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SEC Shuts Down Munchee ICO (techcrunch.com)
374 points by LearnerHerzog on Dec 12, 2017 | hide | past | favorite | 344 comments



Honestly, i'm kind of annoyed by everyone offering an ICO for [insert irrelevant product here]. It's creating a misleading advertising scheme built on top of a current tech _craze_ that will likely leave a lot of "investors" out of money.

The problem is that you're giving money to a relatively unknown company while speculating that the company will create inherent value. Unlike with stocks, you don't have ownership in the company or any voting rights. There is nothing stopping the company's creators from distributing the ICO money to themselves (there might be a board, but since the company isn't public who knows who the board is).

In this case the SEC is right to step in so there aren't a ton of unregulated securities going around and a lot of consumers potentially getting screwed.

Even with cryptocurrencies like Bitcoin, it can be scary. You're literally getting into the ForEx market, which is known to be one of the riskiest markets in existence. With other currencies, at least they're backed by a government that (at least at least attempts) to regulate it's value and protect it from manipulation. With bitcoin, I saw that 40% of all coins in existence are owned by less that 1,000 people. How do we know that the current price inflations aren't a manipulation (or collusion) to jack up the price, sell for USD, then crash the market? It's not illegal/collusion because Bitcoin isn't regulated.

This is definitely a rant, but I have some serious concerns as to where this market is going. Would love to hear other's thoughts.


You mean an ICO that operates in an extremely competitive market, has no product to speak of, and doesn't leverage decentralized networks in any way, shape, or form isn't a good investment? Who would have thought?!

> that 40% of all coins in existence are owned by less that 1,000 people

That was a terrible piece of reporting. The reality is that 1000 addresses hold about 40% of coins. Addresses are not identities; one person can have as many addresses as they want, and businesses (like exchanges) may have a single address that holds the vast majority of their cold storage. The upshot is that we don't know how well Bitcoin is distributed.

Some of those large addresses are exchanges, and are indicated as such on many sites, or held by institutions. They hold large amounts of coin, yet represent the holdings of thousands of individuals. There are also several large addresses that are very similar (i.e. each containing a given number of coinbase rewards) and are very likely to be held by a single early miner. There are also some number of "Satoshi" coins held by the creator of Bitcoin. Some estimate that Satoshi mined ~1million coins, though there is nothing definitive about this figure. There are probably at least 100,000.

Bitcoin market 'manipulation' falls into two categories: 'legitimate' manipulation that requires buying and selling coins in a bid to move market sentiment in their favor, and 'illegitimate' manipulation that requires inside knowledge of an exchange, such as full view of orderbooks for stop hunting, etc. The first kind exposes the manipulator to significant risk (especially from other 'whales', and is far less lucrative than many would believe. For a net gain, they must move the price in the opposite direction from their net buys/sells. The 'illegitimate' manipulator can only affect particular exchanges (insider trading, or else hacking), and thus you can choose an exchange you trust the most.


Makes sense about 1000 addresses not 1000 people. I didn't consider that.

The cold storage aspect is interesting. What happens if the drive is corrupted? Can this type of content be raid(ed)/duplicated?


drive is irrelevant, as long as you have the private key on a piece of paper you can reconstruct your wallet anywhere


You can just upload your encrypted wallet everywhere for backups... if they can crack good encryption, they probably don't even need your wallets' private keys anyways


How is this dissimilar from raising VC money?

> The problem is that you're giving money to a relatively unknown company while speculating that the company will create inherent value.

That's what seed round VCs or angels do. Sure, they tend to invest only in peeps they know personally or through their network to try and control for too much failure. But the same could be done for ICOs...only invest in those that have teams you know well, or can meet, or who will take your call and answer your questions.

>Unlike with stocks, you don't have ownership in the company or any voting rights.

Same thing happens in VC rounds as later round investors dictate terms and dilution to early round investors.

> There is nothing stopping the company's creators from distributing the ... money to themselves

Same thing with VC money...one can hire friends, acquire companies one might have stock in already, buy a swanky office, go on lavish company parties, etc.

> there might be a board, but since the company isn't public who knows who the board is

Verbatim for VC-backed private companies. The "who knows" depends on the due diligence of the investor. Sure, most professional VCs will define who the board is ie. require board seats. But those boards can and do change in later rounds. It's up to the ICO investor to do due diligence. There's no law for ICOs that I cannot email or call the founders and ask about their board. If they refuse to answer, that would be a huge red flag.

All that said, I completely agree: > the SEC is right to step in so there aren't a ton of unregulated securities going around and a lot of consumers potentially getting screwed.

Most retail investors cannot possibly spend the time and effort and money to do proper due diligence regardless of whether it is an ICO, IPO, OTC stock, etc. Most mom-and-pop investors should just buy ETFs with zero fees. Schwab has some great examples!

For professional investors...I think ICOs are a fantastic tool that adds competition to the marketplace...and should scare the hell out of VCs and PE since the days of 2 and 20 without question seem fleeting.

