SEC Shuts Down Munchee ICO
techcrunch.com
techcrunch.com
The problem is that you're giving money to a relatively unknown company while speculating that the company will create inherent value. Unlike with stocks, you don't have ownership in the company or any voting rights. There is nothing stopping the company's creators from distributing the ICO money to themselves (there might be a board, but since the company isn't public who knows who the board is).
In this case the SEC is right to step in so there aren't a ton of unregulated securities going around and a lot of consumers potentially getting screwed.
Even with cryptocurrencies like Bitcoin, it can be scary. You're literally getting into the ForEx market, which is known to be one of the riskiest markets in existence. With other currencies, at least they're backed by a government that (at least at least attempts) to regulate it's value and protect it from manipulation. With bitcoin, I saw that 40% of all coins in existence are owned by less that 1,000 people. How do we know that the current price inflations aren't a manipulation (or collusion) to jack up the price, sell for USD, then crash the market? It's not illegal/collusion because Bitcoin isn't regulated.
This is definitely a rant, but I have some serious concerns as to where this market is going. Would love to hear other's thoughts.
In the medium run, I see ICOs as a light-weight alternative to IPOs, but not as a seed-funding instrument. This is non-sense.
It's entertaining that many seem to believe this for no apparent reason, but the SEC (and other regulators around the world) doesn't seem to agree.
European Financial Regulator Warns Investors On ICO Risks https://www.coindesk.com/european-financial-regulator-warns-...
Germany's Securities Regulator Warns ICOs Pose 'Numerous Risks' https://www.coindesk.com/germanys-securities-regulator-warns...
Japanese Financial Watchdog Issues Warning over ICO Risks https://www.coindesk.com/japanese-financial-watchdog-issues-...
I can't imagine any developed nation won't end up regulating ICOs as securities. That might be a message to which it's worth paying attention.
> that 40% of all coins in existence are owned by less that 1,000 people
That was a terrible piece of reporting. The reality is that 1000 addresses hold about 40% of coins. Addresses are not identities; one person can have as many addresses as they want, and businesses (like exchanges) may have a single address that holds the vast majority of their cold storage. The upshot is that we don't know how well Bitcoin is distributed.
Some of those large addresses are exchanges, and are indicated as such on many sites, or held by institutions. They hold large amounts of coin, yet represent the holdings of thousands of individuals. There are also several large addresses that are very similar (i.e. each containing a given number of coinbase rewards) and are very likely to be held by a single early miner. There are also some number of "Satoshi" coins held by the creator of Bitcoin. Some estimate that Satoshi mined ~1million coins, though there is nothing definitive about this figure. There are probably at least 100,000.
Bitcoin market 'manipulation' falls into two categories: 'legitimate' manipulation that requires buying and selling coins in a bid to move market sentiment in their favor, and 'illegitimate' manipulation that requires inside knowledge of an exchange, such as full view of orderbooks for stop hunting, etc. The first kind exposes the manipulator to significant risk (especially from other 'whales', and is far less lucrative than many would believe. For a net gain, they must move the price in the opposite direction from their net buys/sells. The 'illegitimate' manipulator can only affect particular exchanges (insider trading, or else hacking), and thus you can choose an exchange you trust the most.
The cold storage aspect is interesting. What happens if the drive is corrupted? Can this type of content be raid(ed)/duplicated?
> The problem is that you're giving money to a relatively unknown company while speculating that the company will create inherent value.
That's what seed round VCs or angels do. Sure, they tend to invest only in peeps they know personally or through their network to try and control for too much failure. But the same could be done for ICOs...only invest in those that have teams you know well, or can meet, or who will take your call and answer your questions.
>Unlike with stocks, you don't have ownership in the company or any voting rights.
Same thing happens in VC rounds as later round investors dictate terms and dilution to early round investors.
> There is nothing stopping the company's creators from distributing the ... money to themselves
Same thing with VC money...one can hire friends, acquire companies one might have stock in already, buy a swanky office, go on lavish company parties, etc.
> there might be a board, but since the company isn't public who knows who the board is
Verbatim for VC-backed private companies. The "who knows" depends on the due diligence of the investor. Sure, most professional VCs will define who the board is ie. require board seats. But those boards can and do change in later rounds. It's up to the ICO investor to do due diligence. There's no law for ICOs that I cannot email or call the founders and ask about their board. If they refuse to answer, that would be a huge red flag.
All that said, I completely agree: > the SEC is right to step in so there aren't a ton of unregulated securities going around and a lot of consumers potentially getting screwed.
Most retail investors cannot possibly spend the time and effort and money to do proper due diligence regardless of whether it is an ICO, IPO, OTC stock, etc. Most mom-and-pop investors should just buy ETFs with zero fees. Schwab has some great examples!
For professional investors...I think ICOs are a fantastic tool that adds competition to the marketplace...and should scare the hell out of VCs and PE since the days of 2 and 20 without question seem fleeting.
EDIT: formatting
As an aside, I disagree that the current accreditation is a good measure of being "qualified" - anyone who inherited $1M can be accredited - but it's what we got; at least one bad investment decision won't bankrupt a foolish heir.
Investing in an ICO has essentially the same risks as investing as an angel or VC. I have both invested and received investment and the due diligence process varies greatly from firm to firm, angel to angel. The good ones make good decisions, largely based on lots of hard work. Anyone interested in investing in an ICO could do the same. I have looked at many ICOs and have probably spent over 100 hours of hard work doing due diligence on the few ICOs that looked legit. I pulled the trigger on one, and passed on many more.
