Fusu.com billed as the world’s first and only domain stock exchange seems to be getting a lot of buzz in the industry.

However is it legal????

I started looking at this a couple of weeks ago, as I was considering listing one of my domains for sale.

It looks like a great idea, sell part of a domain, raise some cash, and allow other to participate in the current income and upside potential of the domain.

But the more I looked at the exchange, the more I found asking myself if the sale of a partial interest of a domain, by a US Resident or Citizen, was the sale of an unregistered security in violation of federal and/or state laws.

First the disclaimer.

Although I am an attorney, I am not by any means, nor do I represent that I am an expert in US security laws. I do have a basic understanding of them. I am not smart enough to make a determination of whether the domain interest being sold through Fusu.com are securities under US federal or state laws. I am smart enough to see that there substantial issues that need to be addressed.

This is what attorneys do. Spot issues. This is what we are taught in law school to do. This is what law school exams and even the bar exams test, the ability to spot issues.

Resolutions of issues require substantial time and research by experts in their field.

I would advise anyone considering buying and especially selling domain interests, to get an opinion of a very good attorney, who specializes in security laws, prior to doing so.

Security laws in the US, both state and federal are some of the most complicated laws on the books and violation of such laws carry substantial civil and criminal penalties.

According to fusu.com:

“Investors can buy percentage ownership in domains and trade their shares”

“Fusu uses the concept of a traditional stock exchange and applies it to the domain names industry by providing a trading platform for owners, shareholders and investors”

Domain owners can sell up to 45% of their ownership in a domain to an unlimited number of investors.

Fusu.com does not limit the number of investors that can buy shares in any one domain. The domain owner appears to be in control of the domain with his 55% ownership. All decision regarding the domain name, as whether to park the domain, where to park it, or whether to develop it, all seem to rest with the domain owner. However fusu.com does give the shareholders a right to vote on the sale of the domain if:

“The domain sale price is less than 150% of the current market value; you are required to get approval from at least 90% of the shareholders”

Once the investor buys a share he can then sell the share to anyone else on the exchange or keep the share in which case, according to Fusu.com the shareholder would be entitled to his pro-rata share of all domain parking revenues and sale price, if the domain is sold.

Domainers have to place the domain into an “escrow” account with one of Fusu registrar’s which right now is limited to Eurodns, to insure the proper distribution of funds if the domain is sold.

Fusu.com also states that:

“””By being a shareholder in today’s best domains, you participate directly

• in the increase of domain valuations,
  
• in parking revenue, and
  
• In the sale of premium domains.”””
  

According to its terms and conditions, Fusu.com, “is governed by the laws of the Slovak republic”

So we have two basic questions:

Is the determination of whether the instrument being sold by a US citizen or resident is a security be determined by US law, or Slovakian law?

If the determination whether the instrument being sold by a US citizen or resident is determined by US law, then is the sale of shares or interests in a domain name, a security under US law which would be required to be registered with the Security and Exchange Commission?

Let’s be clear here. The domain owner is the one actually selling the shares or interests in the domain. The domain owner is the one who gets the proceeds from the sale.

Fusu.com is just facilitating the handling of the sale of shares.

As to the first question, although as I previously said I do not have the answers, my gut feeling is that a US based domainer is subject to US securities laws when they sell an instrument and get the funds, especially when the buy of the shares is most lightly also a US citizen or resident.

The second question is much harder.

Under US law, securities have generally been held to include:

1. Stock certificates, Bonds, debentures or other evidence of a secured indebtedness or of a right created in the holder to participate in the profits or assets distribution of a profit-making enterprise.
   
2. Written assurances for the return or payment of money.
   
3. Instruments giving holders rights to money or other property. Instruments can be in the form of, notes, contracts, agreements, certificates of interest or participation in profit-sharing agreements, collateral-trust certificates, preorganization certificates or subscriptions, transferable shares, investment contracts, voting-trust certificates, certificates of deposit for a security, and a fractional undivided interest in gas, oil, or other mineral rights.
   

