Initial Coin Offerings Horrify a Former S.E.C. Regulator
nytimes.com
nytimes.com
Some are plain fraud. Investors will lose, scammers will profit and/or go to jail.
Some are promising startups, that will raise far more money than is healthy for their stage, and will die from too much money. If you don't have enough money (true for nearly everyone) it might be hard to imagine, but I've seen it when VCs give a startup too much. It makes them grow before they've found product-market fit, and when they realize their fit isn't quite right they're too large to change course quickly.
The second is more sad, because not only will investors lose their money but the world will lose an otherwise promising startup.
Just replace “investors” with workers, and scammers with “moneyed special interests.” Some go to jail to satisfy the proles, but otherwise nothing really changes to help the workers
And we keep talking about the pattern within itself, at a lower abstraction, ignoring the level where it matters to most
The reason startups go bankrupt when they have too much money though is because they're forced to spend money before they have product-market fit. And in the same way that the value created by good software scales exponentially as more dollars are invested, the costs of bad software scale exponentially as more dollars are invested.
Whereas money raised by co-ops is more akin to having money in your personal bank account, and it's not often that individuals go bankrupt as the direct result of having too much money. Sometimes they do, like with lottery winners, and I suspect we'll see that a bunch in the short term. But once we have better rules and norms, I think it's going to be less often that we see excess money killing co-ops.
So far, this seems a common failure mode for ICOs as well. So yeah, like co-ops.
That's because currently most co-ops are either run by hippies, or else exist only as tax dodges. But there's no reason they can't be run as dictatorships, the only real requirement is that the majority of the wealth generated gets captured by the people creating it. As the tools for running co-ops get better, we'll see more examples of ones that are better run.
The whole point of having wealth is that you can choose how you spend it. If one person chooses how to spend it, you don't actually have the wealth, they do, and it's not much of a co-op. If multiple people choose how to spend it, then you run into all the coordination-of-disparate-interest problems common to co-ops, communes, clubs, and other social ventures.
In double-entry land, the ownership of labor is diluted every time new capital is contributed. Obviously people contributing capital should get rewarded, but the fact that causality only runs in this direction is super broken. Whereas in triple-entry land, capital can get diluted every time you add new labor. This works because the technology allows labor to be viewed as an asset rather than as an expense.
Accounting innovations like this are kind of boring, but economically it's probably still the most important invention since double-entry was popularized in 1494.
Currently business owners keep track of whether they are making or losing money by entering each transaction into a spreadsheet (or something similar), as per the rules of double-entry accounting. But each of those entries needs to get audited by a human third-party, which costs money. With blockchain much of the auditing work gets pushed onto computers, so you can audit trillions of rows for the same cost as auditing a few thousand spreadsheet rows without blockchain.
This means you can create more complex types of businesses. In practice, it means you can create businesses where the incentives of the stakeholders are aligned in more efficient ways.
There are over 7,000 Co-Op buildings in New York City representing many, many billions of dollars in real estate asset value.
Maybe in the U.S., but there is between 1 and 2 billion people working in coops. You just don't know about it since corps don't want people to know there is another, probably better way, to run a business.
Owner co-ops or worker co-ops? E.g. there are over a hundred million Americans who are members of co-ops, and millions of Americans who work for co-ops. But the number of Americans who actually work for worker co-ops (as opposed to owner co-ops like REI or Ace Hardware) is only a few thousand.
A worker co-op is like what Twitter is trying to do, where they are holding a shareholder vote next month to determine if the employees can buy out the business from the owners and run it for their own benefit.
I think though that an equally valid alternative vision is what's laid out by the Howey Test, where the value of a token needs to come from the network participants rather than from a central party or a promoter. This naturally leads to a situation where the most successful co-ops are the ones that best incentivize their members to create value, e.g. by giving them ownership for creating value. This is the great race that's currently happening in the space as companies are fighting to figure out how to best do this, since every single industry is ultimately going to get reimagined and every sector of the economy is up for grabs.
Over time we'll likely see a hybrid between the minimalist game-theory driven co-ops (e.g. FileCoin) and the principles of labor-movement-style co-ops, as they make sense and as they're (re)proven to actually incentivize people.
The reason cryptocurrencies & ICOs are popular is they let anyone speculate and day trade.
