SEC tightens the noose on ICO-funded startups
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Then the SEC went after the ones that were merely flaky. As in [3], or "a blockchain based food review service with in-app purchasing of tokens". This actually got going, not that anybody used it much. They hired a "YouTube influencer" and claimed “199% GAINS on MUN token at ICO price! Sign up for PRE-SALE NOW!”
Along the way, the SEC found some ICOs from the usual suspects in the penny stock market. Those got shut down.
Then they started sending out letters along the lines of "Hello, ICO promoter. What you're doing is probably illegal. Do you want to give the money back now, or do we bring out our big hammer?" This stopped a lot of potential ICOs.
If you haven't seen it, see the SEC's fake ICO site.[3]
I have yet to find an ICO that resulted in a real, operating, profitable business that wasn't some other cryptocurrency/blockchain based thing. We're not seeing ICOs to build factories or farms or do real stuff.
[1] https://www.sec.gov/news/press-release/2017-185-0
[2] https://www.sec.gov/news/press-release/2018-94
[3] https://www.investor.gov/additional-resources/news-alerts/pr...
This is probably intentional on the part of all of the promoters, investors, and potential users. The idea of the cryptocurrency world is to completely replace the existing global financial system; if a company uses an ICO to build a business that then takes payment in dollars, they've lost, and their backers will be very angry. The whole point is for the ICO token to be the primary means of payment for services within the company's ecosystem, and the backers are rewarded by having an advance claim on those services by virtue of owning the tokens.
The question I'd look at to see whether an ICO is a scam or not is "Are goods or services of non-monetary value being exchanged for tokens?" I suspect the answer to this is negative for the vast majority of tokens, but it's also pretty early in the development cycle: most ICO-funded companies are <1 year old, while it typically takes 2-3 years to build something somewhat useful.
If you suggested in the late 1990s that people would be spending real money for cryptocurrency, I'd think you were crazy. (Actually, Cryptonomicon did suggest exactly that, and I thought that particular plot point was crazy.) Now, I'd give it maybe an 85% chance of being a crazy passing fad and a 15% chance of being the social organizing principle of the 22nd century.
Or read Snow Crash by Neal Stephenson and experience it today. :)
A similar perverse incentive exists in the VC funding world that was parodied in HBO's Silicon Valley series-- namely an incentive against booking revenue early in the game. When you are "pre-revenue" then the mind can go wild with speculation, but as soon as you book revenue those become hard numbers and if they're unimpressive it turns people off. It's incredibly irrational of course, but investors are not on average more rational than other people.
In the ICO world an analog of this is that ICO projects that do ship inevitably suffer from hype deflation since the very first version of anything is never up to the hype that was used to sell it. So there's a dis-incentive to ship. Shipping means contact with reality, so failure to ship leads projects to wander off into scope-creep lala-land and never deliver anything.
I also think the large sums raised could cause pathologies that lead to project failure like ballooning scope, excessive hubris, over-hiring, or factional conflicts among founders. Too much money can defocus a project and too many new hires can actually reduce productivity.
Some ICOs are clearly frauds, but the rest I think are victims of these and other perverse incentives in the system.
Starting companies is hard. Rational investing is hard. Rationally investing in new companies is hard^2.
Decentralized prediction markets, CPU-renting markets and ad networks aren't doing real stuff?
Blockchain-based tokens provide little advantage for representing claims to real assets like factories and farms. Where they're most useful is as currencies in decentralized autonomous organizations, since they are programmable and thus can be used in smart-contract enforced compensation/incentive mechanisms.
In contrast, any token representing a legal claim to a real physical asset would certainly not be a utility token. It would be a traditional security, and thus would find much less of an advantage in being on a blockchain, since it can't take advantage of smart-contract based enforcement, given its dependence on the traditional legal system.
That might change in the future if large liquid securities markets appear on the blockchain, but right now the low-hanging fruit is utility tokens for use in decentralized applications.
It will be an interesting test I suppose. If ICO’s are in fact a novel technology that offers some kind of advantage, then this statement will be correct.
If the entire and total value of ICO as a concept was that it was a means to sidestep existing regulations by pretending they didn’t exist, then this statement will prove laughable.
