Neualtenburg TOS Review - Part II - What is a Person?

The great Horton tells us that a person is a person, no matter how small, but ...

What is a person in terms of the Neualtenburg TOS?

A person in the Nburg TOS is variously referred to as a "character," a "person," a "user" a "citizen" and an "entity."

- An "entity" is just a legal term and can apply to all of the others, like as not it was included because as many have pointed out the TOS seems to have been lifted in parts from the much more formal and legal LL TOS.

- A "citizen" is obviously a citizen of Neualtenburg and although the definition occaisionaly comes up for discussion is generally agreed to be a land-owner of Neualtenburg who has joined the co-operative by virtue of their "purchase" of land in Nburg.

There is a big big big confusion (legally speaking) however in the Nburg TOS as to whether we are talking about "characters" or "people." I believe that as a contract this document is basically invalid because of it and it should be cleared up.

Many times in the document it reads as if the writer envisions that it is a contract between a company and a real-life person, when in fact it's an agreement between a virtual organisation and an avatar. In fact, it's notable that even though the essential reality is a deal amoungst avatars, the word "avatar" does not even appear in reference to a "person."

Stuff like this:...where it obviously kind of assumes that we are gathering information that we actually aren't gathering and giving ourselves powers tht we actually dont have, like this: abound.

This kind of language envisions Neualtenburg running as a sort of "mini-LL," which may in fact be the case in the dim future, but is not the case now. It predicates that we have a web-site where people "register" with their real-life names and personal/credit information and that we gather and maintain this information with all the associated legal ramifications of that.

To me all of these kinds of references are probably innapropriate, but more importantly they are legal nonsense in that it makes the contract an agreement between "entities" that dont really exist. There is no "mini-LL" right now that is Neualtenburg, and no RL people actually live here (that we can prove in a legal sense).

I suggest that all references of this type be eliminated or changed to reflect a contract (a covenant in fact), between avatars and a virtual orgainisation, which is really the true stae of affairs.

Waitwaitwait... while it's certainly true that lots of the old ToS was a simple copy & paste of LL's ToS with a search & replace (and I'm prepared to bet a few L$ that LL did precisely the same — have you ever noticed that "Land" is never defined on LL's ToS? :) ), there are some things that are crystal clear.

A person is one member of the species homo sapiens sapiens, over 18 years of age (or they wouldn't be able to join SL), and hopefully sane enough to be able to understand a ToS. :)

The "confusion" between 'avatars' and 'people' is understandable, because we tend to confuse issues throwing buzzwords at them. In the sense that avatars do creative things (chatting is creation!), they're simply pseudonyms, an area which has been very thoroughly covered in the past 120 years or so by copyright law. All countries, signataries of the Berne Convention which set up international copyright law, will these days entitle pseudonyms full legal protection, and tie pseudonyms to the legal persona behind them, while mantaining the privacy/anonimity of a pseudonym.

This is not something that was 'made up' recently specifically for avatars, virtual worlds, games, or anything 'new'. Rather the contrary. This was made to protect 19th century authors who rarely signed under their own name (remember Mark Twain :) ).

Of course, copyright law evolved over the years and the media. When it hit the music industry, it became soon clear that one band could sign a contract under a pseudonym with 'exclusive rights' and sign another contract, also with 'exclusive rights', under a different pseudonym. Both would be valid. Remember Prince and The Artist Formerly Known as Prince :)

Similar problems occured also with athletes that signed up to different teams with different pseudonyms, so effectively they could be on a match playing against themselves :)

This implied a rewording on international copyright law, and now the full legal protection is given only to a single pseudonym. If you have several, you have to pick one that is your "major pseudonym", and that's the one that is entitled to legal protection. Ethically, you should get rid of the rest (or rather: you can use them, but they don't give you any extra rights; so, as an author or athlete, you can only sign contracts using your 'chosen' pseudonym, but contracts signed under further pseudonyms are void).

Some countries have 'pseudonym registries' but technically it's not necessary; you basically are bound to honour to just sign agreements with one pseudonym; if you do it with two, you're commiting a crime, and have to accept responsabilities for that :)

SL is so pretective about our IP rights that all this lovely framework with 120 years can be used without changing a single comma. Avatar names are just as legally valid as pseudonyms. It also deals perfectly with the concept of "multiple alts" (ie. multiple pseudonyms). Well, you have to pick the one that is your 'primary' one, and are bound to honour to use only that one to sign contracts. If you don't, you're trespassing. Simple.