This is right on the mark. Remove accredited investor requirements, and all that money will go to better options, like for example, YC startups. Nothing could do more damage to the investor monopolies of the world than opening this funding venue.
They say as much money moved into ICO's in the last 6 months as VC funding in the valley. To the very least, thats double the funding for tech startups: higher wages, more founders and higher absolute investment returns.
The tragedy is that scam ICO's make it because they cant put it into better investments due to regulation. Its the classic case of a damaging restriction.
they (a) lie on their attestation and (b) waive their right to sue
You think its a fair trade to lock 95% of Americans out of the investment market in order to protect the elderly?
New law: accredited investing means passing a 1 week course to obtain an investment license, which must be renewed bianually.
Now we can keep Grandma Suzy safe (because she hasn't passed the class) without locking 95% of Americans out of the investment market.
I'm not sure I'd have expected to see day trading touted as an investing approach that should be encouraged.
The bill was largely footed by large numbers of people who knew nothing about the technology. I know one person who founded a router company in 1996, IPO'd in 2000, cashed out his shares for ~8 figures right before the market cratered, and is using that to fund his second startup. I know another person who invested in all sorts of dot-coms in 2000 and lost her entire inheritance & life savings in that (and a few real-estate purchases in 2007). I'd bet that the second group outnumbers the first by a large margin, but people in the first do exist.
I was more talking about day traders specifically. I suspect most of them burned up their capital at some point or other. And a lot of this is probably related to the maxim that when taxi drivers start offering you investment advice, it's likely time to get out.
Private markets introduce much higher degrees of information asymmetry. Maybe you'll get rich, but your odds of losing your money are also much higher. The basic theory of accredited investors is, "Unsophisticated players aren't allowed to gamble unless they can afford to lose."
I'm fine with that. I don't want to pay for the retirement of somebody who got talked into sinking their retirement funds into something that was fucked from the start. If we want to give people a cut of the proceeds of innovation, let them put their money in funds that in turn invest a reasonable proportion of the money in high-risk areas like VC. There the asymmetries are drastically reduced.
I agree it's not a perfect system and people who want to can find other ways to throw away their money. But we're probably not guilty of over-regulating financial markets in general.
I think it's a great system. But I also hate poor people and don't want them to have the same opportunities I have. Let them play the lottery instead right?
[ADDED: In case anyone missed the sarcasm I'm not a huge fan of state lotteries because they target the people who can least afford them. That said, I realize many buyers would go the less regulated route if they didn't exist.]
Neither could employees that have access to internal financials. You could believe your company is doing great, but you cannot invest. You dont have the chance to compete for the resource with the investors that can.
This also means less money goes into investment.
Result:
- Qualified investors get higher returns - Employees get lower wages because there is less capital invested - Founders get less money - Fewer startups are created
In the name of protecting compulsive gamblers?
Also, the people applying for home loans weren't compulsive gamblers. The banks literally told them they were qualified.
Put it up to a vote and the vast majority will do away with these restrictions. The people don't want it. Some people want it, and some people benefit from it. As its usual in economics, those groups are not the same.
"Financial protections" => the government collects a tax to impose a restriction on you, to benefit the richest class.
Actually, for non-startups (i.e., 99% of new businesses), loans from banks, family, and friends, are the primary form of investment. This method of investing does not require the investor to be accredited.
Neither could employees that have access to internal financials.
Investors are also not entitled to internal financials. They might have a right to financial statement, but those are very different things.
Employees get lower wages because there is less capital invested
If the increased capital is coming from employees, then this is just a circular transaction: the money goes from the employee, to the company, back to the employee again = no net financial difference.
Founders get less money In the real world, founders borrow money, which forces them to be calculating and spendthrift with their cash.
Fewer startups are created
Oh no! Juicero would never have existed!...Wait, that's a good thing, and the very existence of Juicero and other wasteful startups suggests that the problem is too much capital, not too little.
Precisely because its illegal to do it otherwise..you are making my case for me with this statement.
> If the increased capital is coming from employees, then this is just a circular transaction: the money goes from the employee, to the company, back to the employee again = no net financial difference.
It could be divested from other less profitable capital investments like index funds, real estate or straight down cash. That lower competition of capital for startups means less startups and thus lower wages.