Personally, I lol’d
I’m not sure why a company doesn’t just come out and do an ICO: a) with a token that’s not a security or b) a token that is a security and comply with securities laws.
Because if you do that, there's no point having an ICO. Just do an IPO - the token is an expensive, pointless distraction from their mission to democratize the world's dogsitters, or whatever they want to do.
A token is virtually frictionless and costs nothing to setup or trade globally, dividends can be paid out directly to token owners.
An IPO is an incredibly lengthy, arduous process requiring a small army of lawyers and accountants simply to offer shares to a restricted subset of sophisticated investors in one country.
US has proven again and again they will touch anyone anywhere (except china and russia), and its a losing battle to go up against an organization that has unlimited resources with capabilities that grow constantly.
It's people trying to play the, "Well, it's different cause it's on a computer!" game that are muddying the waters.
Emily Post had this great rant on how people act like every new technology is exempt from the rules. Her examples at the time was the cellphone in movie theaters. Everybody knew not to talk loudly in the movie theater before the arrival of cellphones, but suddenly plenty of people thought it was ok to a) have a ringing phone, and b) answer it. Eventually everybody got it together again and nobody does that anymore. People figured out how to generalize politeness for the new technology.
It seems like the same deal here. Investment regulation applies when you're selling a piece of your operation. It still will.
Further, since cryptocurrency's use in actual commerce is a rounding error, I don't think cryptocurrencies are even at the mp3 level yet. To be useful to most people, cryptocurrencies need to be turned into real money, which makes enforcement easy enough. It's especially easy here, in that ICOs are big public launches.
Really, anything taking significant amounts of money from non-accredited investors needs to be quite public, because individually they don't have much money. Which again, makes enforcement easy. And also makes it clearly under the domain of the SEC unless they are careful to exclude American investors.
[1] https://en.wikipedia.org/wiki/Society_for_Worldwide_Interban...
[2] https://en.wikipedia.org/wiki/Magnetic_ink_character_recogni...
This describes securities, generally. You and I can transact to trade shares of Uber in renminbi on a Saturday. We can transact, over the counter and using a broker, to trade shares of Apple in Canadian dollars the following day. The Apple trade would need to be reported to the national ticker, for transparency purposes, but that’s about it.
We concentrate public equity trading into fixed windows and currencies to increase liquidity. It’s a convenience. Privately-negotiated trading is still common for large blocks of public securities.
Anybody who's more worried by the potential complications of T+2 settlement when purchasing blue chip stocks than the Wild West world of ICOs shouldn't be investing.
Maybe it's less about trust and more about permission. With token based securities I could trade with whomever I choose whenever I want.
Interesting to see how it turns out in the end.
1. https://www.leaprate.com/news/oanda-suspends-weekend-trading...
They want to draft legislation for regulatory clarity. So we can be sure ICO's will be addressed in that.
If you were one of those companies that helped ICO launches, there's a good chance you will see jail time accordingly.
Remember, the SEC has the manpower and allegedly a technology to uncloak elaborate laundering on the open ledger, which opens up a whole new can of worms called anti-money laundering orgs that become activated.
Im glad I walked away from ICOs.
> subpoenas... focusing on those that failed to properly ensure they sold their token exclusively to accredited investors...
The idea of an accredited investor in this context seems either a little silly or like a major philosophical problem for tokens, depending how you view it. What does it mean to be an accredited investor, anyway? From Matt Levine[1]:
> Under U.S. law, some financial products, like hedge funds and private-company shares, are generally available only to "accredited investors." There's no actual accreditation -- there's no test -- it's just that if you have enough money you're "accredited." The theory is partly that if you have a lot of money you can afford to lose some of it on dumb private investments, and partly that if you have a lot of money then probably you know things about money and won't make dumb private investments. Both of these are terrible theories: If you have a lot of money, you still can't afford to lose all of it in dumb private investments, and there are plenty of rich dentists who don't know much about investing. The result is that it is both too easy to be an accredited investor, in that unsophisticated investors can be accredited, and too hard, in that fancy investing products are available only to the rich. (Rich-ish: The threshold is basically $200,000 in annual income or $1 million in assets.)