EDIT: formatting


The difference is huge, VC can only be provided from accredited investors.


Allow me to clarify. I 100% agree with requiring accredited investors for ICO participation (or IPO or CryptoKitty speculation, etc). My blue collar parents could hardly be expected to spend the full time effort required to do due diligence on an ICO while they were working 2 jobs to make ends meet. In fact they did quite well investing in mutual funds and receiving a pension from a stable employer.

As an aside, I disagree that the current accreditation is a good measure of being "qualified" - anyone who inherited $1M can be accredited - but it's what we got; at least one bad investment decision won't bankrupt a foolish heir.

Investing in an ICO has essentially the same risks as investing as an angel or VC. I have both invested and received investment and the due diligence process varies greatly from firm to firm, angel to angel. The good ones make good decisions, largely based on lots of hard work. Anyone interested in investing in an ICO could do the same. I have looked at many ICOs and have probably spent over 100 hours of hard work doing due diligence on the few ICOs that looked legit. I pulled the trigger on one, and passed on many more.

To me what ICOs represent are a fundamental shift in the marketplace from a closed door, network based, "clubby" process to a transparent, data rich, open process. Not that they cannot be gamed, especially when early investors get different coin prices, etc. Due diligence is definitely required.

The pain this is trying to solve is to allow companies who need access to capital to get it without having to visit Sand Hill Road or apply to incubators. It's not a silver bullet, it's just a different way.

The SEC shutting down scams is a good thing. The SEC chilling all ICOs is a bad thing and protects the status quo and limits innovation. A legit business - even if just an idea - should be able to put its idea and data out there and the founder's experience and expertise, and let the market (of professional investors) decide.

I think the SEC should have a version of some of the Excel sheets you find on Google to check whether an ICO is legit or not. It should not require lawyers. It should be based on Yes or No questions. If a founder can pass that test, the SEC should back off and let the market decide.

But yes, ICO participation should be limited to professional investors. But if there is innovation allowed, maybe there could be a retail-focused ETF for ICOs, for example.


Capitalism. Just worry about yourself. No ico is forcing anyone to invest. Just like Kickstarter doesn't. Or Casino's. Or the stock market. Or equity crowndfunding.


Is your claim that capitalism is so magical that it justifies all abuses of the poor and weak done in its name?


I'm flabbergasted about the carelessness of these companies.

The world basically figured out that everyone can have their own currency, so now every little company starts to print their own money?

Why are people buying monopoly/play-money for dollars? Because CPU-time was wasted to make it unforgeable?

What use does unforgeable money have, if it's not irreplaceable?

Why are buyers not concerned that their freshly purchased ToyCoins are rendered useless in the blink of an eye by the issuance of ToyCoin-2, perhaps by the same company?


> The world basically figured out that everyone can have their own currency, so now every little company starts to print their own money?

The so called "cryptocurrencies" aren't currencies at all. They are simply goods which exist for the sole purpose of being traded around in speculative markets. They are no more money than beans or trading cards. These companies know that and invest in the creation and promotion of a new set of trading cards to pump the value to dump them afterwards.


Indeed. This becomes more obvious when we consider the fact that any individual can produce an infinite number of cryptotokens that are fundamentally interchangeable and indistinguishable from any other, this makes sense when we think about the fact that the "tokens" are not actually discrete objects but really just the practical manifestation of a gignatic balance sheet recorded in a distributed ledger. The cool technical aspect of a blockchain is that we can trust that the data encoded in the ledger will always follow the consensus rules, but if we extrapolate this idea out and imagine a paper ledger with the same properties, it becomes obvious that there is no fundamental reason why any arbitrary ledger is any more intrinsically valuable than another.


That's quite true, and this cryptocurrency mass hysteria has all the markings of a new tulip craze. Meanwhile, sellers keep on pumping the value hoping it's high enough to start dumping on unsuspecting fools.


It might be useful to explain the difference between 'non-currencies' and 'currencies'.

Regular currencies are also imagined-up things which have only a few practical differences. The one difference is usually various government contracts/taxes are only payable with specific currencies and therefore have value because they are 'needed' to pay obligations.


> Regular currencies are also imagined-up things which have only a few practical differences.

That's not true. A currency is designed to serve as a medium of exchange, a unit of account, and and a store of value.

These so called "cryptocurrencies" fail to meet the basic requirements of any currency as they are designed specifically to inflate their value in speculative markets while serving absolutely no purpose of being either a unit of account or even a medium of exchange.

In fact, beans are far better currencies as these so called "cryptocurrencies" as their value are far more stable and are free from speculative drives such as the one discussed in this thread.

Additionally, real currencies have inherent value by being adopted as the official and exclusive medium to pay taxes to governments.


Does what something is 'designed' for really make a difference? Is that the thing that makes something a currency or not? Or is it some other thing that makes something a currency?

The value of some currencies have fluctuated in their value wildly in the past, so stability isn't a some intrinsic thing that marks a currency.

