The Digital Wrapper | Marc Boiron
Derek Edward Schloss (TDW): Marc, great to have you on The Digital Wrapper. This is a conversation I’ve been looking forward to — today, you’re a Partner at law firm Fisher Broyles, but let’s start at the beginning. How did your legal practice take you into blockchain?
Marc Boiron (Fisher Broyles): In 2015, somebody started talking to me about Bitcoin and I got really interested in the technology. At the time I was a securities attorney working with early-stage companies. I didn’t really focus on it too much until late 2016. At that point I remember thinking, “You know what? I absolutely love this tech. All I do is think about it, so I might as well get into it from a legal perspective.” By the second quarter of 2017, I had dropped everything else. Since then, my entire time has been spent working with companies in this space.
Derek Edward Schloss: What areas of blockchain tech is your practice most focused on today?
Marc Boiron: I was one of the earliest attorneys to really focus on security tokens, so a lot of my practice is focused there today. In early 2018, I worked on a project called Slice RE, which was one of the first tokenized offerings for LP interests in a real estate fund. That started things off for me in the security token space.
Derek Edward Schloss: Do you find yourself working on quite a bit of projects adjacent to security tokens?
Marc Boiron: Beyond security tokens, it’s one of those things where there’s so few attorneys focused on this space that it’s really hard to specialize right now — you get phone calls from everybody. They’re looking for someone who actually understands the technology, who understands the ecosystem, who can guide them. And not just legal — but also on the business and technology side. Today, I do a lot of work with crypto funds, protocols¹, mining² operations — things of that nature.
Derek Edward Schloss: It’s interesting that you say that. I’ve noticed there’s a resistance for attorneys operating in these legacy legal spaces to start the initial process of getting acclimated with the technology.
Marc Boiron: Yes, people are either really interested in the technology or they’re not. Given that it’s complicated tech, finding people who want to learn isn’t that easy. Today, there’s a small group of attorneys you run into constantly in this space.
Derek Edward Schloss: Transitioning to security tokens — earlier this year I came across an excellent piece you put together for The Block called Security Tokens: Misconceptions and Benefits. You argued that some of the framing within the security token industry might be off, and re-categorized a number of proposed benefits as misconceptions.
Marc Boiron: I wrote that piece because it’s incredible how much misinformation there is out there about security tokens. I think people get really excited by the technology and suddenly there’s a belief that it’s changing everything, including things that already exist. To the extent that I could put something out there that lays out the true story, that was my goal.
Derek Edward Schloss: It was well done. There were two actual benefits you named I think would be great to talk through — the first is “better cap table³ management”, and the second is “improved corporate governance”. You have some direct experience with both of these, more than most, so I’m curious to hear your takes here.
Marc Boiron: With cap table management, when you have early-stage companies, their cap table management is done in a few ways. First, it might not be done at all — which means the company signed agreements to issue securities but it’s not documented anywhere. Second, the company might manage their cap table themselves, but might not understand how one part of the cap table relates to another. Third, the company has their lawyers manage the cap table, but this can be expensive, and most founders won’t send every document to their lawyer. And as a result, the cap table can end up being a partial cap table. Or fourth, the company pays $10 or so per month for something like Carta⁴ to manage their cap table, but the cap table will only be as good as the inputs — companies might end up having the same issues as they do with their attorneys, although it might cost less.
Derek Edward Schloss: It sounds like none of these methods are quite perfect today — how might security tokens improve the accuracy and efficiency of our cap tables?
Marc Boiron: The better option is to have stock ledgers or cap tables represented on a blockchain. By way of background, cap tables are usually done on a fully-diluted basis — they’re calculated for financing purposes, to give companies an entire economic picture. A stock ledger is different. It’s a very accurate representation of who actually owns the stock in your company, which is really what you need when you’re trying to determine who has voting and dividend rights. When you put an entire cap table on a blockchain, you have a more accurate representation of a cap table, stock ledger, or both. And when a transaction occurs, assuming the only way to transact in your securities is on chain, you have an automatic updating of your cap table and stock ledger where no mistakes can really be made.
