In particular, they apply the security test: "did investors invest money with a reasonable expectation of profits derived from managerial efforts of others?" Since DAO was a wisdom-of-crowd VC fund, the answer is a clear YES.
On the other hand, they are careful to say that other token sales MAY be securities but will be treated based on their specific facts and circumstances.
My takeaway is that this doesn't change anything. The SEC is proceeding cautiously: applying securities law in clear-cut cases, "studying the effects" generally.
It's also not a bad thing to comply with securities regulation. FileCoin is doing quite well selling only to accredited investors on CoinList.
Jesse from CoinList & Protocol Labs here -- completely agree that following securities regulation is an especially great idea. Unfortunately doing that correctly can be really challenging. Despite several misleading doom-and-gloom articles written today (http://fortune.com/2017/07/25/sec-says-digital-tokens-are-se...) the SEC has not said that all tokens are securities. Rather, application tokens are a promising new technology that enable all kinds of use-cases, each one unique from the next, and each having a unique 'regulation profile'. It would be very short-sighted to apply broad sweeping legislation and with this ruling, it's clear that the SEC also feels the same.
Just like mifeng mentioned, it really is a facts and circumstances determination per token. Given we had to build all of the token sale scaffolding (legal, tech, etc.) for Filecoin, it made sense to open this up to other technologists as well. Our hope with CoinList is that creators can focus on building awesome tech and expanding the valuable uses for application tokens while reducing the amount of time and resource they need to spend making sure they stay within the parameters of the law.
Filecoin may be limited to accredited investors for this particular sale, but that's not to say other tokens that use the platform in the future would be required to do the same. Ultimately the decision is up to the creators, but they should be very well educated on the implications of what those choices could mean.
So I see CoinList uses AngelList, which I think verifies accreditation via financial accounts.
From what I've read, the SEC doesn't mandate any particular method to verify net worth. In this space, wouldn't it make sense to accept a signature proving ownership of a large ETH balance?
How? On angel.co's accreditation form I only see a place to upload a single file containing one bank/brokerage statement. It says nothing about cryptographic proof of ownership, or even about providing multiple documents.
I am curious, if the SEC investigated and issued a report on DAO...why not investigate the Ethereum Foundation/Blockchain itself for the ICO of Ether? I'd like to see the SEC issue a written finding on the factual distinction and legal analysis how one is a security and the other is not, it may be as simple as the way the DAO tokens were marketed vs how the Ether ICO token was marketed.
The FileCoin ICO will be the first CoinList ICO, seeing as it was set for 2 days from now I wonder if it will be effected. All the major crowdfunding websites seem to offer equity funding options now, and I'm curious about how they pull that off legally, but if they do, I imagine CoinList will jump through the hoops so FileCoin is compliant.
In my limited and non-lawyer understanding, that's not the SEC's modus operandi for investigations like this.
They want to leave themselves room to study the market and issue definitive guidance later. Also, these investigations cost time and money. So to discourage bad actors, they go after the most obvious offenders but it's not really in their best interest to present a positive counterpoint.
Is it still ok to use ICOs as as glorified Patreon or Kickstarter without worrying you'll run afoul of the securities laws? As long as no one is expecting profits from the tokens they buy from you.
Where it gets strange is if your tokens are picked up by an exchange. What happens if someone buys your tokens with the expectation that they can sell them to someone else? Then the price of your tokens might rise, and they've made a profit. Does that count as expectation of profit?
Im curious why would the price of tokens (which are not equity backed securities) rise?
If I understand it right, your hypothetical is just a kickstarter project where a funding level reward is a "virtual token" and just as say a reward of a t-shirt this token doesn't represent equity in the project? Would anyone expect the value of the t-shirt to go up? Is it possible, yeah actually, imagine if Apple originated through crowdfunding, I bet that original crowdfunding t-shirt might sell on the secondary market, so it all boils down to if there was a subjective belief of a profit or a reasonable personable would have expectation of profit.
As far as I can see from observing the market, the expectation that literally any token will rise in price is evidenced in the market. If you doubt this just go to https://coinmarketcap.com/all/views/all/ which lists over 1000 different tokens, the first 300 of which have a market cap of over one million USD (e.g. HTMLCOIN). In other words, tokens do tend to increase in price after their launch, but only because people expect that their price will increase after launch. It's like the housing market in 2005, except the investment sums are relatively minuscule. It's a self-fulfilling prophecy, for the time being, and the issuers have nothing to lose. Only the buyers risk a loss.
Housing prices weren't increasing because people expected the prices would increase...home prices were increasing because the supply of money/loans for houses exponentially increased.
In other words NINJAs (no income, no job applications) were being rubber stamped for million dollar plus homes with $0 down and 103% financing. And so prices continued to go up because the next NINJA would be approved to buy yesterday's million dollar house of 2 million today.
> Housing prices weren't increasing because people expected the prices would increase...home prices were increasing because the supply of money/loans for houses exponentially increased.
Why would the supply of money/loans increase unless people were taking out loans to buy houses more than usual, and why would they do that unless they expected the price to increase? The increase in supply of loans happened because people bought houses expecting a profit. So increase in credit supply is a secondary effect that occurs when people are more willing than usual to buy houses on credit. And people are willing to this when they expect a profit.
>Why would the supply of money/loans increase unless people were taking out loans to buy houses more than usual
Because the regulations that limited supply of loans disappeared.
Consider that many more people want a million dollar home than can qualify for the loan (afford it).
Think about how much a single change in regulation would effect the number of people who can qualify for the loan/afford the $1M, example: cash down payment. How many more people can afford a $1M if the regulations for the loan approval require cash down of: 100%, 20% or -3% where the bank pays you $30,000 cash to take the $1M loan to buy the house.
Allowing people to finance 103% of a $1M home significantly changes the number of people who can act on the want (demand), to the extent supply of the homes drops and as a result their prices artificially increase supported by more bad loans.
Secondary sales involve person A selling to person B. At that point it's person A's problem, not the issuer's. The exchange, however, could get into trouble for trading securities without being registered
This is not really true. Once a company exceeds a certain threshold of non-accredited owners, it automatically becomes a public company, and faces the same disclosure and controls requirements as a company that became public via IPO. That is why all competently written private stock offerings sell stock with heavy transfer restrictions, so that shareholders can't force management to take the company public.
The analogy is necessarily inexact,ICOs are a new beast. But they don't have to be owners. Too many bond holders can make you public as well. If the tokens are securities and the sponsor/inventor/whatever is considered the issuer, lots of token holders is a problem for the issuer.
Is there any advantage of using ICOs as as glorified Patreon or Kickstarter compared to just taking orders in ETH? Why are you issuing a token to begin with?
there are secondary community engagement and customer/user retention (lock-in?) benefits to using a token
if the token is part of or essential to a yet-to-be-developed app, but not themselves traded, I cannot see why there would be any sense of an investment. but I would in such cases never market the sale of such tokens as an ICO or crowdfunding. I would offer them up for sale, as a product pure and simple. buy now. use later.
i see it as selling an atari 2600 with no game cartridges, and then selling games later when available.
Some exchanges compete to support the most tokens (I guess to earn fees on the trading). If it's possible to transfer a token, exchanges will starting trading it immediately.
I attended https://www.meetup.com/SFLegalHackers/events/240629913/ and sat in on a conversation where a lawyer was talking about issues like this. She specializes with working to help ICOs comply with existing regulations. From what I heard, SEC is not the only agency involved, and each ICO is different. Interesting stuff.
This is naive: The reason the SEC report is specific is because they don't know what the reaction to the ruling will be, what kind of political blowback they could get. Starting with "The DAO" is a politically safe move- If it goes over well with their acquaintances (revolving door and all that) they will start making broader rulings.
> In light of the facts and circumstances, the agency has decided not to bring charges in this instance, or make findings of violations in the Report, but rather to caution the industry and market participants: the federal securities laws apply to those who offer and sell securities in the United States, regardless whether the issuing entity is a traditional company or a decentralized autonomous organization, regardless whether those securities are purchased using U.S. dollars or virtual currencies, and regardless whether they are distributed in certificated form or through distributed ledger technology.
Yes. The SEC is indicating that they're not going to apply this retroactively. Any upcoming Initial Coin Offering to US persons, though, is in trouble. Like all the ones listed here.[1]
I would not count on them not applying this retroactively. The DAO is safe (along with Bitcoin and Ethereum themselves) but everyone else is not. I've heard interviews with some ICO people and it's clear that they know what they're doing is legally questionable. They're doing it anyway because of the obscene amount of money on the table. The SEC will not look kindly on these people.
