Why ICOs Could Eat Delaware’s Lunch
Andrea Tinianow, Esq. is chief innovation officer at Global Kompass Strategies and was, until January, head of the Delaware Blockchain Initiative. David Adlerstein may be a corporate attorney at Wachtell, Lipton, Rosen & Katz.
The views expressed during this article are solely those of the authors.
Over many decades, the State of Delaware has established a preeminent position because the jurisdiction of choice for businesses to arrange , starting from S&P 500 companies (a majority of which are incorporated in Delaware) to countless startups and LLCs.
This is not by accident; the state’s flexible corporate statutes, very well-developed business case law, highly sophisticated and experienced judiciary (including the renowned Court of Chancery), receptiveness to innovations like the “poison pill,” and usually friendly commercial orientation offer efficiency and predictability to businesses and their equity holders and counterparties. From the standpoint of this small state with a population under 1 million, corporate franchise taxes are an important source of revenue.
In recent years, other states have heightened their efforts to draw in out-of-state businesses and to erode Delaware’s franchise, and while recently enacted tax reform should essentially halt so-called corporate inversion to lower tax jurisdictions outside the U.S., Delaware has lost untold millions in franchise taxes as a results of this practice.
Another transformative change is underway that would within the not-too-distant future negatively impact Delaware’s popularity as a jurisdiction of choice. this alteration isn't associated with lower taxes, but to the recognition of blockchain companies that raise capital through the issuance of tokens or coins, often mentioned as initial coin offerings (ICOs), and, relatedly, to so-called “smart securities” or blockchain-based securities with smart contract functionality issued by non-blockchain companies.
Blockchain issuers raised an estimated $5 billion in 2017 through ICOs and, while these transactions varied widely in their quality (and compliance with securities laws), the recognition of ICOs has persisted into 2018 despite well-publicized scams, declining cryptocurrency prices, enforcement actions and powerful cautionary pronouncements by the SEC and other regulators.
As evidenced by Telegram’s $850 million follow-on offering of purchase agreements for cryptocurrency earlier this month, the market appetite for tokens remains voracious, a minimum of episodically. Given the continued development of public blockchain use cases which tokens are the fuel of public blockchains, we expect interest in token offerings to persist.
Unlike shares of stock, tokens or coins generally don't confer ownership in any company and should not include security-like features in the least . Token holders aren't owed fiduciary duties by the board of directors (or anyone else). Rather, the tokens confer something like a license or a coupon, that provides the token holder the proper to use the company’s blockchain platform and/or service, which can or might not exist at the time that the token is issued.
For example, the FileCoin ICO, one among the most important on record, confers a future right to digital storage.
Why should Delaware care about ICOs and tokens?
As the space matures and grows in legitimacy, we expect that more and more innovative companies (both start-ups and well-established) will prefer to issue tokens or smart securities. For these companies, the appeal of Delaware’s brand of experience that focuses on shareholder rights in traditional business frameworks could wane, particularly as other states, like Wyoming and Nevada, actively vie to become the go-to states for blockchain companies and technology.
A new breed of blockchain entrepreneurs also as traditional companies deploying blockchain technology to issue tokens are often expected to hunt out other (token-friendly) jurisdictions which will provide clear regulatory guidance on the issuance of tokens and therefore the rights of token holders.
As time goes by, these companies and their corporate boards are likely to be interested in jurisdictions that have built up a body of case law that focuses on blockchain, tokens and related issues, in much an equivalent way that Delaware developed jurisprudence in issues associated with fiduciary duties and company governance, with the potential outcome of Delaware being left behind during this rapidly growing sector.
This is to not say that the blockchain boom poses an existential threat to Delaware’s formidable corporate franchise. But Delaware’s primacy shouldn't be taken without any consideration .
It is perhaps instructive that up until the first a part of the 20 th century, New Jersey dominated corporate formations. But then-Governor Wilson of latest Jersey waged a campaign to curry favour with the populist faction in his bid for president. This campaign included anti-corporation rhetoric and therefore the passage of antitrust law , resulting in a mass exodus of latest Jersey corporations. The exodus was a boon for Delaware, one which Delaware has nurtured over the last 100 years.
To the credit of its leadership, in August 2017, the State of Delaware was the primary within the nation (and within the world) to enact legislation expressly authorizing corporations to take care of their corporate shares during a stock ledger on a blockchain. Since that point , several other states have introduced blockchain legislation concerning incorporations, tokens, transacting business, and far more.
In fact the State of Wyoming recently passed several pieces of legislation that not only copied Delaware’s blockchain amendments but went a step further by providing guidance on how blockchain companies that issue tokens can do business within the State compliantly.
The State of Delaware is currently making thoughtful efforts to facilitate the utilization of blockchain technology so companies can file UCC financing statements and issue shares directly on a blockchain.
These are important initial steps, and positively the State should proceed with care. But so as to take care of a leadership position within the blockchain space, more are going to be needed within the not-too-distant future.
In particular, Delaware may benefit by, and will seriously consider, providing additional guidance round the issuance of tokens and cryptocurrency (including by being receptive to new legislation, if appropriate), and by leveraging the state’s refined body of business law and expert judiciary to draw in responsible blockchain projects; indeed, the industry would stand to profit from Delaware’s unique brand of experience regarding governance.
If we've seen anything within the blockchain space it's that blockchain companies will need a robust governance regime if they're to succeed both individually and as a sector.
Delaware can help thereupon .