SEC Issues Report Concluding DAO Tokens, a Digital Asset, Were Securities
sec.gov
sec.gov
In particular, they apply the security test: "did investors invest money with a reasonable expectation of profits derived from managerial efforts of others?" Since DAO was a wisdom-of-crowd VC fund, the answer is a clear YES.
On the other hand, they are careful to say that other token sales MAY be securities but will be treated based on their specific facts and circumstances.
My takeaway is that this doesn't change anything. The SEC is proceeding cautiously: applying securities law in clear-cut cases, "studying the effects" generally.
It's also not a bad thing to comply with securities regulation. FileCoin is doing quite well selling only to accredited investors on CoinList.
Where it gets strange is if your tokens are picked up by an exchange. What happens if someone buys your tokens with the expectation that they can sell them to someone else? Then the price of your tokens might rise, and they've made a profit. Does that count as expectation of profit?
if the token is part of or essential to a yet-to-be-developed app, but not themselves traded, I cannot see why there would be any sense of an investment. but I would in such cases never market the sale of such tokens as an ICO or crowdfunding. I would offer them up for sale, as a product pure and simple. buy now. use later.
i see it as selling an atari 2600 with no game cartridges, and then selling games later when available.
where does it say that exchanges and trading are required? (serious question...is there any such requirement?)
If I understand it right, your hypothetical is just a kickstarter project where a funding level reward is a "virtual token" and just as say a reward of a t-shirt this token doesn't represent equity in the project? Would anyone expect the value of the t-shirt to go up? Is it possible, yeah actually, imagine if Apple originated through crowdfunding, I bet that original crowdfunding t-shirt might sell on the secondary market, so it all boils down to if there was a subjective belief of a profit or a reasonable personable would have expectation of profit.
In other words NINJAs (no income, no job applications) were being rubber stamped for million dollar plus homes with $0 down and 103% financing. And so prices continued to go up because the next NINJA would be approved to buy yesterday's million dollar house of 2 million today.
The same conditions don't exist with ICO tokens.
Why would the supply of money/loans increase unless people were taking out loans to buy houses more than usual, and why would they do that unless they expected the price to increase? The increase in supply of loans happened because people bought houses expecting a profit. So increase in credit supply is a secondary effect that occurs when people are more willing than usual to buy houses on credit. And people are willing to this when they expect a profit.
Because the regulations that limited supply of loans disappeared.
Consider that many more people want a million dollar home than can qualify for the loan (afford it).
Think about how much a single change in regulation would effect the number of people who can qualify for the loan/afford the $1M, example: cash down payment. How many more people can afford a $1M if the regulations for the loan approval require cash down of: 100%, 20% or -3% where the bank pays you $30,000 cash to take the $1M loan to buy the house.
Allowing people to finance 103% of a $1M home significantly changes the number of people who can act on the want (demand), to the extent supply of the homes drops and as a result their prices artificially increase supported by more bad loans.
Just like mifeng mentioned, it really is a facts and circumstances determination per token. Given we had to build all of the token sale scaffolding (legal, tech, etc.) for Filecoin, it made sense to open this up to other technologists as well. Our hope with CoinList is that creators can focus on building awesome tech and expanding the valuable uses for application tokens while reducing the amount of time and resource they need to spend making sure they stay within the parameters of the law. Filecoin may be limited to accredited investors for this particular sale, but that's not to say other tokens that use the platform in the future would be required to do the same. Ultimately the decision is up to the creators, but they should be very well educated on the implications of what those choices could mean.
From what I've read, the SEC doesn't mandate any particular method to verify net worth. In this space, wouldn't it make sense to accept a signature proving ownership of a large ETH balance?
The FileCoin ICO will be the first CoinList ICO, seeing as it was set for 2 days from now I wonder if it will be effected. All the major crowdfunding websites seem to offer equity funding options now, and I'm curious about how they pull that off legally, but if they do, I imagine CoinList will jump through the hoops so FileCoin is compliant.
They want to leave themselves room to study the market and issue definitive guidance later. Also, these investigations cost time and money. So to discourage bad actors, they go after the most obvious offenders but it's not really in their best interest to present a positive counterpoint.
> In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants: the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.
Let me clarify this: Just because the US SEC wants something doesn't make it happen on the internet. They can do things with governments and companies, and that's about it.
If some random hacker in Ukraine decides to use a ETH or BTC or smart contract or create a new coin, the SEC isn't going to be able to influence that. There is no point of control there.
And that much better option is to just use the regular banking system.
Cryto currencies have massive costs and disadvantages, and there is no point at all to them if you take about the fundamental premise and purpose of them, which is decentralization.
Something like a DAO contract that doesn't have an issuer (assuming the DAO had an issuer, not sure). Or a payout mechanism like zcash where the mining function pays out to founders wallets over time.