To me what ICOs represent are a fundamental shift in the marketplace from a closed door, network based, "clubby" process to a transparent, data rich, open process. Not that they cannot be gamed, especially when early investors get different coin prices, etc. Due diligence is definitely required.
The pain this is trying to solve is to allow companies who need access to capital to get it without having to visit Sand Hill Road or apply to incubators. It's not a silver bullet, it's just a different way.
The SEC shutting down scams is a good thing. The SEC chilling all ICOs is a bad thing and protects the status quo and limits innovation. A legit business - even if just an idea - should be able to put its idea and data out there and the founder's experience and expertise, and let the market (of professional investors) decide.
I think the SEC should have a version of some of the Excel sheets you find on Google to check whether an ICO is legit or not. It should not require lawyers. It should be based on Yes or No questions. If a founder can pass that test, the SEC should back off and let the market decide.
But yes, ICO participation should be limited to professional investors. But if there is innovation allowed, maybe there could be a retail-focused ETF for ICOs, for example.
Do you think this is a bad thing? I’m on the fence. If someone’s dumb enough to buy into these obviously stupid ICOs, chances are that the person getting the money will spend it better than the buyer would have.
The world basically figured out that everyone can have their own currency, so now every little company starts to print their own money?
Why are people buying monopoly/play-money for dollars? Because CPU-time was wasted to make it unforgeable?
What use does unforgeable money have, if it's not irreplaceable?
Why are buyers not concerned that their freshly purchased ToyCoins are rendered useless in the blink of an eye by the issuance of ToyCoin-2, perhaps by the same company?
The so called "cryptocurrencies" aren't currencies at all. They are simply goods which exist for the sole purpose of being traded around in speculative markets. They are no more money than beans or trading cards. These companies know that and invest in the creation and promotion of a new set of trading cards to pump the value to dump them afterwards.
Regular currencies are also imagined-up things which have only a few practical differences. The one difference is usually various government contracts/taxes are only payable with specific currencies and therefore have value because they are 'needed' to pay obligations.
That's not true. A currency is designed to serve as a medium of exchange, a unit of account, and and a store of value.
These so called "cryptocurrencies" fail to meet the basic requirements of any currency as they are designed specifically to inflate their value in speculative markets while serving absolutely no purpose of being either a unit of account or even a medium of exchange.
In fact, beans are far better currencies as these so called "cryptocurrencies" as their value are far more stable and are free from speculative drives such as the one discussed in this thread.
Additionally, real currencies have inherent value by being adopted as the official and exclusive medium to pay taxes to governments.
And yet, after all the designing (a post factum attribution more likely), they're still just numbers on ledgers.
No, they really are not, and that's a very ignorant thing to say. Mere numbers on a ledger don't have central banks dedicated to implement economic policies to actively stabilise their value nor do they get accepted by state institutions as official and in some cases exclusive form of payment.
The value of some currencies have fluctuated in their value wildly in the past, so stability isn't a some intrinsic thing that marks a currency.
I'm not say I don't agree that the word 'cryptocurrency" isn't banded about far too much, but saying "They aren't currencies" should be supported by some kind of description of what makes a currency a currency otherwise we can tie ourselves in knots.
Saying that the 'design' or 'stability' define whether something is a currency as it is really just using proxies (that might work most of the time) for what makes something a currency. I think.
http://consumer.findlaw.com/securities-law/what-is-the-howey...
"The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor's control. If so, then the investment might be a security. If, however, the investor's own actions largely dictate whether an investment will be profitable, then that investment is probably not a security."
Howey Test https://youtu.be/9lTS1Zofw8w
It's arguably easier to be in compliance in a single market of 350 million people, then in multiple markets, each governed by their own laws.
Some jurisdictions also don’t require normal stock offerings to follow rules as strict as the SEC does. It doesn’t stop the US from having many of the largest stock markets in the world, and a very high level of public participation in equity investing.
https://www.coindesk.com/cftc-no-inconsistency-sec-cryptocur...
So they can all run their scams in countries that don't care? I mean, doesn't this just show that crypto startups are all about providing services to entities that, for various reasons, do not / cannot participate in the aboveground economy?
Like, what reputable, real company would have any problem existing inside the USA's jurisdiction? You could argue drug trade, which is supposedly a "victimless crime" (note: it isn't... depending on the drug, even "non-violent" drug use can fuck over a lot of people outside just the person who choses to take said drug (eg: meth, herion, oxy, etc...)). Anything else though, it is almost certainly a scammer scamming people. Why should above ground society tolerate people wanting to run ponzi schemes, people trying to cash out crypto-ransomware revenue, or people who want to deal in murder-for-hire?
So now just imagine a token that has the same functionality.
You receive a token that does something useful. Do you use that token wisely? Or do you make bad business decisions?
There are tokens that people are buying to use, not just to HODL.
So now just imagine a token that has the same functionality.
You receive a token, it's made of paper like the notebook but does something useful.
Should that token, the piece of paper be regulated? Lol yes, it's now money! And all other assets or securities are regulated.
They both represent either computation-time or file-storage-and-bandwidth time.
Ethereum could easily represent time on a distributed AWS Lambda. And FileCoin can represent an AWS S3 storage.
It just so happens that they both are also cryptocoin.
It gets even uglier that the turning-like machine in Ethereum/Solidity also exists, kind of, in Bitcoin. In fact it was because it worked in Bitcoin they developed Ethereum. So technically even Bitcoin can do processing work. Makes everything a bit murkier to be honest.