Are we sure Ethereum is safe? Bitcoin never did a premined token sale but the Ethereum Foundation did, so it looks much more like theDAO than Bitcoin does.
I think there might be a gotcha there. SEC rulings only apply to dealings within the United States. Being that Ethereum is [at least in general, if arguably not] decentralized, and largely pegged to a Canadian, and started in Switzerland it might not be so simple. The Ethereum Foundation itself is a Swiss nonprofit.
Of course, it remains to be seen what this will turn into. Even if it comes crashing down in the United States, that has little effect on the viability in the rest of the world... especially as of late.
I just wouldn't want to try and run an ICO in the US as a resident of the US!
It doesn't matter if Ethereum is a crypto-decentralized-blockchain-p2p-network-thingamagig. If the Ethereum Foundation sold their thing to US residents, it is under the purview of the SEC.
The only question is if the Ethereum Foundation's token sale passes the Howey Test. An analysis of this must be done like was done in their report of the DAO. I'm not qualified to do this analysis, which is why I ask. I know they said Bitcoin was not a security but that's all I know.
If you read the sec document carefully enough, they singled out the DAO because it's unambiguously a security. Shares in a thingymajig blockchain blah blah corp are still shares, therefore, securities. Most tokens are not shares and have uses other than profit motive, therefore, they are not securities
More like, if you read the SEC document carefully enough, you'll see that they applied the 4 prongs of the Howey test to theDAO token and defended each prong with arguments and evidence. They'll probably do the same thing for Ethereum (but not necessarily come to the same conclusion on each prong).
Saying "it has other uses than profit" is not sufficient since you'd have to back it up with meaningful evidence (what are the actual uses that investors are getting out of it?)
> Saying "it has other uses than profit" is not sufficient (does not address all 4 criteria) and you do not back it up with evidence (what are the actual uses that investors are getting out of it?)
This true, but the 4 criteria are an AND, not an OR.
Again, the Howey test and SEC rulings only apply to American entities/business. So, if it may impact the status of the Ethereum Foundation (barring all other questions) in the United States, but it won't impact it elsewhere at all except maybe in sentiment. Lately the United States' power of influence in economic matters has decreased, so I don't see that being a major deficit in the long run with regard to a technology that's being investigated and accepted internationally otherwise.
> SEC rulings only apply to American entities/business
This is wrong. SEC rulings apply as soon as your investors are US residents. [1] I know neither of us are lawyers, but at least back up what you claim if it might put people's money at risk.
Replying here because we reached max comment count.
I can see how our wires got crossed.
I interpreted your original comment as questioning whether or not this was a threat to the specific tech or foundation at large, and not just isolated to the US region.
So, I guess the argument is moot -- seems like my mistake. It's certainly up in the air in the US at this point. I do find the progression of events interesting, regardless. In spite of what I said, the US does have a social impact with decisions like this -- just maybe not so much right now as in recent years[0].
I get argumentative because I see a lot of promise. I like technical discussion about it vs. regular degradation, so I usually have something to say.
I see what you're saying: people not in the US should not be concerned. But that's not what the post is about and that's not what my question is about.
The question is whether or not what the Ethereum Foundation sold to US residents are securities in the SEC's eyes?
I'm not sure what you mean by "apply this retroactively". their legal argument for tokens being a security is established law. This press release has very little bearing on whether an company may or may not be prosecuted. Furthermore, ICO's are certainly not prima facie forbidden. The legal analysis will be a case by case basis, particularly asking whether a token would be considered an "investment contract".
Was thinking the other day: could someone prove by signing with some wallet keys or moving some coin that they control enough crypto wealth to be an accredited investor? Could you do an ICO that required that?
it's not just US persons. Germany has securities laws, France has securities laws, etc. I mean that German equivalent of SEC can go after those selling securities to Germans without following German securities laws
Serious question: Do you know any countries AT ALL that have no securities commission, or one that doesn't strictly regulate sale of securities, while at the same time the country allows formation of a company?
Being that token sales are international, it would seem there is absolutely nothing illegal about opening a company in that country and offering securities. Even if the owners of the company are US citizens. Then you have the company pay YOUR company as its main supplier, as opposed to its parent.
Israel does not regulate sales of securities to non-Israelis. This resulted in a huge binary option scam industry based out of Tel Aviv.[1] It got so big that it was 40% of Israel's financial sector. It became a political embarrassment for Israel. "Because this industry gives Israel such a bad name and inflames anti-Semitism, we must uproot the phenomenon." - Israel's top securities regulator. A law change is coming, and most of the binary options operators have already fled elsewhere. Cyprus and Bulgaria are popular.
For example can Israel's Securities Authority retroactively go after companies by classifying ICOs as securities? Or in this case, ALL securities can still currently be sold by Israeli companies to foreigners?
Also, what are the rules for Cyprus and Bulgaria? Where do you get the information about their popularity and their applicable securities laws?
> Being that token sales are international, it would seem there is absolutely nothing illegal about opening a company in that country and offering securities. Even if the owners of the company are US citizens.
Actually the US regulates companies that so much as offer securities to US citizens. Try getting an account with a forex broker that's based outside the US and you'll see what I mean. The CFTC doesn't limit itself to US companies.
I haven't seen the same attempts being made on other kinds of securities but the framework is clearly there as the CFTC is using it.
> or one that doesn't strictly regulate sale of securities
There's a reason why some crypto-companies (and not crypto actually) are based in the Cayman Islands (BitMEX), British Virgin Islands (Bitfinex), etc... Crypto Valley [0] in Switzerland is also gaining momentum. BTW, Fred Wilson wrote an interesting piece about this recently [1].
But the issue here is that if you plan to sell "tokens" to US nationals, you now know that you must play by the SEC rules. That or you shouldn't offer them to US individuals. Nothing rare about it, for instance CFDs [2] are financial instruments banned in the US, but traded without problems in the rest of the world. My guess is that ICOs will be like CFDs, offered around the world, but not to US citizens.
No, the issue is that it doesn't matter where you are based, if you offer securities to US persons, you have to abide by US securities laws. If you offer securities to Germans, you have to abide by German laws.
So once they realize they are securities this applies?
The main question is, are the exchanges considered foreign if the ICO is of a foreign company? How do you trade stuff if the securities are not transferrable?
What is an "unregulated company"? A bunch of geeks in a US basement could get prosecuted. A bunch of geeks in a non-US basement illegally selling unregistered securities to US persons might, too. And, if they did it personally instead of through a limited liability company of some sort, and they are found liable for their investors' losses, that will be a personal liability.
Something like a DAO contract that doesn't have an issuer (assuming the DAO had an issuer, not sure). Or a payout mechanism like zcash where the mining function pays out to founders wallets over time.
It seems inconsistent that ICOs are seen as securities whereas the underlying asset isn't. I think the differentiating factor is the degree of decentralization. If the SEC could shut down bitcoin they would. But they can't. So instead they'll go after ICO issuers who happen to be in the US. But many ICOs won't have to be in the US, or issued by humans for that matter.
Personally, the genie is out of the bottle. Value exists in the decentralized digital world, and it now has programmable properties. Trying to regulate securities has become the equivalent of regulating TCP packets. It can be done but at what cost..
> It seems inconsistent that ICOs are seen as securities whereas the underlying asset isn't.
I'm not sure why this would be inconsistent. I admit there's some confusion in the boundary between securities and commodities, but one can certainly have a hedge fund made up from currency or gold futures (neither of which is a security) and have ownership interest in the fund be a security.
(IANAL, none of this is intended to be advice or taken as authoritative.)
> But many ICO won't have to be ... issued by humans
If AIs are issuing ICOs, then I would imagine they would have to obey the law just like anyone else. Heck, very few if any securities are issued by humans -- they're mostly issued by corporations.
You could also think of bitcoin as an ICO. There's 21 million tokens that Satoshi sold, that people purchased with the expectation of profiting from. Boom, it's a security. If the financing model of a traditional blockchain is okay, but issuing tokens are not.. then programmers are about to get very creative with how get around loopholes.
> But many ICO won't have to be ... issued by humans
I mean the contract will be written by a person. But instead of having a central "issuer" (like a core team) the issuing mechanism is automated via the contract on the blockchain.
