Blockchain as shareholder register in US

My friend is selling shares of a blockchain company what he founded in US. His story inspired me to write article on how blockchain could digitalize shareholder register of non-public companies.

Problem: Non-transparent paper based shareholder register

My friend experienced a lot of tensions during selling his shares. And still tensions are not resolved. Going through process establishing company, being the main founder and first CEO of the company, being pushed to leave company, then being minor shareholder who are trying to understand what is happening with company and then looking for buyer of shares, then transferring shares to buyer, then being exposed to the rights of first refusal by company he identified several problems what could be solved by blockchain technology

1. Lack of basic information. My friend knows how much shares he has, but he does not know how much percentage he own in company or how much options are granted, etc. This is a like complete black box. He have asked to president and company lawyers to send him latest cap table several times but they choose not to answer. He felt in very foolish situation when he is trying to sell portion of company but he does not know how exactly big it is.
2. Paper based ownership. In US, when you buy the shares of the company you got PAPER stock certificate from company, and when you sell the shares, you need send that PAPER to the new owner. PAPERS travels around the world. Meanwhile company pays to lawyers as transfer agent to follow movement of PAPERS and keep register of shares.
3. Non-transparency or fraudulent activities. Everybody who have sold shares know that valuation is like god, but as the minor shareholder my friend does not know neither latest valuation or events what has happened with company. He asked to president several times but answer was a silence. Then he was contacted by president with offer to buy his shares with 333% less valuation when he left the company. President told him that it is latest valuation, but after some time he got news that company has been raised some VC funding around the time when he got offer from president. There is a rumor that newest valuation is at least 10 times larger than previous one. So he may be manipulated, how could he know latest capitalization table if company board does not share it with him.
4. Interest of conflicts. My friend got two buyers, one offered him 2,5 bigger price than another one, but that buyer would want to stay anonymous till the end of the deal. Company blocked that transfer due to anonymously of buyer, then he submitted second offer and company executed rights of first refusal. Now he is in conflict with company because terms of transferring shares completely differs. In Transfer Note, he agreed with buyer that he will transfer stock certificate after he will receive funds in his Latvian bank account, but in his founder agreement with company is stated, that if company uses it rights of first refusal he should send certificate, and then company (not stated when), will send check to him (to withdraw check in Latvia costs at least 1% of its value). In addition, company lawyers was accidentally caught in conversation when they seriously assume and develop scenarios that company will fail to pay. And my friend does not trust any further excuse of company lawyers, because current President avoids to fullfill his personal financial obligation to my friend. It is clear that there is distrust among parties and that company insisted on completely different transfer terms that he agreed with buyer and he canceled the Transfer Note. But company lawyers arbitrary as transfer agent canceled my friends stock certificate and transfer ownership of his shares to the company. At least from sociological perspective it is clear that companies lawyers are interest of conflict because they are simultaneously both company lawyers and transfer agent of shares — so they made interpretation of what happen in their favor and abused power of transfer agent to make transaction based on their interpretation of situation.

Solution: shareholder register as permissioned based blockchain with smart contract library

Decentralized shareholder register is perfect use-case for blockchain application. I would built this on following principles:

1. Blockchain database as shareholder register. As blockchain is immutable database then there is no need to use both paper stock certificates and transfer agents for storing shareholder database. It would decrease a lot of transactional costs — no need to send paper over the world and no need to pay for transfer agent to keep capitalization table records.
2. Permissioned based access to data. This database could be run on permissioned based model. It imply the data on every company would not be available to everybody but to the shareholder or debtors of the companies. The model of giving access to the data should be built into database, for example if I have shares, then I have access to capitalization table and none party could violate shareholder rights of accessing information. This would automate access to basic information to the those who has rights on it and reduce manipulation & fraudulent activities performed by the company boards.
3. Smart contract library. Smart contracts could be used as algorithms to automate transfer of shares. Rights of first refusal is one example of that contract. It could be programmed in way that if company accepts Transfer Note and exercise it rights of first refusal than company should have buy share on the terms that are mentioned in Transfer Note. Code could easily monitor it. If company does not follow the terms than code does not rewrite ownership of share to the company and gives note that original buyer could exercise the transfer. If buyer does not exercise the trade based on terms of the transfer than seller remains sole owner of the shares. The smarts contracts could replace transfer agents and reduce money spent on lawyers for solving quite trivial disputes.
4. Digital currency. We could use combination of digital currency, wallets and smart contracts to secure share transfer for both parties. We would save costs on using escrow accounts. This would reduce both time and money spent on transfer disputes and will allow to get rid of overhead costs of lawyers who eagerly look for conflicts where they could show their skills and ask money for that.

Value proposition: Low cost shareholder register

Proposed solution would offer more cheaply and more faster to store and transfer shares of non-public companies in US. Companies could get rid of both transfer agents and conflict looking lawyers. They could save up to 70% of transaction costs. I would suggest 5$ monthly subscription fee for this service. If there are more than 30 million registered companies in US then potential value of companies could be quite big one. What are the main obstacles? I would say lawyers and companies board could oppose to this solution because it would reduce their power to manipulate with data and terms of transferring shares.

Please write a comment or PM:

1. If you experienced similar situation as my friend has
2. If you know other problems what should be solved by this solutions
3. If you would like to use this solution instead of transfer agents
4. If you are sure that my friend have been illegally abused