DOVER, Del. — Delaware is the most popular state for LLC formation, partly because businesses can be formed here without stepping foot in the state and businesses are not required to disclose true owners.
There are close to 1 million limited-liability companies incorporated in the state, a portion of them adult entertainment businesses.
Now, for the first time, state regulators are using newly granted powers to dissolve certificates of formation for four companies without a physical presence and not in “good standing.”
The four LLCs mentioned have been implicated with sex trafficking, and the company behind the LLCs is Backpage.com.
Delaware Attorney General Matt Denn filed a petition last week asking the Chancery Court to cancel the certificates of the companies.
Today, Backpage.com, once called "the world's top online brothel,” is nonexistent. Its website was seized by the Justice Department, and its operators are under federal indictment. So far, the company has pleaded guilty to federal money laundering and state human trafficking charges, while its CEO has pleaded to similar crimes.
While it’s not known how many adult entertainment companies are incorporated in Delaware, the attempt by the state to rip away incorporation papers from companies should be concerning, one industry attorney said.
“All businesses will now need to think twice before choosing Delaware as a potential home jurisdiction and everyone should keep close eyes on how this case progresses,” attorney Corey Silverstein told XBIZ. “This action does appear to be targeting Backpage but the fact that Delaware started aggressively pursuing human trafficking in 2014 when it passed its own legislation should not be ignored. In other words, Delaware aggressively prosecuting human tracking is nothing new. It should be noted that LLCs are routinely dissolved for things such as unpaid fees and delinquent filings.
“This complaint was filed under a brand-new provision of Delaware’s Limited Liability Company Act, which allows the attorney general to seek the dissolution of LLCs that abuse ‘their powers, privileges or existence’ under state law,” Silverstein said. “The question that now needs to be answered in the court is whether or not these four entities fit into this new law.”
Backpage.com was long shielded by federal law and court rulings that protected websites from civil or criminal sanctions stemming from content its users post. It was only after indictments were handed to the company and its operators that FOSTA came into the picture.
FOSTA, a law amending Section 230 of the Communications Decency Act, which previously provided companies immunity from most liability for publishing third-party content, is currently being challenged in federal court by the Woodhull Freedom Foundation and other plaintiffs.
Since FOSTA was signed into law by President Trump numerous adult websites have been affected by the law’s intention to outlaw prostitution advertising. Many have closed shop or limited access.
As for the issue in Delaware, the big concern, Silverstein said, is the actual interpretation of "sex trafficking."
“I do not disagree with governments seeking to prosecute individuals whom engage in sex trafficking (sex trafficking is human trafficking for the purpose of sexual exploitation, including sexual slavery), but I have serious concerns about governments abusing the definition of sex trafficking in order to prosecute law-abiding sex workers and businesses. The adult industry needs to continue to support organizations like the ASACP through donations and reporting instances of suspected illegal activity.”