1: https://www.bloomberg.com/view/articles/2015-12-21/fraud-bon...
Is it blunt? Sure. But it's better than repeating 1929.
There is no rule that the State must step in during bad situations, in fact many would argue that the government stepping in makes things worse. We don't all have to pay the price.
The market needs those corrections to learn. If the government steps in every time, it doesn't have a chance to.
The government needs to step in to prevent a total collapse. When the government refused to step in to rescue Lehman Brothers (precisely because of the moral hazard problem you allude to), all hell broke loose.
Since the expectation (correctly) is that government will step in, we need regulation (before a crash) that limits risk taking, for example capital requirements (=equity) for banks.
Your narrative has been, in my opinion, comprehensibly refuted by, for example, Anat Admati & Martin Hellwig in *The Bankers' New Clothes" [1], or Krugman already in 2008 [2]. An overview over the debate is given in [3], including this quote from Krugman:
> “for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his ‘analysis’ from right-wing flacks.”
This is not to say that government policy has been perfect; but taking the government out of the equation is not going to fix anything.
[1] http://bankersnewclothes.com [2] https://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r... [3] https://www.outsidethebeltway.com/bloomberg-dont-blame-banks...
If some measurable fraction all go at once? That's suddenly a problem for the rest of us.
He's right that there could be more sophisticated tests for "knows what they're doing". But this one has the advantage of being very simple and easy to enforce.
[1] https://saftproject.com/static/SAFT-Project-Whitepaper.pdf
It only takes one SAFT token company to take things to court, and have a judge rule in their favour, to basically legitimise all tokens - no?
(Note: I have no clue who is right here, but just because it's the SEC doesn't mean they are automatically right. Same applies to the IRS etc)
The problem currently with crowd-funded securities offerings is the overall cost of capital (legal and regulatory), lack of liquidity post-raise, and that most of the good opportunities are scooped up by hungry VC's chasing returns in a fast money, low-interest environment. When the world is awash in easy capital, crowdfunding is simply too much of a hassle for solid companies.
In comes ICO's. It fixed a lot of the issues with crowdfunding. Low cost to start (just deploy a smart contract), instant liquidity, and global capital raising. Obviously there are tons of issues (breaking securities laws, sketchy companies, bubble mentality, and why actually do any work when you already have the money, among many others). But this shows that demand for small seed-stage companies is there.
The recent JOBS 3.0 act[0] will make 2 important changes to merge crowdfunding and ICO's. One is the change to accredited investor laws to allow people to prove investor competence without meeting arbitrary income / asset requirements. This was to solve the paradox of twenty-something MBA's on Wall Street giving professional advice on investments to wealthy people without they themselves being able to invest.
The second important change is to create "venture exchanges", which have been theoretically possible before, but have never been created. This will provide liquidity to early-stage startups at new regulated crypto exchanges like Coinbase, Poloniex, etc. I believe that blockchain, at a bare minimum, enforces standard protocols. Whether security trading needed blockchain or not to have protocol standardization accomplished is a separate argument, but either way the technology encouraged and allowed it to happen organically. Strict protocol enforcement of assets (ERC20, etc.) allows crypto exchanges all over the world to inter-operate, and allows securities to be traded much more freely all over the world as each country's crypto exchanges match their rules with local security laws. This will allow offerings based in the US to be bought and traded legally in Japan, South Africa, the EU, etc. It will also allow smaller companies to raise capital more cheaply by tapping into a global pool of investors.
[0] https://www.dandodiary.com/2018/07/articles/securities-laws/...
It’s worth noting that absolutely nobody is confused about there being demand for highly speculative investment in small sketchy seed stage companies.
That demand has been around, literally, for hundreds of years. The entire point of this category of securities laws is to prevent people from meeting that demand, since doing so tends to have disastrous outcomes.
My main gripe with the whole "accredited investor" thing is that its literally legalized classism (and I'd argue a violation of the equal protection doctrine, but that's another theory), as the income requirements eliminate a huge swathe of investing for anyone but the 1%.