I'm not say I don't agree that the word 'cryptocurrency" isn't banded about far too much, but saying "They aren't currencies" should be supported by some kind of description of what makes a currency a currency otherwise we can tie ourselves in knots.

Saying that the 'design' or 'stability' define whether something is a currency as it is really just using proxies (that might work most of the time) for what makes something a currency. I think.


>That's not true. A currency is designed to serve as a medium of exchange, a unit of account, and and a store of value.

And yet, after all the designing (a post factum attribution more likely), they're still just numbers on ledgers.


> And yet, after all the designing (a post factum attribution more likely), they're still just numbers on ledgers.

No, they really are not, and that's a very ignorant thing to say. Mere numbers on a ledger don't have central banks dedicated to implement economic policies to actively stabilise their value nor do they get accepted by state institutions as official and in some cases exclusive form of payment.


> will likely leave a lot of "investors" out of money.

Do you think this is a bad thing? I’m on the fence. If someone’s dumb enough to buy into these obviously stupid ICOs, chances are that the person getting the money will spend it better than the buyer would have.


I've created a simple tool to address this issue: https://github.com/benmarten/CryptoETF


ICOs are in a hype. But there is real value. First, they can be used to bypass a lot of (but not all) regulation. This is good, because the financial sector is overly regulated (and wrongly regulated). Second, there are applications that are not possible in the traditional financial system. For example, the smart contracts behind the Bancor system (another overvalued ICO) provide automated market-making on the blockchain. These smart contracts have a capital buffer no one can touch and that is used for completely transparent market making, thereby ensuring that you can always buy or sell shares. I won't go into detail, but it basically solves the liquidity problem for penny stocks.

In the medium run, I see ICOs as a light-weight alternative to IPOs, but not as a seed-funding instrument. This is non-sense.


>First, they can be used to bypass a lot of (but not all) regulation.

It's entertaining that many seem to believe this for no apparent reason, but the SEC (and other regulators around the world) doesn't seem to agree.


They allow you to avoid regulation if you avoid countries that regulate them like the US. A number of ICOs these days seem to forbid US investors.


The US isn't the only jurisdiction cracking down on ICOs:

European Financial Regulator Warns Investors On ICO Risks https://www.coindesk.com/european-financial-regulator-warns-...

Germany's Securities Regulator Warns ICOs Pose 'Numerous Risks' https://www.coindesk.com/germanys-securities-regulator-warns...

Japanese Financial Watchdog Issues Warning over ICO Risks https://www.coindesk.com/japanese-financial-watchdog-issues-...

I can't imagine any developed nation won't end up regulating ICOs as securities. That might be a message to which it's worth paying attention.


Agreed there is real value, but creating a shadow banking system that is governed by unregulated actors isn't the solution. What's to stop a sophisticated bad actor like say, North Korea from manipulating cryptocoin markets in order to scam a bunch of Americans out of US Dollars? I know there is some belief that they're behind the recent Bitcoin rally...


The SEC isn't going to let them be used to bypass regulation.


Bypassing regulation is neither good nor valuable unless you're planning to scam someone.


How about Uber? Or unlicensed cosmetologists?


Uber? You mean the super slimy company that has been set up to skirt labor laws?


What Is the Howey Test? - FindLaw

http://consumer.findlaw.com/securities-law/what-is-the-howey...

"The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor's control. If so, then the investment might be a security. If, however, the investor's own actions largely dictate whether an investment will be profitable, then that investment is probably not a security."

Howey Test https://youtu.be/9lTS1Zofw8w


This seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as defined by the Howey Test?


> This seems, to me (a layman), to indicate that most any ICO will fall under "security."

Pretty much, yes. Securities are defined very broadly in the US.

Why does it surprise you that these are securities? They very obviously are selling a security to investors, who are purchasing it because they expect the price to increase. Open-and-shut case.

The fact that there's crypto involved is irrelevant.

It really sounds like people are trying to pretend these laws don't apply because they disagree with the laws in question. Which is fine, but let's not pretend like there's any ambiguity here, because there's not. It's extremely clear that almost all ICOs are securities, and if you asked a lawyer I'm 100% sure that's what they would tell you.


You're not correct. I think, less than 50% of ICOs are not securities. But the way to prove is exactly this: ask a lawyer


I think if you hold a non-obvious position like this, it'd be great to explain your reasoning. I am def. curious as to what you think here!


A pure payment system within an app. Say that someone builds a social network that lets you easily get in touch with people who have need of skills that you possess. They then introduce a token system - call it "karma", maybe - that you can grant to people who perform good deeds for you, and then if your karma is positive, you can grant it to others in exchange for favors or services. Since you only receive karma for actions you perform and it doesn't rise in value based on the efforts of the social network, it's not a security. It is a currency, however, and could fall afoul of laws governing currencies.

BTW, a number of games successfully have things like this, eg. Linden dollars in Second Life, gold in WoW, or tokens in FarmVille.