If a company makes a mistake, the SEC first goes after the company. "Unregulated company" sounds like "no company" [1]. In that case, the SEC goes straight after the individuals involved.
[1] Do you mean unregulated or unregistered? Unregulated means sole proprietorship. Unregistered could be an LLC or corporation that just never filed anything with the SEC.
This changes lots of things. You can't just open an DAO/ETH/BTC exchange, you need to be compliant with securities law and regulation. Those who operate as an exchange now but do not file the proper paperwork (which is expensive) should expect audits, fines, and shutdown.
AFAIK the SEC considers BTC a commodity but that doesn't mean it's unregulated. CFTC, IRS, FinCEN, and state regulations impose all kinds of restrictions on cryptocurrency that almost no companies are following.
No, they don't. That organisation only works in the USA, they can't do anything for 'the world'.
Let me clarify this: Just because the US SEC wants something doesn't make it happen on the internet. They can do things with governments and companies, and that's about it.
If some random hacker in Ukraine decides to use a ETH or BTC or smart contract or create a new coin, the SEC isn't going to be able to influence that. There is no point of control there.
Good luck building the "economy of the future" without the US banking system. There is a reason banking sanctions are the US's most powerful non-military diplomatic tool.
If you want to build an economy of the future using the banking system, you already have a much better option.
And that much better option is to just use the regular banking system.
Cryto currencies have massive costs and disadvantages, and there is no point at all to them if you take about the fundamental premise and purpose of them, which is decentralization.
Are they obliged to check this, though? The only checks I've ever seen are making investors tick a box on a webpage to confirm that they aren't a US citizen. Is that good enough, or are these ICOs expected to do more thorough checking?
Some ICOs have advertised their sales in the US, I wonder if the SEC will look on that as offering their tokens to US citizens, whatever the wording they put on their websites?
Still waiting for them to come down hard on a company as an example. In this article it says they won't bring charges in this instance, meaning The DAO, however; if you have taken part in an unregistered sale of securities recently as a U.S. "company", you may want to seek legal advice on how to proceed right away. Maybe a deal can be made with the SEC for "ICO"'s that have occurred recently. Or you may be advised to leave the U.S., which may be the best option.
> Or you may be advised to leave the U.S., which may be the best option
If you were in the United States and/or sold securities to an American investor, the deed is done. Skipping town to avoid the SEC only serves to turn your potential civil liability into a foreign fugitive case.
The SEC should show that it protects everyone's rights and not just large firms with piles of cash to pay to them and to pay expensive lawyers. Otherwise we have to assume that this is largely about trying to tax things.
The way they can do this is by making a real effort to update their technical, documentation, and regulatory programs.
Is there a straightforward way to do an Edgar filing that doesn't require a bunch of training? Is there a web page that clearly lists the requirements for these types of securities in plain English?
How much do the company registrations and filings actually cost? What is the basis for these costs? Because an ICO can be created at no cost. Are the excessive fees due to a lack of modernization or streamlining of the processes, or they simply bribes that line officials' pockets and protect the incumbent firms from poorly funded startups?
In recent cases, how would fees and filings have actually protected anyone? Does the SEC have technical staff or software capable of evaluating Ethereum contracts for validity or safety? If not, how does their regulatory effort provide any benefit, except as an opportunity for them to collect a type of tax and make it harder for startups to compete with large firms where SEC officials have friends working?
Comments like this are ludicrous. Do you really think the SEC doesn't understand distributed ledgers or ethereum contracts? Second, do you think anyone has technical staff that are capable of writing safe contracts in Solidity (Parity wallet would suggest not...).
In short, the idea that people must be incompetent because they're in the government is pretty ludicrous. The SEC is consistently one of the best technical organizations despite the fact everyone lobbies for them to have the fewest resources with which to do their job.
If you think all ICOs pass the smell test, maybe you haven't been fleeced enough in your life to appreciate scams when you see them?
Source: I run a crypto hedge fund and have spent a lot of time evaluating ICOs. Some of them are legitimate, philosophically sound ideas looking for funding and some of them are outright scams.
Actually hung out with a JP Morgan Chase banker the other day. Big into crypto. He said the SEC had no clue what was going on. They leave at 5 PM, and head home to wife's and kids, and mortgages.
While the "kids" are hacking, micro-dosing, and working 100 weeks. And they are all of 17.
It's not in their world. A 55 year old banker is not hacking solidity contracts at 3 AM. No way.
Why should one believe a 17 year old, working 100 hour weeks and micro-dosing (really, what does this have to do with anything?) knows or is more capable than a 55 year old?
For that matter, I'd be skeptical about what any bank employee says about the SEC lol. My mom had worked at a big bank for decades and is not always saying nice stuff... (But in context it's cus they make her life harder)
While there's probably something to the motivated young weirdo hacker theory (it was William Burroughs who said "only the young bring anything in, and they are not young very long"), I would also very skeptical what a JP Morgan banker has to say about the SEC. It's like asking a bank robber what he thinks of the police (hyperbole, I know. Bear with me). There's a bit of a natural bias there.
That said, JP Morgan has launched their own Ethereum fork and is working closely with the Enterprise Ethereum Alliance and (to my knowledge) Vitalik Buterin. It seems they're sincerely chasing this tech (dragon?) for better intentions or for worse.
Real adult activities and hacking are extremely opposed endeavors.
One can make time for both, but the prior probability is quite low that a person with a real adult life will also be on the cutting edge of technology.
If being on the cutting edge is microdosing and working 100 hours a week, to hell with that. Takes a rare person to prefer that to human interpersonal relationships and contact. Solidity contracts aren't going to love you back.
There are occasionally brilliant coders at 17 who produce things of beauty. It's wonderful to behold. They are rare.
Sometimes the fire of youth produces fantastic ideas that change our world. Their initial efforts, though raw and non-optimal, show a beautiful gleam that - through effort by more seasoned developers - is polished into something beautiful. These are more common, but still rare.
Most 17 year old coders however produce well intentioned awfulness that is technically poor, non-optimal, has security holes, and if it handles edge cases at all does so poorly - and that's the good stuff.
The kids work is valuable but mostly to them - they're still learning.. usually still learning the basics too.
I have been coding since I was 8. At 17, I had roughly 9 years experience. I built some really cool things with neural nets/genetic algorithms at 17, and they worked pretty well. However, I look back at the code I wrote and it almost brings me to tears how awful it is.
Right, exactly - I've been coding in some form since I was 5 (in BASIC and PEEK and POKES) but the stuff I did as a teenager was fun exploration play.
It's important to do that! That's great for a programmer and it will likely have some cool ideas... and hell, maybe a product or something will come from it.
Maybe if they had a few of those 55year olds with kids who know how to write a goddamn language interpreter without it being a train wreck, the DAO wouldn't have been the crisis that it became.
This veneration of the church of conspicuous effort is not a new idea. It's lead many people astray. Be careful.
Being competent is not exclusive with leaving at 5pm, having a wife, kids, and a mortgage. Nor is being 17, micro-dosing on psychoactive drugs, working 100-hour weeks or hacking at 3am.
In fact, I would argue that the correlation swings in the opposite direction.
The SEC has been dipping into crypto regulation since at least 2013 when they shut down BTCT for running an exchange that traded shares in various bitcoin mining companies. There are people there who have been working in the field for years now and understand it quite well.
Because the 55 year old is too smart to! It's not like those "kids'" are doing anything good at 3am either; their work seems to be flaky and fraud-prone. See: the DAO hack and recent Ethereum smart contract thefts to name just a couple.
Except the cost to the participants who later have wasted money because the ICO contract was exploitable...
At the current rate major losses are as perceptible as all successes. Maybe the industry needs some externally imposed speed bumps from SOME authority until folks can get their acts in gear?
I'd trust the SEC that one other agency capable of doing so. The SEC actually has a ton of technically capable people who understand and audit technology...they do as much for e-brokers, stock exchanges, high frequency traders, etc.
The only other agency capable of doing so would probably stockpile the exploits and use them to surveil the dark web to catch a million drug dealers and an occasional low level disposable terrorist.
I actually cannot name any successes, I looked for a few moments. I presume they exist.
For those thinking I am glib and downvoting, I am asking: Do you know of any? I searched, asked some friends in etherium. I presume they must exist in some for as we're no longer early-days with Etherium.
