Sand Hill Exchange Fined $20,000 by SEC
blog.sandhill.exchange
blog.sandhill.exchange
I would be surprised if a regulatory body didn't come after this setup. There is a very bright regulatory line around gambling and investing in most countries that a typical person should have known about. What am I missing? Why should I sympathize with Sand Hill Exchange?
But then, tie that to real Securities ... its a miracle they got off with only $20,000 in fines.
Accepting Bitcoin without figuring out regulatory issues was an unwise step for sure.
As far as I'm concerned you should have no more sympathy for them than anybody else. Even if this risk really never crossed their minds, their lawyer should have warned them of how problematic this was during their first five minutes in the law office.
http://www.sec.gov/answers/noaction.htm
These guys could have started there.
It's almost always better to ask forgiveness than permission.
Does the punishment befit the crime. These guys had limits on what the users could do. Anybody - yes even the SEC - could take a look and see it wasn't a platform for massive illegal trading. They could order a cease and desist. Better yet "cap" the volume to its no more than "tiny gaming level". But imposing a 5 digit fine on founders who are working without pay, without funding ? That's not just stifling innovation, but fear mongering.
The title says they only got a $20k fine. Am I misreading it? Was this a lemonade stand run by an 8 year old, or by grown adults who are able to use a search engine and Wikipedia?
It's a funny read....
Another thing I learned: If you’re gonna try to make yourself look like a legitimate financial institution, you’ll be prosecuted like a legitimate financial institution. And when that happens, you sure as shit better have the legal resources of a legitimate financial institution.
The Commission accused us of acting as unregistered broker-dealers, selling security-based swaps, offering swaps on an unregistered securities exchange.
"Without a corporate barrier to protect us, the penalty was personal. How high would the fine go if we did not settle?"
Doing this without an incorporated company is just clown shoes. Surely they must have had one, but a quick skim of their TOS doesn't reveal a company name or Doing Business As entity. I don't understand why an SEC fine would be against the people and not the entity.
Are you sure that it's really not clown shoes? I mean, ordinarily I'd agree that surely no one would be crazy enough to run a securities exchange without incorporating, but the quote you linked from their post seems to imply otherwise.
Let this be a lesson. Always Always Alway create a business entity. Separation == protection
In total, these [U.S. Security and Exchange Commission] users have spent 64 hours, 6 minutes, 26 seconds (and counting!) engaging with our site between March 10 and May 14. Over 96 hours if you include time on the blog and the founder’s personal website. This is more time than our team spent building the damn web page. We have clearly achieved product-market fit with this demographic.
Google cache still has the blog entry [1].
Their Medium article also has been replaced with a message claiming it was censored. Anyone know if they were really censored (e.g., had these taken down against their will, or were ordered to take them down against their will by someone they had to obey), or did they just realize how bad these made them look, and are trying to retract them and possibly using the censored claim to make it look less self-incriminating?
[1] http://webcache.googleusercontent.com/search?q=cache:3MUEzNa...
The SEC could have read that too, and what they thought was a another prediction market they realized was an attempt to defraud users because to quote them, "Nobody wants to play in a market with zero users, we realized. So we gave participants the illusion of liquidity."
I got an archive of the "SEC-analysis" post: https://archive.is/qVNUQ
I don't think that Facebook meant to break "things" like big time securities laws (without even consulting a lawyer or, presumably, even incorporating the business). Maybe no one has done it before because it's illegal--not because it's so innovative.
[1] http://webcache.googleusercontent.com/search?q=cache:lZJ66p_...
Really the right thing here would have been a visit by SEC staff, asking a lot of questions and pointing out some security law violations, at which point the operators go "umm, didn't think about that, we'll be good". But that approach doesn't let the bureaucrats justify 100 hours of browsing on their time sheets, does it?
The injunction to obey security laws going forward does make sense, it gives the SEC leverage if these same people actually do pop up later as scammers.
Some journalism on what they were doing:
http://www.bloombergview.com/articles/2015-03-11/how-should-...
http://ftalphaville.ft.com/2015/03/10/2121090/sand-hill-is-t...
Yeah, it's a lot of cash, but I've been billed more than that for a night in the ER when I didn't have insurance. And seriously, it was up to you to think about the fact that this was bound to attract regulators' attention and that the time they spent on you is currently being picked up by taxpayers. I know you want to compare yourselves with bucket Shops, which you think played an important role in democratizing/disrupting finance a century ago, but this whole idea of 'a chance for regular folk to get in on the action!' is unfortunately the same sort of psychology that con artists use to qualify their marks.
Honestly, if one of you had done an ask HN about whether this was a viable thing people here would have told you why not and what you needed to do to be legit.