Nothing is stopping an uninformed investor from loading their net worth into a single reuglar stock (you know, those perfectly safe instruments that never ever lose their value and leave you with nothing), so I really, truly don't see what these requirements are protecting anyone from, or why that protection is necessary.
If it's really about protection, then education and nondiscriminatory licensing based on testable knowledge would fill that goal, but instead we have income minimums.
These laws came about from very real and serious experiences that were, in fact, catastrophic for many communities. It's a real live problem, and it goes back a long way.
If you want to argue about the details that's great, but any discussion has to start with the reality that an unregulated market leads to really unwanted outcomes here.
You can also do the "who cares if people want to get swindled let them" approach, but recognize that you've been outvoted on this topic, we've decided to protect people like we try to protect people from unsafe food, consumer products scams, and many other situations.
Then it's a good thing nobody here, least of all me, asked for "unregulated markets". Literally your entire post is either responding to points I didn't make, or makes arguments I already addressed, making this exchange a complete waste of time for both of us.
I think it is understood that the regulations are in place to mitigate risk for the most vulnerable. Whether this has been the right implementation (income vs some other means) is what I think OP was getting at.
>>If you want to argue about the details that's great, but any discussion has to start with the reality that an unregulated market leads to really unwanted outcomes here.
Are you saying that the discussion has to start from the premise that on the balance, the outcome of unregulated markets is less desirable than that of a regulated market? Because I would strongly contest that premise.
Diligencing private securities is expensive. Getting information is expensive, the legal work is expensive, the negotiations are expensive. This is fundamental to the lack of reporting requirements and standardisation. Small checks simply don’t make sense in these markets.
Here's hoping some version of the Jobs Act 3.0 passes the Senate (before getting stuffed with a bunch of bs)...
No one, absolutely no one should sit on their thumbs waiting around for regulatory clarity from a slow moving ship unless they have too much to lose. It's time to up the ante and move out of the US. If they keep adding laws instead of deleting them the exodus of seed stage companies is a near-term likelihood.
There continue to be strong legal arguments for utility tokens not being securities:
https://www.coinbase.com/legal/securities-law-framework.pdf
This attitude of deferring to regulatory agencies, which have their own set of institutional biases, on the question of the applicability of securities laws to smart-contract executed issuances of digital tokens that confer zero legal title to a common enterprise, is dangerous to liberty and innovation.
I'm just checking that that's really what you meant to say.
A security doesn't require a common enterprise, it simply requires that one thing represents an interest in something else. The underlying asset is usually financial or intangible in nature, but that isn't required. There are more specific rules and exceptions, but those vary by jurisdiction.
>>A security doesn't require a common enterprise, it simply requires that one thing represents an interest in something else.
Investment into a common enterprise is the second prong of the Howey Test.
True, it even works with past and future music royalties.
David Bowie (together with his financial manager and an investment banker) was probably the first to come up with securisation of non-tangible assets.[1]
It's a fascinating story.
But, as per usual, human greed trumps all, and many latched onto incredibly terrible ideas created by woefully unqualified individuals because of a bull market, cognitive dissonance out in full force. History sure has a way of repeating itself.
"From the SEC’s perspective, there is no lack of clarity. The sniff tests are the same as they have been for decades. The SEC is applying the same securities laws to ICOs that it always applies."
“Everybody’s holding their breath for the SEC to create some kind of coin rule, and they’re not going to,” says a securities attorney at one high-profile Silicon Valley firm. “They’re applying the same laws, the same statutes, the same rules, to stocks and bonds and everything else.”
In other words, "what part of "no" did you not understand."
It's hard to find a successful ICO, in the sense that they did whatever they said they were going to do, and did it profitably. From Medium's list of "successful ICOs:"
ICONOMI is held up as a successful example, but they're a "digital asset management platform". They probably should have a broker/dealer license.
Solve.care claims "Solve.Care makes healthcare affordable and easy for everyone". All they have is some kind of "physician wallet".
Truegame is gambling.
Play2Live is like Twitch.tv, except that it costs to watch.