These aren't new concepts. People have been trying to get around regulation for thousands of years.
Pretty much anything that can be bought and sold is an asset. Yes, that includes notebooks and paper.
If you're saying that the piece of paper represents ownership of something, then the paper is most likely a security or derivative, in which case it is already subject to regulation. A token with the same functionality as this piece of paper would be regulated, and vice versa...
Obviously, this isn't the first time we've had offerings ostensibly taking these forms. People used to buy comic books in the hopes of their appreciation. Ty sold Beanie Babies to people who were stockpiling them for eBay.
The reason Ty didn't get in trouble, but Munchee did, was that Ty was never stupid enough to record videos extolling the once-in-a-lifetime opportunity people had to 9x their investment in restaurant review coupons. Again: a very significant component of the SEC's concern is about marketing and promotion.
They are certainly speculation. But I doubt the SEC would ever claim that literal bars of gold (not notes, physical bars of gold) are securities.
Being a security does not mean it can't also be something useful; it just means that the security aspects of it are potentially subject to securities laws.
EDIT: Beanie babies aren't securities because you actually the beanie baby. However, a piece of paper entitling you to ownership of a beanie baby could be a security.
Imagine a coin securitizing Bitcoin miners ("cloud mining coin"). Yes, that's a security.
Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)
True, but then you're limited to things which can be stored in a blockstream in the space allocated to a single coin. There aren't many useful resources that could fit into that space, even fewer that would scale.
Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)
Unless there is something about Ethereum that I'm not aware of, it does not represent any sort of ownership interest in another asset, it is the asset.
I didn't see any admission like that. Quite the contrary. I think the statement pretty clearly places the ethereum ICO (as distinct from the functioning network after) as a security.
https://blog.ethereum.org/2014/07/22/launching-the-ether-sal...
There are a number of points in that post that scream security.
BTW, a number of games successfully have things like this, eg. Linden dollars in Second Life, gold in WoW, or tokens in FarmVille.
That wouldn't really be an ICO, though, right? You have to be able to convert it back and forth between another currency, not just "earning" it through use of the software to be spent only there and never changing hands.
Pretty much, yes. Securities are defined very broadly in the US.
Why does it surprise you that these are securities? They very obviously are selling a security to investors, who are purchasing it because they expect the price to increase. Open-and-shut case.
The fact that there's crypto involved is irrelevant.
It really sounds like people are trying to pretend these laws don't apply because they disagree with the laws in question. Which is fine, but let's not pretend like there's any ambiguity here, because there's not. It's extremely clear that almost all ICOs are securities, and if you asked a lawyer I'm 100% sure that's what they would tell you.
https://www.sec.gov/news/public-statement/statement-clayton-...
> The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘‘security’’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.
From The Securities Exchange Act of 1934 (N.B. IANAL).
So, will cryptocurrencies, possibly including ICOs, be exempted? Only history will tell.
This is about ICOs. IE, a tokens that are a 'FUTURE' promise for something that doesn't exist yet.
If Bitcoin was a security, the statement from the SEC head would be very different.
I agree with you, but the fact is plenty of people do. Maybe not in the corner of the world, but look broader. This also wasn't the point.
(assuming it was actually done in good faith and not discernibly a scam)
> Can anyone provide an example where an ICO would not be a security
Well, if it's purely a "utility coin", and people are buying it in order to exchange the coin for some service (like, basically, car wash tokens but on the internet), and there's not really any speculation in the secondary market, and people are buying them for their own use and not to resell or speculate on, it's probably fine. On the other hand, if the product that the coins would be used for hasn't been built yet, it's probably not fine (since you're gambling on the founders executing properly, yet have no real control over whether they do so).
...but no, I don't know of any examples that fit that criteria. ICOs don't make a lot of sense for things that aren't securities; the most common purpose (at least for the legit, non-fraudulent ones) is to obtain investment to build a product. That's obviously a security, and one of the core purposes of securities law is to protect people being asked to contribute an investment that will be used to build a product.
You can speculate, for example, that pirate faction battleships are about to go up in price. CCP can and does change that all the time. The investor has no insight or control over how ISK is valued.
What keeps it different and unregulated is that it's a one-way conversion. You can buy things with real cash that can be sold for in-game currency. But you cannot, in theory, sell anything inside of the game for real-world cash.
Some people do, of course, but CCP polices this very heavily to avoid exactly this kind of problem.
Virtual game currencies are not that different from Coins. But the main reason they escape scrutiny by regulatory bodies is that they are one-way conversions.
ICOs were, until very recently, one-way conversions. You buy something from someone, good for you. Once it got to a point where it was relatively easy to convert that virtual thing back into legit currency, people started paying attention.
I can't see a way that any new ICOs can dodge this aspect. But there were COs that did dodge it for a while because no one thought they could get big enough to matter.
If RMT got big enough in EvE or any other video game that offers financial incentives to win at the game (so-called pay-to-win) ever got big enough to be able to affect a currency market, they would fall into this scrutiny almost immediately, which is why gaming companies police this so hard.
There isn't really any functional difference between trading game tokens and trading blockchain coins, except that one is easily transferable to real-world currency and the other is not.
So in that very round-about way, any virtual currency that is seen by the FTC to be one-way will not pass the Howey Test. But almost all virtual game currencies can be traded in one way or another for real currency. Most of them can't be done in a large enough scale to affect real currency, so no one cares. Most in-game currencies should fail the test. But they are irrelevant, so they pass.
Rather than asking whether the potential profit is outside of the investor's control, the question is whether the profit is within the control of some other person or group.
