Sanctions against Russia have now extended to startup companies with previous ties to the invading nation, as Delaware began blocking said firms from doing business in the US state.
The Delaware Division of Corporations this year notified dozens of Delaware-incorporated tech companies that they can no longer do business with the state, according to lawyers and startup founders. This came after the state discovered that the corporate records of these companies contained individuals or business addresses in Russia, The Wall Street Journal reports.
Due to Delaware’s reputation as a welcoming business climate, startup companies originating from the Russian tech sector often settle there to establish a presence in the United States and seek venture capital. However, as of this latest move, these firms have faced the dilemma of existing as Delaware corporations, but are prohibited from paying taxes or filing regular corporate records to maintain a good record with the state.
Banned startups also cannot attract leverage because they cannot amend their Delaware articles of association to issue additional common equity.
According to a spokeswoman for the Division of Corporations, its regulations follow, rather than supersede, federal sanctions laws and says the executive order prohibits US organizations, including state governments, from “providing business formation services with Russian nationals or Russian-based entities “.
The Treasury Department’s Office of Foreign Assets Control in May banned the provision of “accounting, trust and company formation and management consulting services” to residents of Russia, following an order from US President Joe Biden.
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Leonard Grayver, an attorney who advises Russia-affiliated companies, suspects the Diamond State is going beyond OFAC mandates by blocking companies with even one director or minority shareholder based in Russia.
Grayver said companies should be blocked for violating OFAC regulations or aiding money laundering, “but Delaware wants to be holier than the Pope, and they’re enforcing the restrictions more strictly.”
Mikhail Dobrokhvalov, the co-founder of a startup that uses sharable links to distribute non-fungible tokens (NFTs), said he founded Linkdrop Labs in Delaware in 2019. Based on an outdated Russian street address linked to him, according to an annual report, he said he had been informed his firm was on hold in the state from July.
While Dobrokhvalov is convincing the state to reconsider, Dobrokhvalov’s company also has the option of relocating to another jurisdiction, but he would “need the help of a professional attorney and for an early-stage startup.” [theirs] Without funding it is very expensive to seek legal advice.”
Since the start of the conflict in Ukraine, Vasily Zykov, co-founder of Teslogic, which develops a mobile dashboard for Tesla automobiles and was founded in Delaware last year, has left for Armenia. He claimed that Teslogic’s Delaware-based registered agent informed him in June that he was unable to proceed with the filing on behalf of the company.
The state’s crackdown on Russia-affiliated companies is raising fears that they could lose access to US bank accounts holding funds for their companies. Many claim that there is a misconception among potential investors and business partners that their activities are approved by the federal government.
Information for this briefing was obtained from the Wall Street Journal and the sources cited. The author has no securities or affiliations with this organization. No buy or sell recommendation. Always conduct additional research and consult a professional before purchasing any security. The author does not own any licenses.