> Since you only receive karma for actions you perform

That wouldn't really be an ICO, though, right? You have to be able to convert it back and forth between another currency, not just "earning" it through use of the software to be spent only there and never changing hands.


You could bootstrap initial distribution through an ICO (e.g. if people need an initial stock to be able to distribute it to others). And e.g. in-game currency commonly can be bought, but not sold through official channels.


Right. The key difference is you're not allowed to sell in-game/app money for USD.


Isn't that exactly how bounties work on the StackExchange websites?


The SEC Chairman released a statement this morning about cryptos & ICOs. There is a mention of how an ICO can fall outside of the securities designation in the memo.

https://www.sec.gov/news/public-statement/statement-clayton-...


The Chairman just reiterates what's long been the case in securities law: whether an ICO, like any other instrument, is a security depends on the facts of the case.


Imagine it's a network-connected resource like server time or file hosting. Those aren't securities right?

So now just imagine a token that has the same functionality.

You receive a token that does something useful. Do you use that token wisely? Or do you make bad business decisions?

There are tokens that people are buying to use, not just to HODL.


If the coin represents ownership of a resource (or a right to a resource), it can be a security (though it might be a derivative instead, governed by a similar but entirely separate set of rules).

Being a security does not mean it can't also be something useful; it just means that the security aspects of it are potentially subject to securities laws.

EDIT: Beanie babies aren't securities because you actually the beanie baby. However, a piece of paper entitling you to ownership of a beanie baby could be a security.


All right, but if the coin is inseparable part of the resource, it cannot be a security. There is a thin line here.

Imagine a coin securitizing Bitcoin miners ("cloud mining coin"). Yes, that's a security.

Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)


All right, but if the coin is inseparable part of the resource, it cannot be a security. There is a thin line here.

True, but then you're limited to things which can be stored in a blockstream in the space allocated to a single coin. There aren't many useful resources that could fit into that space, even fewer that would scale.

Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)

Unless there is something about Ethereum that I'm not aware of, it does not represent any sort of ownership interest in another asset, it is the asset.


The SEC's position on the DAO was that they were not going to apply their guidance retroactively to that one. Going forward, though, they're cracking down.


Where did the SEC say the ethereum ICO wasn't a sale of securities?


> Now imagine Ethereum. It was ICO'd, talking in today's terms. Is it a security? (hint: SEC just admitted it's not)

I didn't see any admission like that. Quite the contrary. I think the statement pretty clearly places the ethereum ICO (as distinct from the functioning network after) as a security.

https://blog.ethereum.org/2014/07/22/launching-the-ether-sal...

There are a number of points in that post that scream security.


Which is it? Is it that these tokens aren't really investments, but rather utility instruments people are buying to obtain restaurant reviews? Or is it that it's so unfair that the SEC requires these kinds of companies to register before selling to the public like everyone else? It looks to me like your argument is oscillating a bit.


Well, the exciting part might be that the line between investment and utility instrument is blurring. It seems to me that these two categories needn't be separated by a bright-line.


A particular instrument might blur the lines in terms of how it's packaged and promoted, but the underlying activities aren't blurry at all. People who acquire an asset in the hopes that its price will rise so they can resell it on a secondary market are speculating ("investing"), full stop.

Obviously, this isn't the first time we've had offerings ostensibly taking these forms. People used to buy comic books in the hopes of their appreciation. Ty sold Beanie Babies to people who were stockpiling them for eBay.

The reason Ty didn't get in trouble, but Munchee did, was that Ty was never stupid enough to record videos extolling the once-in-a-lifetime opportunity people had to 9x their investment in restaurant review coupons. Again: a very significant component of the SEC's concern is about marketing and promotion.


Are you arguing that beanie babies and comic books are securities? How about bars of gold?

They are certainly speculation. But I doubt the SEC would ever claim that literal bars of gold (not notes, physical bars of gold) are securities.


They are not, but the reason they are not is instructive.


Imagine a piece of paper. Like what you'd find in a notebook. Those aren't assets right?

So now just imagine a token that has the same functionality.

You receive a token, it's made of paper like the notebook but does something useful.

Should that token, the piece of paper be regulated? Lol yes, it's now money! And all other assets or securities are regulated.


Your metaphor doesn't make sense. Are you saying that the token lets me write on it and make toy airplanes? Because if so, then the token wouldn't be regulated...

If you're saying that the piece of paper represents ownership of something, then the paper is most likely a security or derivative, in which case it is already subject to regulation. A token with the same functionality as this piece of paper would be regulated, and vice versa...


Why do you not consider paper to be an asset?

Pretty much anything that can be bought and sold is an asset. Yes, that includes notebooks and paper.


Paper has utility outside of its value. Most coins do not.


I'd counter specifically with Ethereum or Filecoin.

They both represent either computation-time or file-storage-and-bandwidth time.

Ethereum could easily represent time on a distributed AWS Lambda. And FileCoin can represent an AWS S3 storage.

It just so happens that they both are also cryptocoin.