The word avatar does not need to 'appear' tied to a person. Persons sign contracts, avatars are pixellated digital representations of selves inside a virtual world (and are as much a legal persona as, say, a phone number or an email address). Persons sign contracts under their own names, or under pseudonyms. All established for over 120 years! (more, if you include IP rights in the pre-Berne Convention days) The concept 'avatar name' is a neologism — a buzzword, if you wish — identical to a pseudonym in legal 'weight'.

This is pretty well covered :) (although it's my 6th or 7th post, in three different forums, that I have to explain things all the way... ah well...)

As to the rest of your issues:

1) Gathering information

The issue of "gathering information" worries me. Since the ToS was never discussed (there was no time!), at that time, I shrugged it off, because I had no idea on what exactly LL was expecting us to do. Some sims get abuse reports that happened on their private island to the Estate Owner. Ulrika never explained if the same happened to us or not (and I never asked Rudeen if she ever got a "NA abuse report"). The idea behind this is that LL would "delegate" dealing with some abuse reports to "local authorities" (specifically, those related to building, objects left on common grounds, etc.). If that's the case, I'm not sure how we can "keep track" of things!

Some people are control freaks and need those references to make sure they can control people — I, personally, get frightened by any type of 1984-scenarios, RL is bad enough as it is! So, I would advise to get in touch with someone at LL, understand if we they have special "assumptions" that require our "keeping track of information", and, if not (hopefully not!), get rid of all that from the N'burg ToS, where it doesn't make any sense.

I sincerely don't want to have to put up sensors in the air, periodically watching what people are saying, where they're moving, etc., just to obey to a requirement on ToS. This would ruin completely my own experience in N'burg! I know I have to deal with it on the wider SL, but have "double-spying" is too much for my taste.

2) Jurisdiction

This was also one of the things I was worried at the beginning. So imagine that I bump into Dianne's avatar in Neualtenburg; according to ToS, she can now sue me under the California legal system! Definitely the reverse is supposed to happen: we have ways, in N'burg, to deal with "local" issues.

The only thing that our ToS should mention is that first and foremost, all services provided by the city to their citizens are under N'burg's jurisdiction, and any complaints are to be made to the City first. Only if the city itself is in violation of the *LL* ToS, should we go one step higher; suing under California law is possible through LL's ToS, so N'burg's ToS shouldn't mention it — at all.

The idea is that soon SL will have multiple grids, under different jurisdictions. Imagine that one of the grids is operated under Netherland's very tolerant and fair legal system; it might be our convenience to switch the sim to that grid instead :) All comments on N'burg's ToS that apply to LL's own jurisdiction would simply not apply.

Sincerely, I think that copying & pasting ToS is always a bad mistake, but I know it's the norm. Some of my RL customers/partners do it all the time: they present a choice of ToS copied from 3 or 4 sites around the world to the end customer, to have them pick one; the customer tends to ask for legal advice, the lawyer just says "if it's related to the Internet, I don't have a clue what sounds good or not, pick one at random", and copying & pasting goes on and on.

Still, it's what we got. But I fully agree that the "ToS" should be more a contract between people and a virtual organisation. Uh. On a second thought, skip the "virtual" :) I've been dealing with so-called virtual organisations iRL for a decade now, and they are exactly the same in look & feel as "real ones" :) I might add that the notion taht you have to put the word "virtual" in a contract never crossed the mind of any of them... and some predate MMORPGs :) and are as virtual as Neualtenburg... even if they are financial institutions!

Excellent analysis and explanation, Gwyneth.

One of the first things a Business Organizations teacher has to hammer into law students is the concept traditionally called "artificial person" or "juridicial person," of which the legal corporation is one well known common example. A corporation exists only in concept, is a creature of legal process, yet has the legal rights of a "person." It can own property, sue and be sued, commit crimes and has some "civil rights." Unlike a "natural person," it cannot be seen, felt, or smelled. It exists only through the actions of its employees, agents and officers. Yet it is the legal embodiment or "avatar" of the organization behind it.

Like an avatar, it is "virtual," but only in recent years has the latter term come to be used by those who somehow see "cyberspace" as different. So, "virtual" entities and organizations very much exist in real life, and as Gwyneth points out, have well developed principles surrounding them.

In extension of the discussion of what makes a legal entity in Neualtenburg I think it might be worthwhile to take a long considered look at the existing base of Neualtenburg legislation to see if it sufficiently supports the concept of a corporate entity. Some of the initiatives that we are seeing lately such as the Neualtenburg School, a society to bring life to the MoCA and businesses in the Marktplatz and beyond might benefit from having a solid legal base upon which to base their existence. I am thinking specifically of issues such as financial liability, responsibility/accountability of governing individuals in relation to the obligations entered into by the corporation, facilitating legal redress, enabling corporations to enter into agreements and creating a framework to support the establishment of trust in relation to such agreements. As you may have noticed I have already briefly touched upon the issue when drafting the procedural document for the SC's provision of services of alternative dispute resolution. However, I think it would be wiser if we were able to put some definition/distinction into one of the foundation documents to establish the possibility at a very basic level.

