The legality of a company registered in the blockchain and ownership of IP

[Peter R]

Goal:  To create a company recognized as its own legal entity in Common Law jurisdictions that would exist in bitcoin space as fully as possible.

Methods:

1. File the entity's Memorandum of Association in a Common Law jurisdiction.  The memorandum sets out the name of the company, and the authorized share capital, together with the subscribers (who become the first directors and shareholders of the company).

Associate an ECDSA public key with each each subscriber at the time of filling, along with a BIP32 "chain code" for the company.

2. Using the open-assets protocol (colored coins), create an amount of shares certificates equal to the Authorized Share Capital set out in the Memorandum of Association.  The colored coins should be issued using multisig techniques and the ECDSA keys linked to the subscribers in Step 1.  

3. Write the entity's Articles of Association, have each subscriber sign the document with the ECDSA public key associated to them in Step 1.  Embedded the hash of the Articles of Association along with the signatures into the bitcoin blockchain.  This document would also recognize the share certificates created in Step #2 and explicitly allow for their trading as specified by the open-assets protocol.  

4. (OPTIONAL) Write any necessary Shareholder's Agreements, have the shareholders sign it, and embedded the document's hash and the shareholders' signatures into the blockchain.  

Does this work?

It seems that everything except for Step #1 can be done in a p2p and decentralized manner.  The company would not require a bank account anywhere.  The company could still legally own IP such as patents, trademarks as well as other property, and there would be a public record of the subscribers filed in a Common Law jurisdiction (to reduce the fear of scams).  If a bigger company wanted to purchase the smaller company, and assuming the company's internal documentation and accounting was in order, there would be no bright red flags about the arrangement that would turn off the larger company.  

Yes?  No?  Comments?  Concerns?

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[Peter R]

No opinions? 

If you are a lawyer and are interested in working on this idea, please PM me. 

[CIYAM]

Am pretty sure work on this sort of idea is already well underway (although I think that Ethereum and BitShares are more a focus for DACs than Bitcoin).

[Peter R]

Am pretty sure work on this sort of idea is already well underway (although I think that Ethereum and BitShares are more a focus for DACs than Bitcoin).

Yes, but from what I've seen, they are just focusing on the "technical aspects" of blockchain-based companies.  The technical details can be implemented completely with colored-coins and proof-of-existance techniques. 

What I want to work on now is the "legal aspects" of doing this.  Our community needs a clear path to creating such companies that adheres to the letter and spirit of the law.  The Eric-Voorhees settlement with the SEC sets a precedent that bitcoin companies are not outside the jurisdiction of our legal systems (which IMO was obvious anyways).

[CIYAM]

I can't give out details here but I have been in contact with a lawyer who is working on this very thing.

[ShakyhandsBTCer]

What benefits does this have that are not given by owing trademarks and other IP in a traditional way?

How would you receive royalties from use of your patients if your company does not have a bank account?

[Peter R]

I was doing some more research on my proposal and found a hiccup.  The following image is from the Business Corporations Act for the Province of British Columbia, but I see these same laws are common in other jurisdictions too:



What I think this means is that transfers of shares represented by colored coins from one entity to another is not sufficient.  To complete the transfer the entity would need to register his name an address with the company as well.  This actually makes sense, as most jurisdictions will treat companies owned by a majority foreign interest differently.  Without the list of shareholder names and addresses, the company wouldn't have enough information.  

This brings up an interesting grey area: it is not possible to distinguish a colored coin transfer between two bitcoin addresses owned by the same individual from a transfer from one individual to another.  But it is important that an individual have the ability to move his colored coins efficiently when necessary (and thus also the location where any dividends are sent).  However, this means that there's nothing stopping an individual from transferring his coins to another entity outside the knowledge of the company.  This is interesting because all voting rights and dividends would accrue to the controller of the new address, yet legal ownership may still reside with the last registered human.  I think the company could include in its Articles that new owners must register with the company to legally execute the share transfer (perhaps by signing a bitcoin message that includes their name and address with the new key that unlocks their shares).  

