Introducing Abacus Equities: A full service process for tokenizing company equity
We’re pleased to announce the launch of Abacus Equities, a full service process for tokenizing and managing company equity through the Abacus Platform.
Each year, startups raise billions of dollars in venture funding via traditional financing methods. However, fundraising is often slow, complex, and expensive for both investors and startups. Tokenizing company equity is an opportunity to fundamentally improve this process.
What is the Abacus Platform?
The Abacus Platform enables companies to issue permissioned tokens, leveraging the Abacus Protocol for identity and compliance. It consists of all the technical infrastructure needed to manage these tokens, including the token smart contracts with programmatically enforced transfer restrictions, the off chain services needed to perform identity and compliance attestations, and the interfaces needed to interact with the blockchain. Abacus Equities is our first full service product built on the Abacus Platform and allows for the tokenization of company equity through a protocol we’ve called the S-Token.
To ensure that Abacus Equities complies with the Delaware General Corporation Law (DGCL) and U.S. Securities Exchange Commission (SEC) regulations, we’ve engaged Atrium, a tech enabled law firm for startups, as an advisor.
Why tokenize equity?
To understand the benefits of tokenizing equity, we need to delve into some of the biggest problems that exist when managing company stock ledgers today.
Complying with securities requirements presents a legal challenge for companies and investors alike (i.e. with the registration of securities sales and drafting of lengthy disclosures), and have created the need for various professionals and service providers to act as intermediaries. The Abacus Platform and compliance protocol streamline this process by programmatically enforcing compliance through a combination of smart contracts and off-chain services. Our standardized process for issuing tokenized equity includes auditing a company’s cap table, generating or storing relevant commercial documents (i.e. stock purchase agreements), and ensuring that all actions and stock transfers are compliant with DGCL and SEC rules and regulations.
Speed and Efficiency
In addition to the legal complexities, administering equity grants and observing corporate formalities can be frustratingly slow and inefficient. There is potential throughout for a deal to be delayed and inefficiencies to materialize, and the lack of a standardized system and persistent need to chronologically observe formalities mean that the stock issuance process remains slow and archaic. The Abacus Platform offers a process solution by standardizing and automating corporate governance procedures required to administer stock, and reducing the steps necessary for companies and investors to consummate securities transactions. Additionally, tokenized equity issuances and transfers are automatically recorded on the blockchain in chronological order, drastically reducing the overhead of recordkeeping and obviating the need for a corporate officer to administer the stock ledger.
Companies based in technology hubs like Silicon Valley may be able to leverage a network of sophisticated investors and venture capitalists to raise capital, but for companies located elsewhere the potential investor base can be comparatively small. Despite venture capital diversifying geographically in recent decades, an incredibly small number of regional hubs comprise a supermajority of the venture capital investment activity in the U.S. The global landscape is only marginally better. By tokenizing their equity, companies are afforded the opportunity to access a broader set of global investors from which to raise funds. The distribution and compliance mechanisms built into the Abacus Platform’s tokenized equity infrastructure significantly lower the barrier to entry for capital allocation, and allow for greater access to liquidity and increased participation in capital formation among early stage companies.
On July 21, 2017, the Delaware Governor approved proposed amendments to the Delaware General Corporation Law (DGCL). Among other items, these amendments specifically revised Section 224 of DGCL to allow corporations to maintain corporate records, including their stock ledgers, on one or more electronic databases, including distributed electronic networks (i.e. blockchains). Any stock ledgers maintained on a blockchain under the amendments must be administered such that a corporation can (i) prepare a list of stockholders, (ii) record certain required information under DGCL, and (iii) record stock transfers as required under Delaware law.
The amendments are flexible in that they do not prescribe specific technical requirements (i.e. the use of a permissioned or permissionless chain), and they contemplate corporations using one or more networks to administer corporate records. To that end, various approaches for employing distributed ledger technology may be feasible, from fully automated and open smart contract based solutions, to more manual, private solutions. However, as some observers have noted, platforms and protocols that merely automate stock transfers or tokenized equity without addressing the recordkeeping requirements of DGCL do not necessarily meet the requirements of Delaware law absent additional off-chain functionality. Accordingly, any system aiming to employ blockchain technology to streamline the equity issuance and capital formation process must allow for corporations to mint and issue tokens, as well as properly maintain and prepare their corporate records to be fully compliant with Delaware law. Both the Abacus Platform and our compliance protocol meet the requirements of Delaware law.
The amendments to DGCL, coupled with the Abacus compliance protocol, offer an optimal environment upon which to build a platform for tokenizing equity.
Abacus Equities allows companies to take advantage of the benefits of tokenizing their equity without needing to hire intermediaries to develop and maintain complex technical infrastructure they don’t understand. As more capital and liquidity is unlocked through tokenized equity, Abacus envisions the platform expanding to allow for more sophisticated and nuanced capital markets.
A series of follow-up articles will address the technical and legal details of the S-Token protocol, including how we manage cap tables via the blockchain, how we protect private data, and how we programmatically enforce DGCL and SEC compliance with smart contracts and automated APIs. If you’re interested in tokenizing your company’s equity, contact us at email@example.com.