A “security”, under federal law and the laws of Florida (where I live), also includes an “investment contract”, which means, generally, an investment of money in a common enterprise with the expectation of profit to be derived from the efforts of others.

In addition to Federal Security Laws, each state has its own securities laws and regulations. These state rules are known as “Blue Sky Laws”, which regulates both the offer and sale of securities.

With few exceptions, every offer or sale of a security must, before it is offered or sold in a state, be registered or exempt from registration under the securities, or blue sky laws, of the state(s) in which the security is offered and sold.

There are substantial civil and criminal penalties both under federal law if it is determined that the interest in the domain being sold is a security that requires registration prior to sale.

Some types of securities and some offering in securities are exempt from registration requirements. However, most of these exceptions deal with offering which are limited in size and deal with only “accredited investors” which are generally investors who meet specific net worth and annual income requirements, neither of which fusu.com attempts to qualify in the registration process.

In an e-mailed I received from fusu.com General Counsel on Friday, Mr. Tomas Stremy, in which I raised many of these issues, he stated that:

“According to Slovak law we are not selling securities but forward looking contracts, and act only as broker. We are currently working with counsel to address US specific regulations.”

My gut feeling is that since, the investor/shareholder is suppose to receive a pro-rata share of the revenue currently derived from parking the domain, it may not be treated as a futures contract under US law. A “futures contract”, which by definition, may only have value in the future, does not contemplate a current income component. The entitlement to current parking revenue definitely gives a shareholder the current right to participate in the income generated by the domain.

If the domain interest, is definite by US law, I don’t think it helps that fusu.com calls the initial sale of the domain interest by a domain owner to shareholders as “going public”.

“”Going public” happens when the domain owner sells shares of its domain to the public for the first time. This is called an Initial Domain Offering, or IDO

I do not think it helps that fusu.com calls themselves the world’s first “Domains Stock Exchange”.

I do not think it helps that when you click to buy an interest in a domain on fubu.com, you click on “buy shares”.

As far as buying a “futures contract” I don’t see a contract anywhere on the site. If your Selling and others are buying a futures contract, then there should be an actual contract that all parties sign or at least the seller signs on a transferrable basis.

Beyond the SEC and Blue sky laws (which again are only applicable to US residents and citizens), there are other potential problems with the exchange.

Although Fusu.com seems to have the shareholders protected in the event of the sale of the domain, by use of a registrar’s escrow service, there does not appear to be any system in place to make sure the shareholders get their share of parking revenues. There does not seem to be a requirement that the domain be parked with any particular provider and thereby there does not seem to be anyway for fusu.com to collect the parking revenue or track the accuracy of the figures.

What if a domain is subject to a UDRP action or other legal proceedings? Will the shareholder lose their investment, if the domain is taken? Will the shareholders have a claim against the domain owner for failing to protect their interest in the domain? What level of protection will a court place upon a domain owner to protect the interest of the shareholders? A court might find that the domain holder has a duty to appeal any negative decision? Moreover the court may place a fiduciary duty on the domain owner to protect the other shareholders

Speaking of a UDRP action or worse, an action filed in federal court, who is responsible for paying the cost of fighting an action? Even though the domain owner sells 45% of his domain, it would seem to me, the domain owner will be 100% responsible for the payment of the costs of defense. There does not seem to be any basis to require shareholders to pay their share of any costs of protecting the domain. But the issue is far from clear.

What if Fusu.com closes? In Paragraph 5.4 of its terms and conditions, it states:

“FUSU may elect to discontinue offering the Site or the Services, or any portion thereof, at any time for any reason, with or without advance notice.”

Or what if a US governmental entity, such as the SEC orders that the exchange stop operating in the US?

Although I think the shareholders would still own their share of the domain, how would they enforce their rights, and since there are so many small shareholders, owning a small portion of any particular domain, it may not be cost effective for them to attempt to enforce their rights.

Fusu.com has potential to be a very powerful player in the domain market.

There is tremendous potential.

But there are many questions.

The questions have been asked, now we need them answered.