The example that sticks in my mind is the idea that fruit trees can be securities if they are maintained and harvested by non-investors and the fruit sale profits go to the investors.
So, if you own gold, you don't own a security. You own the actual gold, and that chunk of metal does not secure ownership of any other item. It can be exchanged, of course, for ownership of something else, but that's a function of its value as an object. Now, if you own a share of a gold ETF, that is a security that describes your rights to some chunk of metal.
https://youtu.be/9lTS1Zofw8w?t=175
Where if no single person or group is in charge, and decisions are taken by all, is no longer considered a security. This little detail makes the difference from security to not a security.
I'm honestly not sure what the answer is, hopefully you (or someone else) can clarify.
That statement was released on the same day as the Munchee decision, and the Munchee decision is linked from the statement
Context (the Munchee decision is in footnote 6): "I urge market professionals, including securities lawyers, accountants and consultants, to read closely the investigative report we released earlier this year (the “21(a) Report”)[5] and review our subsequent enforcement actions.[6]"
Our approach to "get around" this is to file all the necessary paperwork for a legal security and then only sell the token to accredited investors.
Generally: earning over 200k/yr, or having a net worth over 1MM excluding your house.
The idea is that people who have high incomes or high net worths (a) either are financially sophisticated, or can trivially afford financially sophisticated advisors, and (b) are unlikely to be staking so much on a single deal that their long term outcomes will be at risk.
What's to stop an inheritor from making a poor investment with all their capital? Or a lottery winner? Or ANYBODY with that kind of money, really?
Why is it presumed that at "arbitrary net worth 1 million," a person is "financially sophisticated?"
If the sec wants to I guess "protect people from themselves," why don't they have an actual certification system that is based on a demonstration of knowledge?
Finally, why aren't people with a net worth of under 1 million protected from other poor financial decisions, since in your mind they are not "financially sophisticated" and thus are more likely to engage in payday loans or other predatory financial institutions?
By and large, the entities pursuing 8-figure ICOs are those that (a) don't want to spend $10,000-$20,000 to engage with the SEC and adhere to their disclosure rules, and (b) aren't credible enough to raise from accredited investors.
What's crazy to me is the notion that a business venture that can't scrap together $20,000 should somehow obviously be entrusted with $15,000,000 of retail investor money.
It's not so much proving they are financially sophisticated as it is saying they have enough that "they are on their own". For instance, I can't recall many people caring about the wealthy who lost so much in the Madoff scandal. Most opinions seemed to be "they should have known better".
> 'If the sec wants to I guess "protect people from themselves," why don't they have an actual certification system that is based on a demonstration of knowledge?'
You can actually be exempt from the income/wealth requirements if you are an investment advisor / registered broker. I believe you can be an executive at the issuer and be exempt to.
> 'Finally, why aren't people with a net worth of under 1 million protected from other poor financial decisions, since in your mind they are not "financially sophisticated" and thus are more likely to engage in payday loans or other predatory financial institutions?'
SEC doesn't regulate those. I agree predatory lending should be reigned in though.
How does this square with the SEC commissioner's statement yesterday that not a single ICO has registered to do a security offering?
I am curious, though, how that works with proposed international investors. (I'm not well educated in the financial space)
I hope that these actions clear house of the scams, and open room for good projects to exist without some shade of doubt cast over them—at least not for the reasons there exists some kind of shade now.
It protects the monopoly the investor class has on investments like these.
More broadly, there's a whole set of finance research showing that the investments that accredited investors get access to (private equity, VC, etc.) aren't any better that normal investments on a risk-adjusted basis.
If Oculus had done an ICO instead of a kickstarter, my $400 wouldn't have been merely a preorder. The $400 would've become quite a handy sum by the time Oculus got acquired.
That requires integrating ICOs into the existing startup structures, but it's worth trying.
Right now we'd just have to settle for "If Oculus got acquired, the price probably would have gone up." But you could imagine starting a company that promises to incorporate tokens into the structure somehow: Perhaps the founder would say they'll only sell to acquirers that are willing to offer token holders $x, where $x is based on the price over the last month before being acquired. Then it'd be in the founder's best interest to sell as little of the token as possible to cover operations, since otherwise it reduces their chances of getting acquired -- just like normal investment.
Also it incentivizes founders to make the company do well: if they can tap into funding when needed (because they have premined coins they can sell), they're less beholden to the valley. That means a smart 18 year old can single-handedly launch and fund a company; no permission needed from some cabal of investors.
Moot was 15 when he launched 4chan. If you believed in its future, you could've (a) supported it by buying their token, and (b) possibly made some return on that belief.
Obviously, all of the normal caveats apply: most investments don't work out. But everyone knows that.
If I want to put $2k into a company, why is the government stepping in to stop me? I can go waste $2k at the casino or squander it however I want. It's my money.
Bitcoin itself can be thought of as an ICO. When people buy Bitcoin, we're buying into Satoshi's vision for the future. It's not merely because it's useful. So why is that legal, but ICOs aren't?
The overall point is that this is a powerful model, and it could become even more powerful. The rest of the world is embracing it, so the US could find themselves left out by getting too draconian.
If it walks like a security and it quacks like a security, then everything else is just a technicality: it’s a security.
Also, what benefit does using a cryptocurrency even buy you here other than as a technicality to attempt to sidestep the laws?