He's talking about how the government systematically Rob's from the future through inflation - in particular hurting the poor the hardest and creating lost decades and millennials along the way.
No, governments create inflation to satisfy an illusion of control and stability over the economy, and a side effect is robbing the poor (and giving to the rich).
Think about it:. If you're poor and spending 90% of income on survival, an increase in the cost of living has a more dramatic effect on the margin of survival than the identical increase in cost of living for someone who depends on 20% of their income.
Moreover, it's frequently said that inflation is necessary to combat 'sticky wages'... If you read between the lines, that's effectively 'cheating the poor of their wages'.
The common retort is that the inflation is good for the poor because it reduces the real value of their debt. But in the real world outside the ivory tower of economists who never were actually poor, the poor are offered high interest loans, which are only barely ameliorated by inflation. People who benefit from low interest rates are corporate C-levels, banks, and leveraged an margin investment (which is most of the "1%"
> the SEC should show that it protects everyone's rights
One sure-fire way to get the SEC to go absolutely ballistic is to hurt mom-and-pop investors. This is why the commission was founded [1] and why securities law maintains "accredited investor" thresholds, controversial as they are.
> Is there a straightforward way to do an Edgar filing that doesn't require a bunch of training?
Securities lawyers are a few thousand dollars well spent. That said, the SEC has online self-help resources [2] and an online filing portal [3].
> How much do the company registrations and filings actually cost?
It depends on how much you raise. Right now it's 0.01159% [4].
> an ICO can be created at no cost
Until shit hits the fan. Then everyone needs to hire a lawyer. An SEC complaint, on the other hand, triggers investigations and potentially enforcement actions paid for by the filing fees, amongst other things. It's a public good that helps keep companies honest.
> how would fees and filings have actually protected anyone?
The SEC is constantly litigating [5], launching proceedings [6] and helping resolve failed companies [7] on behalf of investors. Audit requirements stop lots of crap before they get too serious, too.
> Does the SEC have technical staff or software capable of evaluating Ethereum contracts for validity or safety?
The SEC doesn't evaluate filings for fitness, just completeness. Its mantra is disclosure and transparency. That lets investors come up with their own informed conclusions. Especially small ones who can't afford corporate lawyers to pull managers' teeth.
Why shouldn't mom-and-pop get the choice to invest in SEC regulated companies? If you like what the SEC has to offer, you can keep it. Taking away that choice seems paternalistic at best, corrupt at worst.
> Why shouldn't mom-and-pop get the choice to invest in SEC regulated companies?
When retail, i.e. unaccredited investors, get hurt (a) there are more of them and (b) it more often than not puts them into dire, sometimes existential, straits. The latter leads to political backlash and instability, e.g. the 1930s.
Basically, you must have a nest egg to act as a safety cushion before you can invest in risky things. This makes sense on another level, in that doing diligence on un-registered companies is expensive. That, in turn, drives a minimum practical investment size.
People are going to make bad investments, no matter how much the SEC restricts. There are a huge number of non-securities investments available, and people pour huge amounts of money in them. A government is never going to be able to protect individuals from their own bad judgment.
All these regulations do is drive up the cost of directly accessing public capital markets (at last count, $6 million to do an IPO), and contribute to growing income disparity [1].
> All these regulations do is drive up the cost of directly accessing public capital markets (at last count, $6 million to do an IPO), and contribute to growing income disparity
There's a fair argument in weighing the upsides and the downsides of registration requirements. But saying the downsides are "all these regulations do" is intellectually dishonest. Lots of scams get stopped, or at least quarantined, by these regulations. The speed with which the ICO market went from zero to bullshit only seems to re-inforce the prudence of these rules.
> $6 million to do an IPO
Having watched private companies spend much more than that to raise private capital, I think it's safe to say filing fees aren't the primary problem the public markets have.
It's not intellectually dishonest, because I'm commenting on the net effect. If people are getting scammed just as much, but from other sources, then "all they do" is the net effect on the negative side.
But fair enough: if you constrain this new internet sector, then you could conceivably reduce scams, just by virtue of forcing people into higher-friction areas of the economy, where less can practically be transacted. I'm sure Cuba has pretty low scam volumes by the same virtue.
>Having watched private companies spend much more than that to raise private capital, I think it's safe to say filing fees aren't the primary problem the public markets have.
Many private companies spend FAR less than that to raise private capital. To claim that a $6 million fee for entry is not going to disenfranchise a huge subset of the population is intellectually dishonest.
I'm not sure what a "non-securities investments" in the US securities scheme would look like. An "investment contract" is sort of the catch all category for everything that tries not to look like a security, but actually is one. If something is an investment, I can't imagine that it's not a security.
The Howey Test defines an investment contract more narrowly than you imply. People lose absolutely staggering amounts of money each year on bad investments. Money is like water. It flows around these regulations. The detours just add friction that slows innovation, and diverts capital to fees for legal/accounting professionals.
> The Howey Test defines an investment contract more narrowly than you imply
I mean, maybe?
An investment of money, managed by somebody else, with the expectation of profits. I feel like that covers most things we would typically consider to be investments. Aside from something like, "I bought this piece of art... as an investment." Maybe I'm just missing some obvious examples?
So this is kind of an oddly phrased question. It's probably better to think of things in terms of offerings instead of companies. One company might have different offerings using different mechanisms to raise money. And different people can participate in different offerings. Pretty much anybody can participate in a registered offering or a Reg A offering, often called a mini-registration.
A Reg D offering is however limited to accredited investors. With Reg D the SEC is basically saying "We won't require as much disclosure from you, but you'll have to raise money from a more sophisticated investor, ostensibly."
Securities is my go-to example of government regulation that has a net-positive market effect. Whatever we lose in market efficiency we more than make up for in market confidence.
If I were to apply the idea initially expressed to your comment it would be to say "why not give people the choice to invest in non-SEC regulated markets." If the effect is net-positive, than why would you have to force people to choose SEC regulated markets.
Obviously if it was not actually positive then not having the choice is pretty crappy.
For sure. Regulation without justification is "pretty crappy". The starting point should always be "no regulation". Occasionally, we override the starting point following the occurrence of massive market failure, where market forces simply are insufficient to apply the right pressure to actors involved.
In environmental regulations, we had the Love Canal which exposed a lot of school children to toxic waste. The market failed, we responded was CERCLA and the EPA.
In the case of securities regulation, the market failure was a big one in 1929. We responded with major legislation in 1933. And in general, that legislation has been a rousing success. But it's important to note that the goal of security regulation, of preventing crappy investments, isn't just to protect mom-and-pop, but also to prevent against another 1929. In my mind, it's really hard to argue that the effect of US securities regulation hasn't been a net positive.
Do you remember when it was legal to smoke in bars? Every bar was filled with smoke. Sure a bar could opt in to going smoke free, but basically none did because it would drive potential customers away.
I guess my point is that market forces prevented bars from being smoke free, and what you suggest would lead to basically no SEC regulated investments.
Are you genuinely asking what the value of the SEC is? I generally am pro low taxes but the crypto environment right now is so flush with scams that it explains itself
philosophically, because the working "mass" (to quote Alexander Hamilton in the Federalist Papers, 68, I believe) would not have the leisure time to be informed enough to make sensible decisions. i came from a blue collar family where everyone worked 2 FT jobs to make ends meet and making savvy investment decisions was hardly possible. ignoring the lack of financial education and experience, a good sales scam promising you riches after your 16 hour workday with 4 hours of household chores still to do, kids screaming, and no hope in sight, can be highly effective.
that said, look where the electoral college got us!!
so philosophy and reality are different.
in principle i agree, let people decide. in reality that leads to housing bubbles, global warming, donald trump...
I mean, this describes tax code and legislation in general. I'm hoping we can get text parsing models to the point that they can be utilized to simplify legal documents or even the entire US Tax Code. Like, Google Translate can translate Chinese to English decently, imagine if one day it could translate Legal Tax Code MumboJumbo to English as well? Or even cooler, if you could plug in your personal details (well, terrifying I guess) and it spits out all the loopholes you can exploit.
EDIT: I guess services like H&R block tried to automate this, but I'm thinking less like "oh you donated x dollars, make sure to put that on your forms!" and more like "Hey, you live in x city, did you know if you move a mere x miles away you avoid city taxes for y, county taxes for z, and can put a moving bonus for moving n miles!" or even "You are x type of contractor, consider switching your status to y because you will get these real number tax benefits."