It gets even uglier that the turning-like machine in Ethereum/Solidity also exists, kind of, in Bitcoin. In fact it was because it worked in Bitcoin they developed Ethereum. So technically even Bitcoin can do processing work. Makes everything a bit murkier to be honest.


You're not countering anything. I'm aware of both. The SEC is going to have to decide if these coins having utilities makes up their value.

These aren't new concepts. People have been trying to get around regulation for thousands of years.


Most ICOs are probably securities, yes.

> Can anyone provide an example where an ICO would not be a security

Well, if it's purely a "utility coin", and people are buying it in order to exchange the coin for some service (like, basically, car wash tokens but on the internet), and there's not really any speculation in the secondary market, and people are buying them for their own use and not to resell or speculate on, it's probably fine. On the other hand, if the product that the coins would be used for hasn't been built yet, it's probably not fine (since you're gambling on the founders executing properly, yet have no real control over whether they do so).

...but no, I don't know of any examples that fit that criteria. ICOs don't make a lot of sense for things that aren't securities; the most common purpose (at least for the legit, non-fraudulent ones) is to obtain investment to build a product. That's obviously a security, and one of the core purposes of securities law is to protect people being asked to contribute an investment that will be used to build a product.


I would dare to say that even Ethereum and some other alt-coins should be considered securities using this test.


Most are. Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec.


There’s an assumption being made that the SEC has a vastly different way of looking at investor protection than securities regulators in other jusrisdicions. I’m sure there will be some regulatory arbitrage going on, but if an ICO is a security it doesn’t make it automatically illegal, it just means they have to follow rules established that are mostly there to legally bind the organization to disclose information to investors and follow certain governance standards.

Some jurisdictions also don’t require normal stock offerings to follow rules as strict as the SEC does. It doesn’t stop the US from having many of the largest stock markets in the world, and a very high level of public participation in equity investing.


It wouldn't matter if they're located outside the US. The SEC has jurisdiction over all securities that are sold to US persons, and most countries where you'd want to be located have similar laws.


Sometimes they're commodities, not securities, depending on the particulars of the transaction (still regulated, just a different set of regulations)

https://www.coindesk.com/cftc-no-inconsistency-sec-cryptocur...


> Thats why it is so important that crypto startups leave the usa to be outside the jurisdiction of the sec.

So they can all run their scams in countries that don't care? I mean, doesn't this just show that crypto startups are all about providing services to entities that, for various reasons, do not / cannot participate in the aboveground economy?

Like, what reputable, real company would have any problem existing inside the USA's jurisdiction? You could argue drug trade, which is supposedly a "victimless crime" (note: it isn't... depending on the drug, even "non-violent" drug use can fuck over a lot of people outside just the person who choses to take said drug (eg: meth, herion, oxy, etc...)). Anything else though, it is almost certainly a scammer scamming people. Why should above ground society tolerate people wanting to run ponzi schemes, people trying to cash out crypto-ransomware revenue, or people who want to deal in murder-for-hire?


Most countries have securities laws that are similar to those of the United States.

It's arguably easier to be in compliance in a single market of 350 million people, then in multiple markets, each governed by their own laws.


Do you think it's better for the economy overall if they are not regulated by the SEC?


Sure, they could be.


I think that EvE Online's market has passed this test. It's not an ICO, but it is an online currency that is purchased with real currency and gets traded on, speculated on, used to buy things, and accepted when selling things. And the key point is that an investor in EvE ISK is at the mercy of CCP for how they inject money into the game.

You can speculate, for example, that pirate faction battleships are about to go up in price. CCP can and does change that all the time. The investor has no insight or control over how ISK is valued.

What keeps it different and unregulated is that it's a one-way conversion. You can buy things with real cash that can be sold for in-game currency. But you cannot, in theory, sell anything inside of the game for real-world cash.

Some people do, of course, but CCP polices this very heavily to avoid exactly this kind of problem.

Virtual game currencies are not that different from Coins. But the main reason they escape scrutiny by regulatory bodies is that they are one-way conversions.

ICOs were, until very recently, one-way conversions. You buy something from someone, good for you. Once it got to a point where it was relatively easy to convert that virtual thing back into legit currency, people started paying attention.

I can't see a way that any new ICOs can dodge this aspect. But there were COs that did dodge it for a while because no one thought they could get big enough to matter.

If RMT got big enough in EvE or any other video game that offers financial incentives to win at the game (so-called pay-to-win) ever got big enough to be able to affect a currency market, they would fall into this scrutiny almost immediately, which is why gaming companies police this so hard.

There isn't really any functional difference between trading game tokens and trading blockchain coins, except that one is easily transferable to real-world currency and the other is not.

So in that very round-about way, any virtual currency that is seen by the FTC to be one-way will not pass the Howey Test. But almost all virtual game currencies can be traded in one way or another for real currency. Most of them can't be done in a large enough scale to affect real currency, so no one cares. Most in-game currencies should fail the test. But they are irrelevant, so they pass.