> Oh no! Juicero would never have existed!...Wait, that's a good thing, and the very existence of Juicero and other wasteful startups suggests that the problem is too much capital, not too little.
Thats your opinion, but you are making a comment on a site run by an institution whose primary goal is to make more startups.
Does that also apply to "democratic" processes?
Should only "accredited citizens" have the right to vote?
Having to pass a test to demonstrate you understand the policy choices and how they affect you could be a good idea if done impartially.
But to the point, categorical denial of access to a participatory space -- here based on your bank balance -- is akin to denying voting rights based on gender or color.
If the law was really about "protecting people", then gambling and the lottery would also be illegal.
Also, why can't I sign a paper saying I accept the risk of investing? Why can't I become an accredited investor by passing a class? I can pass a series of classes to become an EMT and be trusted with peoples lives, but no classes are sufficient to educate me about investing in startups.
When you look at how the accredited investor laws are structured, its clearly meant lock the middle class out of the market
https://www.worldcasinodirectory.com/united-states/map
And aren't states mostly the beneficiaries of lotteries? Here the revenue is supposed to go to schools or something.
I'm not going to deny there are many casinos (there are plenty) but the OP's statement of "gambling and the lottery would also be illegal" seems to miss that in probably the vast majority of the US, gambling and operating lotteries is illegal. For example, Texas recently had to have a constitutional amendment to allow sports teams to hold charitable raffles.
https://ballotpedia.org/Texas_Proposition_5,_Definition_of_P...
You can! All you have to do is lie on your affadavit of accredition, granting you the two things you want: (1) investment in the venture, to (2) no ability to file criminal charges on the venture management if you get fleeced. You do want both of those, right?
>The reason cryptocurrencies & ICOs are popular is they let anyone speculate and day trade
Even assuming this was good, you can trade as a non-accredited investor.
[1] no disrespect intended, almost everyone is including me
That said, contrast the S&L crisis [3] with Bernie Madoff's fraud [4]. The former lost $160 billion of regular Joes' money (along with wealthy investors'). $132 billion of taxpayer money had to be spent, alongside countless hours of regulators', judges' and lawmakers' time, again, on the public dime. A minor political crisis started (and subsided).
With the latter, $70 billion was lost (though it might have been as "small" as $20 billion). Prosecutors and judges still got involved, but fines repaid their efforts. Systemic effects were largely contained.
TL; DR We restrict the masses from illiquid investments procured through irregular channels because (1) the legal costs of diligence preclude small investments, meaning small investors either invest at a material disadvantage or invest too much (relative to their worth) and (2) the lower your worth, the higher the probability that a busted investment will lose you your shirt. That turns a financial problem into a de-stabilising political problem.
Side note: early-stage investing isn't as profitable, on a risk-adjusted basis, as it might seem if one only counts the winners.
[1] https://www.sec.gov/fast-answers/answers-accredhtm.html
[2] http://www.finra.org/industry/qualification-exams
[3] https://en.wikipedia.org/wiki/Savings_and_loan_crisis
[4] https://en.wikipedia.org/wiki/Bernard_Madoff#Size_of_loss_to...
Disclaimer: I am not a lawyer. This is not legal, nor any other kind, of advice. Consult an investment adviser and a securities lawyer before making risky investments.
These people almost always earn more than $200,000 a year and so qualify as "accredited investors" under the SEC's definition. Keep in mind, too, that start-ups can compensate their unaccredited employees with equity just the same.
Disclaimer: I am not a lawyer. This is not legal nor securities advice.
Actually not, because accredited investors must have cleared $200k for the two previous calendar years and most people who co-invest under the knowledgeable employees exemption are PE associates who have been on the job for less than two years.
Source? (Private equity associates are entry-level number crunchers. Their fraction of carry is a rounding error, if positive.)
Private equity associates very rarely receive carry, which is why they co-invest instead.
*edited for clarity
The vast majority of partner co-investment vehicles I've come across contain partners' capital. A rounding error may be from associates, who are usually counted against the limited number of unaccredited investors such funds can, with great legal liability, be marketed to.
I'd be in favor of needing to take a course on investment in order to be accredited, but having income requirements is bullshit and absolutely lends to making the rich richer and keeping the poor poor.
You can argue that it should work like that, but we intentionally decided to make SEC regulation the rule, and only grant exceptions for investors who have demonstrated they can handle the risk.