The funny thing is, the IRS can already do this without any text parsing of legislation for domestic taxes. They have all the data and rule sets to completely automate the filing process.
In Australia the government has official tax software. It pulls all your PAYG information and auto-fills most of what you need. In NZ, people don't file taxes at all. They login to the IRD website and their tax data is populated. You can accept what's presented or file for corrections.
H&R Block and TurboTax actively lobby against the US IRS from creating the same type of filing system. Our entire banking system is 20 years behind the rest of the world:
> They have all the data and rule sets to completely automate the filing process.
My partner works in outside sales as an agent for a "Fortune 100" company, and the IRS in no way has all the data to automate any part of her taxes. From the way she's compensated, to the reimbursements, to the legitimate business expeses.. there's no way she'd get a good deal if she let the IRS guess at any of that.
Ironically ether & bitcoin started dropping last night around midnight. Makes me wonder if any SEC folks were involved in insider trading. Anyone care to speculate on what this will do to ether/bitcoin values? Does this concentrate interest in the existing players or does it hurt demand and speculation therefore depressing prices?
Nothing especially strange in the price data, just the usual ups and downs. There's a downward trend as of about 14 hours ago, but good luck pinning that on insider trading. Woo $222 to $215. That could happen any day. These charts seem to be a Rorschach test, but:
As far as what this will do, your best bet is to stock up on fortune cookies and astrology mags because they're probably about as informed as anything else on the matter. Preferably cookies, because at least you can eat those.
What exactly does this mean in terms of monitoring? You could cash out to another virtual currency and sit on it for however long you'd like without any trail tied to you.
SEC clarifying some guidelines makes it easier to codify proper token sales like the upcoming filecoin one done by coinlist.
Scam tokens were never going to be the big driver of Ethereum success, official acknowledgement of it as a valid platform was.
This goes another step in that direction, particularly as it avoids clamping down on cryptocurrencies like Ethereum or Litecoin, which the IRS has deemed as property.
Initiatives like the Ethereum Enterprise Alliance are also contributing, so the more respectable it appears, the higher the price is likely to go due to higher expected future utility value.
This is a serious question to the lawyers on HN. In your non-advice way, can you tell us your opinion on the following?
So given that now we have a serious precedent for considering all ICOs aa securities, what are the steps a company needs to take to make sure their ICO is legal under US LAW??
1. Does it need to register the ICO somehow? If so, how exactly are the securities registered?
2.!What regulations apply now? Do the 1933 blue sky laws apply and Regulation D and the usual exceptions - including JOBS act crowdfunding provisions - apply?
3. Can anyone buy the ICO or does the company now need a private placement memorandum?
4. And even so, isn't the secondary market for the tokens constitute "transferring" of securities? What does a company need to make sure all that is legal, short of fulfilling all the reporting requirements of a Public company?
Basically what happens now to all the ICOs done so far by companies like Brave? What are they going to do?
Look at the title of this article and tell me - is it accurate?
I'm not terribly happy with the decision, though I can't say I'm surprised. I enjoy the drama of the Wild West that is Ethereum and the rest of the cryptocurrency ecosystem. Minimal regulation encourages innovation, while regulated markets can exist for people who want stability and certain guarantees to prevent fraud (or at least make it difficult).
I wonder what would happen if financial regulations became more "optional". I.e. the SEC exists to provide guarantees if a given company wanted to get the SEC's seal of approval but does not enforce most regulations on entities that don't seek SEC approval (and thus investors would know such entities are riskier). I suppose eventually a "too big to fail" company would avoid regulation and consequently go under, and that would be the end of that.
The regulations put in place by the SEC are not to help companies, but to protect U.S. citizens from being scammed all the time.
Sure, the wild west is fun, but if you are in an economic ecosystem where a large percentage is comprised of scammers/fraudulent companies, then it will be detrimental to long term success.
Of course. We don't restrict the rights of the entire population to engage in voluntary interactions to preempt crime. We punish actual criminals to deter other would-be criminals, and leave everyone else to be free.
We don't require a publishing license because someone might use their right to free speech to libel someone else. We punish the libeler.
You realize that's not in the slightest bit true, don't you?
For example: Under contract law, there are certain rights that _you are legally not permitted to give away_. You can't actually sell yourself into slavery. You can't contractually disclaim gross negligence on your part. You can't have a contract that unilaterally benefits one party without consideration provided for the other. You can't accept a contract while intoxicated. You can't contractually agree to something that is a crime. ... the list goes on.
>You realize that's not in the slightest bit true, don't you?
What isn't true?
>For example: Under contract law, there are certain rights that _you are legally not permitted to give away_. You can't actually sell yourself into slavery.
A court will void contractual provisions like this, based on a comprehensive body of case law that establishes what constitutes consent. This is a universe away from what you're defending here, which is a federal agency prosecuting individuals because they entered into some investment transaction without 'permission' from said regulatory agency.
> Of course. We don't restrict the rights of the entire population to engage in voluntary interactions to preempt crime.
I gave one example of many of the ways in which we absolutely do restrict the rights of the entire population to engage in voluntary interactions to preempt crime. We limit the types of contracts that everyone can engage in, to prevent a subset of them that would be used abusively. As another example, we place restrictions on freedom of assembly -- voluntary interactions of groups of people -- based upon location and time of day because of the potential to create a disturbance, not the fact of having done so. And so on.
>I gave one example of many of the ways in which we absolutely do restrict the rights of the entire population to engage in voluntary interactions to preempt crime.
Yes I can see how you interpreted my comment that way. I meant we should not do that. In writing it, I was thinking along the lines of "you don't do [some unethical thing]" as a normative statement, not a description of what you don't do. The wording I chose doesn't make that at all clear, so your interpretation is understandable.
>We limit the types of contracts that everyone can engage in, to prevent a subset of them that would be used abusively.
Like I said: A court will void contractual provisions like this, based on a comprehensive body of case law that establishes what constitutes consent. This is a universe away from what you're defending here, which is a federal agency prosecuting individuals because they entered into some investment transaction without 'permission' from said regulatory agency.
Extreme libertarian views like yours have been rejected almost everywhere in the world. Maybe it's your opinion that allowing scammers to manipulate people is their basic right, but no one seems to share that sentiment.
Can't we simply punish the scammers, so as to warn others not to do the same? Generally speaking the regulation of the markets doesn't do all that much to protect individual investors. We just (sometimes, rarely) punish people after the fact. How many regular investors got screwed in 2008 and how many people went to jail?
"Punish criminals to prevent crime" is ultimately a fear-based strategy. For it to work, your potential criminals have to be frightened enough of the consequences of getting caught that the rewards do not outweigh the risk. It works well when the rewards are small, the probability of getting caught and punished is high, and the punishment is considered sufficiently odious.
You can begin to outline the conditions under which it breaks down: if the probability of getting caught and punished is small, if the rewards are high, or if the punishments are insufficiently threatening. Investment scams and other organized crime is a great example. The rewards are high - millions and millions of dollars. The chance of getting caught are low - a lot of what you do will appear legitimate, and a lot of what you are doing wrong rests on intent. You have to separate the self-deluded from the con men. And if you do get caught, your punishment might be relatively light (a few years in prison as a nonviolent offender), and if you are clever with how you hide the money, you might get to keep most of what you steal.
In some sense, the SEC is like cops patrolling where they are most worried about crime. You are changing the math by increasing the risk while decreasing the reward, which dissuades more criminals than ineffectually punishing a few while others prosper.
You're not even representing my view accurately. My view is that scammers should be punished, not the entirety of the population on the premise of preempting crime.
Rejecting a person's argument on the grounds that it's "extreme [insert label]" that "everyone rejects" is not constructive.
A couple examples: restricting them from soliciting investment without going through a $6 million compliance process for gaining approval to do an IPO. Restricting people from engaging in anonymous securities transactions with each other.
This is not a sentiment that can be proven wrong. It's a statement on basic rights.
And history shows that attempts to control complex industries with cookie cutter rules imposed from on top create the most dysfunctional industries in the economy, namely finance, pharmaceuticals, and healthcare.
Much like vaccines, meat inspection, and building codes, we've forgotten what it's like without them. We (Great Britain and USA) have been making securities regulations for 400 years.
The important lesson of securities regulation is that it helps the "good" guys more than it hurts the bad guys.
