The Colony token sale would have been committing securities fraud
blog.colony.io
blog.colony.io
Second, even if a particular token represents a security, offering it to the public is not "securities fraud" in and of itself. Fraud is a material misstatement or omission. What the author is talking about would be an unregistered securities offering, which if no exemption is available, would be illegal. Illegal but not necessarily fraudulent per se.
This is not to say that Colony should have an ICO. I don't know anything about their specific case. But this article is not useful to anyone else trying to make a similar decision.
Are you a lawyer? Because it wasn't the opinion of the author; it was the opinion of their lawyers.
> offering it to the public is not "securities fraud" in and of itself.
Right. In the US, you can abide by the new-ish JOBS act for crowdfunding from non-accredited investors. You'd be selling a security. The problem with token sales is that they are trying _not_ to be securities. This may not be "fraud", but it is likely in violation of securities laws.
> this article is not useful to anyone else trying to make a similar decision.
The takeaway is that no project going forward should do a pre-functional token sale.
The takeaway from this article is just wrong, b/c it implies that the SEC thinks token presales are all inherently fraudulent. That is not correct.
Many ICO's are illegal securities offerings, probably. And many are also fraudulent. These two things often overlap. They are not equivalent though.
Howey is a FACT DEPENDENT TEST. That means, if you are planning any kind of token offering, you have to get advice about your specific circumstances.
As a heuristic, "stay away from ICOs" is pretty solid. No one will be harmed by this. Many people will be harmed by participating in crappy ICOs, either as promoters or buyers.
However, HN is a forum for technical discussion, and I'm criticizing the technical basis of that article.
It does seem that the best-advised projects avoid listing pre-sale tokens on an exchange. This hasn't stopped them from raising loads of money for their respective foundations, in exchange for cold wallets or invite codes.
The devil is always in the details. Very few people have the relevant experience to advise in this field with any confidence. I do not claim to be one of them.
So, mentally set the word "fraud" aside if that's bothering you and consider the article.
>But this article is not useful to anyone else trying to make a similar decision.
If the analysis in the article is correct, it is absolutely useful. They key takeaway is this:
>Here’s the short of it. As far as we can tell, no matter what, tokens purchased for pre-functional products are securities. After it is functional, it depends.
>Here’s the short of it. As far as we can tell, no matter what, tokens purchased for pre-functional products are securities. After it is functional, it depends.
Of course, as you note below, Howey is a fact-dependent test and every offering requires its own unique examination. However, as a general guideline this is useful advice for others in a similar situation and provides guidance on the questions they should be asking about their potential ICO.
As far as I can tell, no-one is saying that Colony is fraudulent, merely that its token looks like a security.
I agree it's not necessarily going to be deemed a security, and I am not a lawyer, but from my reading of Howey and related decisions I would say whether an instrument is deemed a security will come down to how it was marketed and what the general expectation and intent of the purchasers seemed to be. Since Howey emphasizes that only the function of the instrument matters, not the form, I would say that even if a cryptocurrency has use value, it could still be deemed a security if a large fraction of its purchasers mainly expect to achieve a passive profit by buying it. After reading the blog post, I can see why the Colony developers are being cautious
I don't know that it's a badly written law so much as one which gives its enforcers and arbiters a lot of latitude to decide its jurisdiction because the bad behavior it's trying to control is so hard to pin down legislatively. The law could certainly be abused, and probably has, but the cases I've read have left me with nothing but admiration for the wisdom and consideration with which it's been applied. And that's despite the fact that I have a generally libertarian bent and a general dislike of over-broad laws.
For example, the Filecoin ICO for U.S. participants was restricted to accredited investors, which required a proof of income above $200k/year. Obviously, ICOs are risky, and we can all see why someone with less income probably shouldn't invest as much money as someone making over $200k. However, preventing someone in a lower income bracket from making ANY investment feels like economic stratification.
For example, lots of drug dealers get busted on tax related charges. Being the pimps busted on securities laws isn't impossible, especially if you set that up as a slam-dunk case while making the other hard to prosecute.
Not commenting on their specific case, but that reasoning is dubious.
The SEC thing was probably unavoidable anyways.
