What You Need to Know About Blockchain

You may have first heard about blockchain from a client or a friend, but it’s important to have baseline information about what it is and what differentiates it from cloud computing or your dedicated server. It is much less about geeking out on computer science and more about getting rid of the need for trust.

What Is Blockchain?

Blockchain is a technology that encrypts, replicates, and verifies data across an array of servers to make the digital records more reliable than traditional cloud or single location-based servers. Blockchain networks can be relatively small and only include a small number of “nodes” (servers or users) within a single company for example, or they can be completely open to millions of different users around the world. The data, when recalled is pulled from all nodes (individual servers) where it was stored to verify the data was not modified by hackers. That stored data is compared to be sure no discrepancy exists and consensus exists among all nodes in the blockchain. This redundancy ensures the data has not been modified. A blockchain is a “self-auditing” network having no central authority approving the transactions. A blockchain may require an “oracle” to make rules, but ideally has no user with super-authority to make modifications to data without blockchain verification. Therefore, blockchain networks are more redundant than traditional centralized servers, leading to safer and more reliable record-keeping that does not require a single trusted repository.

How Is Blockchain Used?

Blockchain, also known as distributed ledger technology, has worlds of applications outside of its most well-publicized one, the digital currency Bitcoin. New companies that have developed a blockchain-related application are being formed every day with some of the most promising involving legal and financial transactions. Blockchain has garnered attention in the legal and finance world not only because of Bitcoin and Ethereum, but because many are comparing blockchain’s disruptive potential to the internet. Many lawyers understand the value of eSigning, emailing, and online agreements, but many lawyers have become so accustomed to traditional record keeping that they have not come to appreciate the potential for blockchain record keeping.

Blockchain technologies related to corporate stock and record keeping have great potential to guard against different types of defective or fraudulent transfers. The current popular method of maintaining records in Microsoft Excel or an application, such as QuickBooks, is vulnerable to creditor accusations of manipulation. The immutable record provided by a transaction in a blockchain allows the books and records to be more defensible if the blockchain retains verified data on:

  1. How corporate assets were acquired;
  2. When assets were acquired;
  3. From whom assets were acquired;
  4. How much was paid for assets; and
  5. How assets were disposed of or transferred.

Delaware’s Blockchain Amendments

Delaware is on the forefront of Corporate law. On July 21, 2017, Delaware Governor John Carney signed Senate Bill 69 into law which amended sections of the Delaware General Corporate Law (DGCL) to include blockchain amendments, giving legal efficacy to digital distributed ledgers. At least seven states as of today have enacted blockchain legislation with many more coming. The new Delaware legislation, which applies to the stock ledgers of Delaware corporations, raises the question of how blockchain could be applied to other non-corporate organizations to document their ownership, management, and even internal record keeping and bookkeeping.

Apart from newly-formed and existing corporations who want to move their books and records to a blockchain system, lawyers may also be approached by client entrepreneurs who are developing a new blockchain technology. It is important to have threshold knowledge about blockchain since the frequency of these questions will only increase and you will need to be able to inform your clients’ and your own decisions. Our experience with blockchain entrepreneurs and legislators in Delaware has led us to start to build technology to solve the transparency and record-keeping issues posed by Series LLCs. We have also benefitted from this experience by better understanding how we can guide clients and their businesses through the changing world of blockchain law by improving technology and transactions and removing trust from the equation.

What is a Delaware Opinion Letter and When Do You Need One?

You have been shopping around for the best terms on financing commercial real estate.  Your broker has told you that conventional bank financing will not be as favorable as a newer form of securitized financing.  Your broker recommends a Commercial Mortgage Backed Securities (CMBS) loan to finance the purchase of the property.  CMBS loans are typically for tens of millions of dollars and are used to finance commercial real estate purchases.  A bank will create a CMBS by “bundling” multiple mortgage loans and selling them in securitized form as bonds.  CMBS loans, like traditional Real Estate Investment Trusts (REITs), enable banks to loan more money out and allow wealthy investors to invest in high-yield real estate.  You like the idea and learn the lender is requiring you form a single-purpose Delaware LLC.  You have been told that the entity is to have a single equity member and a second non-equity special member to reduce the likelihood of the property going into bankruptcy.  This reduces the risk to the lender, allowing it to offer lower rates.  The catch is you will need to hire Delaware counsel to give an opinion letter.

What is an Opinion Letter?

The licensed Delaware attorney will review your organizational documents and loan documents and provide an opinion on these documents before the lender will fund the loan. This is drafted to meet the requirements of the lender and to make sure the entity has the power and authority to close on the deal and perform its obligations.

When to Obtain an Opinion Letter

A Delaware Opinion Letter should not be overlooked until the last minute. It may take 20 hours of legal services to do all the work required to render the opinion. In the opinion letter, the Delaware attorney will state assumptions, qualifications, and limitations regarding the legal existence of the LLC, whether it was properly formed, whether it is currently in good standing with the Delaware Secretary of State, and whether its governing documents were executed. We also often provide suggestions to revise and restate the borrower LLC’s Operating Agreement to be consistent with the loan agreement’s restrictions on the borrower.

Why is an Opinion Letter Needed?

The main reason a lender will require the opinion letter at closing is because they want reassurance that the LLC operating agreement will be enforced should the borrower default on the loan. Lenders are more comfortable knowing that provisions in an operating agreement designed to protect the lender are more likely to be enforced in Delaware compared to any other state. Most lenders require the borrower to be a Delaware single-purpose entity (SPE) LLC because the Delaware LLC Act and Delaware’s case law favor what the parties agree to in the written contract, and Delaware will be the governing body of law should the borrow and lender go to court.

We at The Williams Law Firm receive calls from lead counsel and principals of borrower entities in states across the country. We represent these types of clients who need us to help in this specific capacity. Our nimble practice allows us to turn around drafts of opinions prior to closing day for a comparatively favorable fee paid at closing. We would welcome the opportunity to assist you.

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