When I buy 100 shares of PZZA, I want to be reasonably confident that Papa Johns is cooking pizza and not the books. That confidence, or trust in the system, reduces friction that helps both buyers and sellers of securities.
A case for mandatory vaccination can be made, as it addresses public health threats, which are negative externalities. Meat inspection cannot. You can choose to eat only government certified meat and not suffer any ill effects from non-certified meat being available on the market.
Just because you want products certified by a government body to be safe doesn't mean you have a right to force others to live according to your standards.
> A case for mandatory vaccination can be made, as it addresses public health threats, which are negative externalities. Meat inspection cannot.
Meat inspection deals with a different failure of ideal markets than direct externalities, to wit, information asymmetry. However,the market inefficiency produced by information assymetry itself has negative externalities, so it's not unrelated.
People, left to their own devices, manage complexity effectively.
For example, most people don't understand how microprocessors work. But this is addressed through an effective and spontaneous process of delegating responsibility.
The government can play a positive role in helping manage this complexity, by providing certification programs, and freely available public information. What it should not do is constrain the actions of individuals, by mandating that a particular standard be used.
There is a massive negative externality for allowing scammers to run free in a situation where the upfront ability to assess fitness-of-goods is lacking.
The cost of dishonesty, therefore, lies not only in
the amount by which the purchaser is cheated; the
cost also must include the loss incurred from
driving legitimate business out of existence.
That's not an externality. An honest business is not entitled to any customer's business. If the customer wants to squander their money away at the casino, leaving them with no money to spend at the honest business, they have that right. It's their money, and they are not obligated to spend it at the honest business.
And in any case, the market for lemons is a theoretical exercise. It does not actually happen in real markets, because there are various market mechanisms that emerge to address it.
> And in any case, the market for lemons is a theoretical exercise. It does not actually happen in real markets, because there are various market mechanisms that emerge to address it.
The "market mechanisms" you speak of are government regulations establishing minimum standards and forms of redress (e.g., and most on the nose, lemon laws).
I think this is a special case of Gresham's law that bad currency drives out good. The problem is information asymmetry. You may be trying to buy SEC securities, but if they are swamped with fakes, it causes huge friction costs to figure out whether to transact and that hurts the market. Only experts (accredited investors?) have the resources to play.
Everyone is not worse off. We have seen rapid innovation in the Bitcoin market, toward far better risk management and security practices, in the absence of regulatory restrictions. Some speculative claim that everyone is worse off if they're free doesn't justify robbing someone of their rights.
Of course. Anyone that scams should be punished. That does not require introducing a license for engaging in some consensual activity, and prosecuting anyone that does this activity without the license. This fearful attitude that will sacrifice the liberty for the promise of security will leave you with neither.
Which is why most publicly-traded companies would get the SEC seal of approval in my hypothetical scenario--institutional investors (which I think own most of the U.S. stock market) would demand it.
It might not change the overall ecosystem that much.
Many companies doing ICOs are already locating themselves in friendlier jurisdictions, and making some effort to block U.S. contributors.
What efforts are these? All I've seen are checkboxes on their web site making the user tick a box confirming that they aren't a US citizen.
Geo-blocking US IP addresses won't work either, because an ethereum contract can't refuse a transaction based upon its source IP address (it doesn't know it). So if an ICO publishes their ethereum contract address online (e.g. via a twitter post), they are implicitly advertising to US investors.
The most serious effort I've seen had a geoblocked website that worked with a Chrome plugin. You could get around it, without even using a proxy, but only if you could understand the smart contract code and figure out how to prepare the data it required.
To my way of thinking, if you're sophisticated enough to do that, you're sophisticated enough in blockchain matters to make your own investment decisions.
It's a common fallacy that people think "I'm good at X, so I must also be good at Y" It seems to afflict techies the most, somehow we think just because we can understand computers, we must therefore be skilled in other domains too, like investments...
I'm not claiming that being good at computers means I must be good at investing.
I'm claiming that if I understand smart contract code, I'm good at evaluating a white paper's technical claims about a project being built with smart contract code.
Also I'm claiming this makes me better prepared to invest in these projects than, say, a cardiologist. But the SEC would be perfectly happy to let the cardiologist invest, while restricting the programmer who actually understands the industry.
They're already doing it. It's near impossible to do it effectively, if the contributor is comfortable interacting directly with smart contracts, but they're doing things like geoblocking their websites, making you click a box saying you're not in the U.S., etc.
At one point, financial regulations were somewhat optional. The SEC was created to put an end to securities fraud, because it turns out that having no rules on speculation is a bad idea.
Do we need to repeat history, just to prove that financial regulations are a good idea? We had a Depression once. I'd not like to do it again.
Indeed, and yet the market cap of these cryptocurrencies has grown much faster than that of almost any company you could name over the last few years. (Yes, I know that's an apples-to-oranges comparison, but apparently a lot of people, myself not included, are willing to take the risk.)
I believe there are different tiers to some securities regulations, right? I seem to remember some sort of "professional investor" status you can apply for, that lets you participate in certain private offerings. And I believe the different marketplaces (NYSE, NASDAQ, etc) also differ in the requirements, although I guess these would come on top of common regulations required by the SEC.
A fundamental problem with different tiers of regulation is that people tend to misjudge their competence. Look at the list of Madoff victims, or that congressman who got a bunch of his colleagues to buy his Australian healthcare micro-cap. And while it may feel almost like justice when a congressman fails in such a public and spectacular way, for everyone who deserves it, there will be thousands of people fleeced by corrupt "investment advisors" pushing scams onto unsuspecting victims.
It's easy to say it's these people's fault, and "Americans shouldn't be treated like children". But that sort of just-punishment-for-stupidity rhetoric implies, under the most gracious interpretation, that people people are capable of learning, and that such scams would therefore only be a transient phenomenon. History shows pretty well that this is not the case: new stupid people are born every day.
The less charitable interpretation is that there's just nothing wrong with exploiting peoples' stupidity to take their money. In that case, I wonder why this logic doesn't apply to physical capability as well: we don't need police, a real American can defend his property on his own. And if he's too old, or weak, or not organised enough to always have at least as many defenders around him than there are attackers, then he deserves a good beating...
People tend to not enjoy living under such conditions, so they start outsourcing their protection, both physically and financially. It gives them peace of mind, and it's also extremely efficient in terms of economics: "Hey, why don't we get together, hire someone who specialises in understanding investment risk, and tells us if this company's CEO is actually a convicted felon who has already bought the one-way ticket to Bolivia."
...and after a few rounds of professionalizing this concept, you end up with the SEC.
There's also a fundamental misunderstanding of the term "risk" at play in these debates:
There's the usual "risk" of investments that, in a functioning market, should be almost linearly (anti-)correlated with the potential reward. This is the risk that's meant in all those formulas.
The risk of the Wild West is that you're falling for a scammer. This is a risk that behaves rather differently than the other risk.
The first, good, reward-promising risk is what one might call the uncertainty of things you cannot (practically) know without trying: will people enjoy this movie, will these scientists come up with a drug that works. You can make educated guesses, and the market serves to incentives people to guess well, and therefore allocates money to the most worthy causes available. Importantly, regulations try to make all relevant information available to everyone, and the idea is that all that's left to do is having good intuition, and you may be better at that than all the investment banks combined.
The second risk, that of falling for a sweet-buzzwording scammer, is a risk that only exists because you don't know all the relevant information. But that information exists, and others have it. In such a market, you're almost sure to lose your money, because it is possible to eliminate such risk if you have enough money to invest: Others, who have more resources than you, may just send somebody to the company's address and discover that the CEO has a face tattoo of a Swastika and has his grandmother generate random numbers by flipping coins.
When DAO originally made the HN Front page I made this comment [1] calling DAO snake oil and suggested people could lawfully operate their own "DAO" as an Investment Club LLC, specifically Investment Clubs can be exempt from securities laws [2] subject to the restrictions I outlined in my prior comment such as a limit of "100 tokens" (i.e. 100 members to make future investments).
I actually addressed this question a year and a half ago as well [1], where I defined the DAO as blockchain based Investment Club Software. In otherwords what you are calling the "autonomous application", that wouldn't be the LLC but the Software that manages the Investment Club LLC. Note: the Wikipedia article for "investment club software" that I originally linked to no longer appears to exist.
