Talking .CHEDDAR Part 2: The Continued Operations Instrument

FairWinds Partners —  December 20, 2011

This week here on the gTLD Strategy blog, we’re going to be talking finance. Specifically, we’ll be breaking down the costs of applying for and operating a new gTLD, the application questions that deal with finances, and a little thing called the Continuing Operations Instrument (COI). Today, we’re going to discuss the COI and the options applicants have available to them.

As we mentioned in yesterday’s post, the Applicant Guidebook requires all applicants to submit the same information, regardless of whether they are multinational corporations with billions of dollars in revenue, or globetrotting groups of entrepreneurs scrambling to find investors willing to back their .IDEA.

Given the diversity of not only potential applicants, but also the sizes of their new gTLD registries, ICANN developed an inventive yet controversial insurance policy designed to maintain critical registry functions in the event that one of these new gTLDs fails. That is the Continued Operations Instrument (COI); it is described in the New gTLD Agreement Specifications (number 8), and forms the basis of applicants’ answers to Question 50. Although to date, no existing registry has ever failed outright, the odds of failure are likely to increase with potentially hundreds of or even 1,000 new gTLDs launching within the next few years. Thus, each applicant is responsible for setting aside a “rainy day fund” to ensure failure does not adversely affect domain registrants. Even applicants that plan to run closed, “single registrant” gTLDs with no other “registrants,” per se, will have to demonstrate a COI.

The COI has been a point of contention within the Internet community, as many potential applicants rightly feel that it puts an undue burden on those who are not sitting on millions or billions of dollars in cash supplies. The ongoing debate centers around the Registries Services Group’s proposal to replace the COI with a Continued Operation Fund (COF), a more socialized insurance model that would require each applicant to put $50,000 into a general fund, to be drawn upon in the event of any registry’s failing.

While this debate remains unsettled, applicants should continue to move forward following the current COI requirement described in Question 50. The amount of the COI will depend on the registry services provider chosen by the applicant, because it must equal three years’ worth of costs to run critical registry functions. ICANN notes that it is building a model for these costs, though we haven’t seen anything yet, likely due to the aforementioned ongoing debate.

ICANN has provided applicants with two options to meet the COI obligation. The first is to secure an irrevocable standby letter of credit from a reputable financial institution – “reputable” meaning it has been rated AA or better. The letter of credit must have a term of at least five years from when the gTLD is delegated.  The second option is to park the funding in a cash escrow account, held by a similar financial institution and with an equal term.

Those applicants that have a substantial line of credit at their bank and don’t wish to set aside potentially hundreds of thousands of dollars may spring for a letter of credit. On the other hand, applicants not especially excited about paying interest on a letter of credit for three or four years may wish to go the cash escrow route – the “set it and forget it” option, if you will.

Another important decision applicants face is when to secure their COI. If they secure it prior to submitting their applications, they will receive a score of 3 points on Question 50 and pass the financial capability section with a minimum score of 1 point on each of the remaining five questions. Applicants that decide to wait until they contract with ICANN will receive a score of 1 point on Question 50, and will thus need to score 2 points on two of the remaining five questions. The required responses and documentation will be a bit more stringent for those that choose the second option, and we’ll leave that conversation for tomorrow’s post.

TAGS: Applicant Guidebook, COI, ICANN

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