Interestingly, cash would seem to be a security under this definition. Except it is explicitly exempted:

> The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a ‘‘security’’; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker’s acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

From The Securities Exchange Act of 1934 (N.B. IANAL).

So, will cryptocurrencies, possibly including ICOs, be exempted? Only history will tell.


Nobody is saying that crytocurrencies 'in general' are going to be declared securities.

This is about ICOs. IE, a tokens that are a 'FUTURE' promise for something that doesn't exist yet.

If Bitcoin was a security, the statement from the SEC head would be very different.


> Nobody is saying that crytocurrencies 'in general' are going to be declared securities.

I agree with you, but the fact is plenty of people do. Maybe not in the corner of the world, but look broader. This also wasn't the point.


We'll probably need better criteria for what's actually a proper crypto 'currency' vs 'security' vs whatever else first.


Pretty sure the SEC already commented saying they consider Bitcoin to be an asset rather then a currency?


I wonder if you were to declare an intent to establish a new nation in the Antarctic (say by purchasing some of Chile's land) and to fund raise for fees associated with this new nation you offered to sell people dollars of your soon-to-be currency at some fixed price below the expected value, would the SEC disapprove of such an action?

(assuming it was actually done in good faith and not discernibly a scam)


The SEC would not have any jurisdiction there.


If you're doing the fund-raising in the US, they would absolutely have jurisdiction.


To clarify, yes, this is with the assumption you're actively fundraising in the US. And even if your entity is not based in the US, the question would be for the US related portion of your entity.


I don't think you're right. Under this impression, most of cryptocurrencies are securities. However, SEC said, they're not: https://twitter.com/mikebutcher/status/940487575491497985


"It has been asserted", i.e. that assertion is false and most ICOs are securities.



That quote is slightly misstated. It makes it sound like gold bars would be securities (since any profit from reselling gold would be "largely or wholly outside of the investor's control" since the market for gold is so large and relatively volatile).

Rather than asking whether the potential profit is outside of the investor's control, the question is whether the profit is within the control of some other person or group.

The example that sticks in my mind is the idea that fruit trees can be securities if they are maintained and harvested by non-investors and the fruit sale profits go to the investors.


The fruit tree itself would not be the security. It's the thing which gives the investors the right to their share of profits which would be the security. Or, in other words, a security secures your right of ownership to something else. In a company, we typically call those things "shares". You either own the tree directly, or you hold a security which secures your right of ownership of the tree.

So, if you own gold, you don't own a security. You own the actual gold, and that chunk of metal does not secure ownership of any other item. It can be exchanged, of course, for ownership of something else, but that's a function of its value as an object. Now, if you own a share of a gold ETF, that is a security that describes your rights to some chunk of metal.


The FCTC has ruled that bitcoin is actually a commodity, not a security, mostly due to the limited number of bitcoins and "proof of burn" required to acquire new bitcoins via mining. On that note... how is gold (or any other commodity, like oil or corn or wheat) not a security? Seems a little broad.

I'm honestly not sure what the answer is, hopefully you (or someone else) can clarify.


On the video "Howey Test" the most interesting part for me is at the end (2:55)

https://youtu.be/9lTS1Zofw8w?t=175

Where if no single person or group is in charge, and decisions are taken by all, is no longer considered a security. This little detail makes the difference from security to not a security.


Related to this bigger HN submission from yesterday ("Statement on Cryptocurrencies and Initial Coin Offerings"): https://news.ycombinator.com/item?id=15902054

That statement was released on the same day as the Munchee decision, and the Munchee decision is linked from the statement

Context (the Munchee decision is in footnote 6): "I urge market professionals, including securities lawyers, accountants and consultants, to read closely the investigative report we released earlier this year (the “21(a) Report”)[5] and review our subsequent enforcement actions.[6]"


To put this in perspective, Token Report analyzed its database of ICOs and found each one that currently uses similar language to Munchee; or, promises returns to investors. https://medium.com/tokenreport/token-report-whos-been-breaki...


For better or worse, this sets a fairly clear precedent. Will be interesting to watch people try to get around it.


I am a co-founder in the cryptocurrency space. Our lawyers were smart and advised us against releasing a utility token ICO because they predicted that these SEC actions would be coming.

Our approach to "get around" this is to file all the necessary paperwork for a legal security and then only sell the token to accredited investors.


So basically, follow the existing law that governs securities and investments. I personally don't see a big problem with that, considering the laughable scams that have occurred over the past six months.

I am curious, though, how that works with proposed international investors. (I'm not well educated in the financial space)

I hope that these actions clear house of the scams, and open room for good projects to exist without some shade of doubt cast over them—at least not for the reasons there exists some kind of shade now.


> I personally don't see a big problem with that

It protects the monopoly the investor class has on investments like these.


And by "investments" you mean "worthless and fraudulent garbage", if we're talking about ICOs. Honestly garbage is probably worth more, might be recyclable or compostable.

More broadly, there's a whole set of finance research showing that the investments that accredited investors get access to (private equity, VC, etc.) aren't any better that normal investments on a risk-adjusted basis.