There is nothing saying that a non-accredited investor can't invest when a valuation is low. The investment just has to be regulated by the SEC.
We had no say in this.
The SEC unilaterally created modern day (1970s onward) accredited investor rules, although I'm sure they had their routine public comment period as if that made a difference.
The 1930s Congress and public had no idea that exemption from their protection would take shape this way.
Former accredited investor-like rules relied on financial literacy tests. These were predictable discriminatory and even the most compliant financial firms found them to be too vague. The SEC switched to the money tests to solve the lack of clarity and discrimination problems, LOL OOPS.
The exact mechanism for how an exemption is decided is certainly up for debate. I was simply saying the mandatory part was decided on by 'us'.
Are you sure about that?
Transacting in cash USD is still the preferred currency of the cartels.
What are the other major uses (excluding speculation) of BTC?
You also get the money immediately without it going through the ACH network.
This is a great example of how costly regulation actually is. I am horrified at the SEC, not at ICO's. Figure how all that moeny could be going, for example, to YC startups, for a fraction of what they give investors.
The SEC is blatantly discriminating. Why can't I sign a piece of paper and accept responsibility for myself? I'm a grown man with 200k+ in assets, I don't need the government to protect me.
Any self-made software engineer with 5-10 years working at startups doesn't have the legal capacity to buy stocks in the company he works at.
Think that as an investor, this rule eliminates 95% of your competition. As a founder, you have a much weaker position of negotiation. And as an employee, you have incredibly distorting restrictions of what you can get and how much because of this rule.
All harmful regulations exist for very good reasons.
And as an employee, you have incredibly distorting restrictions of what you can get and how much because of this rule. Blatantly false. An employee can receive unlimited amounts of stock as compensation. They're simply limited in their ability to expend their own financial resources to acquire stock of non-traded companies.
All harmful regulations exist for very good reasons.
Very true. But this isn't one of the harmful regulations. And even if it is harmful, it prevents significantly more and greater harm than it inflicts.
Today, employees negotiate the bulk of their stock only once: when they know the least about the company they work for. Not only that, but the information they have is asymetric with investors, because share classes are not the same which makes for a very convoluted and intrasparent market. Also, the majority of startup employees that quit do not excercise their options to the fullest: but they dont have the ease to sell those options to third parties, because of SEC rules. i.e. someone not able or willing to purchase stock when he leaves a company is most likely going to lose them. All consequence of this restriccion of buying and selling stock. Check out Sharepost for an example of this unmet market that drives down compensation.
> Very true. But this isn't one of the harmful regulations. And even if it is harmful, it prevents significantly more and greater harm than it inflicts.
What's your math to make this claim. I'm willing to be convinced in a strict utilitarian sense.
I'm thinking a lot of investors don't care about this and just have dollar signs in their eyes.
I half-left the industry for a few reasons:
(1) Current crypto-markets highly favor "smoke and mirror" hype-driven approach to product as opposed to a user and product centric approach.
(2) Most "businesses" in the space are basically about skimming money off the top of a frothy market and effectively encouraging the scammy parts of the system. I suppose I could be making a lot of money this way right now but would highly violate my personal ethics to do so.
(3) It is exceedingly difficult to tie any sort of standard value to a blockchain-issued token, partially because of the complex regulatory framework around such offerings
(4) The libertarian bias of the industry effectively forces a massive head on collision between the incumbents (e.g. the SEC) and folks trying to circumvent their control, also effectively guaranteeing some version of "blood on the streets."
That said, as someone who founded the first platform dedicated to these topics I obviously think there are a lot of positive elements that are possible. Including:
(1) Streamlining and adding efficiency to capital markets by removing middlemen
(2) Funding novel highly sophisticated technological projects that would be difficult to get funding for in the VC world (Ethereum, DASH)
(3) Creating broader incentivization than exists in traditional funding models such that users of a product are directly incentivized by its success
(4) Allowing for novel forms of governance and organizations that are not bound by the legal system of any specific legal jurisdiction (e.g. DAOs)
All of these ultimately have high value. However, I think what we are likely to see is a major phase of consolidation after the current hype cycle wears off (much as what happened with "the DAO").
The reality is that ICOs are mostly scammy and useless projects at the moment with a few shining examples.