So it's the shareholders who are responsible for forming an LLC? How can they prevent non-members from becoming partners in the DAO, given the software is autonomous and has no permission controls?
First LLC's don't have "shareholders" the owners/equivalent of an LLC is a Member.
The process would basically be as follows:
Say you form an Investment Club LLC, you create a smart contract/ICO with up to 99 tokens, and purchasers of the ICO tokens become a "member" of the LLC.
Thereafter, the Investment Club LLC members could create a smart contract/investment opportunity, but you would only be able to vote/invest if you are a token holder...you say there are no permission controls but this was exactly how the DAO was marketed to function, buy a Token for DAO and you could participate/vote on future DAO investment opportunities.
So you're suggesting that instead of Slock.it developing the smart contract, an LLC should have? How do the token buyers qualify as members of an LLC when they're anonymous buyers with no legal affiliation to a LLC? Or are you saying the LLC wouldn't be a traditional one with a legal identity and identification of its members?
Assuming that would be unwise. In general, US securities laws cover anything that looks or works something like a security. There have been clever attempts to get around this before. They didn't work.[1]
You're right, but in the case of things like Storj and Sia, for instance, the ICO token is used to pay for the services offered by the network. What it really is, is a tradable pre-sale. It's as if you could trade the perks offered by a Kickstarter. I'm not sure if that would make it exempt or not, but it is an interesting legal question.
How much paid use does Storj or Sia have? Very few, if any, have bought into these tokens to use the underlying service. It's mostly "expectations of future profit", especially considering many of these tokens is described as having no use. The idea seems to be that useless tokens can not be considered securities, which seems as likely as a cop must answer truthfully if he is a cop.
Ya, I would expect the SEC to take that position. But it seems like a subtle legal question, that has the potential to turn all kinds of clearly non-security products into 'securities' in the eyes of the law. Does standing in line to buy iphones on the day of release so you can sell them on eBay constitute buying a security? What about Air Jordans? Etc...At some point, the definition broadens to any purchase with the expectation of profitable resale, which is quite broad indeed. I don't think any court would allow such a broad interpretation of the SEC's power.
Sure, but that's (literally) their work to define that boundary, and it is quite clear on which side of the line they intend ICOs to fall.
Those where the outcome is based on the work of others are clearly securities. I would argue the outright useless ones are more a form of gambling (lottery tickets have no other uses and and the outcome can not be controlled) but then there's the element of getting your friends and neighbors in on it that complicates things.
How it's being sold is likely what matters, and the websites can be pretty toned down compared to their forums and Twitter feeds.
Tickets to concerts, airpods, condos in london and tulips are subject to scalping and trading over MSRP. So even though people are trading service vouchers or physical objects, they are not a security just because a market has developed over their trade, speculative or not.
True, but that hardly seems material. I'm an investor in Sia, I like the project. Whether or not it's implemented as an Ethereum token is nearly meaningless. To be quite honest, it'd probably be better if it was, that way it could focus more on its core competencies.
The term token is a generalized term to talk about the tradable asset on a blockchain. Bitcoin is the token on the Bitcoin blockchain. Ether is a token on the Ethereum blockchain, currently at a lower level than any of the ERC20 smart contract based tokens, but it's still referred to as a token.
It does seem to be ambiguous. If you read the qualifications in section III: https://www.sec.gov/litigation/investreport/34-81207.pdf, they seem to apply to voucher tokens as well. Especially "A reasonable expectation of profit".
This seems like an important distinction, i.e., between an ownership token and a "voucher token," assuming the latter is a token that gives the holder the right to some service. Curious how a groupon isn't a security if a voucher token is.
* the investor has the expectation of profits, which profits are expected to arise solely, or substantially, from the efforts of the promoter or third party.[1]
That pretty much covers all "make money fast" schemes.
IANAL, but a security is profit-sharing/right to $-related things, like stocks and bonds. Tokens that are used to make purchases within applications/networks are not securities, for example in the Storj example above, tokens are bought to purchase storage, and there's no implication of organization profit-sharing or appreciation of value, etc. While some people may speculate on the growth of the network and purchase such tokens, their purpose is to purchase storage capacity from the network.
As a hedge fund manager who just added a token to one of our projects (to help create a resource to combat extremism naturally), I wrote up my thoughts here:
A general rule of tokens is that if they promise a profit they are a scam and if they promise a share of profits a security.
The closer they are to API keys the better in terms of non-securitability.
It is likely that the token usage will gradually bifurcate between those that are "property" and scarce digital assets like Bitcoin (or rarepepes) and those that are API keys.
For our charitable project we've tried to incorporate elements of both to create an interesting token economy to build a useful resource.
Hopefully there will be more of these attempts, both registered as securities and that fall outside of this classification.
Why? Nobody is forcing crypto currenency on anyone. I get that registered companies might have some other deal with the govenment and with hacker organisations, but a free and open (and non-country-bound) system should really not be 'managed' by some random organisation in a random country.
The SEC exists to prevent fraud. It's about people having a choice between truthful investments. These companies are allowed to operate as they claim they are with relatively little oversight. What the SEC regulates is a company claiming they will use investment to do X and then the company does Y or keeps it for themselves. Which is also known as fraud. Like the DEA (an example of something unjust), Secret Service, and ATF, the SEC is a specialized branch of law enforcement.
What these personal choice fundamentalists forget is that lying is wrong. And when you lie about what you are going to do with someone's money, that's a form of theft, e.g. fraud.
Same reason SEC exists. Because many people are easy to manipulate, and plenty of malicious people out there will convince (not force) them to invest in their ICO, etc.
Then we should limit who people can vote for, since voters are so easy to manipulate into voting against their own interests. The basic principles of liberal democracy assume that a person has an absolute right to make decisions for their own life. These kinds of restrictions are unconscionable restrictions on the right of free people to their personal autonomy.
There is simply a massive difference between the theory of democracy and its actual implementation. Your personal autonomy is restricted by the government, massively, period, generally for everyone's own good. They decide what and how much medicine you can put in your body. Whether you can gamble, and where, and on what, and how much. What drugs you can take. What speed you can drive. Whether you must go to school or not based on your age. Which food you can buy at the supermarket. What you are allowed to see on television. Where and when you may protest. What behavior is allowed in public and what is not. What speech is considered 'free' and what isn't. What machines you may operate and under what circumstances. Which financial transactions you may or may not participate in and the terms of those transactions. The type of home you build and it's specifications. Which countries you may or may not enter and under which circumstances. Whether you are allowed to work or not. It's just the way things are.
But it looks like things are changing with regards to finance.
Because now, it is going to be much more difficult for the government to regulate your financial activities.
The "way things are" is changing, and changing for the better.
Don't like it? Then the government can send in its men with guns and attempt to stop it.
The technology is getting better and better, though. So it will soon become extremely difficult for those men with guns to do anything at all with your untraceable, untraceable, and unstoppable financial activities.
May the best group win. The government will need all the luck it can get.
>Your personal autonomy is restricted by the government, massively, period, generally for everyone's own good. They decide what and how much medicine you can put in your body. Whether you can gamble, and where, and on what, and how much. What drugs you can take. What speed you can drive. Whether you must go to school or not based on your age. Which food you can buy at the supermarket.
These restrictions violate people's basic rights and are to the material detriment of society at large. The more of a regulatory burden is placed on an industry, the more dysfunctional, bureaucratic and nepotistic it is.
Basic rights are defined by various charters, constitutions, international agreements, and that's about it. If you find that one of those restrictions contradicts the ones applicable to your country and legal system, you have a good shot at changing it. (Point in case: gay marriage, and other Supreme Court rulings.)
As for all other rights, those are determined by the government that is democratically voted in. If most people, via their elected representatives, decide that you shouldn't be allowed to speed, or smoke crack, and it's not constitutionally guaranteed, then it's not a basic right and it's not your right at all. Maybe moral right, but that depends on highly subjective morals and might therefore still get you into legal trouble.
Best course of action is probably to find a country with a legal framework that matches your morals. If there's no such country, perhaps the time for these ideas hasn't come and you want to lobby for them to be recognized as basic rights, since right now they're obviously not.
>Maybe moral right, but that depends on highly subjective morals and might therefore still get you into legal trouble.
We're intelligent human beings. We should be able to arrive at some kind of consensus on what our moral rights our, through rational discourse. That's what I'm trying to do right now. My argument starts with what "the law" means:
> We should be able to arrive at some kind of consensus on what our moral rights our, through rational discourse.
