Can Ethereum based tokens be used to represent a voting share in a private company?

Question

If tokens are issued to represent votes for a private company are they considered securities by the SEC?

I want to create a legal entity, like a trust, that will appoint board members who oversee a private company. Tokens will be issued to represent votes for these purposes as well as rights to a share of company profits.

The company would be wholly owned by the trust, and legal matters/decisions like the appointment of board members could only be affected by votes from token holders.

I would disseminate profits by creating a "pool" from which token holders would be able to claim their share periodically, for example quarterly.

Answer 1

Yes.

This fulfills Howey test criteria for a security: carries dividends and is common enterprise.

In most jurisdictions (in your cases, states?) and with most company types, it is a company internal matter how it maintains the shareholders registry. Tokens/a blockchain would be one format of a shareholders registry. The requirement is just to maintain it.

However you still most likely need to collect the real world identities of the shareholders. In some cases you need to report these identities to the companies house. This is especially true if you are going to pay out dividends. Furthermore there might be additional regulation to follow if your token is subject to public trading.

Disclaimer: TokenMarket Ltd, for which I work for, sets up such company structures for clients with equity tokens. If you need legal advise regarding creating such structures you can contact us https://tokenmarket.net

Answer 2

Disclaimer: I am not a lawyer, and this is not legal advice.

If you want a legal entity, then you'll need to create one through the normal means of doing so. For example, in the US, this usually involves filing certain paperwork with the State Secretary of State. Once you've done this, it exists. I've done so myself.

If you want an entity on the blockchain, you can create a token/voting smart contract, then distribute the tokens to those who you want to hold them. Then said contract can act on the blockchain.

Can these two be mixed? Beats this non-lawyer. Multiple legal firms have created frameworks for this, including a framework called Otonomos. Do they work? I have no idea, and I've never heard of a court case involving one yet.