Goodbye ICOs, hello ILPs?
careyolsen.com
careyolsen.com
> Two Estonia-based companies, Blockhive and Agrello, have formed a partnership to provide the first ILP of its kind, 'Blockhive'. Blockhive's model removes the issuance of tokens (in the anticipation of future appreciation of those tokens) and replaces it with a contractual entitlement to 20% of their annual operating profits.
That sounds more like equity to me than a loan.
Whatever the structure, it isn't new. Putting it in a fancy blockchain is new, but the agreement to pursue some endeavour and share in the revenues, either as an obligation or as a percentage of profits, is ages old.
And just as old is the fact that you have to actually do what you said with the money, or else it's fraud.
This is just equity crowdfunding with the word blockchain involved, and as a result probably more dishonest or deluded companies and a greater likelihood the securities aren't even legally valid never mind attached to genuine prospects of profit, never mind attached to prospects of profit adequate to make up for the asset's lack of liquidity.
(Reading more details in their terrible white paper, the only difference between this and a completely standard security is that in order to pretend it's a "loan" they've offered to "repay the principal" at "maturity" i.e. buy back the security in 10 years' time at the price you paid for it. Which would theoretically be a good idea for an stock in a low growth business, and also a great way of creating a relatively stable Ponzi scheme...)
Seriously though, just look at this utter nonsense: https://blockhive.ee/ilp
One can structure preferred stock to walk like a bond and quack like a stock (as well as the other way). This structure is an incredibly stupid solution to a regulatory problem.
But now maybe it's order of magnitude or two cheaper and so you can do a whole bunch of them where you used to be able to only do a few. Does that change anything? I really don't know, maybe, maybe not. Maybe it makes it practical to break a company up into many many smaller pieces and allow investors to provide more specific investments, or many smaller companies in general, due to greatly reduced legal/operational fees? And maybe that let's you do something cool? Imagine if facebook (or more likely whatever is post facebook) had hundreds of smaller investment vehicles that mapped to teams and projects, and we could all choose not to invest in the privacy invading ones? Or at least had to more explicitly do it?
Sure, it's not philosophically completely novel: structural changes like this fractalize throughout technology and ultimately boil down to "that's just this, but one level of abstraction up," which makes it easy to understand, but doesn't necessarily make it useless. Sure, there's nothing new under the sun, the internet is, after all, just a really fast xerox machine, and we already have libraries.
I don't look at crypto currency and think, "Oh this is obviously the future, fiat currency and banks are bullshit" and I don't even fully buy the argument I made above myself. But when I look at all the criticism to crypto, it looks a helluva a lot like 1993 and "The internet is a fad" all over again. "It's slow, it's shitty, it wont scale, it doesn't solve any real problems for real people, it's better having publishers/banks intermediate this stuff anyway" etc. etc.
We'll see.
Keeping track of investors and paying them dividends isn’t even close to the most expensive part of fundraising. This is akin to starting a car company differentiated solely by the material of the muffler.
Even for large companies: say we want to do my crazy invest at the team level idea: I don't really agree it would be simple to operationalize all of that money flow, and I do actually think having a blockchain could help if that is your goal, which is a big if.
I'm not here to hard sell anyone on crypto, but I also am not comfortable with the wholesale dismissal of it either, so I'm definitely hoping a lot of people disagree with me and we can tease some of this stuff out.
Edit: Since we have the downvoters here, does anybody want to defend accredited investor laws? Here is some stimulus material - https://qz.com/431198/this-is-not-a-typo-only-3-of-americans...
These are unrelated. You can hold stocks, bonds and commodities in your own name. It’s inconvenient and carries no advantage over owning them in “street name”. But that isn’t an accredited/un-accredited difference.
I was just stating that the former is a form of discrimination to restrict opportunity and increase wealth disparity. The latter is just a preference. Both were being discussed in the parent comment.
Kickstarter brings some value (e.g. neat landing page, network effects etc.), but 8% is a lot to leave on the table.
It sounds like the principal and interest paid back is a fixed and predetermined value, rather than proportional to the company's revenue, which would make it a loan.
