When it comes to international commerce and equities, Delaware, the second-smallest state in the U.S., has big intentions. The state already has a stellar reputation as one of the best places to establish a corporate entity in America, boasting two-thirds of all U.S.-listed companies and 85 percent of all IPOs.
Delaware possesses more registered legal entities than residents, due in large part to the state’s corporate tax favorability, asset protection and friendly regulatory climate. Now there are signs that the state, through a new set of recently unveiled legislation, is positioning itself to attract a different worldwide community of business enterprises into its corporate entity ecosystem.
This month, the state passed a series of legislative amendments that, when signed into law, will allow corporations registered in the state to issue and trade shares on a blockchain platform. When fully codified, businesses will have the go-ahead to trial new processes with the understanding that they now have the protection of Delaware’s highly touted corporate entity laws.
Welcome to Delaware
So, what’s the significance of this? The biggest impact is that businesses and enterprises around the world will have the option of issuing, executing and settling shares via a blockchain. It is also likely to fuel other related activities on blockchains tied to custodianship, trading, shareholder communication and redemption. This could lead to a fundamental reshaping of the prevailing global securities model, a key element in fostering global free enterprise and business investments.
The prevailing business equity model used in most markets today has a long history, dating back to the 17th century. Systems over time have grown complex, with multiple hoops to jump through, with fees at every level.
Centralized clearing creates systemic risk by presenting a single point of failure. Therefore, since in most jurisdictions legal ownership rests with the transfer agents, true ownership can become confusing and difficult to understand, thereby violating shareholder limit protocols. Moreover, paper-based systems, even if digitized, are subject to fraud and, in the case of e-transactions, security breaches.
By utilizing a decentralized model, blockchains will allow both investors and issuers to interact directly with each other, eliminating the need for third-party intermediaries like brokers, custodians and clearinghouses, thereby reducing transaction costs. Settlement can occur within a few short moments, as opposed to days, with funds being released and fees being reduced.
Legal ownership and control would be given back to investors and companies, and the system would allow for proxy voting to become more transparent and accurate. Dividends and stock splits can be easily facilitated, virtually mitigating costs and errors. Further, concerns around the single-point-of-failure risk with the prevailing system would be eliminated.
As far as the disadvantages, transparency might be an issue for some investors who would rather their financial positions not be visible to anyone. Fixing errors is another, as transactions on blockchain ledgers, once recorded, are immutable.
Charting the Next Steps
This recent amendment ensues from larger efforts designed to streamline corporate and governmental processes in Delaware. The Delaware Blockchain Initiative, which launched over a year ago, coordinates the state government’s efforts around incorporating blockchain technology for systems involving everything from land titles to birth and death certificates to professional licenses to collateral claims and company filings.
A key player in attracting businesses worldwide to fuel future blockchain initiatives is Global Delaware, a project of the Delaware Department of State, Division of Corporate and International Development. It was created to achieve three primary goals: 1) help Delaware’s companies develop markets overseas, 2) attract foreign companies to establish operations in Delaware and 3) strengthen and expand Delaware’s role as a leader in corporate governance.
Global Delaware is collaborating with New York–based Spitzberg Partners LLC, a corporate advisory and investment firm that provides strategic counsel on international political, economic, technology and security matters. Together, they will focus on attracting global enterprises from the fintech and blockchain sectors to Delaware.
The broader objective here is to promote the many advantages for companies doing business and investing in Delaware, furthering the state’s stellar reputation for helping businesses get launched and operational quickly for business growth and success in the U.S. Lower costs, a favorable regulatory climate, ease in accessing government officials and close proximity to universities and research institutions are among the many advantages businesses find by setting up corporate entities in Delaware.
The initiative has a particular focus in attracting entities from Europe.
“Delaware is a gem for companies looking to set up shop, but up until now, it has been largely a hidden gem,” said Andrea Tinianow, director of Global Delaware. “We hope the partnership will help us shine the light on all of the great things Delaware has to offer European companies looking to find success in the U.S.”
Tinianow believes that her work will make Delaware, and its favorability toward blockchain technology, a perfect portal for those looking to establish themselves stateside.
“This is a fantastic opportunity for European companies that are looking for a soft landing in the U.S.,” she said. “Delaware knows how to help businesses get up and running quickly, and we are delighted to join forces with Spitzberg to make the process easy and seamless for businesses seeking growth and success in the U.S.”
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