California Attorney General Xavier Becerra.
California Attorney General Xavier Becerra.
Photo: Rich Pedroncelli (AP)

The Internet Corporation for Assigned Names and Numbers (ICANN) has delayed a decision on whether to allow the sale of the organization that controls .org registrations to a band of private equity ghouls after the California attorney general’s office issued a warning

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Domain names with .org suffix are used by countless nonprofits, in part because the nonprofit selected by ICANN to run the .org top-level domain—the Internet Society’s Public Interest Registry (ISOC/PIR)—has kept the cost of registration very low year after year. In theory, though, running that .org registry could be a cash cow to anyone who bought it and jacked up the prices, as nonprofits seeking the renewal of .org domains would be a captive market. Such an opportunity would be especially alluring as ICANN removed price caps on .org registration fees in 2019.

That egregious scenario appears to be in the cards with Ethos Capital, a private equity firm that came out of nowhere to offer ISOC $1.1 billion for control of the PIR, which would be converted to a for-profit firm. (While Ethos appears to only have two employees, it is backed by the tight-fisted goons at Perot Holdings, Fidelity Investments owner FMR LLC, and Solamere Capital, which was started by Mitt Romney’s son.) Ethos has sought to allay concerns with a series of meaningless commitments, such as limiting price increase to 10 percent per year for the first eight years, or approximately 214 percent of the original rate in under a decade.

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ISOC has more or less admitted that it considered the $1.1 billion offer out of greed, with officials telling the L.A. Times the number was so huge “we couldn’t just say no without considering.” ISOC has cleared the sale to move forward, despite the opposition of its own Chapters Advisory Council and the troubling arrangement that PIR would take on $300 million in debt as part of the deal, putting it under immense pressure to rapidly increase revenue. But one big catch is ICANN has to approve the deal or it might fall through. As Ars Technica noted, ICANN’s governance structure allows only limited influence from the internet community and it is subject to only lax regulation from the feds, while the Ethos deal involves several former ICANN officials, so any approval would immediately come under suspicion.

In a letter dated April 15, state A.G. Xavier Becerra—whose office demanded to see confidential documents in January—put everyone involved on blast. Becerra’s letter opens by citing his authority to regulate California-based charitable trusts and public benefits organizations, then cites elements of ICANN’s charter to warn the org that it “must exercise its authority to withhold approval”:

ICANN selected PIR as the registry operator for the .ORG top level domain because of PIR’s commitment to “institute mechanisms for promoting the registry’s operation in a manner that is responsive to the needs, concerns, and views of the non-commercial Internet user community.” If, as proposed, Ethos Capital is permitted to purchase PIR, it will no longer have the unique characteristics that ICANN valued at the time that it selected PIR as the nonprofit to be responsible for the .ORG registry. In effect, what is at stake is the transfer of the world’s second largest registry to a for-profit private equity firm that, by design, exists to profit from millions of nonprofit and non-commercial organizations.

According to the Register, sources with knowledge of the matter said that the letter had unnerved ICANN enough to delay a planned decision on the sale from April 17 to May 4. The California Attorney General’s office declined to comment on whether its investigation into the deal has turned up new information, citing the inquiry’s ongoing nature. But the letter makes clear that the AG has identified particularly troubling elements of an already suspicious arrangement.

“PIR and Ethos have failed to respond to ICANN’s questions regarding PIR’s financial picture after the sale,” Becerra wrote in the letter. “PIR maintains that its anticipated income will be sufficient to service the $300 million loan necessary to complete this purchase and maintain its level of operation. Additionally, as a for-profit entity, PIR will now incur tax liabilities, and its loan will be due in five years.”

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“It is, therefore, disturbing that Ethos has failed to identify the new services it contends will generate the necessary revenue to cover those expenses,” he added. “While PIR currently has sufficient income for its operations, as a nonprofit it pays no taxes and is not saddled with a $300 million loan and investors who expect a rate of return.”

Becerra then questioned whether ISOC actually has a legitimate reason to sell the PIR, how the Ethos deal would actually solve those problems, and whether the process by which it agreed to the sale was in good faith:

There has been too little information provided about the sale process by which the proposed transfer sale was agreed to by ISOC. If ISOC was concerned about diversifying its revenue streams, what did ISOC do, if anything, before deciding to sell the .ORG registry agreement? Why did ISOC not conduct a competitive bid process for a new registry operator if it wanted a change in the registry operator? Did ISOC explore options other than a sale to a private equity firm, given that its nonprofit status was key to PIR becoming the .ORG registrar? What consultation, if any, did ISOC conduct with its stakeholders prior to proceeding with the proposed sale?

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Furthermore, Becerra warned that ICANN’s arrangement with ISOC to handle the .org registry through PIR “contains a presumption in favor of renewing the agreement following its expiration,” stating that section “makes no sense” if PIR is converted to a for-profit entity.

“Empowering a for-profit entity that could undermine the accessibility and affordability of the .org domain, which serves nonprofits, should concern all of us,” Becerra told Gizmodo in a statement. “We’re urging ICANN to deny the request to transfer control of the .org domain to a for-profit private equity firm. In California, we’re committed to an Internet that serves everyone and we’re simply concerned that this transfer puts profits above the public interest.”

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According to the Register, ICANN’s founding CEO Mike Roberts and founding chairman Esther Dyson wrote a letter to Becerra earlier this month accusing ICANN of hypocrisy and urging him to delay the deal by six months.

Becerra didn’t explicitly threaten ICANN or ISOC in the letter, but he did end the letter by reiterating that his office has jurisdiction to intervene.

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“ISOC and PIR are charitable organizations that are accountable to their community stakeholders and to the public at large,” Becerra concluded. “... This office will continue to evaluate this matter, and will take whatever action necessary to protect Californians and the nonprofit community.”

In a statement on its website, ICANN acknowledged the letter but disputed that the deal would make PIR beholden only to the demands of its new private equity overlords.

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“The Attorney General’s letter does not take into account the recent work that PIR has done to make the entity more responsible to the community,” ICANN wrote. “ICANN requested that PIR strengthen the Public Interest Commitments to ensure meaningful enforceability; a draft of the revised PICs has been provided to the ICANN Board.”

Clarification, 4/21/2020: A previous version of this post noted that a price increase of 10 percent a year for eight years would constitute approximately 214 percent in under a decade.” We’ve updated this post to make clear that we meant 214 percent of the starting price, as opposed to a 214 percent increase.

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