The innovation here I believe is conditioning repayment obligations on the company having sufficient revenue.
So in a sense it's like a loan contract with a clause allowing you to get a repayment holiday when your business is not earning enough.
This, like all loans, has much less upside potential than equity.
Since the trading of the ILP stock happens on-chain, a chain traded virtual "crypto" currency comes in very handy.
> That sounds more like equity to me than a loan.
I agree wholly.
IANAL, but I also wouldn't equate ILP to non-voting shares. There's still a significant difference (especially in cases where there's bankruptcy, or company liquidation, or other n cases and exceptions.
Dodge, wriggle, obfuscate, avoid, confuse, complicate. The only difficulty is determining whether a given article is written by those deliberately writing to capture that audience, or by someone who's bought into it.
Much like SC stuff, I'll enjoy watching folks blather this kind of stuff in front of a judge at some point.
I don't understand why people get joy out of seeing someone punished for a victimless crime.
Criminalizing entire categories of economic exchange, based on sweeping and prejudicial generalizations that they're all scams, is the preemptive approach to crime that makes for a more repressed society with greater wealth inequality.
I’m not arguing in favor of either side with this comment, just looking to clear up some apparent confusion on what the parent comment stated.
That subject is someone being prosecuted under criminal law for offering a security to another consenting adult without having met the mandated requirement of having that security approved by the ordained regulatory agency.
Edit: responding to below:
>>why you might also believe that securities frauds are victimless.
It's not "securities fraud" though. No fraud need happen for someone to be prosecuted under criminal law for offering a security to the public.
The fact that you label all securities offerings without government approval "fraud" supports my earlier point that your position is "based on sweeping and prejudicial generalizations that they're all scams".
Its not a trick question.
The term "securities fraud" as defined by securities law statutes is political-speak, and very misleading.
Fraud involves deceiving the counterparty in the exchange. But "securities fraud" need not involve deception. It can be completely non-fraudulent. The term is therefore an Orwellian misnomer to give the public the appearance of a victim.
As for why those regulations exist, you can look back in history to see why those regulations were initially enacted (lots of fraud in the securities space), or just look at the more recent history of crypto activity, and see many instances where they tried doing the same things, and those that were duped by the scams found out why those regulations exist in the first place.
"Very, very few places are outright criminalizing it."
But securities laws DO outright criminalize victimless behaviour.
>>As for why those regulations exist, you can look back in history to see why those regulations were initially enacted (lots of fraud in the securities space)
There is no justification for criminalizing consensual economic exchange. Doing so in the name of preempting crime is a case of guilt by association, and collective punishment, against all the innocent parties who take part in this kind of activity.
As for the consequentialist justification: the result of accepting the principle of paternalistic restrictions on voluntary exchange is current securities laws, and they are totally dysfunctional.
It costs $6 million to do an IPO. This excludes 99% of the population from being able to directly access the public capital markets.
And then we try to deal with the symptoms of this unequal economic access with welfare and other forcible income redistribution schemes.
The real solution is to return to a free society where we don't create structural barriers to economic participation.
>>or just look at the more recent history of crypto activity,
I see a lot of innovative projects being funded. I see rapid innovation that has totally transformed distributed consensus technology over the last five years.
We have major problems in our world that cause over 50 million deaths a year.
We need to be willing to take risks and deal with the inconveniences and volatility of freedom to solve these problems.
There is no path in front of us that doesn't involve risk. Either the risk associated with our current problems, or the risks associated with experimentation/innovation in trying to solve those problems.
That's the reality that society has to face in order to make an informed decision on which path to take.
This is a toxic attitude. “Don’t worry if you’re breaking the law; they’ll have to change to stay relevant!”
For example: Free enterprise has been against the law in many nations in the past, and those nations lost opportunities because of this. Most of them now allow free enterprise.
Your statement is 1-dimensional and makes the assumption that every law is good.
It doesn’t follow the law. And it doesn’t attempt to challenge it. It hand-waves it away with an unprovable hypothesis. It’s lazy in a way that encourages unthinking and stupid behaviour.