There's a bunch of other subtleties this brings up that would be interesting to explore in more detail.  In any case, I think just learning that there is actually a legal requirement for a company (in BC) to know the names and addresses of its shareholders shows that it would take a fair amount of work to structure a company so that it could function efficiently in bitcoin space.  But once this is done a few times, perhaps similar structures could be used by other new companies too.

[CIYAM]

I had considered this already - and I think the solution is perhaps to get such information (name, address, etc.) and add a "salt" then *hash* this and publish the hashes (so can't be reversed).

When it comes to to "prove" this info it can be easily done (but only by the person who provided the info).

[Peter R]

I had considered this already - and I think the solution is perhaps to get such information (name, address, etc.) and add a "salt" then *hash* this and publish the hashes (so can't be reversed).

When it comes to to "prove" this info it can be easily done (but only by the person who provided the info).

I think the Company is required to register the share transfer when presented with a sufficient endorsement (that proves the previous owner agrees to the transfer).  It sounds like the company must record the legal name and address of a human or corporation.  The Company has obligations to release this information under certain circumstances (and it needs to track % foreign ownership is certain cases).  

[Peter R]

Interesting.  In this section is sounds like the "endorsement" is independent of the "registration."  In the case of colored coins, I suppose the "endorsement" would be the bitcoin TX authorized by the selling shareholder's digital signature, while the "registration" would be when the new owner presents his name and address to the issuer (The Company), along with cryptographic proof that the endorsement is valid.  I can't find any indication that time limits are imposed.  It sounds like a share transfer could be endorsed but not registered indefinitely, but this sounds sketchy...  

[Peter R]

I suppose if a shareholder "lost" his private key, that the company might be required to replace the now-inaccessible shares.  This poses a problem because the private key might actually be controlled by someone who the shareholder recently endorsed the shares over to.  Conveniently, it looks like in such a case, the Company can require an indemnity bond from the shareholder claiming the loss.  If later someone else presents a properly endorsed transfer, then the issuer may exercise his rights under the indemnity bond from the person who falsely claimed to lose his shares (colored coins).

[Peter R]

So I think this all sounds quite promising.  In hindsight, this idea isn't really that novel.  It's just basically replacing ink signatures with digital signatures and witnesses/notaries with the blockchain timestamp server, thereby moving the details from the analog word into a digital one while drastically reducing compliance headaches (assuming the necessary software systems are available).   

I no longer believe the requirement to record names and address is a negative.  It actually allows a little bit of "fuzz" in the logic in a way that people can resolve edge case disputes.  The fact that the issuer can demand an indemnity bond I think is key here.  If a purchaser of a share certificate chose to remain anonymous by not asking the issuer to register the transfer, and if he later learned that the seller claimed to have lost his shares, then he or his agent would need to present the digitally-signed endorsement to the issuer to prevent this.  This seems reasonable to me. 

I also don't see why the shares couldn't legally trade on a crypto-exchange either (assuming the Shareholders' Agreement doesn't prohibit this).  When a user deposited his shares, the Exchange would register the transfer with the Issuer (which can be automated).  The Exchange would hold the shares on the user's behalf and allow trading of the securities as it does for bitcoins.  When a buyer withdrew the shares, the TX from the Exchange would represent the endorsement, and the buyer could choose to present this to the issuer (again a process that could be automated) to register the transfer in the Company's register. 

I've tried to start a discussion on this topic a couple of times and in a few different sections, yet each time I get very little interest.  Why is that?

[railzand]

There is very little expertise on so many matters like this in this forum. I guess it's early days, and people like you have to forge ahead almost alone.

[Peter R]

I had considered this already - and I think the solution is perhaps to get such information (name, address, etc.) and add a "salt" then *hash* this and publish the hashes (so can't be reversed).

