Delaware Blockchain Initiative: Revitalizing European Companies’ Funding Efforts

André Eggert is a partner and Yamila Eraso is a principal associate at Lacore Rechtsanwälte LLP. This post is based on a Lacore publication by Mr. Eggert and Ms. Eraso, and is part of the Delaware law series; links to other posts in the series are available here.

The amendments passed by the State of Delaware to the General Corporation Law (known as the DGCL) are the first tangible product of the well-known Delaware Blockchain Initiative (DBI or Initiative). This is just one step in a multi-milestone project engaged by the State of Delaware through the Delaware Secretary of State’s Global Delaware arm, in order to maintain Delaware’s leadership in the corporate world. [1]

Much has been written about the DBI and the impact it may have on U.S. corporate law. We agree that the Initiative is fundamentally changing the corporate panorama with its forward-thinking approach toward distributed ledger technology’s benefits and real-life uses. [2] So far, most of the discussion has focused primarily on the significant benefits that the DBI offers Delaware corporations in terms of corporate records, capitalization table maintenance, proxy voting and transactions settlement. These undoubtedly could prove transformative.

Another significant consequence that has not been analyzed in depth is that as part of the benefits for using electronic databases developed through blockchain technology, companies will be able to maintain a clean, up-to-date record of shareholders directly “on chain”, showing “on-chain” shares with different rights embedded into the code of the share itself. The latter is revolutionary and can have a special impact in the European and international context.

The benefits to European companies

With the opportunity to put a company’s shares on Delaware’s electronic ledger, fundraising, in particular for growth companies, might develop in a completely new direction. The foregoing, in our opinion, will have a quick impact on European companies, as many have begun to consider offering equity participation via blockchain technology. These equity participations are called “equity-tokens” [3] and represent a classic share with special investors’ rights described in a smart contract.

Due to the lack of initiatives such as DBI in Europe, these ideas must be developed using complicated alternative structures. In Germany, for example, models have been developed in which a nominee holds the company’s shares as a (paper) registered shareholder, with quasi-equity tokens issued to blockchain users. These quasi-equity tokens embed smart contracts that provide for a type of trust agreement between the respective token holder and the nominee. The smart contract is supported by traditional legal solutions (written agreements), thus making the token holder only an indirect shareholder through the written agreement. We can anticipate that although creative, this solution might not be error-free. But even with the challenges that the foregoing structure poises, the idea of “equity-tokens” is becoming an attractive solution and could potentially contribute to building a valid alternative to classic venture capital investment in Europe.

Delaware’s introduction of distributed stock ledgers and distributed ledger shares will mean a change in fundraising trends and will reinvigorate the once known “Delaware-flip”. During the early years of European venture capital, many European companies switched their legal domicile to Delaware in order to attract funds from American venture capitalists. This re-incorporation movement, coined “the Delaware-flip”, became a “must-do” if a company was remotely interested in attracting American capital at some point in its life cycle.

However, as European venture capital opportunities increased, companies in certain European jurisdictions (such as Germany) were able to access better-developed venture capital and startup environments. Domestic European funds actively backed early-stage European companies, and the need for the “Delaware-flip” was reduced. At the same time, American venture capital funds realized that certain European jurisdictions offered a stable legal framework with more “Americanized” investment agreements, making standardized investments in Europe feasible.

Now that European companies are looking to offer equity participation via blockchain, DBI can become a key player. If European companies can have their shares directly issued into the blockchain, we anticipate that this new opportunity will gain momentum when “equity-tokens” are offered directly to investors worldwide via Delaware’s distributed ledger platform. Since the idea of “equity-tokens” can be fully developed under the legal framework provided by the changes introduced to the DGCL, [4] European companies will not need to use the nominee structure described above and, instead, will be able to directly issue equity-tokens as legally compliant shares [5] in Delaware.

The status in Europe

The idea of leveraging the Delaware Blockchain Initiative to offer equity-tokens to investors is quickly gaining traction in Europe. One European platform operator called Neufund, which intends to act as a bridge between the worlds of venture capital and blockchain, [6] is leading a European regulatory effort for the development of regulation on tokens, giving prominent attention to the Delaware Blockchain Initiative as an example to follow.

When such platform integrates with Symbiont—Delaware’s distributed ledger tech partner, to offer tokenized equity without a nominee structure, European companies will be soon flipping to Delaware. European companies could raise funds in a legally compliant yet revolutionary way: (i) directly on the distributed ledger in a clean, transparent and decentralized manner, (ii) with a fully-supported smart contract system that would grant investors true decision-making and economic empowerment, and (iii) in a way that will protect and execute their investors’ rights, all while participating in a company’s distributed ledger fundraising process. The benefits for the European venture capital ecosystem are clear.

Although challenges related to cross-border transactions and capital markets still remain, especially in light of the latest SEC announcements, from a pure corporate perspective, the implications of Delaware’s openness towards distributed ledger technology cannot be overstated. The DBI is not only a first step into the future development of this technology, but also provides a real possibility of constructing corporate governance systems entirely managed through blockchain technology. This positively influences the domestic American market and also potentially provides an attractive alternative for funding efforts of European companies.

Endnotes

1Andrea Tinianow and Caitlin Long contributed a detailed piece on the changes introduced by the Initiative on their post to the Forum.(go back)

2For more details on the DGCL “blockchain” amendments, we invite you to read the Forum post by Matthew J. O’Toole, Michael K. Reilly, and David B. DiDonato of Potter Anderson & Corroon LLP.(go back)

3When talking about tokens, reference is usually made to a technological protocol which involves a digital asset and an entry onto an electronic ledger. There are different types of tokens representing value in itself within the blockchain such as bitcoin or ether (so called “protocol tokens”), or off-chain items such as assets, rights or others (so called asset-backed or rights-related tokens). Equity-tokens are a type of rights-related token which, with appropriate legal and technological solutions, represent stock or ownership interest in business entities. In other words, equity-tokens are the blockchain representation of off-chain paper-based equity.(go back)

4Amended § 224 DGCL sets forth that a corporation’s stock can be authorized and issued directly in a stock ledger kept in “electronic networks or databases (including one or more distributed electronic networks or databases)”.(go back)

5Although tokens have been disrupting the venture capital scene lately, well-structured offers of equity-tokens are rare. Most of the token offerings flooding the markets seem to offer protocol, asset-related or resource-related tokens that serve as investment vehicles into the company behind the token offer, involving serious regulatory and compliance problems such as securities regulations, AML/KYC procedures, among others derived from the lack of business and legal clarity and certainty of whether such tokens represent products, resources, blockchain network access or equity.(go back)

6More information at neufund.org(go back)

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