It seems inconsistent that ICOs are seen as securities whereas the underlying asset isn't. I think the differentiating factor is the degree of decentralization. If the SEC could shut down bitcoin they would. But they can't. So instead they'll go after ICO issuers who happen to be in the US. But many ICOs won't have to be in the US, or issued by humans for that matter.
Personally, the genie is out of the bottle. Value exists in the decentralized digital world, and it now has programmable properties. Trying to regulate securities has become the equivalent of regulating TCP packets. It can be done but at what cost..
I'm not sure why this would be inconsistent. I admit there's some confusion in the boundary between securities and commodities, but one can certainly have a hedge fund made up from currency or gold futures (neither of which is a security) and have ownership interest in the fund be a security.
(IANAL, none of this is intended to be advice or taken as authoritative.)
> But many ICO won't have to be ... issued by humans
If AIs are issuing ICOs, then I would imagine they would have to obey the law just like anyone else. Heck, very few if any securities are issued by humans -- they're mostly issued by corporations.
You could also think of bitcoin as an ICO. There's 21 million tokens that Satoshi sold, that people purchased with the expectation of profiting from. Boom, it's a security. If the financing model of a traditional blockchain is okay, but issuing tokens are not.. then programmers are about to get very creative with how get around loopholes.
> But many ICO won't have to be ... issued by humans
I mean the contract will be written by a person. But instead of having a central "issuer" (like a core team) the issuing mechanism is automated via the contract on the blockchain.
If a company makes a mistake, the SEC first goes after the company. "Unregulated company" sounds like "no company" [1]. In that case, the SEC goes straight after the individuals involved.
[1] Do you mean unregulated or unregistered? Unregulated means sole proprietorship. Unregistered could be an LLC or corporation that just never filed anything with the SEC.
http://www.ibtimes.co.uk/devcon-2-ethereum-may-pass-howey-te...
Of course, it remains to be seen what this will turn into. Even if it comes crashing down in the United States, that has little effect on the viability in the rest of the world... especially as of late.
I just wouldn't want to try and run an ICO in the US as a resident of the US!
The only question is if the Ethereum Foundation's token sale passes the Howey Test. An analysis of this must be done like was done in their report of the DAO. I'm not qualified to do this analysis, which is why I ask. I know they said Bitcoin was not a security but that's all I know.
Saying "it has other uses than profit" is not sufficient since you'd have to back it up with meaningful evidence (what are the actual uses that investors are getting out of it?)
This true, but the 4 criteria are an AND, not an OR.
This is wrong. SEC rulings apply as soon as your investors are US residents. [1] I know neither of us are lawyers, but at least back up what you claim if it might put people's money at risk.
[1] https://www.sec.gov/divisions/corpfin/internatl/foreign-priv...
The impact would be on their existence within the US, but not internationally. Not with regard to the SEC alone.
edit: Okay, you started as snark, then tightened it up a bit after an edit, but my point still stands.
The question is whether or not what the Ethereum Foundation sold to US residents are securities in the SEC's eyes?
I can see how our wires got crossed.
I interpreted your original comment as questioning whether or not this was a threat to the specific tech or foundation at large, and not just isolated to the US region.
So, I guess the argument is moot -- seems like my mistake. It's certainly up in the air in the US at this point. I do find the progression of events interesting, regardless. In spite of what I said, the US does have a social impact with decisions like this -- just maybe not so much right now as in recent years[0].
I get argumentative because I see a lot of promise. I like technical discussion about it vs. regular degradation, so I usually have something to say.
[0] http://business.financialpost.com/news/economy/imf-predicts-...
Being that token sales are international, it would seem there is absolutely nothing illegal about opening a company in that country and offering securities. Even if the owners of the company are US citizens. Then you have the company pay YOUR company as its main supplier, as opposed to its parent.
Is anyone on HN familiar with such a country?
There's a reason why some crypto-companies (and not crypto actually) are based in the Cayman Islands (BitMEX), British Virgin Islands (Bitfinex), etc... Crypto Valley [0] in Switzerland is also gaining momentum. BTW, Fred Wilson wrote an interesting piece about this recently [1].
But the issue here is that if you plan to sell "tokens" to US nationals, you now know that you must play by the SEC rules. That or you shouldn't offer them to US individuals. Nothing rare about it, for instance CFDs [2] are financial instruments banned in the US, but traded without problems in the rest of the world. My guess is that ICOs will be like CFDs, offered around the world, but not to US citizens.
[0] https://cryptovalley.swiss/
The main question is, are the exchanges considered foreign if the ICO is of a foreign company? How do you trade stuff if the securities are not transferrable?
Perhaps the ICOs don't pass the Howey test!
For example can Israel's Securities Authority retroactively go after companies by classifying ICOs as securities? Or in this case, ALL securities can still currently be sold by Israeli companies to foreigners?
Also, what are the rules for Cyprus and Bulgaria? Where do you get the information about their popularity and their applicable securities laws?