Maybe the laws should be relaxed to open it up to more laypeople, but given how easily people get burned and scammed at this stuff, I’m not fully convinced (penny stocks anyone? Or even Bitcoin: yes some people got rich and others will get rich in the future, but there’s a very high chance that a lot of laypeople who bought in recently because of the price surge are going to lose a lot of money). The point of “accredited investor” is that they can afford to lose their investments.
That's why we have the JOBS Act now. I'm hoping some ICOs start using it.
...for the founders of said fraudulent garbage and perhaps a small number of very lucky people.
Changing the word "stock" to "coin" doesn't change any of the underlying dynamics.
An ICO is not a bad alternative to pre-seed funding.
To quote The Dude "Well, that's just like your opinion, man". I think your point is that the intention of the law is so that people are manipulated into buying securities they can't afford (e.g. scams). This is true, however some would argue that this legislation is yet another reason the rich continue to stay rich, which is a legitimate argument. So I wouldn't be so dismissive of that opinion.
How do people making this argument think money works? People that can commit $20,000,000 to an investment with the stroke of a pen are going to get the best opportunities no matter how they're structured: they can offer better terms. Literally the only thing retail investors could conceivably offer to compete with them is "willingness to be screwed over without recourse".
Stipulate a future in which essentially no ICO is regulated, and most new venture raises happen with publicly traded ICOs. Follow that thought to its conclusion and explain to me how the best opportunities are going to provide 10,000% gains, rather than markets acting the way all logic in either direction about ICOs dictates they must act, and pricing risk and opportunity accordingly?
I see how, in the post- free-ICO world, you'll be able to bet that restaurant review coupons will 10x your money. Coupons for everything. 10x your money on dog washing and cat sharing; that'll happen too.
What I don't see is why the truly credible teams doing truly important work with a real chance of success are going to offer securities on those same terms. How does that work? How stupid would you have to be to look at a market where restaurant review coupons are worth $15MM because they're certain! to 9x your investment, and then go to market with the next generation of, say, the Cisco Catalyst 9400 switch on those exact same terms?
Aren't restaurant review coupons in some sense the ceiling on how too-good-to-be-true these ICO deals can be? I mean: that business is obviously not going to work. A reasonably sophisticated person can only put money on it in the hopes that someone dumber will buy it off them in a week or two.
Your argument hinges on the assumption that the government should protect people from this outcome. If they make a bad bet, it's their bet to lose.
Right now, churches ask for thousands of dollars via mail. People send them with the hopes that they are "planting a seed" and to "watch that seed grow." All of this behavior goes on without society collapsing.
What's the key difference? Why do people need to be protected when suddenly they have a chance of winning real returns, however remote?
Just because you don't understand the logic of the argument doesn't invalidate it.
I think we both agree that allowing anyone to invest without an accreditation is probably harmful, however don't you think it's worth discussing/investigating the negative externalities of such an accreditation?
Please refrain from aggressively straw manning me. We said nothing like that and you know that’s not our position. You’re trying to reducto ad absurdim us without actually doing the reducto part.
I see it this way: there are many different ways to structure a funding event: a bank loan, a bond issuance, an ICO, a partnership, a Series A, etc.
If we’re talking about a small scale, say $100k, but none of my investors have very much money, just a few hundred maybe, I am dramatically limited in the sorts of funding structures I can legally use.
If my investors all have millions of dollars and are putting in 10s of thousands, I can legally structure the deal however I like.
I think that’s an unfair limitation that makes it harder to start businesses that no rich person would ever care about.
I do care about protecting investors, but I think the wealth requirement is the laziest possible way to do that. Mandatory disclosure rules would be better. Requiring insurance would be better.
And I tend to agree.
The difference between a restaurant review coupon ICO and a pink sheet biotech firm isn't risk. Both will almost certainly fail. The difference is that the ICO refuses to publish audited financials, and demands the right to shoot Youtube videos extolling a once-in-a-lifetime opportunity to 9x an investment.
That's what the SEC is protecting retail investors from.
A fact people seem to overlook in these discussions is that unless you can see the future, you can't just invest in Google and Airbnb; you invest in a sample of the whole tech startup market. And when you do that, by and large, you underperform the S&P 500.
Funds and endowments invest as VC LPs not simply because they want access to the insane deals that startups provide, but because they want decorrelated investments: they want some of their money allocated to investments that will perform differently than the market as a whole. When you have billions under management, it makes total sense to throw tens of millions at tech startups.
When the primary determination is whether you already _have_ money, rather than education, professional history, earning potential, or a history of demonstrated ability to make informed investment decisions... it becomes extremely difficult to argue that its anything other than an artificial class barrier.
VC funding will probably dry up somewhat during the present recession, like it usually does in bad times. But this time the result may be different. This time the number of new startups may not decrease. And that could be dangerous for VCs.
When VC funding dried up after the Internet Bubble, startups dried up too. There were not a lot of new startups being founded in 2003. But startups aren't tied to VC the way they were 10 years ago. It's now possible for VCs and startups to diverge. And if they do, they may not reconverge once the economy gets better.
This logic works in reverse, too: if funding becomes dramatically easier thanks to ICOs, startups have no reason to court VCs anymore. And that could be dangerous for VCs.
What exactly would the problem be with letting people crowdfund startups (i.e. equity)? Why not follow Filecoin's lead? I've been reading your arguments and you haven't really articulated your concerns; just persuasive cases that the status quo should be maintained.
The next Google/FB/Netflix might very well start using the model here, if you let it. But only if they have access to capital. And right now, that means VCs.
I agree with tptacek's general thesis here: there's not any inherent difference between ICOs and "normal" early-stage investing that justifies an utter lack of regulation of the former but not the latter.