When it comes to to "prove" this info it can be easily done (but only by the person who provided the info).

I think I misunderstood what you meant CIYAM.  You mean that the Issuer would publish a mapping between shares and the registered owner's identity hash.  This way, before Alice purchases the shares from Bob, she can cross-check against the company's register that indeed sha256("name=Bob, addr=1234 Main Street, Seattle, USA"<>salt) is the registered owner.  This is actually very nice because it further incentivizes the Issuer to keep his registry in order!

There is very little expertise on so many matters like this in this forum. I guess it's early days, and people like you have to forge ahead almost alone.

Yes, very early days indeed.  It is exciting to begin to realize how much is possible.

[ShakyhandsBTCer]

I had considered this already - and I think the solution is perhaps to get such information (name, address, etc.) and add a "salt" then *hash* this and publish the hashes (so can't be reversed).

When it comes to to "prove" this info it can be easily done (but only by the person who provided the info).

I think the Company is required to "register" the share transfer when presented with a sufficient endorsement (that proves the previous owner agrees to the transfer).  It sounds like the company must record the legal name and address of a human or corporation.  The Company has obligations to release this information under certain circumstances (and it needs to track % foreign ownership is certain cases).  

This is also true for us telecommunication companies as there are limits as to foreign ownership

[CIYAM]

With regards to identity information I am indeed referring to a "mapping" so that the public registry doesn't contain any such information (just a hash) but the Issuer itself would have all the shareholder private details they legally require.

This allows two things: allows each shareholder to "verify" that their public issue is correctly recorded and allows a court to be sure that if address information for a particular shareholding are demanded that those details are indeed *correct*.

The use of a salt would of course be to prevent anyone from being able to try and "mine identities" across different issuance's.

[Peter R]

I spent some more time looking into the Business Corporation Act of British Columbia.  The minimum requirements to form a legal company in the Province of BC are to register:

   - A Notice of Incorporation
          -> name each incorporator   (no address required)
          -> numerate the initial share distribution
          -> signed and dated by each incorporator

   - The Articles of Incorporation
          -> these form the regulations or "laws" of the company
          -> if this document is not submitted, the "default articles" are assumed

The incorporators are not required to use the default Articles of Incorporation, and it appears the agreement can be modified in its entirety only subject to some minor formatting requirements defined in the Business Corporation Act.  I thought it would be interesting to slowly go through the "default" Articles to see what still makes sense for a company existing largely in bitcoin space, and what needs to change.  I'll start with Section 2 because Section 1 is just references to other Acts and definitions of terms.

Incorporation Agreement

Part 2 — Shares and Share Certificates

Form of share certificate
2.1 Each share certificate issued by the Company must comply with, and be signed as required by, the Business Corporations Act.

According to the Business Corporations Act, the signing must be "manual."  At first I thought that meant "by hand," but it doesn't.  I think it is more accurate to say that a human has to initiate the signature--think of it like shares held by a company need to be stored "offline" so that the company's shares can't get "goxxed."

I would modify this point to say something about digital signatures being the preferred method of signing, and time-stamping in the blockchain be the preferred method of issuance (or the preferred media to which the shares are written).  

Right to share certificate
2.2 Each shareholder is entitled, without charge, to one certificate representing the share or shares of each class or series of shares held by the shareholder.

Seems reasonable.  

Also note that there is a legal distinction between the share certificate and the shareholder.  It seems that the official record of share ownership is the registry that the company must maintain, and one that is tied to a name and address.  The certificate isn't the ownership, instead it is both a way for the shareholder to demonstrate ownership, and, by signing the certificate, a way to endorse ownership to another person.  So colored coins would work the same way.  The coins are just the certificates and the company keeps the official registry of ownership (to real names and addresses) on a secure server.  

No modification required for this point.  