Actually the US regulates companies that so much as offer securities to US citizens. Try getting an account with a forex broker that's based outside the US and you'll see what I mean. The CFTC doesn't limit itself to US companies.
I haven't seen the same attempts being made on other kinds of securities but the framework is clearly there as the CFTC is using it.
Some ICOs have advertised their sales in the US, I wonder if the SEC will look on that as offering their tokens to US citizens, whatever the wording they put on their websites?
Still waiting for them to come down hard on a company as an example. In this article it says they won't bring charges in this instance, meaning The DAO, however; if you have taken part in an unregistered sale of securities recently as a U.S. "company", you may want to seek legal advice on how to proceed right away. Maybe a deal can be made with the SEC for "ICO"'s that have occurred recently. Or you may be advised to leave the U.S., which may be the best option.
If you were in the United States and/or sold securities to an American investor, the deed is done. Skipping town to avoid the SEC only serves to turn your potential civil liability into a foreign fugitive case.
The way they can do this is by making a real effort to update their technical, documentation, and regulatory programs.
Is there a straightforward way to do an Edgar filing that doesn't require a bunch of training? Is there a web page that clearly lists the requirements for these types of securities in plain English?
How much do the company registrations and filings actually cost? What is the basis for these costs? Because an ICO can be created at no cost. Are the excessive fees due to a lack of modernization or streamlining of the processes, or they simply bribes that line officials' pockets and protect the incumbent firms from poorly funded startups?
In recent cases, how would fees and filings have actually protected anyone? Does the SEC have technical staff or software capable of evaluating Ethereum contracts for validity or safety? If not, how does their regulatory effort provide any benefit, except as an opportunity for them to collect a type of tax and make it harder for startups to compete with large firms where SEC officials have friends working?
Except the cost to the participants who later have wasted money because the ICO contract was exploitable...
At the current rate major losses are as perceptible as all successes. Maybe the industry needs some externally imposed speed bumps from SOME authority until folks can get their acts in gear?
For those thinking I am glib and downvoting, I am asking: Do you know of any? I searched, asked some friends in etherium. I presume they must exist in some for as we're no longer early-days with Etherium.
Your move, KirinDave.
... What? Wait... what? I'm actually more confused by your response. So, the idea is governments create inflation to... rob the poor?
Also, who's Rob?
> in particular hurting the poor the hardest and creating lost decades and millennials along the way
Are you implying that millennials have... the government to blame for their current grim prospects in the job market? Because of inflation?
Think about it:. If you're poor and spending 90% of income on survival, an increase in the cost of living has a more dramatic effect on the margin of survival than the identical increase in cost of living for someone who depends on 20% of their income.
Moreover, it's frequently said that inflation is necessary to combat 'sticky wages'... If you read between the lines, that's effectively 'cheating the poor of their wages'.
The common retort is that the inflation is good for the poor because it reduces the real value of their debt. But in the real world outside the ivory tower of economists who never were actually poor, the poor are offered high interest loans, which are only barely ameliorated by inflation. People who benefit from low interest rates are corporate C-levels, banks, and leveraged an margin investment (which is most of the "1%"
The only other agency capable of doing so would probably stockpile the exploits and use them to surveil the dark web to catch a million drug dealers and an occasional low level disposable terrorist.
One sure-fire way to get the SEC to go absolutely ballistic is to hurt mom-and-pop investors. This is why the commission was founded [1] and why securities law maintains "accredited investor" thresholds, controversial as they are.
> Is there a straightforward way to do an Edgar filing that doesn't require a bunch of training?
Securities lawyers are a few thousand dollars well spent. That said, the SEC has online self-help resources [2] and an online filing portal [3].
> How much do the company registrations and filings actually cost?
It depends on how much you raise. Right now it's 0.01159% [4].
> an ICO can be created at no cost
Until shit hits the fan. Then everyone needs to hire a lawyer. An SEC complaint, on the other hand, triggers investigations and potentially enforcement actions paid for by the filing fees, amongst other things. It's a public good that helps keep companies honest.
> how would fees and filings have actually protected anyone?
The SEC is constantly litigating [5], launching proceedings [6] and helping resolve failed companies [7] on behalf of investors. Audit requirements stop lots of crap before they get too serious, too.
> Does the SEC have technical staff or software capable of evaluating Ethereum contracts for validity or safety?
The SEC doesn't evaluate filings for fitness, just completeness. Its mantra is disclosure and transparency. That lets investors come up with their own informed conclusions. Especially small ones who can't afford corporate lawyers to pull managers' teeth.
[1] http://www.columbia.edu/~hcs14/SEC.htm
[2] https://www.sec.gov/info/edgar/guidance
[3] https://www.filermanagement.edgarfiling.sec.gov/Welcome/EDGA...
[4] https://www.sec.gov/ofm/Article/feeamt.html
[5] https://www.sec.gov/litigation/litreleases.shtml
A Reg D offering is however limited to accredited investors. With Reg D the SEC is basically saying "We won't require as much disclosure from you, but you'll have to raise money from a more sophisticated investor, ostensibly."
