> I personally don't see a big problem with that
It protects the monopoly the investor class has on investments like these.
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.
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
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.