Interstate legal competition exists, but it’s slow and complicated. It’s especially unusual in finance. Furthermore, cryptocurrencies are, in many jurisdictions, starting from a hands-off position. Deregulation is less likely than further regulation.
> Your statement is 1-dimensional and makes the assumption that every law is good
I don’t assume that. If there is a law one finds unjust (a) work to change it or (b) break it in an act of civil disobedience. Don’t tell other people to break it with false assurances around why they won’t get in trouble because regulators are competing or whatever.
In this case, I think the floodgates are open. The SEC and CFTC can't go after everyone, so by that reasoning, some people will be able to (maybe illegally) sell unlicensed securities through these ICOs. Some of those will do well and some of these investors will make bank. Others will lose their shirt.
What this whole ICO thing shows is that perhaps fundraising should be more deregulated in certain areas. Artificially limiting investment opportunities to HNWIs, while a sane approach, isn't working. You can keep enforcing and going after hundreds of ICOs, but it's not likely they have the resources for that. That's the equivalent of putting your head in the sand while not realising an uprising is happening.
For example: why not make it possible for companies to raise at most $25K per person, from people who do not classify as a HNWI? The law should be shaped as the world develops. And that's what I think will eventually happen. The world shouldn't be shaped around the law.
That’s one hell of a bet to encourage others to take. (You aren’t encouraging anyone. But the original article is.)
> limiting investment opportunities to HNWIs, while a sane approach, isn't working
I used to believe this. Cryptocurrencies have shown me the existing rules are closer to being correct. Given the chance to discern fraud from fact, investors without teams of lawyers bought into every single form of elementary fraud the Securities Act of 1933 successfully, to a broad degree, stomped out.
Cryptocurrencies’ buyers aren’t investing. They are gambling.
The fundamental problem is diligence costs money. In the public markets, reporting requirements shift that burden on companies. Many companies don’t want that burden. They stay private. To diligence them, investors must be able to bear the cost of diligence and risk of their investment.
Given VC investors, on average, fail to systematically outperform public markets, I fail to see the merits of the case “investors who invested in stupid things A (cryptos), despite having access to sensible thing B (registered securities), should be given access to marginally-less stupid thing C (unregistered securities).”
Any high risk investment is a gamble. Most cryptocurrencies are garbage, useless and will eventually disappear. But several of them (in my view) are interesting and will be around. Investing in cryptocurrencies isn't riskier than angel investing in a startup. if you love losing money, invest in 10 startups. You'll most likely lose money on all 10 deals. Your chances of making a massive return by investing in crypto are probably significantly higher.
At the end of the day, if you can risk $1 to potentially make $10 or 20, with an 80% chance of you doubling your money, a 50% chance that you 10x and a 25% chance you 20x your money -- honestly, why wouldn't you do that? Not with your entire net worth, but those odds are just too good not to put some money in.
In fact, I'd say more, anyone who hasn't at least invested some money in cryptocurrencies.. just doesn't like making money. What if Bitcoin actually ends up becoming digital gold? You'll have lost out on the best possible investment in our lifetime. What if Ethereum ends up powering most dApps? etc
One, you mucked up your arithmetic (80% + 50% + 25% > 1). (I’ll assume you were expressing cumulative probabilities.) Two, you left off the tail of the distribution where one loses money.
Put together, I’d say no to your pitch—schemes promising a greater than 100% chance of making lots of money and 0% chance of losing any are 100% scams.
It must be extremely easy to fleece these people, because how many do you think report these crimes to the same government they distrust so much?
Looking forward to an endless stream of slightly tweaked and renamed reworks of the same concept in the decades to come.
Uber deliberately broke rules in an effort to change them and went into their fights willing to pay the penalties. That’s civil disobedience. They didn’t argue the rules wouldn’t be enforced because of regulatory competition or whatever.
Furthermore, when Uber broke the rules it was their asses on the line. They had a terrific record of reimbursing drivers who got fined for taxi violations. With ILPs, in the other hand, we have some rando encouraging others to take stupid bets.