Edit: spelling
Obviously if it was not actually positive then not having the choice is pretty crappy.
In environmental regulations, we had the Love Canal which exposed a lot of school children to toxic waste. The market failed, we responded was CERCLA and the EPA.
In the case of securities regulation, the market failure was a big one in 1929. We responded with major legislation in 1933. And in general, that legislation has been a rousing success. But it's important to note that the goal of security regulation, of preventing crappy investments, isn't just to protect mom-and-pop, but also to prevent against another 1929. In my mind, it's really hard to argue that the effect of US securities regulation hasn't been a net positive.
I guess my point is that market forces prevented bars from being smoke free, and what you suggest would lead to basically no SEC regulated investments.
When retail, i.e. unaccredited investors, get hurt (a) there are more of them and (b) it more often than not puts them into dire, sometimes existential, straits. The latter leads to political backlash and instability, e.g. the 1930s.
Basically, you must have a nest egg to act as a safety cushion before you can invest in risky things. This makes sense on another level, in that doing diligence on un-registered companies is expensive. That, in turn, drives a minimum practical investment size.
All these regulations do is drive up the cost of directly accessing public capital markets (at last count, $6 million to do an IPO), and contribute to growing income disparity [1].
[1] https://www.brookings.edu/research/make-elites-compete-why-t...
There's a fair argument in weighing the upsides and the downsides of registration requirements. But saying the downsides are "all these regulations do" is intellectually dishonest. Lots of scams get stopped, or at least quarantined, by these regulations. The speed with which the ICO market went from zero to bullshit only seems to re-inforce the prudence of these rules.
> $6 million to do an IPO
Having watched private companies spend much more than that to raise private capital, I think it's safe to say filing fees aren't the primary problem the public markets have.
But fair enough: if you constrain this new internet sector, then you could conceivably reduce scams, just by virtue of forcing people into higher-friction areas of the economy, where less can practically be transacted. I'm sure Cuba has pretty low scam volumes by the same virtue.
>Having watched private companies spend much more than that to raise private capital, I think it's safe to say filing fees aren't the primary problem the public markets have.
Many private companies spend FAR less than that to raise private capital. To claim that a $6 million fee for entry is not going to disenfranchise a huge subset of the population is intellectually dishonest.
I mean, maybe?
An investment of money, managed by somebody else, with the expectation of profits. I feel like that covers most things we would typically consider to be investments. Aside from something like, "I bought this piece of art... as an investment." Maybe I'm just missing some obvious examples?
Those might be the fees. The cost of a registration is much higher. Gotta put food on the table of all those lawyers and accountants.
https://www.pwc.com/us/en/deals/publications/assets/pwc-cost...
Certainly, money can be raised more cheaply with exemptions, but those come with their own tradeoffs.
EDIT: I guess services like H&R block tried to automate this, but I'm thinking less like "oh you donated x dollars, make sure to put that on your forms!" and more like "Hey, you live in x city, did you know if you move a mere x miles away you avoid city taxes for y, county taxes for z, and can put a moving bonus for moving n miles!" or even "You are x type of contractor, consider switching your status to y because you will get these real number tax benefits."
In Australia the government has official tax software. It pulls all your PAYG information and auto-fills most of what you need. In NZ, people don't file taxes at all. They login to the IRD website and their tax data is populated. You can accept what's presented or file for corrections.
H&R Block and TurboTax actively lobby against the US IRS from creating the same type of filing system. Our entire banking system is 20 years behind the rest of the world:
http://penguindreams.org/blog/the-american-banking-system-is...
My partner works in outside sales as an agent for a "Fortune 100" company, and the IRS in no way has all the data to automate any part of her taxes. From the way she's compensated, to the reimbursements, to the legitimate business expeses.. there's no way she'd get a good deal if she let the IRS guess at any of that.
In short, the idea that people must be incompetent because they're in the government is pretty ludicrous. The SEC is consistently one of the best technical organizations despite the fact everyone lobbies for them to have the fewest resources with which to do their job.
If you think all ICOs pass the smell test, maybe you haven't been fleeced enough in your life to appreciate scams when you see them?
Source: I run a crypto hedge fund and have spent a lot of time evaluating ICOs. Some of them are legitimate, philosophically sound ideas looking for funding and some of them are outright scams.
While the "kids" are hacking, micro-dosing, and working 100 weeks. And they are all of 17.
It's not in their world. A 55 year old banker is not hacking solidity contracts at 3 AM. No way.
Fucking awesome. Nobody should be doing that.
In fact, I would argue that the correlation swings in the opposite direction.
While there's probably something to the motivated young weirdo hacker theory (it was William Burroughs who said "only the young bring anything in, and they are not young very long"), I would also very skeptical what a JP Morgan banker has to say about the SEC. It's like asking a bank robber what he thinks of the police (hyperbole, I know. Bear with me). There's a bit of a natural bias there.