The question of incorporation has gone around the block a couple of times. I think it was always one of Ulrika's dreams, so much so that she presented it as a fait accompli on the old neualtenburg.org web site.

There have always been two issues. The first is the paperwork and cost of doing the incorporation. The level of hassle seems to vary from jurisdiction to jurisdiction, however, so this may or may not be a real problem.

The second is the reporting requirements incumbent upon a corporation once it exists. We would have to have a board of directors with regularly announced meetings, for example, but by far the biggest problem would be meeting the requirement to continually prove that we are not subject to taxes. Sudane has documented this elsewhere in some detail, at least as it would apply to anything incoporated in the USA.

I have no idea if it is even possible to incorporate Neualtenburg in a non-US jurisdiction, given SL's ties to the laws of California. Realistically, incorporation is more trouble that it's worth, IMO, as long as Neualtenburg is subject to the USA IRS.

My belief is that the paper work, legal fees, meetings of the board and quarterly reporting requirements make RL incorporation a complete non-starter. I don't think anything is really subject to IRS taxation until you exchange $L for US dollars. Correct me if I'm wrong here.

RL articles of incorporation for the "City" would only make sense if the tax savings more than offsets the implementation and overhead of the RL corporation. I doubt even Ansche is incorporated in Germany.

More power to you if you ever get there, but for the moment I think the focus should be on attracting business and growing the top and bottom lines. Just my 2 cents.

Okay, probably my last post was a bit unclear on the issue so let me clarify that I do not share any vision of incorporating the Neualtenburg Projekt at all.

What I am instead envisioning is that we ensure that our legislative framework in-world takes into consideration to the necessary extent the possibility that we may have corporations doing business in Neualtenburg acting on behalf of the interests of one or more citizens, who by way of an ownership arrangement (charity, sole ownership, actual corporation or some other form) retain formal control of the corporation's actions, assets and obligations.

I may likely post a lengthier contribution on this topic at a later time in order to clarify what I mean and what I think is needed but it would be nice if somebody in the community would be available for a bit of 'intellectual / legal sparring' on the issue in the mean time.

So if I understand correctly, what you're proposing is not that Neualtenburg incorporate, but that the city create a framework for other SL enterprises to incorporate subject to Neualtenburg law. Do I understand you correctly?

Yes in so far as it is deemed to be necessary from a legal point of view and feasible from a political point of view.

Frank Lardner might be able to consult a bit, as he seems to have taken biz orgs courses (law school). I like this idea, part of my plans included a business partnership with the city. The ability to have sole proprietorships, partnerships, associations, even corporations under NB law could be useful. It's also a fair bit of law to write.

In essence this is a sensible thought process had there been no (or very basic) original framework. However, since there is already in place a significant volume of documentation regarding N'burg, it's TOS and government, it is incumbent on the City to tighten this up now rather than later.

In my RL work experience, most of these documents mean very little in the end anyway, but starting with a good base goes a long way. As Gwyneth has pointed out, the cut-and-paste method of document prep is fairly common (see the amount of legal documents that are available for novice use), but it is fraught with inconsistency and ambiguity. A legal document need not read like a law dictionary to be functional.

Regards,
GL
Beneficent Observer

This is a possibility offered by Neualtenburg that has come up before, and is feasible. It was discussed at some length (in general, not in particular to Neualt) in the thread Towards a Theory for Enforcing Contract, Resolving Disputes & Incorporation

All this is feasible. I would NOT make it part of the Constitution, but rather part of a legislative work of the governing body, a simplified Corporations Code. Most corporation codes make formation of a corporation a very simple matter, with minimal paperwork and disclosures. Complexity comes in if someone wants to sell stock to the public, in which case the opportunity for fraud and abuse motivates sound governments to more regulation.

Such a code might specify that the incorporator file some basic paperwork and execute a covenant accepting the governance of the Neualt Corp Code, as from time to time amended. That Code might provide for the payment of an initial and annual fee, subject the corporation to binding dispute resolution by the Neualt process, and require the posting of security in the form of a lien on land held in Neualt or its commercial colony in formation.