This is the case because many regulations (Tax code, laws) favor the wealthy. If we didn't have the SEC regulations, then the clever and wealthy would prey on the poor and uneducated. This is textbook what happened in the 20s.
Honestly, the SEC is probably one of the last decent regulatory bodies of our government.
Startups are one of the most risky investments you can make. By arguing for regular folks to invest in startups, you just convey your ignorance in the risks associated with them. Most startups fail which is why full time investors invest in many startups and due extreme diligence because it is such a hosh posh of scams and people overselling their company.
This is just not even remotely true. Plenty of people have those things but haven't yet been able to acquire the money to qualify as an accredited investor. This line of reasoning is like the oligarch's dream.
"If you were as smart as me you would have as much money as me and could invest like I do. Also, until you have as much money as me, I won't let you invest like I did to get all this money, because if you don't already have as much money as I already have you must not be as smart as me and clearly can't understand the kind of investing I do. In fact, I will make it illegal for you to invest like I did until you come up with as much money as I already have from doing those things that you are not allowed to do."
The worthless fraudulent garbage is an even a better way to get poor. Which is why there is a financial test to make such investments: “does this person have that kind of money to piss away?”
Unless we want to equate "Not having a great deal of money as someone who is too stupid to know how to invest."
If a little old lady living on a fixed income loses all her meager savings to a huckster we feel a lot worse for her than if a Wall Street 1%er with three houses loses all his savings to the same huckster.
Which might not be the fairest or most logical way to legislate, but laws are about feelings as much as anything else.
Of course there are numerous counter-examples. Rap artist M. C. Hammer comes to mind. A rich person can afford a bad investment or two, but not a string of them.
"Middle class", using the conventional definition of 67%-200% of median household income, is about $40k to $110k a year. The median within that range is about $65k. Let's say you pay about 25% in taxes, and manage to save 1/3 of what's left. That's about $16k/year, which means it would take that household an entire lifetime to save up a million dollars.
Well, then, I guess they best not be pissing away what little they have on dodgy ICOs. I mean, perhaps I’m wrong on the math, but you still haven’t convinced me of the case that those making $65K/year should get to dump their retirement money into dodgy investments. Rather, you’ve furthered the case against.
~23 years if you add $16k a year and compound at 8% (below average S&P return for our lifetimes). If you increase contribution along with pay increases the time to a million will be less, small changes in return % also make a huge difference.
Not exactly overnight, but also completely doable.
And Oculus could have just as easily took your $400 and vanished without a trace. Or you could have unknowingly purchased shares that were worthless to begin with.
Historically, this has not been true. Depending on your definition of "rich", very few wealthy people have gotten there by investing in other people's companies where accreditation was required. Most wealth is built by via ownership of your own company, real estate (which is a type of company), or by investing in public markets. These pathways are all still available to you, and almost certainly still represent a better long-term risk-adjusted return than ICOs.
If Oculus had done an ICO instead of a kickstarter, my $400 wouldn't have been merely a preorder. The $400 would've become quite a handy sum by the time Oculus got acquired.
This actually is an interesting point, but it does require some serious cherry-picking. I'd be interested to see the data behind a scenario where all the funded startups for the last decade had been ICOs instead of venture-backed. I doubt it'd look so rosy in that scenario, especially when you consider that many more failures would likely have been funded, based on how easy it is to raise money from an ICO based on nothing other than a pretty website template.
They are a much, much better way to get poor. There's a reason we have the laws we do: a long history of amateurs getting taken to the cleaners by professional fraudsters.
The issue with Kickstarter is that it gave you no ownership interest in Oculus. Your $400 was just a pre-order. But at least it's a pre-order! Whereas the issue with ICOs is that they give you no ownership interest. Your $400 is just a donation.
"The $400 would've become quite a handy sum by the time Oculus got acquired."
Only if you had purchased equity. An ICO is not equity. You're literally about being taken for a ride, and responding by wishing you could have been taken for a bigger ride, with fewer protections.
They also don't protect workers from getting worthless secondary 'common' stock.
Keep regurgitating their lies. It's working for them.
Heck, after the JOBS Act, it got even easier to do this under Reg A+, which allows for a lightweight IPO for raises under 50MM --- which describes most ICOs.
What's happening in this thread is simply special pleading for a particular type of enterprise to be exempt from those rules.
* It's not OK to raise 200M with no team and product;
* Compliance only creates obstructions, not protection.
You don't need to be an accredited investor to invest in one. You just need to limit your investment to no more then 10% of your salary, or net worth, whichever is greater.
There are currently over 150 Reg A+ companies in the United States. I am eagerly waiting for people lambasting how the accredited investor rule keeps out little people... To explain why little people aren't falling head over heels to invest in RegA+ corps.
One year is an insanely long time these days!
You're 100% right.
Wrong. It's like saying there is a LAW requiring a certain credit score or a certain set of math skills. I don't have anything to add on whether investor accreditation is fair or not, but comparing federal law and regulations to loan or hiring opinions/choices is disingenuous. The comparison to predatory loan regulations or legal certification requirements for hiring would in fact be more apt.
In the worst case you end up keeping out smaller players, yet the scammers find creative ways around the system. Take, for instance, patents. They were initially envisioned as a way for independent inventors to ensure their ideas were not stolen. But a century of absurdly complex rules and regulations paired with extreme fees mostly keeps out very small scale inventors. On the other hands, the scammers are seemingly as active as ever and completely inappropriate patents are still regularly granted. So what have we truly accomplished?
