Case Study of a Government Harnessing the Power of Ethereum: Norwegian Cap Table Management Platform for Private SMEs
Introduction
The Norwegian Government has developed a platform called BRØK, which uses the Ethereum blockchain network to share and update unlisted companies’ shareholder information. But before we dive into this case study of a government harnessing the power of blockchain for the creation of a public good, we need to understand: (1) what is shareholder management of unlisted companies (2) why we need updated shareholder information (3) why a single, trusted source of truth is needed for this financial data.
Why Do Companies Need to Disclose Shareholder Information?
A quick introduction to laws of transparency in corporate law
A corporate registry is a database that stores information about registered corporations, which are organizations that have been incorporated and paid a fee to be included in a government-certified list of businesses. This centralized storage tracks companies from their incorporation to their dissolution, keeping records of all related documents such as registration, maintenance, and incorporation.
Many nations around the world often include SMEs that are unlisted — or companies whose shares are not traded in a public stock exchange — in these registries. Unlike publicly listed companies that have a duty of information disclosure to their shareholders, unlisted companies often don’t disclose up-to-date changes of their companies. And even if they do, these updates are not published in a timely manner.
One of the key pieces of information, when one evaluates a corporation, is understanding ownership as a shareholder composition can tell us who owns what part of the company. Companies are required to keep a record of shareholder composition, also known as cap tables. In some countries, even if it is not a publicly traded company, if one requests this document, the company needs to disclose it (although an obligation of disclosure may vary by country).
In the financial world, disclosure refers to the timely release of all information about a company that may influence an investor’s decision. The laws of information transparency also encompasses the concept that all parties should have equal access to the same set of facts in the interest of fairness.
Why is this important? Because then an insider can use material nonpublic information for personal gain at the expense of the general investing public. If you are interested in learning more about this topic, check out the Sarbanes-Oxley Act of 2022.
Laws on transparency is also the reason why investors who acquire more than 5% of a class of equity securities of a publicly traded company need to file a Schedule 13D report with the SEC, which among other facts must include their reasons for acquiring the stake and any plans they may have for the company.
Activist investors (aka shareholder activism), typically specialized hedge funds, that acquire >5% of a public company end up filing a Schedule 13D. Interestingly, in 2022, there has been multiple ESG-focused activism campaigns, including Carl Icahn’s failed attempt to push for animal welfare in McDonald’s food supply chain.
Where can I view cap tables of private companies (startups)?
As stated above, not all governments require unlisted SMEs to disclose shareholder composition of their companies, so unless a public institution is operating a platform to support this information disclosure, only certain investors will get access to private companies’ cap tables. As seen in the case of startups.
But having said that, the importance of cap table transparency and real-time update has been heavily emphasized from the past decade in the startup realm, which is why we have seen a myriad of SaaS tools facilitating cap table management for startup founders, employees (with ESOP) and investors to use.
If you are in the U.S., there are high chances you will be using Carta as your cap table management software. Some startups are also opting for AngelList after they announced their stack equity management tool in 2022. European startups and investors, on the other hand, are using a Switzerland-based equity management software called Ledgy and in Asia, a South Korean startup called Quotabook is trying to amass the local market (this was one of the early-stage startups we’ve invested in my previous fund).
For ‘outsiders’ who can’t get access to detailed breakdown of a company’s shareholder breakdown, crunchbase will be the place to go since at least information of the latest investment rounds (total amount, # of investors, who were the lead investors) can be accesed.
BRØK, Shareholder Management Platform for Unlisted Companies in Norway
Currently, around 380,000 private companies in Norway maintain their own cap tables. This information is considered public and must be made available to anyone who requests it. However, there was no easy way to share and maintain this information digitally by the Norwegian corporate registry thus why BRØK was created.
BRØK is a platform for publishing shareholder information on the blockchain. It will support a range of other scenarios including: transfer of shares, mortgage on sales, information about a shareholder, deletion of information about a shareholder (in alignment to GDPR) and changes in number of shares due to changes in capital, stock splits and merges.
This platform will create a single, trusted source of truth that different systems can rely on as other service providers, financial institutions, the press and public institutions would be able to view this financial information efficiently, in a timely manner.
How it was built with blockchain technology?
Each company’s stock is represented on BRØK using the ERC-1400 standard, which is a token standard designed to represent tokenized financial assets on the Ethereum blockchain. It is compatible with most Ethereum tools and platforms due to its retroactive compatibility with the ERC-20 token standard. This token standard also allows issuers to set up substantial control over token transfers by attaching data to transfers and performing granular certificate checks while being compliant with regulatory constraints.
The ERC-20 token standard introduces a standard for Fungible Tokens, in other words, they have a property that makes each Token be exactly the same (in type and value) as another Token. Some functionalities of ERC-20 include: transfer of tokens, current token balance of an account, calculation of total supply of the token available on the network and approve whether an amount of token from an account can be spent by a third-party account
In BRØK, each company has its own listing on the blockchain. This listing includes information about the number of shares in different classes of shares, with an anonymized address pointing to the owner. Whenever there is a change in the shareholder information published, this is recorded with a timestamp and the corresponding signature from the specialized system that made the change.
To comply with the EU’s privacy regulation of GDPR, BRØK stores identifiable personal information not on the blockchain (as it is impossible to delete revision trails) but on an open distributes database structure. In the case of BRØK, the creators went for Ceramic, which is a data network built on top of IPFS and the Ethereum network.
IPFS is a file sharing system that can be leveraged to more efficiently store and share large files. It relies on cryptographic hashes that can easily be stored on a blockchain.
To minimize transaction costs, or gas fees, and ensure faster speeds on the Ethereum network, the creators of BRØK decided to use Arbitrum’s layer 2 scaling solution.
Arbitrum is a type of technology known as an optimistic rollup. It allows Ethereum smart contracts to scale by passing messages between smart contracts on the Ethereum main chain and those on the Arbitrum layer 2 chain. Much of the transaction processing is completed on the second layer and the results of this are recorded on the main chain — drastically improving speed and efficiency.
A more detailed blog post from the builders of BRØK:
Was this the first attempt of a blockchain-enabled cap table management?
While doing this research, I found out that U.S. company Figure Technologies has also developed a cap table software solution called Figure Equity Solutions using its Provenance Blockchain. Its subsidiary Figure Securities received SEC approval as an Alternative Trading System and is also a FINRA approved broker-dealer.
Figure Equity Solutions was built by Figure Technologies to eliminate the standard two-day settlement and reduce counterparty risk. For more information about the cap table management solution on Provenance blockchain refer to the Medium below:
Concluding Remarks
I decided to write a piece about this new shareholder management platform because IMHO it is a exemplary case study of a government harnessing the blockchain technology to create a public good…that is not a CBDC. Many governments hoped that blockchain would be a game changer for issues such as security and operational challenges. Still, we have seen mixed results in government attempts to implement blockchain in their day-to-day operations.
Blockchain isn’t a silver bullet, and governments should be more cautious about how and in which sectors to implement blockchain technology. For instance, what is your stance on the whole debate of digital IDs enabled by blockchain? Let me know your thoughts below.
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