Night and day.
Care to show me where Uber lobbied for changing of the taxi laws? Last I saw, they were just fine with those still existing, so long as they were exempt.
no. To me it looks more like RICO as Uber leadership never risked to be subjected to any punishment. The rank-and-file were actually violating the local laws and were caught/cited/fined.
>They had a terrific record of reimbursing drivers who got fined for taxi violations.
"your family will be well taken care of" :)
Please refrain from putting Travis K. in the same category as Rosa Parks.
Civil disobedience isn’t inherently good, momentous nor socially activistic. (See the story behind Homer Plessy [1], who was hired by railroad owners in a bid to cut costs related to a segregationist state law. It famously backfired when SCOTUS created “separate but equal”.)
It is simply “the active, professed refusal of a citizen to obey certain laws of the state, and/or demands, orders, and commands of a government” [2].
"This is a toxic attitude. “Don’t worry if you’re breaking the law; they’ll have to change to stay relevant!”"
Uber X enabled a cheaper form of public transport by adding some efficiencies, but also by actively skirting regulation that was in place for Hire Cars and Taxis (that also made them more expensive options) that was designed for public safety.
Following this, Governments changed laws to allow for this new class of driver with new regulations that lowered the cost of compliance.
This is exactly the same as a new financial instrument designed to allow some other form of innovative public good that breaches current regulations that were designed for safety. With the expectation that regulation will ave to change for them.
In both cases the regulations being breached were designed for some kind of public safety. The breakers believed they were delivering some kind of greater good. I'm not saying the method is right or wrong... it appears to get results.
I've never read anything about Plessy being "hired" by railroad owners - rather there was a civil rights group, the Citizens Committe, who were comprised of a variety of folks opposed to the seperste car act.
They asked Plessy to voulenteer to be test case, to which he agreed. (And yes, it did backfire).
The railroad company was an ally to the cause due to costs of adding more cars, so they agreed to help.
Also, while that sentence does come from Wikipedia definition, I've never heard it used outside the scope of activism / civil rights work in 35+ years of activist work.
It would seem to me that in order to make this not just a pipe dream, the company would have to operate 100% on the blockchain, presumably Ethereum. Otherwise, how could the smart contract do anything? If I pay one of these "companies" cash, the smart contract knows nothing about that. I would have to pay the business in cryptocurrency, and specifically through the mechanisms defined by the smart contract.
This seems RIPE for abuse. What if they just...don't? Crooked "founders" doing a chunk of revenue through some off-chain business or anonymously outside of the smart contract. "Investors" get decreased returns because the business does not appear to be performing well, all while the "founders" laugh their way to the exchange.
> To access and transact on the Blockhive platform, users must fully register and receive the protocol's Future Loan Access Tokens (FLAT) (transferrable loans that can be assigned to third parties) as soon as they lend funds to the company.
That sounds an AWFUL lot like a debt security to me. They're not even trying to hide it at this point. So in essence, they've invented an ICO where tokens pay dividends over a fixed term, where you just have to pray that the company is being truthful about their revenue.
This sounds like the setup for a giant pyramid scheme. I can totally see a company doing one of these "ILP"s and using the revenue from newer "loans" to pay the interest on older "loans".
As it were, it's not even necessary. The Sia platform (disclaimer: I'm a founder) has a token which does something similar, but in a fully decentralized way. Sia is a storage platform, and each time someone forms contracts on the network, a fee is taken from those contracts and automatically distributed to the fund token holders. It's a similar model, but revenue is excluded to the blockchain, and it's fully decentralized.
Tokens are exciting because of what it allows us to achieve in the absence of any form of government. We can make storage contracts that are roughly analogous to SLAs, but without needing paper contracts, courts, lawyers, lawsuits, ambiguity, or drawn out battles about who was right and who was wrong. The blockchain takes care of all of that in a very compact, definitive, predictable way.
And no, it's not about skirting regulations or doing things that the law won't allow. It's about enabling things that the law already enables, but enabling them in more efficient ways.