And yet, that worthless fraudulent garbage is one of the few ways to get rich.

If Oculus had done an ICO instead of a kickstarter, my $400 wouldn't have been merely a preorder. The $400 would've become quite a handy sum by the time Oculus got acquired.

That requires integrating ICOs into the existing startup structures, but it's worth trying.


And yet, that worthless fraudulent garbage is one of the few ways to get rich.

Historically, this has not been true. Depending on your definition of "rich", very few wealthy people have gotten there by investing in other people's companies where accreditation was required. Most wealth is built by via ownership of your own company, real estate (which is a type of company), or by investing in public markets. These pathways are all still available to you, and almost certainly still represent a better long-term risk-adjusted return than ICOs.

If Oculus had done an ICO instead of a kickstarter, my $400 wouldn't have been merely a preorder. The $400 would've become quite a handy sum by the time Oculus got acquired.

This actually is an interesting point, but it does require some serious cherry-picking. I'd be interested to see the data behind a scenario where all the funded startups for the last decade had been ICOs instead of venture-backed. I doubt it'd look so rosy in that scenario, especially when you consider that many more failures would likely have been funded, based on how easy it is to raise money from an ICO based on nothing other than a pretty website template.


Considering that an ico in oculus’s case would mean that they would issue a token which could be exchanged against a device, I fail to see how the token could increase in value in any significant way.


I guess I was thinking more of Oculus as platform than as device.


Getting rich by investing in public markets....come on. No non high net worth individual will get rich investing in public markets.


There is a reason you need to be an accredited investor to buy startup stock, and it isn't because the elite banksters are trying to protect their monopoly (startup venture capital for early-stage --- anything prior to, say, a B-round --- startups is a rounding error).

Changing the word "stock" to "coin" doesn't change any of the underlying dynamics.


This perspective is... naive. When accredited investors became a thing it may have started as a paternalistic "protect the poor from themselves", but now it merely serves to limit the supply of investors (read:rich) to a relative few who can dictate more favorable terms to those seeking that capital (read:poor).

When the primary determination is whether you already _have_ money, rather than education, professional history, earning potential, or a history of demonstrated ability to make informed investment decisions... it becomes extremely difficult to argue that its anything other than an artificial class barrier.


What I think is naive is the idea that opening investment in something up to the public would somehow harm the financial sector, rather than generating billions in profits for it.


http://www.paulgraham.com/divergence.html

VC funding will probably dry up somewhat during the present recession, like it usually does in bad times. But this time the result may be different. This time the number of new startups may not decrease. And that could be dangerous for VCs.

When VC funding dried up after the Internet Bubble, startups dried up too. There were not a lot of new startups being founded in 2003. But startups aren't tied to VC the way they were 10 years ago. It's now possible for VCs and startups to diverge. And if they do, they may not reconverge once the economy gets better.

This logic works in reverse, too: if funding becomes dramatically easier thanks to ICOs, startups have no reason to court VCs anymore. And that could be dangerous for VCs.


Who cares about the VCs? VCs are an insignificant component of the financial system. I don't agree that ICOs would be harmful to VCs, but even if they were: the larger financial system would profit enormously from retail investment in fly-by-night startups.


This subthread was about class barriers and investors. You expressed ICOs might not be harmful to them, so I mentioned a way they might be. Not sure where the financial sector topic came from.

What exactly would the problem be with letting people crowdfund startups (i.e. equity)? Why not follow Filecoin's lead? I've been reading your arguments and you haven't really articulated your concerns; just persuasive cases that the status quo should be maintained.

The next Google/FB/Netflix might very well start using the model here, if you let it. But only if they have access to capital. And right now, that means VCs.


Again: you're suggesting that when we talk about the interests of rich financiers, we're talking about the VCs. I'm sure not. If there's a financial power center to be concerned about, it's Goldman Sachs, not Sequoia. The fact that ICOs might somehow impact some tiny corner of the finance industry doesn't matter if it's going to juice things for the giant investment banks.


Why would ICOs make startups less reliant on VCs, other than the fact that (for the time being) ICOs let startups skirt investment regulations they'd otherwise have to adhere to?

I agree with tptacek's general thesis here: there's not any inherent difference between ICOs and "normal" early-stage investing that justifies an utter lack of regulation of the former but not the latter.


The accredited investor stuff exists not to keep the rich folk rich, but because the SEC doesn't give a fuck if rich people fall for scams. They care if Grandma living off a fixed income sinks her life savings into the latest ICO fad, loses everything and has to eat cat food for the remainder of her years -- not only does that fuck over Grandma, but it fucks over society. If Joe Millionaire falls for some dumbass ICO scam... too bad, so sad.


And yet, in practice, it seems to do something completely different...


If you have "education, professional history, earning potential, or a history of demonstrated ability to make informed investment decisions", then you should easily be able to make enough money to become an accredited investor.

