Digital tokens are emerging as a third asset class, alongside cash and equity—one that lawyers increasingly will need to manage in M&A deals, according to Nick Abrahams, Norton Rose Fulbright’s global co-leader of digital transformation.
The Sydney-based tech lawyer, who is also an innovator, entrepreneur and futurist, has worked on several M&A deals in which tokens have played a role and has also advised on employee incentive schemes that include tokens along with shares.
“What’s become clear is that organizations now effectively have a third asset class,” he said.
Traditionally, a company pursuing an M&A deal either buys the target with cash or with shares or a combination of the two. But times are changing, Abrahams says.
“Now, it’s cash, it’s shares and it’s tokens. It’s a mixture of assets we’ve never seen before.”
To be sure, most of the deals involving tokens that Abrahams has handled to date have been for crypto companies. But he expects the use of tokens to become much more widespread.
Already, large corporations have demonstrated interest in using Web3—the looming next iteration of the internet that will rely on tokens and blockchain, Abrahams said.
“I do think it’s going to become more pervasive and organizations will look to see how they can realistically, and in a value-added way, tokenize their business,” he said.
A digital token confers a right on the owner to own or do something specific. For instance, FileCoin tokens can be exchanged for cash or data storage space, while Australian company Treasury Wine Estates last year created a token that gives the owner the right to a bottle from a barrel of the rare and prized wine, Penfolds Magill Cellar 3, vintage 2021.
The tokens exist as a piece of code that facilitates the owner’s ability to do whatever it is they are allowed to do with the token. They exist on the blockchain, where all transactions are recorded.
Along with M&A deals, Abrahams has advised on employee incentive plans that contain a token component and has found that employees are often more enthusiastic about receiving tokens than equity because, unlike equity interest, ownership of tokens vests immediately.
Laws and Regulation
While bundling tokens into a deal creates additional complexities for lawyers, Abrahams for the most part rejects the idea that current laws and regulations aren’t fit to take account of the new asset class.
“You’ve got the existing legislation—there’s no point in saying, ‘Oh, it doesn’t make sense because of the technology,” he said. “You can apply the existing legislation. Sometimes it works out fine for the client. Other times you may have to see how you can reorganize the proposition to make sure it does comply with laws.”
Abrahams concedes dealing with tokens isn’t simple. Tax laws are more favorable to equity grants than tokens. And securities laws, anti-money-laundering laws and foreign investment regulations also need to be considered.
And the rules surrounding tokens are a new world for lawyers accustomed to dealing with equities. For example, tokens are governed by a “tokenomics schedule,” which outlines the rules surrounding what will happen to these tokens in the future, such as how many more can be created. Where equities have a shareholders’ agreement and a company constitution, Abrahams explains, tokens are governed by a white paper.
Examining these white papers can involve delving into a token’s actual computer code—not a task most lawyers are able to undertake. Norton Rose has a designated team to handle this, led by London-based by the firm’s London-based co-head of technology consulting Peter McBurney, who is also a professor of computer science at King’s College London, Abrahams said.
A Circuitous Route
Abrahams himself never imagined he’d be a tech lawyer, let alone the co-founder of a successful online legal services website called LawPath; co-creator of the world’s first AI-enabled chatbot, used by the legal industry in the EU, Canada and Australia to manage data privacy laws; and an author, futurist and professional speaker on the subjects of technology and disruption.
Indeed, after graduating from the University of Queensland, he worked as a corporate lawyer in Tokyo and Sydney. But after about nine years, he quit law to pursue a different career.
“I had a bit of a personality flaw—I’d always wanted to be a Hollywood studio executive,” he said.
Abrahams got a master’s degree in film at the University of Southern California, arguably the top film school in the United States, and joined Warner Bros. as an executive, working with writers and directors. He left to become the chief operating officer of a Los Angeles-based dot.com, and, after that company went public, Abrahams said it looked as if he’d never have to work again.
But then came the dot.com crash. He went back to law, joining Norton Rose in 2002.
In the 20 years since, he has become a tech guru, writing books about digital disruption and giving speeches to companies on innovation, technology and future trends, as well as expounding on the future of cryptocurrency, the metaverse, NFTs, and what he calls the digital asset revolution.
And it turns out he didn’t have to abandon his love of the film industry. He sits on the board of directors of the Sydney Film Festival.
But in the legal world, Abrahams’s passion now revolves around digital assets and the changes he says they will create. Young lawyers with expertise in this area will increasingly be needed, he says, as they will have extensive knowledge about the unusual, complex conventions of crypto and NFTS that the average lawyer lacks.
This is a “massive opportunity,” he says.