Derek Edward Schloss: How have you seen some of these ownership issues come up in your legal practice?
Marc Boiron: I practiced in Delaware for a while before moving out to California. When you’re in Delaware, one of the issues that tends to come up is around issuing stock that companies think exists but doesn’t actually exist, voting stock that a person doesn’t actually own or transferring stock that can’t actually be transferred. For example, I worked on both the Dell and Dole cases. In Dell, a brokerage input the wrong vote on behalf of beneficial holders of stock, which resulted in certain rights of those holders not being exercised. That brokerage paid a significant sum of money to those holders. If they were holding their stock directly, as is easy and efficient to do with security tokens, then this problem would have never existed. In Dole, there were approximately 30% more votes cast than shares that existed. This all happened because of the way shares of public companies are held and voted. With security tokens, the time of every vote — assuming it on chain — and ownership of all securities would be captured perfectly. The question after Dole and Dell is how often is there a similar miscounting or incorrect votes that we never know or find out about because there was no litigation? I’m not sure anyone knows the answer to that. The bottom line is, putting your cap table and stock ledger on a blockchain really deals with this issue and several others.
Derek Edward Schloss: The other security token benefit I’d love to chat about is the improvement of corporate governance. This seems to be closely related to the tracking and management of cap tables.
Marc Boiron: Yes, corporate governance is definitely related. In private companies, corporate governance isn’t really as significant — people don’t really hold the annual stockholder meetings that they should, and if they do, it’s very informal in nature. With that said, you could envision some kind of system that triggers an automatic vote that needs to be taken by shareholders for the directors each year, which would begin giving shareholders rights that they did not even know they previously had. I think it’s unlikely that will be done often by private companies — but as you get companies that are VC backed with more investors involved, or even crowdfunded companies — then it starts making more sense.
Derek Edward Schloss: What are the implications for public companies?
Marc Boiron: With public companies, it comes back to getting an accurate count of the voting that you do. In Delaware, you have a record date for that vote — either your bylaws or Delaware code will tell you how the record date is set. If your stock is on a blockchain, then you can go ahead and look at the blockchain at any given time and say, “This is exactly who needs to vote”.
On top of this — with blockchain, you have the ability for every individual to be a record holder of your stock instead of beneficial holders. Now, it’s worth pointing out that it solves some Delaware law issues, that can technically create issues under 12(g)⁵. 12(g) is the section of the Exchange Act that says if you have more than 2,000 common equity holders, and more than $10.0 M of assets, then you need to register under the Exchange Act.
Derek Edward Schloss: Right — staying under that 2,000 holder amount can be fairly critical.
Marc Boiron: One of the benefits of our beneficial ownership rules is that if you’ve got one custodian that holds tokens for ten thousand people, it will count as one equity holder — not ten thousand. With that said, we would be much better off having every actual owner of a company have a true say in the company, rather than having one custodian decide how things are voted. As a side note, it is currently problematic to have one custodian holding a large number of security tokens of a private company because beneficial owners of the security tokens could request to hold them directly at any time, which could cause the company to have more than 2,000 holders.
Derek Edward Schloss: Can you walk through some of the benefits that might exist if we bring company management closer to equity holders?
Marc Boiron: A custodian will always pass records on to the beneficial owners. But because the beneficial owners are so far removed, they’re never truly in tune with what’s going on in the company. As it relates to corporate governance, I think you’d have a much greater number of people who would be close to what’s going on in the company if they were actually true record holders. In addition, you’d never have the issue that happened in Dell where you have a custodian who votes the wrong way for a transaction. There’s layers of benefits there, and most of them have to do with getting to directly hold your stock rather than holding it through a custodian.
Derek Edward Schloss: That’s great Marc. Let’s transition over to some of the regulatory action we’ve seen since the start of the year. Earlier this year, SEC Commissioner Hester Peirce called out recent SEC cryptoasset guidance as a “regulatory version of an escape room”. I’d love to go through some of the recent guidance and see if we can put some of these puzzle pieces together.