That said, JP Morgan has launched their own Ethereum fork and is working closely with the Enterprise Ethereum Alliance and (to my knowledge) Vitalik Buterin. It seems they're sincerely chasing this tech (dragon?) for better intentions or for worse.
One can make time for both, but the prior probability is quite low that a person with a real adult life will also be on the cutting edge of technology.
Sometimes the fire of youth produces fantastic ideas that change our world. Their initial efforts, though raw and non-optimal, show a beautiful gleam that - through effort by more seasoned developers - is polished into something beautiful. These are more common, but still rare.
Most 17 year old coders however produce well intentioned awfulness that is technically poor, non-optimal, has security holes, and if it handles edge cases at all does so poorly - and that's the good stuff.
The kids work is valuable but mostly to them - they're still learning.. usually still learning the basics too.
It's important to do that! That's great for a programmer and it will likely have some cool ideas... and hell, maybe a product or something will come from it.
But the original post was just naive.
This veneration of the church of conspicuous effort is not a new idea. It's lead many people astray. Be careful.
> General Partner, Crypto Lotus. > Cryptolotus.com
First google result for "crypyolotus sec" is an apparent SEC filing: https://goo.gl/txKA3t
In short, the idea that people must be incompetent because they're in the government is pretty ludicrous.
The comment did not express that. It was mainly about transparency and communication.
that said, look where the electoral college got us!!
so philosophy and reality are different.
in principle i agree, let people decide. in reality that leads to housing bubbles, global warming, donald trump...
https://coinmarketcap.com/currencies/ethereum/
As far as what this will do, your best bet is to stock up on fortune cookies and astrology mags because they're probably about as informed as anything else on the matter. Preferably cookies, because at least you can eat those.
Scam tokens were never going to be the big driver of Ethereum success, official acknowledgement of it as a valid platform was.
This goes another step in that direction, particularly as it avoids clamping down on cryptocurrencies like Ethereum or Litecoin, which the IRS has deemed as property.
Initiatives like the Ethereum Enterprise Alliance are also contributing, so the more respectable it appears, the higher the price is likely to go due to higher expected future utility value.
So given that now we have a serious precedent for considering all ICOs aa securities, what are the steps a company needs to take to make sure their ICO is legal under US LAW??
1. Does it need to register the ICO somehow? If so, how exactly are the securities registered?
2.!What regulations apply now? Do the 1933 blue sky laws apply and Regulation D and the usual exceptions - including JOBS act crowdfunding provisions - apply?
3. Can anyone buy the ICO or does the company now need a private placement memorandum?
4. And even so, isn't the secondary market for the tokens constitute "transferring" of securities? What does a company need to make sure all that is legal, short of fulfilling all the reporting requirements of a Public company?
Basically what happens now to all the ICOs done so far by companies like Brave? What are they going to do?
Look at the title of this article and tell me - is it accurate?
https://www.forbes.com/sites/laurashin/2017/05/18/want-to-ho...
I wonder what would happen if financial regulations became more "optional". I.e. the SEC exists to provide guarantees if a given company wanted to get the SEC's seal of approval but does not enforce most regulations on entities that don't seek SEC approval (and thus investors would know such entities are riskier). I suppose eventually a "too big to fail" company would avoid regulation and consequently go under, and that would be the end of that.
Anyone tech savvy enough to contribute money to an ICO is tech savvy enough to connect to a non-US VPN before doing it.
Geo-blocking US IP addresses won't work either, because an ethereum contract can't refuse a transaction based upon its source IP address (it doesn't know it). So if an ICO publishes their ethereum contract address online (e.g. via a twitter post), they are implicitly advertising to US investors.
To my way of thinking, if you're sophisticated enough to do that, you're sophisticated enough in blockchain matters to make your own investment decisions.
I'm claiming that if I understand smart contract code, I'm good at evaluating a white paper's technical claims about a project being built with smart contract code.
Also I'm claiming this makes me better prepared to invest in these projects than, say, a cardiologist. But the SEC would be perfectly happy to let the cardiologist invest, while restricting the programmer who actually understands the industry.
Sure, the wild west is fun, but if you are in an economic ecosystem where a large percentage is comprised of scammers/fraudulent companies, then it will be detrimental to long term success.
US citizens shouldn't be treated like children that need to protected from their own stupidity.
And history shows that attempts to control complex industries with cookie cutter rules imposed from on top create the most dysfunctional industries in the economy, namely finance, pharmaceuticals, and healthcare.
The important lesson of securities regulation is that it helps the "good" guys more than it hurts the bad guys.
When I buy 100 shares of PZZA, I want to be reasonably confident that Papa Johns is cooking pizza and not the books. That confidence, or trust in the system, reduces friction that helps both buyers and sellers of securities.
Just because you want products certified by a government body to be safe doesn't mean you have a right to force others to live according to your standards.