DISCLOSURE: I don't mean to critique any particular political philosophy in this post. If I have criticism it is more directed to tactics and strategy.
In the end of the day, why is it the government's job to protect idiot people's money? And that's coming from the country where gambling is legal? The whole thing is based upon get-out-of-our-way-government exactly because of these ridiculous regulations.
If someone got money to waste, and decided to bet on some ICO horse, I wish him luck. If he doesn't have money to waste, it doesn't stop him from gambling on a real horse (which is still legal, and yet has 0 meaning whatsoever), so why are we so bothered about him gambling on this new virtual horse?
Sure, arrest those ICOs that are actually 100% clear scam because they left misleading expectations which they never had an intent of fulfilling.
We need regulation because regulation promotes confidence in the market which increases participation in the market.
Security regulation is among the easiest government regulation to justify from a market perspective.
It's how democracies work
And? "Democracies" aren't inherently good, just, noble or virtuous. As the old saying goes "Democracy is two wolves and a lamb voting on what to have for dinner. Liberty is a well-armed lamb contesting the outcome".
In my opinion, one of the jobs of government is to address clear market failures. On the securities side of things, 1929 was a clear market failure. On the environmental side of things, Love Canal was a clear market failure. The government is in the best position out of any entity to address these failures, to prevent a horde of swindlers from tanking our economy or to prevent some corporate stooges from poisoning elementary school children.
I'm actually fine with the government acting to "increase participation in the market". That's why we try to have a steady 3% inflation, to encourage market participation.
Can someone explain this statement to me? Is he saying I.C.O.s are the most flagrant violations occurring since the Code of Hammurabi was written, or is the Code of Hammurabi itself a violation?
People were losing their shirts investing in shady companies so the government stepped in to protect people from themselves.
For this reason it won't be surprising at all when we start seeing some attempts to enact regulation.
Those examples have cleary less benefit for society then the dumbest investment strategy. Let people invest, sure tons if people will lose their shirt but they will learn from it and stay away. Everyone else in the society gets to Enjoy the increased liquidity in the society. Why does anyone think that its ok that we created this random gatekeeps in the society that block ordinary people from investing beciase they are to “stupid”. The accredited investors sheme is a fraud, the arbitrary number on 1m$ networth to be an accredited investor is a joke. Thats means that even a Business Prof. Can’t invest because the SEC deems him to be to stupid.
They also carry less risk. Few people who "lose their shirt" say "oh well, I didn't do my diligence." Instead, they blame the system. Their anger becomes political capital. Moreover, inept investment combined with leverage can decimate an economy in a way frivolous personal spending does not.
If you want to learn about why these regulations appeared, in more or less similar form, many times independently across the world, start by reading on the history of free banking, the Panic of 1907, the post World War I securities market and the debates surrounding the Securities and Exchange Acts of '33 and '34.
Disclaimer: I am not a lawyer. This is not legal nor securities advice.
> They also carry less risk. Few people who "lose their shirt" say "oh well, I didn't do my diligence."
No they don't. Plenty of people lose their entire life savings in casinos, and plenty of poor people spend money on lottery tickets when they should be spending money on food.
You have not sufficiently explained how gambling is less risky than investing.
Soviet Union famously regulated this very well. These luxury goods were only available to accredited investors aka the Party elite.
It seems to me that back then this behavior was condemned by the people of the Land of the Free.
Investor protection are about Fraud protection. NOT, because it is good or bad to spend money on something.
If you spend 2 Million dollars on a car, you are getting exactly what you were sold. If you buy a lottery ticket, you are getting exactly the odds that were promised to you.
But investments are a different story. Someone is trying to promise you that your investment will go up. They are making claims that they cannot guarantee.
That is why investments are regulated.
I challenge you to find a single ICO which says that (or something very similar) in their terms and conditions, homepage, or white/yellow papers. So far, every single one I have read about said it was a risky investment with no guaranteed return.
Now check out lottery advertisement for a different message: https://i.pinimg.com/736x/c8/95/f6/c895f66260e1517e2b2437d8a...
Casinos and the state lotteries do everything they can to convince people they will make profit. Do you think a regular Joe can calculate the expected value of a scratch card? Sure, he knows he has a 1/1,000,000 chance of winning the jackpot and a 1/25 chance of winning $20. He is being misled.