Marc Boiron: Let’s do it.
Derek Edward Schloss: Back in April, the SEC released a new framework for analyzing whether a digital asset is offered and sold as an investment contract. What were some of your top takeaways here?
Marc Boiron: This framework had to do with the nature of what the Howey test really is — a lot of people want to blame the SEC, but really it comes down to Howey. Howey is a test that depends on facts and circumstances, and the framework acknowledges that there’s a huge number of circumstances at play when we’re dealing with digital assets. For our practice, what we’ve done with clients is taken that framework and boiled it down to ten or so points from the forty points that the SEC put forth. We try to separate the ten key points from the “once in a blue moon” points that issuers don’t necessarily need to focus on and end up being encompassed in the ten points we put together, but that the SEC did include in the framework to make it clear. The framework wasn’t very helpful, but I don’t blame the SEC — this is really the only thing they can do when dealing with Howey.
Derek Edward Schloss: There’s been a few major blockchain projects in the news that touch on the state of digital assets and securities regulation — Blockstack, YouNow, and Pocketful of Quarters. Let’s start with Blockstack, the decentralized computing network. Blockstack’s Reg A+ offering for its STX tokens, which aim to power its decentralized network in the future, was recently qualified by the SEC.
Marc Boiron: You know, the very first thing to note here is that the SEC is willing to qualify a project’s security token. Blockstack is super interesting because you would have thought it would be one of the last projects to be qualified due to the complexity that you’re dealing with — a utility token that is also a security. With a Reg A+ offering, you’ve got free transferability which makes it a lot easier than if you were dealing with the same thing in a Reg D context. Nonetheless, it’s really complicated, so what it tells me is that their lawyers did a good job. They put together concise, thoughtful responses to the SEC’s comments. I think that gave the SEC confidence to go ahead and qualify them. YouNow was very similar, though it seems like Blockstack did the bulk of the work getting the SEC comfortable on the concept of a utility token as a security being used in a network.
Derek Edward Schloss: Recently, Pocketful of Quarters received a no-action letter regarding their “Quarter” token, a stable gaming token that will be used as a medium of exchange across multiple games. I want to clarify here that the no-action letter is completely separate from the company’s previous equity raise for $145k. What does a no-action letter like this tell you, Marc?
Marc Boiron: To me, this was no different than the SEC’s no-action letter for Jet Token. Yes, this was the first time that we got a no-action regarding a public network — here, it was Ethereum⁶ and an ERC-20⁷ token. However, it’s really not all that different than a private network like Jet Token. With Ethereum, you can essentially create a private network through restrictions at the smart contract level — which is what happened here. I still think the no-action letter is important for market confidence. This gives anyone who is going to deal with these tokens confidence that there’s not going to be any regulatory action taken with respect to the way the token is structured and sold. I think it’s very valuable in that sense, but I don’t think it had much value in terms of telling us how you can do things or not do things.
Derek Edward Schloss: The SEC and FINRA also released a joint statement on broker-dealer custody of digital asset securities. The statement focused specifically on the Customer Protection Rule for Broker-Dealers under Rule 15c3–3. What are you seeing here?
Marc Boiron: I think everybody agrees that this statement was meant to state the things that still need to get figured out rather than helping solve any of those things. We saw something similar by the SEC’s Division of Investment Management last year when they said, “Before we see any kind of investment companies registered in this space, here’s the things we need to deal with.” This most recent statement was a bit more disappointing. Essentially, if you’re not a custodian in this context, then there won’t be an issue. But if you are acting as a custodian, then you’re going to have some issues — because you can’t possibly comply with some of the rules and laws that exist today.
Derek Edward Schloss: How would you have liked to see the SEC and FINRA be more helpful here?
Marc Boiron: In this case, we have rules that the SEC could change — unlike with Howey, where it really doesn’t have as much flexibility. Sure, the SEC can interpret Howey a little less strictly than it does. But here, some of these rules are things that the SEC has direct control over, and they’re choosing not to do anything.