StopTheFakes.io: "Token sale is finished. Thank you for your participation". It's like Mechanical Turk looking for copyright infringement. On their actual site, "http://web.stopthefakes.co/", no new tasks since 2017.
This is pathetic.
A lack of precedent makes this the biggest challenge. New regulation would have the same problems.
Personally i don't think that ICOs should be banned or regulated - if anything, they are frequently done by anonymous or fake identity people and cashed out using monero, anyway.
Just explain people that they are a scam, and a crime if (unlikely) caught, just like they explained about nigerian prince scam.
just because you're callin' that pollen dust -- don't mean your allergic nose won't sneeze bust.
What harm could come from indicting scammy ICO pushers too quickly, or those who had crowdsourced too much money?
That the poorest households spend 9% of their income on state-run lotteries, yet people can't try their hand at investing their own money in businesses/projects that haven't been vetted by a centralized government agency, shows the opportunistic and disingenuous appeal to virtue that's used to sell the public on the need to be controlled.
So basically ICOs, then.
But painting an entire category of financial transactions as fraudulent, based on crude generalizations, is not just.
As someone who watched all this quite closely back in the day I cannot believe the amount of money these hucksters pulled out of people and still are to this day.
I don't like people promising the moon to hype up speculative investments, but there are non-government solutions to this, like reputation markets.
In fact we see these non-government solutions working already: token investors today are unrecognizable from those that were giving a website with a white paper $40 million worth of cryptocurrency in 2016. This transformation has occurred completely independently from any regulatory action. The collective intelligence of the market has increased from hard-won lessons in the need to do due diligence, and the emergence of numerous sites for rating token sales (mind you, there's still a lot of room improvement in the curation market).
Regulations can obviously address some of these problems too, but any restriction on how consenting parties choose to interact is going to have massive unintended consequences, and in my estimation the unintended consequences do much more harm than what's alleviated by the regulations.
Also worth mentioning is that the regulations that the SEC is trying to impose on token sales go far beyond prohibiting issuers from promising big gains. They try to micromanage how an offering is conducted with inflexible cookie cutter rules that inhibit innovation and make the entire market dependent on a centralized gatekeeper, which is a monopolistic and fragile situation prone to systemic failures.
It's obvious to me that a free society should not tolerate this level of control being exerted on how people engage in voluntary interactions with other consenting adults.
The problem is that the idea that we ought to be free to do with our money what we wish threatens many powerful special interests, so we get a never-ending stream of rationalizations and emotional appeals for restricting people's contracting rights, and for funnelling commerce through centralized gatekeepers.
If that's what you want, fine. But you should be open and honest about the fact that you believe that financial fraud should be legal.
And I'd like to point out that fraud is not a new concept. It is something that has been explored in many aspects of society, and most people oppose fraud. Fraud on a Blockchain is still fraud.
Someone saying "We believe this token will go up 200% in two years" is probably not a misrepresentation of facts, and thus not fraud, and should probably be allowed, and they should suffer the reputational damage when their predictions don't pan out.
But if we created laws that did prohibit people from hyping up the investment potential of a token they put for sale, or laws that require token sale organizers to disclose the general risks around investing in speculative assets, like requiring them to include a statement on their website like "this is a highly speculative asset that has not been registered with the SEC. Speculative investments have a high likelihood of losing all of their value. It is recommended that you get professional investment advice before making an investment into a speculative instrument like this, and that you avoid investing a large portion of your wealth in them", that would probably be fine. It wouldn't be a major impediment to voluntary exchange.
Like I said though, what the SEC is seeking to do goes far beyond barring token sale organizers from hyping their project's profit potential, or requiring such warning messages on their websites. If that's all the SEC wanted to do, I wouldn't be nearly as opposed, if at all.
No, they don't. This is like saying the 13th Amendment infringes on your right to sell yourself into slavery.
In any case, that's an extremely dishonest comparison. In no way is spending money that your past self left to your present self however you wish (e.g. investing in a out-there idea called "Bit Coin" in 2010, instead of wasting it on state-run lotteries that the government advertises), comparable to selling your future self's freedom away. The latter violates the rights of someone who is arguably not you. The former violates no one's rights and should not be prohibited in a free society.