Sending of share certificate
2.3 Any share certificate to which a shareholder is entitled may be sent to the shareholder by mail and neither the Company nor any agent is liable for any loss to the shareholder because the certificate sent is lost in the mail or stolen.

What is this "mail" they speak of?  

I think this point can be eliminated entirely, or replaced by something that describes the way the digital shares will be sent from the company to the share holder.  

Replacement of worn out or defaced certificate
2.4 If the directors are satisfied that a share certificate is worn out or defaced, they must, on production to them of the certificate and on such other terms, if any, as they think fit,
(a) orderthecertificatetobecancelled,and
(b) issue a replacement share certificate.

This is no longer possible.  Eliminate this point entirely.  

Replacement of lost, destroyed or wrongfully taken certificate
2.5 If a person entitled to a share certificate claims that the share certificate has been lost, destroyed or wrongfully taken, the Company must issue a new share certificate, if the person
(a) so requests before the Company has notice that the lost,destroyed or wrongfully taken share certificate has been acquired by a protected purchaser,
(b) provides the Company with an indemnity bond sufficient, in the judgment of the directors, to protect the Company from any loss that the Company may suffer by issuing a new certificate, and
(c) satisfies any other reasonable requirements imposed by the Company.

It is possible to lose, destroy or have a share wrongfully taken.  I think this point is pretty good as is.  For example, I think even if someone loses their private key, the company would still be required to re-issue the share certificates because the "official" ownership record is the company's registry and not the colored coins themselves.  What's helpful solving "double spends" here is that the company can take an indemnity bond in case the shareholder actually sold his shares to someone else (and the company later learns this when the owner registers the endorsement).  

I might go into more detail about the way the "indemnity bond" would work in such a case in this point.  It would be useful to have a clear protocol for dealing with share fraud.

Certificate not to be replaced after registration of transfer
2.51 A person entitled to a share certificate may not assert against the Company a claim for a new share certificate under Article 2.5 if
(a) the share certificate has been lost, apparently destroyed or wrongfully taken and the person fails to notify the Company of that fact within a reasonable time after the person has notice of it, and
(b) the Company registers a transfer of the shares represented by the certificate before receiving a notice of the loss, apparent destruction or wrongful taking of the share certificate.

This is pretty useful as is.  It gives the company an "out" when the company knows that shares claimed as "lost" were already registered to another person (because a chain of digital signatures exists and there is no evidence of fraud or theft).  

Splitting share certificates
2.6 If a shareholder surrenders a share certificate to the Company with a written request that the Company issue in the shareholder’s name 2 or more certificates, each representing a specified number of shares and in the aggregate representing the same number of shares as the certificate so surrendered, the Company must cancel the surrendered certificate and issue replacement share certificates in accordance with that request.

This point needs to be reworked.  There is no longer a need for the shareholder to surrender share certificates in order to get them "split up."  A protocol like open-assets (colored coins) already takes care of this.  

This point should be updated to work with the new efficient share-management technology.  


So far so good.  19 more sections to go

[Ron~Popeil]

This thread is an interesting read. This stuff will become more of an issue sooner rather than later. I think an interesting side issue is whether a court would view this kind of agreement as legally binding.

[Syke]

Wouldn't it make sense to put this stuff in the Namecoin blockchain?

[gatomalo]

This is just the tip of the iceberg, the blockchain offers 2 things data transparency and secure communication, this opens up the system to all kinds of tools were no trusted middleman is needed to execute contracts and such. Colorcoin, Mastercoin and Counterparty. use a protocol on top of Bitcoin like http on tic/ip giving us new tools to create any legal or financial tool and contracts and change things like business transparency. Business and regulators needs these tools to help Bitcoin become more accepted in the regulatory world and then the legality issues will go away.
 
I use to think the coin was important but the public blockchain and the p2p network will change the world with new and exciting business tools add BIP32 and multi-sig -n out of-15 - then we really have programmable money and programmable execution of cyber code in the blockchain. that's cool beans