Derek Edward Schloss: This reminds me — there’s been some recent news lately that FINRA has been sitting on months of blockchain-based broker-dealer applications. Some of the firms have been waiting to hear back from FINRA for over a year.
Marc Boiron: A long time. FINRA is waiting for more guidance from the SEC — no doubt about that. They’re not really going to do anything until they get the green light from the SEC.
Derek Edward Schloss: I think there’s a concern that the cryptoasset ecosystem might be developing more quickly in other regions of the world, which could end up putting US-based companies at a disadvantage. Are you concerned?
Marc Boiron: Does it concern me? I mean — look I don’t like it, but it doesn’t concern me for the time being. The US has such a lead on the rest of the world in the securities markets. We do have time before anyone else has a chance to catch up. To really compete, I think we’d need a market that investors are flocking to, with investor protections in place, and that still receive the benefits of blockchain and security tokens. You need all of that to come together before the SEC and the US get their act together out of a concern of another jurisdiction threatening the US’s lead in the securities markets — and I don’t think that’s going to happen in the next year or two. I would be really surprised if we don’t have our act together a little more by then.
Derek Edward Schloss: As it relates to security tokens, are there laws you think should be updated that could help the industry really thrive today?
Marc Boiron: To start, I would say that my focus right now is taking current securities and moving them onto the blockchain, and less about STOs as a financing mechanism. As a result, I think the thing we need to remove — to get this technology going — is transfer agents⁸. Transfer agents make sure that one side of the ledger and the other side of the ledger are correct. Blockchains are ten times better than a transfer agent for this. To me there’s absolutely no reason to have transfer agents play this role in the future. Transfer agents do play a role beyond balancing the stock ledger, around communications with investors and other investor relation-type tools. However, those are things anyone can do. Eventually, investors will also be able to place votes using platform dashboards, which makes some of these new solutions that build platforms for managing security tokens so much more capable than transfer agents are today.
Derek Edward Schloss: Playing off this idea — once the infrastructure for security tokens is more solidified, are there any other existing roles or processes you see being eliminated fairly quickly?
Marc Boiron: It depends on how the market develops. Right now, institutions can’t hold their own securities — they need to use a qualified custodian. Historically, why did we actually need to have custodians? Well, to protect stock certificates so that they’re not lost and so institutions don’t misuse them. With blockchains, many of these issues are naturally dealt with because issues around lost tokens can be easily be addressed and beneficial holders of tokens can hold them directly. It starts becoming clear that individuals might not need a Schwab account — they can just hold securities themselves and give access to Schwab to transfer them. This now outs the individual, rather than the institution, in control. To add to this, the risks of individuals or institutions directly holding their own securities might not carry the same risk as holding their own non-tokenized stock — they can never really lose it. If it is lost, the token is burned and reissued. I think those are the reasons why custodians should play a much more limited role with security tokens than they do today with traditional securities.
Derek Edward Schloss: Marc, you’re one of the more well-known attorneys working in the tokenization space. What advice do you have for existing securities attorneys or service providers who might be looking to get involved?
Marc Boiron: My advice is threefold. First, spend time understanding the technology. If you don’t want to do that, then it’s not worth getting into the space. It’s crucial to understanding how issues will develop — especially on the non-security digital assets part of it. The second piece is understanding the security token ecosystem and who’s involved. I have had a number of clients tell me, “Hey, I’m going to build this solution”, and I’ll say, “Why? There’s this company that’s doing this, and there’s that company that does that, and there’s this other company that does this other thing.” Understanding who’s involved so that you can guide clients in the right direction is very important. You don’t want to see clients spending money on services that they really don’t need because there’s solutions that already exist. Go to a few conferences, be a part of the ecosystem, start getting to know people. Finally, understand how the infrastructure works — you don’t have to understand every aspect of it, but the key parts that we’re trying to solve for, and the laws around it, I think is really important. I don’t think just having a securities background is really enough in this space — you need to understand more than that.