How much do you think this will end up costing companies to comply with? Ultimately we'd all like to have 100% honest ICOs. But you have to balance the cost of compliance with the expected results. Many ICOs already block American investors and that was before this. How will this effect the rates of scams? How will this effect the rate of perfectly up and up ICOs that are not made available to US investors?
People are growing tired of the pay-to-play barriers to entry. Why can't we have the regulations without the financial burdens? (Hint: the answer is not about following the regulations themselves, but artificially limiting supply to make for easier enforcement. Otherwise there are too many to meaningfully regulate.)
If you can find people willing to work for your without pay, you can.
If you can't cough up a few thousand dollars or take our a small business loan to hire some lawyers, why should I believe that you're trustworthy enough to skirt regulations?
In my head, I read the last statement like "why should the law trust you if you don't have enough money, and why should you be allowed to do something without the law's trust?" I believe enforcement should be reactive on regulation skirting within reason. Akin to an audit, an arrest, or anything else. You agree to abide by laws, you may even sign something or fill out a form to that effect. That there is an extra step to see if you "really" agree seems to be a way to artificially limit filing counts. I admit I am not that knowledgeable on possible history where too many did fraudulent filings requiring this individual-lawyer-review preemption.
So youre criticizing an institution while being ignorant of the conditions that caused that institution to come about? I suspect you’re not alone in this thread but this kind of ahistoricity makes it impossible to have any kind of reasonable civic discourse. Democracy demands that we educate ourselves. Read about the Great Depression, the creation of the SEC and why it was needed in the first place. The current situation with ICOs where you have some legitimate businessses and some scams advertising themselves to Main Street investors is very similar to the situation with securities before the SEC.
> I am unsure how you read it as why the SEC came about.
Visiting your original statement: > I admit I am not that knowledgeable on possible history where too many did fraudulent filings requiring this individual-lawyer-review preemption.
This "possible history where too many did fraudulent filings" is the history immediately preceding the creation of the SEC, the period before and during the Great Depression. Things like ICO scams are exactly what the SEC was created to respond to. Securities with no inherent value driven by speculation. I'm sure many will argue that this is unfair to the law abiding ICOs and that's true. But the SEC prevents a deluge of fraudulent securities from taking peoples money and doing the damage in the first place.
I feel you really, really do need to make yourself familiar with that before chastising everyone for not agreeing with your position on these regulations. And if you want to argue that they shouldn't apply, then you need to think long and hard about what makes this situation different, and not just because it's "on a computer".
Can you help me become familiar with the historical SEC failure that prevents them from accepting applications for non-accredited investment without strict preemptive oversight? Or more simply why can't I register a security like I register a company? Because my historical understanding is RegD has been there since the beginning of the SEC.
I think you are probably right. But as crowdfunding (er, "crowd investing") becomes more available to the masses and the SEC cracks down on it more, a whole group of people that otherwise were unfamiliar w/ these rules aren't going to remain happy. I would not be surprised to see the barriers relaxed (but not the regulations of course).
"Coin offerings do not have to fall in the tens of millions of dollars."
The amount of money does not matter; a scam is a scam.
"For companies on this scale, having to hire a legal team to ensure compliance is a significant burden."
That sucks for them. But the alternative is far, far worse.
"A coin offering instead of angel investors could have been an interesting option for a similar company now a days."
Why? If the only reason is that they don't have to comply with the reporting and transparency regulations, then it's not a good reason.
"But you have to balance the cost of compliance with the expected results."
Why? And, quite frankly, why should an ICO be treated any differently than any other security? They are exactly the same; and have absolutely nothing differentiating them from traditional securities.
"How will this effect the rate of perfectly up and up ICOs that are not made available to US investors?"
I'm going to say it won't. Perfectly up and up ICOs will be able to get compliance, and will thus be open to all.
False.
If anything, it exposes consistently larger "chunks of value" to the risk involved in the investment. Given accredited investors are used to evaluating risk it simply allows the to participate freely in the unknown risks of these types of investment vehicles without getting smaller investors involved in the mix. (It also prevents them from using their position against lower investment amounts made by lower accredited individuals.)
The "protection" afforded here is to the common investor, who by definition does not carry a large store of value with them. By preventing them from investing directly, by way of limiting their involvement based on their stored values, the SEC is protecting the "collective stored value" of the lower classes. And, this makes sense, given the dollar's value is based in part on what people are willing to pay for a given set of objects. This is the responsibility of the Fed to US.
An analogy would be the Yap allowing their children to go and mine Rai Stones by themselves. No sensible society would allow this to occur, given the dangers. And, yes, I'm comparing lower accredited investors to children, when considering the amount of knowledge they may carry with them regarding risk.
So some financial products where they will always drift to zero are fine, but investments in companies that have a chance to profit aren't allowed.
That is the difference between the "3x leveraged ETF" and the "company that has a chance at profit" in your example, not some weird value judgement the SEC is making.
If you are allowed to do investing when young and at low levels, like many other things in life, you could learn some great lessons and maybe you won't sell your 1/2 million dollar IRA investments for 1/4 million in a market downturn.
Part of the problem is a sort of systemic survivor bias where the accredited investors rarely talk about all the times they lost all of their investment, and instead focus on the ones where they made money (the more disproportionate the better). The reality is the most of the investment opportunities that are offered only to accredited investors lose money, and what that translates to is that most people, if allowed to invest in these things, would lose money they couldn't afford to lose.