Therefore, since gambling companies are legally allowed to mislead regular people, then there is no reason to protect them from investing and maybe actually making a profit.
"The EOS Tokens do not have any rights, uses, purpose, attributes, functionalities or features, express or implied, including, without limitation, any uses, purpose, attributes, functionalities or features on the EOS Platform."
It's (almost) impossible to find words like "invest" or "investment" on ICO websites or white papers.
So people are going broke by the masses from buring money on shit they don’t need to impress people they hate cus advertisement told them to.
Shutting people off from investing their own money however they like is Elitist thinking!
The only example of yours that is close to equivalent is a casino gambler, and even then, we DO heavily regulate the casino industry. It is either outright banned in many places, or there is some agency that is in charge of making sure the gambling is legit (i.e. the rate of return for a slot machine is what it is supposed to be, and isn't simply taking money)
The world is global, money is global.
[1] https://www.indexmundi.com/facts/indicators/CM.MKT.LCAP.CD/r...
ICOs are the Wild West, with the added benefit that they’re totally intangible so you can’t even be stuck holding the bag.
But with laws at least I know that they met a base level of not ‘a cartoon mafia hiding under a table giggling at the idiots buying our scam’.
> Coin offerings generally happen without the involvement of financial institutions or regulators because investors pay for the coins using Bitcoin and other virtual currencies, which can be sent outside the traditional financial system.
Essentially it's a throwback to the days before any financial regulation existed.
Even so, it might take a long time before they start failing in large numbers and law enforcement starts taking action. Until then, a lot of money will be won and lost.
FileCoin retained a reputable law firm [1], restricted their applicable marketing to accredited investors [2] and used a template agreement designed by lawyers to comply with the law [3].
[1] https://www.nytimes.com/2017/08/07/business/dealbook/initial...
[2] https://techcrunch.com/2017/08/10/filecoins-ico-opens-today-...
Disclaimer: I am not a lawyer. This is not legal nor securities advice.
Grandmas and Joe smoes are not being scammed. You can only lose money from file coin if you are in the top 1% already, and therefore probably don't need the government to protect you.
And, indeed, it isn’t. FileCoin has only done a pre-sale so far, selling securities (SAFTs) to accredited investors. They haven’t explained (afaik) how the tokens will be issued and make their way into the hands of the public. That’s why I was curious to see Grundfest citing them.
And ICO does not exist yet. It is a promise that you will recieve something in the future, but that you can't get now.
Once file coin actually exists, in the here and now, and works, THEN it is totally OK for regular people to buy and sell it.
HFT is mostly ultra-fast arbitrage programs, and the benefit of using them far outweighs the downsides.
Maybe the problem is not with HFT but in the industry as a whole
TLDR; Wall Street is part of an industrial/political system that extols "free market" capitalism, publicly, when in fact, "free markets" and "free market meritocracy" is a myth, and they know it. Privately, these same people hire lobbyists and otherwise influence the political system to craft regulation & policy around property, monopoly, contracts, bankruptcy, and enforcement. These regulations protect and enhance the benefit of the few.
For a longest time, Wall Street had three tricks: securitization (breaking cash flows into securities), portfolios (putting securities in a box) and leverage (borrowing and lending). (One could argue swaps are a fourth.) That's it! IPOs? Securitise a company. CDO? Portfolio mortgage securities. Mortgages? Securitise them!
Now there are blockchains. A whole new thing! If there's a group thrilled shitless about blockchains and ICOs, it's Wall Street. Best part: when the whole thing goes south, they get to blame Silicon Valley.
Pardon me, I was being facetious. We agree. I was responding to a comment claiming investment banks "are clearly threatened by the ICO boom" [1]. Wall Street is more likely to coöpt, as opposed to be replaced by, blockchains.
This will not end well.
So beanie babies were securities too?
This is just silly. Surely there's some better definition of what a securities are.
In some countries security is either equity or fixed income instrument. As I understand ICO-s are neither.
But I'm very glad this article is getting more attention.
I ask this genuinely because I am not familiar with the philosophical aspects of law. I understand that regulators would rather not take an action to harm someone innocent, but it seems to me that they strongly prefer that over taking an action that prevents harm to many people.
ICOs externalize many consequences.