In the commonly used sense of the term, the scope of morals by far exceeds what you'll get even reasonable people to agree upon. "Rational discourse" means that you need enough of an uncontroversial set of base facts that either party is willing to work with. I don't think we have enough of those to derive a single valid system of morals without injecting other, subjective, more controversial opinions in the process.
Say, you have a basic statement such as "All people should be equal", something that most can agree with. By itself, this isn't actionable, and won't determine how to handle a situation unambiguously. You could come up with a libertarian doctrine that all people should be given the same treatment regardless of their background or current situation, or you could come up with a socialist doctrine that disadvantaged people should get extra support to balance out unequal origins and misfortune. Or anything in between. None of these can be rationally discarded, because there's not enough source data to come to any conclusion to begin with. If you attempt to expand the set of source data, you will find many who disagree with you. That's why it's subjective.
That said, trying to distill what basic facts we do have, so that they can be worked with in a constructive fashion, is a commendable goal. Good luck!
You do not have a right to speed on public property because others share ownership in it, and thus have a legitimate right to contribute to the rules that govern its use. If you owned your own private track, you would have such a right.
The basic principle of liberal democracy is that we have an absolute right to personal autonomy unless we violate other people's equal right to the same.
Making it illegal to offer a digital token for sale to other consenting adults, without approval from a central authority, is unconscionable.
You interfere with my right to personal autonomy by bankrupting yourself throwing good money after bad in stupid investments, leaving yourself destitute and in need of additional public services.
Or do you also intend to claim that the poor should be allowed to die on the streets as punishment for not being rich?
No one has a right to force you to support someone who made themselves destitute. You're using one infringement of personal autonomy to justify another.
I don't believe all taxes are an infringement on freedom. A tax on natural resource consumption, and to a lesser extent, immovable property within a state's jurisdiction, can be morally justified in my opinion. I also don't have a problem with a head tax, conditioned on the punishment for noncompliance being exile, rather than imprisonment. A tax on private transactions is an infringement on liberty in my opinion.
On that note, it's interesting that the first 'War on Drugs' used taxes on private transactions as its avenue to prohibition. Since the government at the time didn't have the Constitutional authority (this is before the Supreme Court was utterly corrupted by politics) to outright ban drugs, what it did instead is require that all targeted drugs pay a stamp tax, and then simply refuse to issue the stamp. This shows the prohibitive nature of taxes on private transactions.
Trying to protect everyone all the time from everything quashes innovation. I've lost money in ICOs. I lost money in the DAO, too. I'd lose that money 10x over again to prevent the SEC from squashing this nascent space like this.
Should not the individual be held responsible for making a poor decision? Taking the stance that we should be protected from every possible bad thing that can happen is a recipe for economic disaster. Especially when the one offering such protection is the one that manipulates us the most.
Is there some way we can just replace these kinds of threads with a link to some canonical thread about why the concept of security laws is fundamentally unjust or unwise? This discussion really has nothing to do with the topic at hand.
This discussion really has nothing to do with the topic at hand.
It's possible to veer off-topic in a substantive way. Some of the more interesting HN comments have been spawned that way.
Whether subsequent comments will be high-quality depends on the topic and the amount of energy thrown into the conversation, but fresh perspectives are good as long as people are introducing them productively.
Threads like this shouldn't be auto-collapsed. One of the main reasons people write quality responses in an off-topic conversation is because it will be seen. Take away the eyeballs and you take away the quality.
Then go somewhere else. Why do you get to declare what is valid as discussion or isn't? If people are engaging in the discussion, obviously they value it.
He's suggesting that arguing whether SEC law being just/constitutional/what have you. Regardless of your position, is largely off topic for these posts.
It would be better to just link to the argument somewhere else than derailing this one.
I remember after the ethereum flash crash how many people were saying "screw decentralization, I'm getting a lawyer". Those sort of values go out the window when the person who loses, loses a lot. The laws are in place for the benefit of all
There's no room for buyer beware? I mean c'mon. People participating in ICOs are still pretty sophisticated technically. Seems like we're regulating interactions between well informed consenting adults.
Every one of these scams that have imploded, including the DAO itself, have had participants crying out for interventions. That should speak volumes about the amount of consent involved (and indeed the sophistication).
Citations? I know of maybe 5-10 coins that have been hacked or imploded in a fraudulent way due to the intrinsic nature of the coin, out of thousands created
There are hundreds of projects that have held token sales. The vast majority have not imploded.
For what it's worth, I think the majority will fail to produce a profit. That's okay. A high failure rate is fine in an emerging industry. Venture capitalists can easily tolerate 90% failure rates for example.
DAOs and the JOBS act for sure open up opportunities for crooks to do some "boiler-maker-esque" stuff. I cannot disagree with that. And I do not doubt that gullible people can be hoodwinked by bad people. I would say that fraud and property theft can be handled on a case by case basis. That protecting hypothetical gullible crypto enthusiasts at the expense of the entire industry and putting up huge legal barriers to entry is the wrong move.
In another thread commenters speculated that ICO hacks were coming from inside jobs.. does this new SEC report change how the government would handle that? Is fraud of securities different from fraud over imaginary coins now?
You can't change the thirst for freedom inborne in every man via laws. This will only make cryptocurrency slip more easily through their fingers and galvanize efforts to avoid oversight.
The only people directly affected are people who have offered an "initial coin offering" (ICO) of pre-mined coins from a new cryptocurrency, in the U.S., without registering the offering with the SEC. This ruling is looking at ICOs specifically, not just anyone who has bought or sold cryptocurrency.
> The SEC's Report of Investigation found that tokens offered and sold by a "virtual" organization known as "The DAO" were securities and therefore subject to the federal securities laws. The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies.
> The agency has decided not to bring charges in this instance, or make findings of violations in the Report
So they aren't going to bring charged to the creators of The Dao. What about the other dApp's based in the US that have already ICO'd (BAT, Augur etc.)? Also, if a company successfully files/gets approved by the SEC, does that mean that NASDAQ can now list tokens?
AFAIK the SEC only cares about securities sold in the U.S. I'd imagine this incentivizes a lot of Token issuers to leave the U.S?
I don't understand exactly what this implies. If DAO is a C Corp, will it pay taxes on USD equivalent value of their coin holdings (150$ million going by the report?), or only on what they ultimately convert to USD? What if they use the coins to make purchases directly? If I own a C Corp, can I hide earnings in USD from being taxed by exchanging them for coins I make using some open source block chain?
I'm uncertain of how much value the SEC provides. Problems they fail to solve:
* High brokerage fees
* Poor-outcome annuities
* Penny stock trading
* Risky options trading
Tokens are fraught with fraud, but the impetus for research is upon the individual. I fear that regulating this will stifle innovation with little benefit to end-consumers in terms of safety, because people will still get swindled out of their money by other legalized means.
Isn't it also illegal to buy unlicensed securities? Couldn't the SEC also prosecute individuals who simply bought into these as unaccredited investors?
Value is going to dip. They are speculative. Investments.
The big supporters of cryptocurrencies were under the delusion that they were exempt from financial regulations. Today the SEC reminded them that securities law applies to everyone.
This makes it significantly harder to invest. Investors getting out will cause a drop in the coins' value.
I am not sure how that exempts anyone from anything. If you, as a Swiss company, issue tokens that are securities according to country X and sell them to citizens of country X without going through a securities offering, you are violating that country's securities laws and the fact that you are based in Switzerland I don't think is relevant
I was watching a YouTube video of a popular Ethereum blogger and he mentioned that one of his acquaintances was charged with tax evasion for not reporting his cryptocurrency income. This person thought he could just pay what he owed and be done with it. Unfortunately, it doesn't work like that. Once they catch you for tax evasion you'll pay whatever you owe in addition to facing tax evasion charges.
In particular, they apply the security test: "did investors invest money with a reasonable expectation of profits derived from managerial efforts of others?" Since DAO was a wisdom-of-crowd VC fund, the answer is a clear YES.
On the other hand, they are careful to say that other token sales MAY be securities but will be treated based on their specific facts and circumstances.
My takeaway is that this doesn't change anything. The SEC is proceeding cautiously: applying securities law in clear-cut cases, "studying the effects" generally.
It's also not a bad thing to comply with securities regulation. FileCoin is doing quite well selling only to accredited investors on CoinList.