In fact, the commercial colony could consist primarily of the land holdings and corporate headquarters of its "domestic" corporations, sort of a Neualtenburgian Bermuda. Their land-holdings could be held in trust by the Commissioner of Corporations as security against failure to pay any money judgment rendered by the Neualt judiciary body in a civil case brought against the corporation in Neualt. The owner of the land in trust could use it for rental, commercial or manufacturing purposes, subject to local zoning laws, and would be required to pay the "carry cost" of any tier payments or equivalent.

All, of course, if there is anyone interested in that level of "friction" in order to operate their land-based enterprise.

To be successful, we need to make it attractive for SL businesses to "incorporate" in Neualtenburg. As Frank points out, RL corporations are considered "citizens" of the state in which they are incorporated, an interesting digression for our discussion of what is a "citizen" of NBurg.

In the US, many RL corporations have found it convenient to incorporate in Delaware, for a number of reasons to numerous to mention here. See, http://www.delreg.com/adv.cfm. In maritime law, many vessels fly a "flag of convenience", see http://en.wikipedia.org/wiki/Flags_of_convenience, registering the vesel in a lax jurisdiction, one of the most notorious of which is Liberia.

I'd like to see N'burg take on the Delaware (not Liberia) model, but what are the potential advantages of incorporating in N'burg?

(1) N'burg corporations could be permitted to fly a "flag of convenience" (not the nasty kind) indicating that they continue to abide by, or at least haven't been adjudged to be in violation of, an N'burg fair trading policy.

(2) Agreeing to be bound by a neutral party's decision about commercial disputes could give reluctant buyers some assurance that any concerns they have about another contracting party can be adjudicated by a trusted neutral.

(3) If the group tools improve, N'burg corporations might pledge land (or tier?) as surety for their agreement to be bound by N'burg decisions about disputes.

(4) Such corporations might include not-for-profit associations (gosh, maybe even SL marriages?), where there is an agreement (pre-nups?) to be bound by N'burg decisions.

I'm sure there are lots of other examples - feel free to chime in!

I think you could do this now in some circumstances. Consider the following hypothetical:

Alice and Bob are both citizens, They enter into an agreement where Alice secures a debt with her city land. Presuming that Alice and Bob agree to let the SC arbitrate disputes and the SC agrees to do it, in the event of a default by Alice, either by her own admission, or by a finding of default by the SC or other agreed upon judicial entity, the city, acting through Rudeen, would reclaim Alice's land and transfer it to Bob.

I'm not necessarily saying that we'd want to do this, but I think we could now, at least when both parties are citizens.

I had a nice, extensive post on this subject, when suddenly my S.O. popped in the living room, distracted me, and the computer died on me, post unsent :) So this is my second attempt, I hope I can remember most of the ideas...

Perhaps one of the things that happened for the best is that I got time to read Frank Lardner's "Towards a Theory for Enforcing Contract, Resolving Disputes & Incorporation" thread. And happened accross Prokofy's reply to a simple question I asked on his blog entry The Rule of Law. There are similarities on both writings (despite issues like style and intent :) ) — both try to address the issue on how "incorporation in SL" can be done, but in both, the problem is always the same: delegation of authority. How can people trust others, even with a signed contract, that you can notarize, but not enforce? Why should you bother to create "companies in SL" if they're not different from individuals in a group?

I remember my first experience in SL working for a "SL company". The pay was reasonably good, the organisation was quite fine, colleagues were nice, the work was interesting, although The Company had, like all others I've met in SL, a major flaw. It was not a "company". It was one guy with some good ideas and money to back them. There were no shareholders to account to; only customers to judge your reputation; and obviously, a "company" is supposed to have rights and duties as any other entity in SL, but the fact is — it doesn't. Despite The Company's boss' best intentions, the truth is, SL simply does not have the requirements for "incorporation", and I remain a skeptic towards "naturally emerging trade associations" or similar organisations which would "regulate" how things should work, and give meaning to philosophical concepts like "companies" or "corporations". I hope I may be proven wrongly; I've been waiting for those to "emerge" in the past 18 months.

Still, we have SL's single exception to all that, Neualtenburg, and its unique framework that allows us to grasp the best of RL practice and copy & paste most of it to our needs :)

My personal experience with incorporation is limited to a single jurisdiction, although I happened to work in one case with a company doing accounting both under the European system and the US GAAP (although it was definitely an European company, it did answer to an US 'mother' company). In my jurisdiction, things are tremendously simple, from a conceptual point of view, and, from many talks with some US residents, quite unlike the US model in several aspects. However, from Neualtenburg's point of view, this 'simple' system (perhaps because it's more 'primitive'?) might fit our needs better, and thus I might share some of it with you...