How smart contracts are supposed to work:
1. I decide to enter into some agreement with an untrusted third party.
2. Both parties put the collateral related to the agreement into some sort of smart escrow account.
3. Events unfold. Smart contract system needs to be able to observe and validate these events somehow.
4. Depending on what happens, the smart contract system decides who gets the collateral. Neither party can back out of the deal after the fact, or claim that some loophole makes the deal void -- the software is the final arbiter.
There's no way to make "give me money, and if I manage to turn it into more money, I promise to give some of it back to you" into a grifter-proof smart contract, despite the wishful thinking of anarcho-libertarians everywhere.
This whole thing reeks of sleazebags trying to trick unsophisticated investors/speculators who are catching on to the idea that "basically every ICO is a scam" into thinking that they've created a financial product with less risk. There is absolutely nothing stopping someone running an arrangement like this from running away with the money, just as with ICOs.
Edit: Read the white paper more in depth. Principal paid at maturity.
Edit2: Seems kinda similar to an ETN (exchange traded note)
1. Start-up defines token buyback rate in terms of revenue (not profit!)
2. Start-up sells tokens
3. At every defined interval (e.g., monthly), start-up updates revenue statistics and buys back tokens according to 1 and destroys them.
This means:
- it's an eternal bond if you never sell your tokens
- the actual interest rate payment is done via token buybacks, so it's also kind of a dividend
- token value is largely determined by future revenue of company
Some thoughts:
- Re 1: You have to scale the token buyback according to the number of outstanding tokens (otherwise the long-term holders benefit relatively more per time held than short-term holders)
- You might want to define a cap after which you will stop your buybacks (still haven't thought this fully through)
- You may want to start 3rd party audits after some predefined event (to increase trustworthiness), e.g., after reaching an annual revenue of X
- This is especially suited if you have some quantified business metric like "loans repaid", so you don't even have to define it in terms of company revenue.
* For every $X we will spend $0.0001 buying back tokens?
* For every $X we will buy back Y coins?
* For every $X we will buy back Y coins at a set value?
I guess it's got to be the first or third since the second would imply that the cost of buying back the coins could be greater than the revenue of the company (let's saying I buy all the coins and refuse to sell them, whachagonado?)
Basically what you're describing is selling a royalty interest with a fixed buyback value.
Which whilst technically achievable seems like a strange thing to do. Since when you're starting a company it's very difficult to calculate your margin. The result would be that you could very well end up finding that the royalty makes your company unprofitable.
The company I talked with was in the loan business, so if you set a target rate of 10% on every interest rate payment, it's possible it's gonna break your neck but then you didn't have a very good business model to begin with.
The idea is that after 5 or 10 years you already bought back a decent amount of your tokens and initially you can set different buyback rates (e.g, X% for the Xth year up to 10) to "soften the blow" in case you're entering a highly competitive market (aka shark pool).
The good news is that it's kind of self-regulating: if you underperform, the tokens will be worth less so your buybacks in terms of coins will be higher and your subsequent buybacks therefore cheaper.
Emphasis mine. Why do these people think regulatory bodies exist?
Further, could someone ELI5 how this works. I issue ILP, what is my liability? Do I pay 20% of my profit in USD? If yes, why the blockchain? Do I pay 20% of my profits in cryptocurrency? If yes, what cryptocurrency I use and who defines the exchange rate, and why I would want to pay the profits in cryptocurrency?
Under U.S. securities law, securitised loans are just as much securities as securitised companies (i.e. stock).
... Initial Loan Procurements (ILPs) have emerged as a new fundraising method. Similar to an ICO but in the form of loans rather than coin acquisitions, ILPs enable borrowers and creditors to enter into a loan agreement through legally binding smart contracts. With an ILP, a creditor's investment is contractually tied to the performance of the company and eliminates the wild swings of volatility that have been associated with a vast number of ICOs. In simple terms, as long as the company makes a profit, the creditor gets annual returns...
Minus the enforceability or equity and bond claims. So a combination of the worst elements of equity and debt plus additional negatives. Financial innovation at its finest...
Big, if true.