Edit: come to think of it, I'm surprised your mentors int he Accelerator didn't point out this very obvious pitfall to you.
Oh please, these people are what, 22? 25? They are supposed to know the basics of security law off the tops of their heads?
They got an idea and spun it up in a weekend. Yes, on reflection, allowing this sort of thing opens all sorts of loopholes for bad actors. And it had to be shut down. But it isn't as if this was done by a bunch of associates at Sullivan & Cromwell, or the interns at Goldman Sachs. They did something fun, it got afoul of the securities laws, whatever. Explain the legal breech and practical problem and tell them to pack it up, boom, we're done.
But bureaucrats are basically sycophants and / or bullies. They aren't in the job to protect the public. They're in the job to make money by connections, and to push around people without the knowledge or stones to tell them to fuck off.
No, but they should have known that it might be relevant and done some research online and/or talked to a lawyer.
Later, when Matt Levine, who is a columnist from Bloomberg and a lawyer, wrote about them in his column and said that he could not see how it is legal, specifically mentioning SEC and CFTC regulations as problem areas, that should have been a giant freaking clue that they should investigate these things. Instead, they tweeted "Cool! NYC banker hipster @matt_levine is hating on us. We must be getting too mainstream :)".
And we are not talking about doing just "anything". We are talking about a very specific thing: starting a company that is going to take real money from people, and help them do risky things with it--a company that depending on how you look at it is a securities company or a gambling company or a prediction market. According to their FAQ, they planned to have no limits on how much money someone could put into this, and they were aiming for very high volume, so if it had worked out they would be dealing with vast amounts of money.
All of those are highly regulated areas, and it is hard to believe that anyone who had even glanced in the general direction of doing a company in any of those areas would not be aware of that.
So are you seriously suggesting that it is reasonable to start a company that is going to handle, you hope, vast quantities of money for a vast number of people in a highly regulated industry, and NOT do any online research or seek legal advice to make sure that you are legal?
And do you seriously think that when a prominent writer who covers your field and is a lawyer tells you he can't see how your business is legal, it's reasonable to mockingly dismiss that?
Now if that is wrong -- if they intended to generate real revenue and profit off this thing, and raise money -- then yes, they're idiots.
But if this was something put together as a project, something fun and interesting to do, then I understand why they didn't consult a lawyer.
Not "anything". Starting a business, especially in a highly-regulated domain, OTOH, is not the same as "anything".
And, even granting that one might not be aware enough of the regulatory landscape to recognize that need, when someone who is knowledgeable points to the specific areas of risks and you just blow it off as a sign of success than someone is "hating on" you, yeah, then its arguably gone from innocent to willful ignorance.
They got an idea and spun it up in a weekend.
They ran it over a few months, publicized it, and demonstrated their knowledge of brokerage history history. Plus just about every 'How to set up a small business' guide ever written warns about setting up a structure to protect yourself such and LLC or the like.
But bureaucrats are basically sycophants and / or bullies. They aren't in the job to protect the public. They're in the job to make money by connections, and to push around people without the knowledge or stones to tell them to fuck off.
Yes, everyone is exactly the same. They're all big old killjoys who don't want you to have any fun man.
Grow up.
They are supposed to do due diligence before starting a business and accepting money. That doesn't mean knowing things "off the tops of their heads", it means doing their homework.
Generally, it's pretty easy to get a loan for college. It's more difficult to get a loan because the government fined you.
Student loans are federally subsidized (or directly issued by the federal government) and specially non-dischargeable in bankruptcy, so banks are more willing to make them than they would be to make other unsecured loans to people in similar financial circumstances. So its a bad example, unless you are aware of similar federal or federally-subsidized "pay off your SEC fine" loans.
I definitely agree that it's unfair. But life goes like that. Don't focus on the assholes. Pay your bills and move. Ten years from now, this just a really good story.
You'll be fine.
$20,000 was a cheap lesson.
When two dozen of these start popping up, ok, now it's time for a message. Until then? Just get the thing on side and call it a day.
Some things really are as simple as they seem on their face.
[1] http://www.bloombergview.com/articles/2015-03-11/how-should-...
We never had any intention of operating in a regulated industry, nor do we have the resources required to do so.
"Oh, it was just for shits and giggles" ... when there's real money involved?
A peek at archive.org shows the sales pitch at the time of the SEC traffic / tracked visits. I'm not seeing anything about "for entertainment purposes only" here:
The mission of Sand Hill Exchange is to democratize startup investment.We believe the startup ecosystem benefits when everybody can participate in startup growth. Our vision is to extend the power of public markets to private companies.
[source: https://web.archive.org/web/20150315015146/http://sandhill.e...]
Yet, in a comment in this thread, a $20,000 fine was financially ruinous.