Basically you have individual persons under the law, and collective persons, which have similar rights and duties, although eventually different taxation levels as a result (as an individual, you might have a choice to become a 'collective' of one person — see below :) ).

The major difference between a 'collective' person and an individual is the amount of liability you have. Individuals have always unlimited liability. Collective persons, however, have limited liability. In return for that extraordinary benefit, they need to have 'organised accounting'. Notice that unlike what happens in the US, organised accounting does not mean 'public' accounting — your accounting is still private, and just between you and the State that reviews your accounting for the purposes of taxation.

How does the State evaluate your 'level' of limited liability? It's actually very easy. When you start up a company with a certain amount of stock — from a one-person-shop to a multi-billion, stock-exchange-traded public corporation — you have to place that amount of money in escrow, and this is public information (in past centuries, that money was held in escrow by the national bank; later, of course, any bank was allowed to hold the money in escrow, since they're overseen by the national bank anyway). So, at any point you do business with someone, that someone knows how much your limited liability is 'worth'. A tiny shop selling sausages or newspapers may just have limited liability up to a few thousand Euros (the minimum is 5,000, I think; it used to be 1,000, not long ago); the largest national telecom may have a few billion :)

This value goes by the name of 'partnership capital'. It's not exactly 'stock value', although there is naturally a 1:1 correspondence — if you raise your stock, your 'partnership capital' also raises, and vice-versa. The difference is mostly one of philosophy; thus, your 'stock value' also determines automatically your 'credit value' with banks and other creditors, and there are rules and laws that say how much the company can be in debt before being 'forced' to increase their 'partnership capital' by emitting and selling more shares. But the concept is one of philosophy: to protect both your customers (who might not know beforehand how much you're worth) and your shareholders (who need to know the amount of liability the company is allowed to), the State holds an escrow on the 'partnership capital'.

(In modern days, of course, this model is mostly 'virtual' in my country, and although banks are still forced to emit a declaration to the State that you have deposited that amount in the bank, it's not a true 'escrow' — you can start to withdraw money from it on the day of legal incorporation, namely, to pay for incorporation costs... and all subsequent running costs since Day One).

So, how could this be set up in N'burg?

First, the philosophical bit: companies incorporated in N'burg have limited liability to the amount of stock the partners have invested. This amount has to be deposited on the Neualtenburg Bank (that's the bank owned by the City of Neualtenburg; the same one that emits bonds; since some citizens also wish to create their own private banks, there could be a way to have protocols with the N'burg Bank to transfer escrows to private banks instead).

What the City of Neualtenburg provides is "overseeing". This works the following way. Let's assume that a minimum for "incorporation" is, say, L$ 10,000 as stock value. The initial partners — Jack, Jill, John, and Jane — raise the required amount and deposit it into an account at the Neualtenburger Bank (NB for short — not to confuse with "Nota Bene", the notary that you would also need to register the Incoporation Charter for your company), and register "The Four Jays, Inc."

Neualtenburg Law will only need a bare minimum of 'rules' for the Charter. One person will be the Director (CEO, or whatever they wish to call themselves) and will be appointed by the majority of shareholders. Very likely a second person will be a Treasurer; the Charter will tell the public how many signatures will be needed to make a legally binding statement, and who will be able to withdraw money from the account at the NB (if allowed at all).

In our model, let's assume all 4 owners have equal shares (ie. each has contributed L$2,500 in stock). They vote on Jack for Director, and Jane as Treasurer.

Now "The Four Jays" will be able to do all the contracts they wish, start buying and selling things, enter into debt, etc. Their L$10,000 at the NB will, however, be held as escrow. What Neualtenburg will say is that these guys are liable up to L$10,000 — if the company is not able to pay for their debts, or not willing to do so, or — this being SL, after all — simply run away from Neualtenburg, yelling that they are not citizens any more and that all this company thingy is nonsense, ha ha, well, in that case, they can file for bankrupcy, or be forced to declare bankrupcy.

The SC, as the court system in N'burg, will then try to gather all 'defrauded' customers and hear their pleas and claims, based on signed documents. N'burg will have L$10,000 in escrow to be able to pay — and that's all the creditors will get. But at least they will get something.

Now let's assume a more "normal" level of transaction will occur. The Four Jays wish to invest in a plot of land in N'burg, but all their money, of course, is in escrow. They now deal with the City the following way: they want a mortgage on the plot of land, based on the money held in escrow. The City will agree: after all, money or land, it's the same thing. The Four Jays buy their plot and open up their business.

Things start to go well: they're making business. How does the City know? Every quarter they'll have to present their income statements (accounting) to the City Treasurer. Let's assume they have been making good business: over L$2,000 per month in sales. This means that on sales only, they'll make more than what is held on escrow.