It can be hard to see that when an angel investor crows about a huge payday from someone they helped get started. And in hindsight it is "easy" to see how that deal made perfect sense. But imagine if you were allowed in on Uber's last fundraising round and now they are in danger of a 40% 'down round' courtesy of SoftBank? That second mortgage you took out on the 'hottest startup in the bay area' starts looking like you're going to have to pay it back by your own labor.
Another argument I have heard made is "Hey, it's my money and who are you to tell me how to invest it?" (note told in the first person even though the 'you' reading this or commenting on it may have never made such an argument). I totally understand and resonate with that argument, but when you do invest it with someone who was very slick and had you completely believing that they could turn dog poo into gold, and it turns out after you lost your entire investment that they never really could and there was evidence in their books or history that, had you known, you never would have invested. Then you want them punished some how, but for what? Lying through omission and tricking you out of your money? And we have a system for that, its a bunch of regulations, imposed by the SEC, which allows the SEC to fine or jail people who violate them. And they include things like FD or Full Disclosure rules which demand they cannot lie to you by omission or it is on them. And if an investment is legit and they want to offer it to non-accredited investors, then the person selling the securities will go through the necessary hoops and there won't be an issue selling them to you.
The problem is that this isn't a binary. To protect the hapless grandparents from losing their retirement, it also restricts knowledgeable but not rich people from making informed decisions for themselves.
Welcome to living in society. It is all give and take.
It’s easy to play armchair politician or legislator online....
- apply the same financial disclosure rules we use for public exchanges?
- or require insurance against failures to properly report risk
Or, in other words, by the time the plebes are jumping in on crazy new financial scheme X, you're well enough into bubble phase that restricting investment is probably fine.
But beyond that I don’t understand why regulation on investment is seen as ok, but regulation in loans to prevent people to drown in debt (which is kind of worse) is frowned upon. I’m not even the most liberal person, but if people are free to lose more than they have (or buy guns, or destroy their health with sugar, or what else) then why are they not free to put their money where they want?
Do you actually want to go back to a time before the SEC. That's how you get a Great Depression.
Do you not see the obvious chicken-and-egg problem here?
Wouldn't the scams just get launched from other countries that don't have to care about the SEC?
How is this any different than traditional corporate capitalization?
Did you set aside a large pool of tokens for a potential investor who prefers convertible equity?
A reserve for an option pool? How will employee stock options..erm..sorry..'token options' plan work?
If your company is successful, and a great offer comes up to exit, what's the plan for M&A using tokens?
Most importantly, why would investors want coin over stock? Are they given all the same legal company equity rights as traditional stock?
Bad news: ICO's are now technically a security!
- setup a system that looks like it will increase value of your token over time
(as MUN case: “As more users get on the platform, the more valuable your MUN tokens will become”)
- don't make any promises about increase in value/income about your token.
- let people discover and share, or promote on side channels.
IANAL but as far as I searched, I guess as long as you don't make any value increase claims etc, you are totally safe
It seems that most ICO do both the things. If not a self-inflicting post about the token growth but at least the raising cash for operations part.
That doesn't make it OK. I think what's happening here is that ICO's are raising large enough funding to finally warrant involvement by the SEC.
The kitty tokens are more like a product than a security I think as each kitty token is unique, but I'm not a lawyer
Take this difference, for example: if you buy a collectible Ford Shelby GT from 1964 and you pay 10x more what the previous owner paid, you do so with hopes that its a good investment into collectible that eventually someone will give you a better price in the future. Your asumption/feeling of security (hence name "securities" btw) is not guaranteed by anything more than hope that someone will eventually pay more (they never may be such person).
Meanwhile if you buy Ford stock with the same purpose of re-selling it later down the road for hopefully higher price, you are being reassured aka "secured" by the company financial standing, their technical analyze, current market value, future strategy for the corp, etc. If these are phony then hopefully/supposedly SEC steps in to protect you from what most likely will turn out to be scam. Collectibles (genuine one of course) do not come with guarantee/security that their current value (what you personally gave for) will remain in the future, or be repriced higher.
Is this number correct? 40? 375.000$ on average seems unlikely...
A small number of investors buy up the tokens, the ICO then sells out in record time and looks like it’s some kind of amazing hot tech.
As soon as the tokens become tradeable, the value is immediately several times higher (due to the hype) and the original investors cash out a large portion of their investment.
Due to the immense amount of capital they can then rinse and repeat on every token sale and spread out their portfolio across the entire crypto space. If a token does skyrocket they’re invested enough to still profit.
[0] https://www.sec.gov/litigation/admin/2017/33-10445.pdf Fact 27
If you are investing in real estate, you have an expectation in increase in value, but if the real estate agent is promising you, increase in the value, and promising you to do the all marketing, etc and selling part. Then it is something else.
The point is basically intentionally misleading investor.
It is an investment of money There is an expectation of profits from the investment The investment of money is in a common enterprise Any profit comes from the efforts of a promoter or third party
As long as profit depends on someone else's work. (this third party is not other investors, or market appreciation, this is direct promotion or work)
Umm, isn't that the entire purpose of the SEC or even more broadly the purpose of all contract, finance, and commerce laws? Just because someone is moving bits around instead of pieces of paper doesn't mean the law doesn't apply to them.
The SEC considers itself to have such authority because the laws passed by Congress explicitly give it that authority. If you have a problem with that authority existing in the SEC, your complaint should be directed at Congress, not the SEC’s factually accurate belief in the existence of its legal authority.
That regulation protects the layman who doesn't know that an ICO is a glorified trust.