I hope they immediately refunded everyone their BTC, this is how 'innocent' people end up running Ponzi schemes.
Because they got fined $20k, and now they have no backing for the $1.5k of deposits they have taken.
The archive.org will show most of our content pages were in a permanent state of flux -- the only constant page was our terms of service, which quite clearly called us a "fantasy contest"
Also, you were promoting it publicly on at least one occasion a few months ago: https://news.ycombinator.com/item?id=9642186
I did want to share some additional facts, which will come to light when the statement of facts gets published.
(1) We had exactly 55 paying users, who had deposited $1550 and 15.6 BTC.
(2) All but 5 of these users were friends, family, or members of our accelerator.
(3) Our private beta test had been in operation for 7 weeks.Not really, in this case.
Securities laws aren't the kind of thing you up and ignore just because you feel like it.
No, it doesn't always. The truth is not in the middle here; you guys were being breathtakingly clueless. Trying to pass it off as cleverness is just self-delusion, and none of the excuses your team has written are justifiable. You should probably do some honest introspection before taking your next pass on starting up a business. Not doing so is a disservice to yourself.
An interesting thought is that the site itself wasn't making any money on the trades when there was real currency - which was illegal. But as a purely fantasy VC game they can make money on subscriptions, advertising, etc - which is legal.
It's a bit like advertising you have an STD on your Tinder profile.
I guess given the nature of the prediction market they could have flipped a coin to see who fined them first....
Another example of 'early monetization is dangerous'.
http://www.nakedcapitalism.com/2015/05/three-former-sec-comm...
With statements like, "Nobody wants to play in a market with zero users, we realized. So we gave participants the illusion of liquidity."
"We created bots to trade against incoming orders. They were like my friends. I even named them! My favorite was the “Jesse Livermore” bot. Opportunistic to a fault."
"The bots would run every day and place orders against each other so the market looked like it was exhibiting lots of price movement and volume. For added credibility, we randomly generated trading histories for each company going all the way back to last year."
Their lawyers realized they were admitting to creating a scheme to defraud investors to the safety of their market. Or maybe the SEC read it, and realized that perhaps this wasn't just a simple trading platform, but had a lot of fraudulent data on it and criminal charges were better.
Medium blog post: https://archive.is/DOVJZ
EDIT: I don't expect to stem the downvotes, but the SEC's time is better spent policing large-scale financial crime. Consider the opportunity cost here.
At that point, it's no longer a funny joke.
You should probably correct your own announcement, then, since you say "when we pushed aggressively to monetize we received a cease and desist from the SEC".
Allowing people to use their own money without trying to keep any of it isn't "monetizing" as that term is usually used of a service.
> We created bots to trade against incoming orders. They were like my friends. I even named them! My favorite was the “Jesse Livermore” bot. Opportunistic to a fault.
> The bots would run every day and place orders against each other so the market looked like it was exhibiting lots of price movement and volume. For added credibility, we randomly generated trading histories for each company going all the way back to last year. So we had historical price and volume in addition to streaming quotes for chart data.
and by then letting people speculatively place their own money into the already unbalanced and illegal equation, you somehow managed to wipe your hands of any responsibility for their actions?
What in god's name are you smoking? You got off easy with a 20k fine. You belong in prison.
In fact, its amazing they continue to run the site, even without accepting money, creating 'fake' data and fake investors to show fake growth of something tied to a real security (you can still trade private stock), is inviting a shit tonne of legal hassles.
"Oh hey, here's a list of private startup stock I own, can you please create some fake data to show a huge interest on your site so I can drive the private sale price and generate some sales?"
As long as they weren't actively making misleading or fraudulent claims (e.g., leading users to believe they were actually investing in the companies), they should've been left alone.
And by the way, a lot of people make money off of jokes. [1]
Oh, ok.
That's one of the best euphemisms for 'fraudster' I've ever seen.
> As long as they weren't actively making misleading or fraudulent claims
Did you read the article?
An unfunded startup seems like a big win for a department which can't enforce anything helpful for the average citizen.
Well, lets check that by looking at the SEC Enforcement Division webpage [0], and a couple of the news for the past week:
* Merrill Lynch Admits Using Inaccurate Data for Short Sale Orders, Agrees to $11 Million Settlement [1]
* SEC Charges Deutsche Bank With Misstating Financial Reports During Financial Crisis [2]
[0] http://www.sec.gov/enforce
Not exactly supporting your case, also, FWIW-- I'm fairly well versed in this as my major was economics with an emphasis on finance. I spent many, many months (years) of my life doing this sort of analysis. Please next time don't rush for an anecdotal example and perhaps you'll learn something in the process, eh?