At this point, the City has some options. It may, for instance, allow The Four Jays to withdraw part of their money from escrow — or, if you wish, borrow money using the escrow as collateral. They now have a mortgage and a loan — but they still have money and land as collaterals. Even if tomorrow all four partners mysteriously disappear, the City won't have lost anything, and will still be able to meet eventual creditors on a bankrupcy suit with some cash.

Suddenly let's assume Anshe Chung sees an opportunity — she wishes to sell a sim to The Four Jays, as they are so prosperous and good at making money, they probably wish to expand. But now she has a problem. Anshe can clearly see that these guys are only as good as L$10,000; a whole sim costs (roughly) L$300,000, way beyond the money in escrow. If Anshe accepts a contract with them, and they default on payment, and leave the city to escape punishment, the best she'll get is just L$10,000 — because that's the total liability they're 'worth'.

Notice the difference between this business and the business that happens on a daily basis. Anshe knows in advance what kind of company she is dealing with. She also knows the extent to wish she can get indemnification in case they default on payment. With those data, she might accept the transaction — or not.

She also has an advantage: she might demand that "The Four Jays" temporarily increase their liability, and pay for the sim through the Neualtenburger Bank's escrow account. This is perfectly natural; iRL (in my country) this is called an 'accordion operation' (I don't have the slightest idea on how this relates to US law): a company temporarily expands their liability value — in this case, by depositing a bigger value in escrow — then 'contracts' their liability to a much lower value after a certain 'transaction' occurs. In practice, this means that instead of paying Anshe directly, The Four Jays would use the NB as an 'escrow agent'. If something goes wrong, they would be able to recover their money whenever they wished; likewise, if Anshe gets cheated somehow, she'd be able to demand to 'freeze' the account, file a suit, and ask to get at least the L$300,000 before either of the Four Jays drops from SL or declares themselves unaccountable by forfeiting citizenship in N'burg.

The City may also 'demand' an increase (or allow for a reduction) of liability. If business is increasing admirabily — say, The Four Jays, now operating from the sim bought from Anshe, are now having regular incomes of over L$20,000/week — they might get a gently tap from the Treasurer, which would say: "sorry guys, you have grown too much — time for you to raise your liability". This could happen quarterly. Again, they would have the choice to either deposit more L$ at the NB or to buy more (mortgaged) N'burg land (which would allow them to increase their operations further, and so on). For the public at large, what this means is: this company is a success; they're increasing their liability from the minimum value of L$10,000, to, say, L$100,000. They really must be good; it's safe to do business with them; if something goes wrong, there is more than enough at the NB to get as compensation...

Eventually, over the months, the NB may even be more benevolent, and share the risk; they might see that business is so good that these guys deserve a boost, and the NB will we willing to make bigger loans, up to, say, 75% of the money and land in escrow. Thus private corporations, incorporated in N'burg, would get a 'state stipend' in the form of 'loans' against escrowed capital or assets (land), if they're run successfully. On the other hand, if something goes wrong, they can be 'safe' — they'll still be able to pay back all their creditors, up to their liability. It's a much more risk-free environment.

I apologise for the looooong example, I tend to get carried away :) But I hope this story illustrates a basis for incorporation:

1. it's not just a "legal thingy". Obviously there will be an Incorporation Charter, duly notarized; but while a "piece of paper" is worth enough to get you to court to file suits, it isn't a guarantee of getting your money back in case of fraud (and of the company 'suddenly disappearing')
   
2. at each step of the process, several things happen:
   1. your incorporated company defines the limit of liability in terms of L$, by letting the Neualtenburg Bank hold that value in escrow
      
   2. land or money can be used as escrow
      
   3. the NB can allow you to withdraw part of the amount held as escrow (under a 'loan' or equivalent terms) if your business is successful
      
   4. the City will monitor your accounting, and demand the company's adjustment of their liability by withdrawing or adding to the escrow account as it sees fit
      
   
   
3. under this model, not only companies are controlled, but they have a solid basis for limited liability; suing for bankrupcy under these terms will mean the money held under escrow is forfeited; there is no risk the company 'disappears' and leaves their customers unhappy
   

Interesting side-effects from this model include:

1. The Neualtenburger Bank gets a purpose — beyond emitting bonds for city revenue, it'll also hold money/land as escrows, or use other collaterals (land) as a basis for loans
   