Meat inspection deals with a different failure of ideal markets than direct externalities, to wit, information asymmetry. However,the market inefficiency produced by information assymetry itself has negative externalities, so it's not unrelated.
For example, most people don't understand how microprocessors work. But this is addressed through an effective and spontaneous process of delegating responsibility.
The government can play a positive role in helping manage this complexity, by providing certification programs, and freely available public information. What it should not do is constrain the actions of individuals, by mandating that a particular standard be used.
https://en.wikipedia.org/wiki/The_Market_for_Lemons
the money quote being
The cost of dishonesty, therefore, lies not only in
the amount by which the purchaser is cheated; the
cost also must include the loss incurred from
driving legitimate business out of existence.And in any case, the market for lemons is a theoretical exercise. It does not actually happen in real markets, because there are various market mechanisms that emerge to address it.
The point is that everyone is worse off in a situation like this, both customer and (legitimate) business.
It is a type of market failure, everyone loses.
The "market mechanisms" you speak of are government regulations establishing minimum standards and forms of redress (e.g., and most on the nose, lemon laws).
We don't require a publishing license because someone might use their right to free speech to libel someone else. We punish the libeler.
For example: Under contract law, there are certain rights that _you are legally not permitted to give away_. You can't actually sell yourself into slavery. You can't contractually disclaim gross negligence on your part. You can't have a contract that unilaterally benefits one party without consideration provided for the other. You can't accept a contract while intoxicated. You can't contractually agree to something that is a crime. ... the list goes on.
What isn't true?
>For example: Under contract law, there are certain rights that _you are legally not permitted to give away_. You can't actually sell yourself into slavery.
A court will void contractual provisions like this, based on a comprehensive body of case law that establishes what constitutes consent. This is a universe away from what you're defending here, which is a federal agency prosecuting individuals because they entered into some investment transaction without 'permission' from said regulatory agency.
> Of course. We don't restrict the rights of the entire population to engage in voluntary interactions to preempt crime.
I gave one example of many of the ways in which we absolutely do restrict the rights of the entire population to engage in voluntary interactions to preempt crime. We limit the types of contracts that everyone can engage in, to prevent a subset of them that would be used abusively. As another example, we place restrictions on freedom of assembly -- voluntary interactions of groups of people -- based upon location and time of day because of the potential to create a disturbance, not the fact of having done so. And so on.
Yes I can see how you interpreted my comment that way. I meant we should not do that. In writing it, I was thinking along the lines of "you don't do [some unethical thing]" as a normative statement, not a description of what you don't do. The wording I chose doesn't make that at all clear, so your interpretation is understandable.
>We limit the types of contracts that everyone can engage in, to prevent a subset of them that would be used abusively.
Like I said: A court will void contractual provisions like this, based on a comprehensive body of case law that establishes what constitutes consent. This is a universe away from what you're defending here, which is a federal agency prosecuting individuals because they entered into some investment transaction without 'permission' from said regulatory agency.
Including regulators.
You can begin to outline the conditions under which it breaks down: if the probability of getting caught and punished is small, if the rewards are high, or if the punishments are insufficiently threatening. Investment scams and other organized crime is a great example. The rewards are high - millions and millions of dollars. The chance of getting caught are low - a lot of what you do will appear legitimate, and a lot of what you are doing wrong rests on intent. You have to separate the self-deluded from the con men. And if you do get caught, your punishment might be relatively light (a few years in prison as a nonviolent offender), and if you are clever with how you hide the money, you might get to keep most of what you steal.
In some sense, the SEC is like cops patrolling where they are most worried about crime. You are changing the math by increasing the risk while decreasing the reward, which dissuades more criminals than ineffectually punishing a few while others prosper.
Rejecting a person's argument on the grounds that it's "extreme [insert label]" that "everyone rejects" is not constructive.
Just don't use cyptocurrencies. The only purpose of crytocurrencies is to get rid of a central authority in charge of everything.
If you don't care about the fundamental feature and premise of crytocurrencies, then you are much better off using the regular financial system.
Detrimental to long term success -- how do you know? I am inclined to believe the opposite.
"Drama" is not really a desirable characteristic for most users of a market.
A fundamental problem with different tiers of regulation is that people tend to misjudge their competence. Look at the list of Madoff victims, or that congressman who got a bunch of his colleagues to buy his Australian healthcare micro-cap. And while it may feel almost like justice when a congressman fails in such a public and spectacular way, for everyone who deserves it, there will be thousands of people fleeced by corrupt "investment advisors" pushing scams onto unsuspecting victims.
It's easy to say it's these people's fault, and "Americans shouldn't be treated like children". But that sort of just-punishment-for-stupidity rhetoric implies, under the most gracious interpretation, that people people are capable of learning, and that such scams would therefore only be a transient phenomenon. History shows pretty well that this is not the case: new stupid people are born every day.