Profits are misleading. Revenue is not; in the market they must meet epectations which are not monetarily equal to, or even representative of, their tax obligations (payments).
Profits are dependent on tax laws, costs (factored in or not), and revenue. Revenue is a number. Revenue is objective. I.e. Profit is more malleable than revenue.
I find it unfortunate that we live in such a world where stark "realness" is needed, but thems the breaks.
Imagine you arrested a millionaire for some petty theft like stealing a $100 watch (which is the sort of thing that happens sometimes). Well it'd be appropriate to give a short jail spell or fine the person a few hundred or even a few thousand dollars, depending on the circumstances. But not to fine the person $500,000 just because s/he happened to be a millionaire and could easily have afforded it. Proportionality is a two-way street.
Of course, I am not saying that the system is necessarily fair, just that we should try to critique it using a meaningful context rather than an emotional one.
It's like speeding tickets, a speeding ticket isn't a deterrent if you can continue to pay the cost. It simply punishes those whose marginal income is deeply affected by the cost of the ticket, in essence it deters the poor(est).
The perpetrator in your case, should be charge $500,000 because he has more than enough money to not steal. How Finland deals with speed tickets comes to mind as the correct approach:
http://www.theatlantic.com/business/archive/2015/03/finland-...
Why? You couldn't let out loans as a bank at all if you had to maintain 100% reserves.
Plus how would you possibly enforce that? I can't lend my brother $100 with the promise to pay it back now?
Nor do they "make up" money. They have the money when they lend it out, it comes from the "fractional reserve" that they are required to have, or cash assets above and beyond that.
Likewise I could personally loan out money up to the amount of money I have, even with fractional banking, but I couldn't loan out money up to my entire net worth, as it's not all liquid.
Furthermore, at what point does it suddenly become OK to chase after a financial security law violation? Is there a valuation limit? Cash flow limit? War chest limit? What exactly is the qualification to no longer be "a shame"?
How much do you think it cost them to go after Sand Hill?
The SEC has limited resources. I think the grandparent is questioning whether this is the best use of them.
I mean just juxtapose this (from the article):
"For added credibility, we randomly generated trading histories for each company going all the way back to last year.....
We pasted descriptive text cribbed from the websites of banks and registered exchanges to make our website look like a serious business."
Source: https://medium.com/@eiaine/how-startup-growth-hacks-resulted...
With what Ivanplenty said in this thread:
"'Sand Hill Exchange' accepted items of real value (USD and BC) that could be used to 'purchase' (or bet on) things named after real securities that trade (or are expected to trade) on public markets for a profit."
(Source https://news.ycombinator.com/item?id=9642353)
What a scary world if the SEC didn't shut these guys down with a slap on the wrist! (Assuming Ivanplenty is correct and they monetized as he stated.)
I mean they are literally inventing trading histories and collecting bitcoins and dollars to trade on them. That's the kind of market that sends real investors scurrying away from it, and I'm glad the SEC protects investors from that happening, by simply shutting it down. It is positively a good thing. (Also, the history of investor protection is because snake-oil salesmen really did take advantage of investors, selling them the clear blue sky:
http://en.wikipedia.org/wiki/Blue_sky_law
So it's not like this is some theoretical thing. The problem happened first, and the solution simply solved it. There are a lot of areas where the legal system can improve, but the existence itself of the SEC and the fact that it shut this exchange down is not one of them. This is absolutely warranted and called-for. Yes, you need to register if you want to do this type of thing, and you need to play by the rules.)
Squashing tiny companies might make them feel better, but it's not impactful. Going after companies defrauding investors / playing it fast and loose for millions is how you clean up finance.
Putting out big fires like that is a good -- but expensive -- way to grab headlines, sure. Something the SEC definitely needs to do to the extent it can.
Dealing with small things like a little market that lets you bet real money on company valuations in a market with deliberately falsified trade histories is how you prevent something from becoming one of those big fires, relatively cheaply for all involved, and before lots of people get hurt by it. Also an important thing for the SEC to do.
See eg Coinbase's comments on the BitLicense. There's an opportunity to move fintech forward in the US, and actions like this- regulators trying to pad their resume- are stifling.
The reality is that there is a point at which it is no longer OK to chase after a securities law violation. This is why the SEC doesn't go after PE firms that aggressively use carried interest (e.g. a partner puts his salary into the fund and later _only_ pays long term capital gains on his redemptions). There's _too_ much at stake in those cases so the SEC backs off.
Where do you think SEC staff go after they leave the SEC, and what do you think they make there? The SEC makes those enforcement actions against major banks that it _has_ to. The other stuff gets quietly dealt with.
The SEC cannot allow something like this to operate with cash at play, but the whole thing should have been cleared up with a couple of visits and phone calls.