I'm saying your complaint is like that. Yes, it does prevent you from doing that. Nobody cares, however. Just like you are trying to complain that you are prevented from buying a security where you get absolutely no insight, knowledge, or reporting whatsoever. I just cannot take that complaint seriously at all, and any legitimate investment doesn't either.
>>No, they don't.
Now you admit that they do. So you're resorting to misleading rhetoric to try to blunt the common sense argument I'm making, which is that in a free society, no one has a moral right to tell someone else how they can spend their money.
People should have more humility, and not assume their understanding of the world is so far superior to the common man's that they have a right to exert their will on the common man. The call for these types of regulatory restrictions appeals to shallow unthinking narcissism, and nothing more, which is why it needs to be supported with inappropriate and inflammatory comparisons to selling yourself into slavery.
What you're advocating is illiberal and paternalistic, and your presumptions about the level of insight that goes into investment made into unregistered offerings are crude and baseless over-simplifications.
>>Nobody is going to take an argument like yours seriously.
That's not true and I don't believe you think it's true. You're literally comparing investing in a speculative instrument not vetted by a government agency with selling yourself into slavery to try to dull the appeal of my argument.
If you thought no one would agree with me, you wouldn't be going to such extreme lengths to counter my claims. You would be comfortable letting them stand on their own merit.
Wrong. You're complaining about investments that give you absolutely no knowledge and no information about themselves, making you unable to make an informed decision. That's not even gambling, so don't try to call it investing.
"If you thought no one would agree with me, you wouldn't be going to such extreme lengths to counter my claims. You would be comfortable letting them stand on their own merit."
That line is absolutely false. If it had any merit whatsoever, this wouldn't be an internet forum.
The fact that you have to resort to this, and to comparisons of buying an unregistered investment to selling yourself into slavery, shows that you don't have a solid set of arguments to support your position, and that you're prioritizing your agenda ahead of the truth.
And like I said, your actions belie your claim that no one agrees with me. If you thought no one would agree with me, you wouldn't be going to such extreme lengths to counter my claims. You would be comfortable letting them stand on their own merit.
https://youtu.be/psqCMwhDxZo?t=12m29s
I guess time will tell.
By SEC definition accredited investor is an investor who has either $1M of liquid net worth or stable income not less than $200k per year.
Original intent of the government was to bar unsophisticated investors from high risk investments.
While I understand logic of the law - many people are completely financially irresponsible and are not capable of critical thinking (that's what politically correct term "unsophisticated investor" actually means), I find this law extremely frustrating.
For example, I had no chance to buy Spotify when it was well under $1B valuation because the government baby-sitting me by excluding me from opportunity to invest into early-stage startups.
If you want to downvote me on "not capable of critical thinking" and at the same time support barring people from making their own financial decisions, please think twice because it's clear contradiction.
There is a compromise: Why not lower entry level of becoming accredited investor? For example, you could be semi-accredited investor with lower capital but with limits on investments. Or making some government exams on risk taking and investing? Or having special government-approved platform for early-stage investments for unaccredited investors. There are lots of combinations.
Right now, there is a huge hunger among people for early-stage investments. And if you are not making it legal, it just go underground and as a result with more dangers for unsophisticated investors.
It's very important to understand this and the adverse selection problem that would emerge if laws were changed. There's a reason that only scammers did ICOs.
This is absolutely incorrect. One of many examples - Tezos.
Re: Tezos - "Inside the Crypto World's Biggest Scandal"
https://www.wired.com/story/tezos-blockchain-love-story-horr...
And let's be clear: you can still invest in a startup as a non-accredited investor. There is no prohibition on that, or else startups couldn't give equity to employees, contractors, or others (see, e.g., pre-IPO Facebook and Google, and the many famous stories of dotcom millionaires from their respective IPOs).
Employee compensation is different.
P.S. It's amazing how much Hacker News readers are against cryptocurrency, in favor of very big government, very high taxes up to 70% as their Piketty, Krugman suggest to enforce equality of outcome. This community became total opposition of what Paul Graham might thought back in 2007. The only thing is left is to change Hacker News icon to Che Guevara emblem.