanical problems sponsors tend to discover late, and our program has all of them.
Mineral interests are recorded at the county, and title runs through decades of deeds, leases, pooling agreements, and probate. Division orders determine who gets paid and in what proportion, and the three operators maintain those records. They will pay the LLC, because the LLC is the party of record. A token that changes hands on a Tuesday doesn’t update a division order, so somebody has to reconcile twenty thousand moving positions against three operator payment streams off chain, every month, by hand.
Revenue is also irregular. Royalty income varies with production decline, commodity price, and operator behavior, and it arrives with reporting lags. The program promised monthly distributions and an 8% target against a stream that behaves nothing like that, which needs reporting discipline that matches the actual cash cycle rather than the cadence in the marketing.
Retirement money adds another layer. Royalty interests are a traditional self-directed IRA holding, and working interests generate unrelated business taxable income, which means retirement accounts reach these structures through a narrower path than platforms usually describe.
None of this is a reason to avoid mineral tokenization. It’s a reason to price the operational build honestly.
What SEC enforcement in this category already looks like
Oil and gas offerings have a long enforcement history, and it shapes how regulators approach anything new here.
The SEC’s Office of Investor Education has warned investors about private oil and gas offerings and the concentration of fraud cases in them. Enforcement has followed the same pattern for years. The Commission has charged sponsors who sold debt and equity interests based on working interests in wells through unregistered offerings, with unsupported production projections and salespeople acting as unregistered brokers.
One detail from that order deserves attention from anyone planning a public-facing token program. The Commission rejected the claimed Regulation D exemption because the interests had been offered through general solicitation without reasonable steps to verify accredited status, and roughly two hundred non-accredited investors ended up in the deal.
Hold our program next to that. A public website, a five hundred dollar minimum, an 8% yield projection, and open transferability. Unregistered offering, retail buyers, a projection running ahead of the wells, and whoever gets paid to drive signups. The technology is new. The pattern is not, and examiners will recognize it immediately.
The SEC staff has separately confirmed in its January 2026 statement on tokenized securities that the securities laws apply to tokenized securities to the same extent as their traditional counterparts, and that recording ownership on a ledger does not change the analysis.
The questions I actually ask
- Did the seller create the fractional interests, or is a whole existing interest being conveyed to one buyer?
- What type of interest is being carved: royalty, overriding royalty, non-participating royalty, or working interest?
- Do holders have any genuine operating control, and would exercising it be practical?
- Does the vehicle hold carved fractional interests, fee mineral acreage, or both?
- How many holders can the chosen exclusion support, and does the token enforce that cap?
- Who updates division orders when tokens transfer?
- What does the marketing say about yield?
The first question disposes of most programs, including ours. Fractionalizing is what tokenizing means.
Tokenized mineral rights start as securities
The program we followed is not a bad deal. Six hundred forty net royalty acres under producing Delaware Basin wells is a real asset, honestly acquired. What fails is the legal theory wrapped around it, and it fails at the first step, before anyone reaches a fact question.
Sponsors arrive wanting to argue that their structure is co-ownership and not an investment. That argument can’t be won, because the statute doesn’t invite it. A fractional undivided interest in mineral rights is a security by name.
Accepting that early is worth real money. It moves the project off a characterization posture that won’t survive contact with a regulator and onto exemption selection and transfer mechanics, both of which have known answers. It also surfaces the two issues that do the most damage when found late: whether the vehicle is holding securities for Investment Company Act purposes, and whether the transfer layer can hold a holder cap the token was designed to defeat.
Those are the same problem viewed from different ends. Twenty thousand freely transferable tokens and a hundred holder exclusion cannot coexist, and the sponsor has to choose which one the structure keeps. Resolve that in the code and the operating agreement together, before the first token is minted.
If you are structuring a tokenized mineral rights offering and need to choose the right exemption and transfer model before launch, book a call to review the ownership structure, holder limits, Investment Company Act exposure, and transfer mechanics.
Frequently Asked Questions
Are tokenized mineral rights securities?
Almost always. Section 2(a)(1) of the Securities Act lists a fractional undivided interest in oil, gas, or other mineral rights as its own category of security. Because tokenizing means dividing an interest into transferable fractions, the act of creating the token is the act that creates the security. Howey never enters the analysis.
Can I structure tokenized mineral interests as co-ownership instead of a security?
No. The co-ownership argument sometimes available in real estate does not transfer, because Congress named mineral fractions in the statutory definition. Recording deeds for each holder does not change the result. The only recognized exception is conveying an entire existing interest whole to a single buyer, which is the opposite of tokenizing.
Does this apply to hard rock minerals and lithium, or only oil and gas?
The statute says oil, gas, or other mineral rights, so the category is not limited to hydrocarbons. State securities definitions are often broader still and reach royalty interests, overriding royalties, working interests, and production payments. Assume coverage and confirm the specific state definitions that apply to your offering.
Are tokenized working interests treated differently from royalty interests?
Sometimes, but not usually in a way that helps. A holder with genuine operating control may fall outside securities treatment, and token holders do not have that control. Working interests also carry drilling costs, plugging obligations, and environmental liability that royalty interests do not, which makes them poorly suited to retail buyers.
Is a fund holding tokenized royalty interests an investment company?
Possibly. The Investment Company Act includes fractional undivided mineral interests in its definition of security, so carved royalty interests count toward the 40% investment securities threshold. This differs from bullion or agricultural vehicles, where the underlying is not a security and the threshold never engages.
What happens to division orders when a mineral token transfers?
Nothing automatic. Operators pay according to division orders they maintain, and a blockchain transfer does not update them. The entity of record continues receiving revenue, and someone has to reconcile allocations off-chain. Build and staff that process before launch rather than discovering it at the first distribution.
