Company Shares on Ethereum

Question

Shares are designed to provide owners with:

• ownership
• profits/losses

How would Ethereum based ownership make sure each owner, gets their share profits?

Is this even possible with Ethereum / smart contracts?

Answer 1

There are indeed many opportunities where Smart contracts can reduce the analog friction that is present with the current ownership of equity. The most obvious use case is of course the instant transfer of ownership that is paired with low costs and speed, due to cutting out the intermediaries and wet signatures. However, from there it's easy to go a step further. Once your companies shares are distributed it's a small step to do governance (shareholder / director voting) and funding via these channels.

However, there are still obstacles that limit a wide adoption of doing so. You always need a legal framework, thus a link between the digital and analog should be there, and that's a tough once to crack.

Otonomos is one of the companies that is doing exactly this, actually making it work with real world companies.

Answer 2

If all profits and losses are on the blockchain then everything can easily be managed with smart contracts. For example boardroom provides tools for governance of Daos and it is a simple matter to write a contract that disperses funds to different parties . However where it gets challenging is the interface with the 'real world' legal system. As far as I'm aware there are 4 approaches:

• Dao only (Slock.it) The Dao exists only on the blockchain, proposals and cast their votes to elect and direct a service provider which will represent them in the physical world. (The Slock.it contracts can be found here) The service provider is paid in crypto currency if the Dao votes to do so. The advantage of this approach is that everything is done with contracts and corruption risks are minimised. The disadvantage is that the Dao cannot directly own or profit from real world assets. Further some have argued that members of a Dao may be held jointly and severally liable in any legal dispute.
• Filing Agent (Otonomos) approach. A filing agent creates a legal company and updates share ownership within a governmental registry to match token allocation. The advantage of this approach is that a real company is created which can own real world assets. The disadvantage is that there could be potential agency problems where directors or the filing company disobey the Dao it it is unclear how this would be resolved legally in case of dispute. For example if tokens are sold but shareholders dispute that that sale of tokens = sale of shares. Further if shares are widely issued then this would probably be seen as a public offering with all the regulatory burden this entails.
• Company Limited by Guarantee. A private company limited by guarantee with members undertaking to be liable for some nominal amount (£1) in the event of insolvency. A register of members must be maintained and be available at the registered premises but this could be any database so the DAO itself could maintain the register. The articles of association should state that directors will follow the will of the DAO, what is to be done with any profits, and how new members are admitted.
• Purpose trust approach. A private benefit/ purpose trust(§13) is created and the terms of the trust written to required trustee to disburse all profits to token holders and to vote in accordance with the majority of token holders. A conventional legal company is then created with the private benefit trust nominated as sole voting shareholder. The advantage of this approach is that the company can hold real world assets, liability is limited and both directors and trustees obligations can be made clear in the terms of the trust. The disadvantage is that only a few jurisdictions recognise private benefit trusts and sale of beneficiary rights in a trust may be ruled to be a security offering.
• Government registry on the blockchain (Theoretical). Governments allow share ownership to be directly administered via the blockchain and enforce shareholder rights. This would be the ideal solution but at present no government is doing this.

Note that none of this is intended to be legal advice or guidance. More generally you should be aware that most jurisdictions have strict rules on issuance and trading of shares and other securities so you should do your due diligence to ensure that you are fully compliant with all required laws and that members and developers personal liability is limited.

Answer 3

Here is an example Payout solidity contract created by the BlockApps team. This contracts comes with every project initiated using the Bloc framework for decentralized applications.