The less charitable interpretation is that there's just nothing wrong with exploiting peoples' stupidity to take their money. In that case, I wonder why this logic doesn't apply to physical capability as well: we don't need police, a real American can defend his property on his own. And if he's too old, or weak, or not organised enough to always have at least as many defenders around him than there are attackers, then he deserves a good beating...
People tend to not enjoy living under such conditions, so they start outsourcing their protection, both physically and financially. It gives them peace of mind, and it's also extremely efficient in terms of economics: "Hey, why don't we get together, hire someone who specialises in understanding investment risk, and tells us if this company's CEO is actually a convicted felon who has already bought the one-way ticket to Bolivia."
...and after a few rounds of professionalizing this concept, you end up with the SEC.
There's also a fundamental misunderstanding of the term "risk" at play in these debates:
There's the usual "risk" of investments that, in a functioning market, should be almost linearly (anti-)correlated with the potential reward. This is the risk that's meant in all those formulas.
The risk of the Wild West is that you're falling for a scammer. This is a risk that behaves rather differently than the other risk.
The first, good, reward-promising risk is what one might call the uncertainty of things you cannot (practically) know without trying: will people enjoy this movie, will these scientists come up with a drug that works. You can make educated guesses, and the market serves to incentives people to guess well, and therefore allocates money to the most worthy causes available. Importantly, regulations try to make all relevant information available to everyone, and the idea is that all that's left to do is having good intuition, and you may be better at that than all the investment banks combined.
The second risk, that of falling for a sweet-buzzwording scammer, is a risk that only exists because you don't know all the relevant information. But that information exists, and others have it. In such a market, you're almost sure to lose your money, because it is possible to eliminate such risk if you have enough money to invest: Others, who have more resources than you, may just send somebody to the company's address and discover that the CEO has a face tattoo of a Swastika and has his grandmother generate random numbers by flipping coins.
Do we need to repeat history, just to prove that financial regulations are a good idea? We had a Depression once. I'd not like to do it again.
Source?
So, yes.
It's easy to see why poor decisions repeat cyclically.
We have seven years of experience running regulatory-compliant online fundraisings via AngelList. Now we're bringing that knowledge to ICOs.
[1] https://news.ycombinator.com/item?id=11707497
[2] https://www.sec.gov/reportspubs/investor-publications/invest...
The process would basically be as follows:
Say you form an Investment Club LLC, you create a smart contract/ICO with up to 99 tokens, and purchasers of the ICO tokens become a "member" of the LLC.
Thereafter, the Investment Club LLC members could create a smart contract/investment opportunity, but you would only be able to vote/invest if you are a token holder...you say there are no permission controls but this was exactly how the DAO was marketed to function, buy a Token for DAO and you could participate/vote on future DAO investment opportunities.
EDIT: Added appears to since IANAL
There is. These tokens are explicitly marketed on that basis.
Those where the outcome is based on the work of others are clearly securities. I would argue the outright useless ones are more a form of gambling (lottery tickets have no other uses and and the outcome can not be controlled) but then there's the element of getting your friends and neighbors in on it that complicates things.
How it's being sold is likely what matters, and the websites can be pretty toned down compared to their forums and Twitter feeds.
And the ICO token is also used (and sometimes explicitly advertised) for investment as well. Uh oh.
* an investment of money has been made,
* in a common enterprise and
* the investor has the expectation of profits, which profits are expected to arise solely, or substantially, from the efforts of the promoter or third party.[1]
That pretty much covers all "make money fast" schemes.
[1] https://www.americanbar.org/content/dam/aba/publications/blt...
https://medium.com/ananas-blog/sec-on-icos-securities-are-se...
A general rule of tokens is that if they promise a profit they are a scam and if they promise a share of profits a security.
The closer they are to API keys the better in terms of non-securitability.
It is likely that the token usage will gradually bifurcate between those that are "property" and scarce digital assets like Bitcoin (or rarepepes) and those that are API keys.
For our charitable project we've tried to incorporate elements of both to create an interesting token economy to build a useful resource.
Hopefully there will be more of these attempts, both registered as securities and that fall outside of this classification.
Making it illegal to offer a digital token for sale to other consenting adults, without approval from a central authority, is unconscionable.
Before endorsing yet another law that restricts our right to engage in voluntary interactions, consider this: https://www.theatlantic.com/politics/archive/2016/06/enforci...
Or do you also intend to claim that the poor should be allowed to die on the streets as punishment for not being rich?
On that note, it's interesting that the first 'War on Drugs' used taxes on private transactions as its avenue to prohibition. Since the government at the time didn't have the Constitutional authority (this is before the Supreme Court was utterly corrupted by politics) to outright ban drugs, what it did instead is require that all targeted drugs pay a stamp tax, and then simply refuse to issue the stamp. This shows the prohibitive nature of taxes on private transactions.
These restrictions violate people's basic rights and are to the material detriment of society at large. The more of a regulatory burden is placed on an industry, the more dysfunctional, bureaucratic and nepotistic it is.
