We want to alert you to an important change in the National Venture Capital Association (“NVCA”) model investment documents, which are industry-standard form documents that parties to venture capital investments use regularly.
The NVCA recently released updates to its model documents (available here) that include a variety of changes. As is typical for certificates of incorporation (or charters) of venture-backed companies, the NVCA model certificate of incorporation contains a laundry list of protective provisions that give investors an approval right over certain corporate actions.
In response to the proliferating use of blockchain-related technologies and assets, cryptocurrencies, and token sales, including initial coin offerings (“ICOs”), by companies as an alternative fundraising method, the newly-updated NVCA model charter includes a broad protective provision prohibiting the Company from transacting in any digital tokens, cryptocurrency or other blockchain-based assets, including through a pre-sale, ICO, token distribution event or crowdfunding, or through the issuance of any instrument convertible into or exchangeable for tokens, without investor approval. The exact language is located in Section 3.3.5 of the updated NVCA model charter.
The effect of this provision is to give the Company’s investors to the right to approve—or block—a venture-backed company from executing transactions involving tokens, cryptocurrencies or blockchain-based assets. Of course, the model provision may be negotiated and is optional.
ICOs and similar transactions present a host of complex legal issues that founders should discuss with outside counsel.