Derek Edward Schloss: This is a great transition into a product you’ve been helping build out with Security Token Academy. Can you share a few of your insights working with our team to develop the new STA Professional Membership program? Why do you think the new Professional Membership program might be so important for the security token industry at our current stage?
Marc Boiron: When Aubrey⁹ was first talking about the Professional Membership program, the thing that interested me the most was really this idea of building out an ecosystem. The more good people we have doing this, the better. The more people we have learning about this technology and helping grow the ecosystem, the better. It’s going to speed everything up. Security Token Academy, and everything you guys do by way of education, is super important for this industry. And given the vital role that lawyers play, having a membership in place for them to learn from one another, to gain more exposure — these are the important things that will help grow the industry over the coming years.
Derek Edward Schloss: That’s great, Marc. Final question — why are you so excited to wake up each morning and work on this stuff? What are you most looking forward to in 2019?
Marc Boiron: Purely from a technical perspective, I love that we’re continuing to see more progress with the technology. We keep seeing new tech and new protocols come up — so that’s fun. And continuing to see the evolution of Bitcoin and the world’s view of Bitcoin, that is very interesting as well.
Derek Edward Schloss: I agree, having front row seats to the evolution of this technology has been a blast. How about on the regulatory side of things?
Marc Boiron: You know, one of the things that weirdly excites me the most is this new political focus on crypto, which has been thrown into the light because of Facebook’s Libra. We’re now getting so much attention in Congress, and I think that’s a really good thing. Where the regulations are going to go — I don’t know, but there’s a lot of questions being asked that really get to the heart of how the regulation of blockchain and digital assets need to change or expand.
Derek Edward Schloss: Marc, on behalf of The Digital Wrapper, thanks for your time.
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Footnotes
¹ A protocol is a system of rules that define how something is to be done. In computer terminology, a protocol is usually an agreed-upon or standardized method for transmitting data and/or establishing communications between different devices.
² Mining is the act of validating new transactions and recording them on a blockchain’s ledger. With Bitcoin, a new block (the structure containing recent transactions) is mined every ten minutes. Miners compete to solve a difficult mathematical problem. The solution found is called the “Proof-Of-Work”. This proof proves that a miner spent time and resources to solve the complex problem. When a block is solved, the transactions contained in that block are considered confirmed.
³ Cap Table is a spreadsheet or table that shows the equity capitalization for a given company.
⁴ Carta is one of the leading cap table management software companies.
⁵ Rule 12(g) of the Securities Exchange Act of 1934 states that an issuer is required to register as a publicly reporting company with the SEC if and when specific conditions are met — subjecting the company to specific reporting requirements.
⁶ Ethereum is an open-source, blockchain-based, distributed computing platform and operating system featuring smart contract (scripting) functionality.
⁷ ERC-20 is a common list of rules and standards for all Ethereum tokens to follow, empowering developers to predict how new tokens might function within the larger Ethereum ecosystem.
⁸ Transfer Agents are trust companies, banks, or similar institutions assigned by a corporation for the purposes of maintaining an investor’s financial records and tracking his or her account balance. The transfer agent records transactions, cancels and issues certificates, processes investor mailings, and handles other investor problems — including reissuing lost or stolen certificates.
⁹ Aubrey Chernick is the Founder/CEO of Security Token Academy.
Legal Disclaimer
Security Token Academy is the leading platform for educational information about security tokens and digital securities. Security Token Academy is not a registered broker-dealer or investment advisor. You cannot purchase or invest in tokens through our website SecurityTokenAcademy.com. We do not offer investment or purchase advice, nor do we endorse or recommend purchases or investments in tokens of any kind (security tokens, utility tokens, network tokens, etc.). In addition, Security Token Academy does not tell you if any purchase or investment is suitable for you. All investments entail risk, and investments in start-ups as well as security tokens involve a potentially greater risk. This interview is not investment advice — it is strictly informational. Do not trade or invest in any tokens, companies, or entities based upon the information in this interview.