As for all other rights, those are determined by the government that is democratically voted in. If most people, via their elected representatives, decide that you shouldn't be allowed to speed, or smoke crack, and it's not constitutionally guaranteed, then it's not a basic right and it's not your right at all. Maybe moral right, but that depends on highly subjective morals and might therefore still get you into legal trouble.
Best course of action is probably to find a country with a legal framework that matches your morals. If there's no such country, perhaps the time for these ideas hasn't come and you want to lobby for them to be recognized as basic rights, since right now they're obviously not.
We're intelligent human beings. We should be able to arrive at some kind of consensus on what our moral rights our, through rational discourse. That's what I'm trying to do right now. My argument starts with what "the law" means:
https://www.theatlantic.com/politics/archive/2016/06/enforci...
In the commonly used sense of the term, the scope of morals by far exceeds what you'll get even reasonable people to agree upon. "Rational discourse" means that you need enough of an uncontroversial set of base facts that either party is willing to work with. I don't think we have enough of those to derive a single valid system of morals without injecting other, subjective, more controversial opinions in the process.
Say, you have a basic statement such as "All people should be equal", something that most can agree with. By itself, this isn't actionable, and won't determine how to handle a situation unambiguously. You could come up with a libertarian doctrine that all people should be given the same treatment regardless of their background or current situation, or you could come up with a socialist doctrine that disadvantaged people should get extra support to balance out unequal origins and misfortune. Or anything in between. None of these can be rationally discarded, because there's not enough source data to come to any conclusion to begin with. If you attempt to expand the set of source data, you will find many who disagree with you. That's why it's subjective.
That said, trying to distill what basic facts we do have, so that they can be worked with in a constructive fashion, is a commendable goal. Good luck!
And till now, you had no other option.
But it looks like things are changing with regards to finance.
Because now, it is going to be much more difficult for the government to regulate your financial activities.
The "way things are" is changing, and changing for the better.
Don't like it? Then the government can send in its men with guns and attempt to stop it.
The technology is getting better and better, though. So it will soon become extremely difficult for those men with guns to do anything at all with your untraceable, untraceable, and unstoppable financial activities.
May the best group win. The government will need all the luck it can get.
Because not everyone agrees with that position.
It would be better to just link to the argument somewhere else than derailing this one.
It's possible to veer off-topic in a substantive way. Some of the more interesting HN comments have been spawned that way.
Whether subsequent comments will be high-quality depends on the topic and the amount of energy thrown into the conversation, but fresh perspectives are good as long as people are introducing them productively.
Threads like this shouldn't be auto-collapsed. One of the main reasons people write quality responses in an off-topic conversation is because it will be seen. Take away the eyeballs and you take away the quality.
What these personal choice fundamentalists forget is that lying is wrong. And when you lie about what you are going to do with someone's money, that's a form of theft, e.g. fraud.
Checks and balances and all that: elect better representatives.
Every con artist in history has claimed that their mark knew what they were getting into.
For what it's worth, I think the majority will fail to produce a profit. That's okay. A high failure rate is fine in an emerging industry. Venture capitalists can easily tolerate 90% failure rates for example.
> The agency has decided not to bring charges in this instance, or make findings of violations in the Report
So they aren't going to bring charged to the creators of The Dao. What about the other dApp's based in the US that have already ICO'd (BAT, Augur etc.)? Also, if a company successfully files/gets approved by the SEC, does that mean that NASDAQ can now list tokens?
AFAIK the SEC only cares about securities sold in the U.S. I'd imagine this incentivizes a lot of Token issuers to leave the U.S?
There are countries you can go to of course, but not many left. Grand Caymans... Switzerland is no longer a safe haven from U.S. jurisdiction either.
Residents. Noncitizen American residents are protected by the SEC. Though even that is a leaky boundary [1].
[1] http://clsbluesky.law.columbia.edu/2017/04/11/proskauer-rose...
Disclaimer: I am not a lawyer and this is not legal advice. Do not take legal advice from my Internet comments.
Or to American residents. The Treasury also claims jurisdiction over securities transactions done overseas using U.S. dollars.
* High brokerage fees
* Poor-outcome annuities
* Penny stock trading
* Risky options trading
Tokens are fraught with fraud, but the impetus for research is upon the individual. I fear that regulating this will stifle innovation with little benefit to end-consumers in terms of safety, because people will still get swindled out of their money by other legalized means.
- must have investment, - profit expectation, - this profit must come from efforts of others (management) - limited or none voting right
So what is preventing digital currencies classified at securities?
(I am not a lawyer)
I also don't see it having much effect at all as all of those tokens are traded in secondary markets.
The big supporters of cryptocurrencies were under the delusion that they were exempt from financial regulations. Today the SEC reminded them that securities law applies to everyone.
This makes it significantly harder to invest. Investors getting out will cause a drop in the coins' value.