2. Although the Neualtenburger Bank will obviously need to have their funds ready in case a company goes bankrupt, it doesn't make any sense to hold it forever in an account. Instead, it should do investments:
   1. in Neualtenburg-incorporated companies, by picking the ones looking more promising and offering them 'stipends'/loans/mortgages at low (or zero) interest rates to encourage growth;
      
   2. in other Neualtenburg-incorporated banks, which might, for instance, use that money for more 'risky' businesses (remember, those banks will also have escrow money/land deposited at the NB!) but which allow a higher return; also, some escrow money may be "transferred" to other N'burg-inc'ed banks as a way to ease the burden
      
   3. in other SL-wide businesses: buying sims and developing them under the N'burg covenant (if those projects fail, the sims can always be resold and not all is lost); loan big amounts of money under collaterals for others to develop their projects
      
   
   
3. obviously, the Neualtenburg Bank is under the direct supervision of the Guild, and, through it, it's part of Government, and its operations are totally transparent and must meet first with Governmental approval, and secondly (indirectly) through citizen's voting.
   

I have not even thown in the concept of public stock exchanges... which will be the subject for other posts, I expect.

To Sudane: notice how the word "taxes" (almost) never appeared :) I think that the mere fact that N'burg-incorporated businesses will have to establish an escrow account with the N'burg Bank will give that entity large funds that can be successfully invested at a profit, thus globally diminishing the 'need' to encumber N'burg-incorporated companies with 'taxes'. This, of course, is the model of most fiscal paradises — but also of perfectly legitimate low-tax countries like Luxembourg or Switzerland, which rely heavilly upon financial services and a large number of companies incorporating under their systems. I think that Delaware in the US uses similar assumptions to attract companies incorporating there.

Your model is one used in various other financial security set-ups. The Federal Reserve Bank, for example, requires individual banks to maintain a certain level of "reserves" on deposit with the FRB; commercial lenders and banks often require depositors to maintain "compensating balances" of money at little or no interest with the lender; tax havens like Bermuda "expect a substantial investment in our economy" as a condition of licensure. The list goes on.

Objections to this have included that this would put an additional expense on a business enterprise, making it uncompetitive. For that reason, it would probably appeal only to a business with substantial profit opportunity that depended upon customer confidence in its ability to perform in the future. This would probably leave out plain retail businesses, but would help professional and financial service businesses like architects, major building contractors, banks and landlords.

The recent sudden closure of several sims that had or were seeking commercial tenants should remind renters that a sim controlled by one whimsical owner can disappear overnight, along with all the goodwill and effort built up in a merely rented sales location. A sim with some third-party limitations and restraints might enable long-term leases, which would be more attractive to those looking for an alternative to buying a whole sim for a long-term business enterprise.

This is very interesting.

The only one of Frank's example's that I would see as somewhat parallel to Gwyn's model is the Federal Reserve Bank, and this is rather on a different scale than is being proposed. The FRB is serving a "national" function where the focus is providing currency stability. There is no US system, to my knowledge, analygous to what Gwyn describes. The commercial lender who demands a "compensating balance" is interested only in lowering their own risk; even without such an escrow deposit, (which is unusual in my experience) they'll require invasive financial disclosure, including personal guarantees by principals, and "first in line" status on any asset distribution in bankruptcy.

Gwyn's model is very strange to me, a US businessperson. By requiring the escrow fund as a condition of granting a desired legal status, the "state" (or the granting entity) assumes a guarantor function for that company. Essentially, the "state" becomes a partner in that company, providing a level of assurance for investors and vendors; apparently in exchange for the deposit of funds, from which the state can of course generate income. Of course, the "state's" liability is capped at the level of the escrow deposit... very good for the state. But, it seems to me, it also invests the "state" in the integrity of the company that it "partners" with. Arthur Anderson, formerly one of the US "Big Seven" accounting firms, although performing a slightly different function, went down in flames with the collapse of Enron, for which it was the auditor. It's surely not an exact analogy, but the parallels are there.

That said, I am not against persuing this concept. Despite its foreign-ness to me (corporations, partnerships, LLC's are definitely NOT required to deposit any assurances with anybody in the US), it's a service where I can certainly see how Neualtenburg might play an interesting role in the SL universe. Only, you'll have to walk us Americans thru this step by step... hehe...


Sudane

I think this is a fascinating idea. Sudane rightly points out its unfamiliarity, but it seems to me the only way to do this sort of thing in a world where there is no central government that can compel payment in the event of a default or other liability. This means that some sort of escrow system is the only way creditors can be assured of at least some payment in case of default.

Another possible wrinkle would be for creditors wishing to have the escrow amount as a fallback to be required to register their potential claim with the NB, making the total level of debt the escrow account was securing a matter of public record, although not the identities of the creditors necessarily.