To be fair, our entire business model is illegal in the US, and mostly illegal in many countries. We already have to deal with the penalties for running an escort agency.
On the plus side, it's a good business model so our chance of success is pretty high. If we end up having good returns, there will be less complaints and we'll be less of a target for the SEC organically.
We intend to be the first blockchain-funded cypherpunk unicorn. It would set a bad precedent if we didn't treat investors fairly.
SEC doesn't much care if you did right by investors. Hell, you're helping prove intent - right here in this post. Add conspiracy to your charges, by the way.
Seeiously, consult a lawyer. You're going to go to prison.
But that is not what we're counting on!
Basically we asked: What if everything related to sex work was legal? What would the inevitable startup look like? With modern privacy tech, we can attempt to try it. We can ignore legal issues by operating extrajurisdictionally and anonymously.
This article discusses our technical setup: https://medium.com/@PinkApp/pink-app-trading-latency-for-ano... - excuse the clickbait title. Please let me know the flaws you see! Latency could be a killer, but we think we can mitigate it.
The core team, people that know real-world ID, are very few. Within a few months we plan to move nearly exclusively to high-latency communication methods.
By having trustless contractors run public-facing aspects of the business, the core team's opsec attack surface is drastically reduced. We have contingency plans, so even in case of arrest or death, the system can be restored from backup. Maybe one day there will be private mature smart contracts and we can codify it. Meanwhile we'll rely on lawyers and other trusted parties.
It may sound crazy ... a libertarian cypherpunk dream. But think how if you told people that it'd be popular to send non-refundable Internet money to a hidden internet service that promises to give it to an anonymous drug dealer on the other side of the planet to mail you drugs via the US Postal Service and that people would willingly trust them and it'd all be safer than using the street ... well people would have called you crazy! Yet it's popular and darknet services do exist that haven't had their operators busted.
I don't offer an opinion on your business methods, recovery methods, or even the morality.
Instead, I point out that you're going to go to prison. As noble as you think your cause, they most absolutely will not care. Also related: I'd not count on jury nullification.
You do what you've got to do, but you are going to prison if you follow up on this plan. There are a few things one shouldn't play with; firearms, nuclear weapons, and the SEC.
If you're okay with long term incarceration and fiscal penalties that could bankrupt Bill Gates, knock yourself out. If you can be tied to your online messages declaring intent, it's really going to make for an angry judge. I've seen angry judges, they remind me of honey badgers.
Seriously, I highly recommend you seek legal council from a qualified legal professional licensed to practice in your jurisdiction. Morality and consumer complaints aren't actually things the SEC care about. They are only marginally less aggressive than the IRS.
If our opsec fails, I'll end up in prison, very probably. That's what contingency plans are for: the project can keep operating without me. Meanwhile that's going to take a ton of effort and time, so I can the project to a point where I'm not vital.
Lawyers opinions are the same. No lawyer will advise their client to be the founder of an illegal enterprise. This is not much of an insight. Other than that, most lawyers are not capable of assessing opsec risk.
At any rate, don't you think it's a bit useless to tell someone determined to obviate the government to go ask a government agent for advice?
That's what the Silk Road folks thought.
The feds can screw up a million times. You only have to do it once.
And our contingency plans will enable another team to pick things up to restore from backups und continue operating.
Private companies can sell their shares to anyone who wants to buy them, and the government has no say unless there is actual criminal fraud involved.
Americans tend to think of Europe as full of “nanny states”, but this is one instance where the United States is seriously nannying its citizens by removing a core freedom of capitalism from them.
And if a platform is a prerequisite: Just build the barest possible platform MVP, much like a pre-launch landing page.
The token is a "currency" that people are buying into through some exchange rate to participate in a market with token denominated currency.
So what they are doing is the opposite of what they should be doing. They should invest their money and grab market share, get as many investors on board as possible, fine tune their market strategy and technology so they can beat whoever they consider competition. Short: They should earn their place at the top.
What they do instead is waste the money to buy imaginary safety (the law about Coins is still uncertain, what can a lawyer do) and then even use it as an excuse to not move forward. There's zero chance to win this way.