The Legal Strategy Behind Backpack's Token-to-Equity Plan

Backpack crypto exchange has unveiled the legal strategy behind its ambitious token-to-equity conversion program, arguing that a deliberate separation between token functionality and platform-based rewards will keep the initiative outside the scope of U.S. securities law. Co-founder and Chief Compliance Officer Can Sun told reporters that the equity conversion right is attached to a VIP program rather than to the digital asset itself, a distinction the exchange believes is critical to satisfying regulators as it pursues a $50 million fundraise at a $1 billion pre-money valuation.

How Does Backpack's Token-to-Equity Program Work?

The conversion mechanism hinges on participation rather than token ownership alone. Users who want to earn Backpack equity must actively trade on the exchange, use its broader suite of services, and lock the token for a minimum of one year, according to Sun. Only those who meet all of these requirements through the VIP program gain the right to convert holdings into company shares at a fixed ratio.

"The token could be floating out there to anyone, but if you don't use Backpack, if you don't stake it for a year, then it has none of those rights," Sun said in a statement. "It's not a property of the token itself, it's the property of a VIP program that we're running."

CEO Armani Ferrante first signaled the initiative on X last Monday, revealing that the exchange has set aside 20% of its equity for eligible participants. The program is designed to turn active users into partial owners as the company pushes deeper into the U.S. market.

The token could be floating out there to anyone, but if you don't use Backpack, if you don't stake it for a year, then it has none of those rights.

— Can Sun, Co-founder and Chief Compliance Officer, Backpack

Fundraising and Public-Market Ambitions

Backpack is pursuing its legal strategy amid broader corporate expansion. The exchange is in discussions to raise $50 million at a pre-money valuation of $1 billion, as reported earlier this month. Simultaneously, Sun confirmed that multiple SPACs and investment bankers have expressed interest in taking the firm public, although the company has not committed to a specific timeline.

"We have a lot of interest, but we want to find the right time to do it," Sun told reporters, noting that the token's supply unlock schedule is expected to align with the timing of any public-market transaction. The careful sequencing suggests Backpack views its token launch and potential IPO as interconnected events rather than separate milestones.

The IPO Backup Plan

Should regulators ultimately determine that the token-to-equity arrangement constitutes an unregistered securities offering, Backpack has a contingency. Sun stated that the company would simply register the tokens as an additional class of securities during its anticipated initial public offering, effectively curing any compliance shortfall.

"The remedy for an unlicensed securities offering is registration," Sun explained. "We're just going to register an additional class of securities on our IPO. That cures it in the worst-case scenario." Sun, who previously served as general counsel at collapsed crypto exchange FTX, expressed confidence that the program would have been permissible even under former SEC Chair Gary Gensler, who aggressively pursued enforcement actions against numerous crypto firms.

The remedy for an unlicensed securities offering is registration. We're just going to register an additional class of securities on our IPO. That cures it in the worst-case scenario.

— Can Sun, Co-founder and Chief Compliance Officer, Backpack

Coinbase Precedent and Tokenized Equity History

Sun pointed to a 2020 SEC filing by Coinbase as a relevant precedent. Before ultimately pursuing a direct listing on the Nasdaq, Coinbase attempted to register a "Class T common stock" that would have been tokenized as part of a public offering. Sun worked on the filing while at law firm Fenwick.

SEC documents show that regulators asked Coinbase to provide legal analysis explaining how tokenized shares differed from traditional stock and whether they constituted a fundamentally different type of investment. Coinbase ultimately abandoned the effort, citing the need for "further consideration." The episode illustrates both the regulatory complexity of tokenized equity and the growing willingness of crypto firms to test the boundaries of securities law.

What This Means Going Forward

Backpack's legal approach could set a precedent for how crypto exchanges structure token-based ownership programs. By decoupling the equity conversion right from the token and embedding it within a platform loyalty program, the company is attempting to navigate a regulatory gray area that has historically deterred similar initiatives. If the strategy withstands scrutiny, it may open the door for other exchanges to offer comparable programs. The outcome of Backpack's fundraise and its path toward a potential IPO will likely determine whether this model gains wider adoption across the crypto industry.