Are there? To me, it seems that an auditor says "This company is doing business responsibly", whereas the NB would be saying merely "This company is worth L$ 100,000" -- and that loss of credibility is more likely to occur over the former statement than the latter (which is true by definition as long as NB holds the money in escrow).

A very interesting proposition.

You're right, of course. But I feel that emotionaly, in terms of the perception of the creditor judging the creditworthiness of the company, the two are very similiar. I perceive a company audited by Arthur Anderson, where the satisfctory audit is a matter of public record, as a safer plce to issue credit than a company who is not so backed. Similiarly, I perceive a company which has $X held in escrow by the government to be safer than one which does not.

After all, the issues of perception and confidence are at the center of the business transaction.


Sudane

Another analogy common in US law is the requirement that certain "alien" or "nonadmitted" insurance companies (such as Lloyd's of London) post security deposits in the form of cash in banks in the U.S. (or letters of credit) as a condition of their being approved as insurers to cover US risks.

This is a state regulatory requirement, a condition of doing business, yet does not make the state the "guarantor" of the insurer. It does provide the US state liquidator (if one must be appointed) with a ready source of funds from which the policyholders in that state may be compensated if the insurer becomes insolvent and is ordered liquidated.

The deposit for Lloyd's alone amounts to billions of dollars. As explained following 9/11, when major insurers like Lloyd's were placed under great strain, prompting cash calls on members: "One of the reasons for the cash calls is to augment the reinsurance trust fund held in the U.S., and administered by The New York Insurance Department on behalf of the National Association of Insurance Commissioners (NAIC). All "foreign" insurers maintain such funds. Lloyd's has two—a surplus lines fund of around £1.2 billion ($1.74 billion) and the reinsurance fund of about £4.1 billion ($5.94 billion). This fund is normally kept equal to 100 percent of estimated gross claims, but the NAIC has agreed to relax its rules for at least the next quarter. The adjustment payment due Nov. 15 will require that only 60 percent of estimated gross claims relating to the WTC disaster be deposited. * * * The fund isn't actually used to pay claims. "It's like a security deposit," [a Lloyds spokeperson] explained, "While it could in theory be used to pay claims, it isn't in practice. All claims are paid out of London."" Time-Tested Lloyd's Turns to Address U.S. Disaster Losses (Insurance Journal Oct. 29, 2001)

Similar requirements for a security deposit as a condition of the grant of certain rights and privileges appear in other regulated industries and even in private contracts, such as the common "first and last month's rent" requirement for a residential tenancy, or the escrow fund sometimes paid in conjunction with a real estate transaction.

Legislation might create a Neualtenburg Ministry of Trade, with powers to establish a Neualtenburg Commerce Bank. The NCB could be chartered to receive, hold and invest (conservatively) cash and land pledges that the appointed Minister may require as a condition of issuing a Certificate of Good Standing. A CGS could be issued to a Neualtenburg Chartered Entity (NCE) formed in accordance with a simple Corporations Code to be written and enacted. It might also be allowed to a foreign entity chartered in accordance with a comparable law in another jurisdiction with a Corporations Code comparable to and approved by the Neualtenburger Minister of Trade.

This is a very nicely focused statement for the system. Frank, if nothing else, we've got to make you Candidate#1 for one of Aliasi's proposed microplots, so we rope you into a citizen role .

The statement raises the issue of what's in it for Neualtenburg, besides prestige and the reputation as perhaps the first ever. "The NCB could be chartered to receive, hold and invest (conservatively) cash and land pledges ..." seems to me the heart of the matter vis a vis benefit. There is no, to my knowledge, conservative investment possibility available in SL. In essence, because NBurg does not exist yet (in this role). Perhaps RL investment should be considered here. Exchange fees might torpedo the concept, but it is perhaps worth exploring. There must be some balancing benefit to the City received by it in exchange for the service provided to the affiliating entity. Registration fees just won't do it.


Sudane

Don't banks sometimes charge escrow fees? There could certainly be court costs imposed in the event of an actual liquidation. There will, after all, be administrative costs. On the intangible side, if this is done right, it could make Neualtenburg one of the places to do business in SL.

Ahhh ... but there is a conservative investment: "Land, Scarlett ... its the only thing that LASTS." If the escrowed funds were invested in land which was rented to third parties (or even back to the depositor), it would generate income. And provide a basis for expansion of Neualtenburg, or whichever entity put together the land bank.

If successful, financial services (suretyship, escrow and depositor services) could become a prime export of Neualtenburg. As is the way in Switzerland and Bermuda.