Startups are one of the most risky investments you can make. By arguing for regular folks to invest in startups, you just convey your ignorance in the risks associated with them. Most startups fail which is why full time investors invest in many startups and due extreme diligence because it is such a hosh posh of scams and people overselling their company.


> If you have "education, professional history, earning potential, or a history of demonstrated ability to make informed investment decisions", then you should easily be able to make enough money to become an accredited investor.

This is just not even remotely true. Plenty of people have those things but haven't yet been able to acquire the money to qualify as an accredited investor. This line of reasoning is like the oligarch's dream.

"If you were as smart as me you would have as much money as me and could invest like I do. Also, until you have as much money as me, I won't let you invest like I did to get all this money, because if you don't already have as much money as I already have you must not be as smart as me and clearly can't understand the kind of investing I do. In fact, I will make it illegal for you to invest like I did until you come up with as much money as I already have from doing those things that you are not allowed to do."


> When the primary determination is whether you already _have_ money, rather than education, professional history, earning potential, or a history of demonstrated ability to make informed investment decisions...

This is the case because many regulations (Tax code, laws) favor the wealthy. If we didn't have the SEC regulations, then the clever and wealthy would prey on the poor and uneducated. This is textbook what happened in the 20s.

Honestly, the SEC is probably one of the last decent regulatory bodies of our government.


Is there any access at all, even through other funds? If not then there is a problem. Maybe prohibiting advertising and soliciting is enough. Maybe place some limits. But there are no good reasons I can think of to blanket prohibit investment itself to the "non-accredited".


Yes; the money venture capitalists invest comes from other funds, among them things like pension funds.

A fact people seem to overlook in these discussions is that unless you can see the future, you can't just invest in Google and Airbnb; you invest in a sample of the whole tech startup market. And when you do that, by and large, you underperform the S&P 500.

Funds and endowments invest as VC LPs not simply because they want access to the insane deals that startups provide, but because they want decorrelated investments: they want some of their money allocated to investments that will perform differently than the market as a whole. When you have billions under management, it makes total sense to throw tens of millions at tech startups.


> it isn't because the elite banksters are trying to protect their monopoly

To quote The Dude "Well, that's just like your opinion, man". I think your point is that the intention of the law is so that people are manipulated into buying securities they can't afford (e.g. scams). This is true, however some would argue that this legislation is yet another reason the rich continue to stay rich, which is a legitimate argument. So I wouldn't be so dismissive of that opinion.


I do not understand the underlying logic of this argument. It seems to suggest that but for pesky SEC RegD rule, there'd be 10,000% appreciation opportunities for everyone, not just the wealthiest investors.

How do people making this argument think money works? People that can commit $20,000,000 to an investment with the stroke of a pen are going to get the best opportunities no matter how they're structured: they can offer better terms. Literally the only thing retail investors could conceivably offer to compete with them is "willingness to be screwed over without recourse".

Stipulate a future in which essentially no ICO is regulated, and most new venture raises happen with publicly traded ICOs. Follow that thought to its conclusion and explain to me how the best opportunities are going to provide 10,000% gains, rather than markets acting the way all logic in either direction about ICOs dictates they must act, and pricing risk and opportunity accordingly?

I see how, in the post- free-ICO world, you'll be able to bet that restaurant review coupons will 10x your money. Coupons for everything. 10x your money on dog washing and cat sharing; that'll happen too.

What I don't see is why the truly credible teams doing truly important work with a real chance of success are going to offer securities on those same terms. How does that work? How stupid would you have to be to look at a market where restaurant review coupons are worth $15MM because they're certain! to 9x your investment, and then go to market with the next generation of, say, the Cisco Catalyst 9400 switch on those exact same terms?

Aren't restaurant review coupons in some sense the ceiling on how too-good-to-be-true these ICO deals can be? I mean: that business is obviously not going to work. A reasonably sophisticated person can only put money on it in the hopes that someone dumber will buy it off them in a week or two.


> It seems to suggest that but for pesky SEC RegD rule, there'd be 10,000% appreciation opportunities for everyone, not just the wealthiest investors

Please refrain from aggressively straw manning me. We said nothing like that and you know that’s not our position. You’re trying to reducto ad absurdim us without actually doing the reducto part.

I see it this way: there are many different ways to structure a funding event: a bank loan, a bond issuance, an ICO, a partnership, a Series A, etc.

If we’re talking about a small scale, say $100k, but none of my investors have very much money, just a few hundred maybe, I am dramatically limited in the sorts of funding structures I can legally use.

If my investors all have millions of dollars and are putting in 10s of thousands, I can legally structure the deal however I like.

I think that’s an unfair limitation that makes it harder to start businesses that no rich person would ever care about.

I do care about protecting investors, but I think the wealth requirement is the laziest possible way to do that. Mandatory disclosure rules would be better. Requiring insurance would be better.


> I do not understand the underlying logic of this argument.

Just because you don't understand the logic of the argument doesn't invalidate it.


That's obviously true, but doesn't get us anywhere.


I generally appreciate your commentary and authority on certain topics, but the "I'm right, you're wrong" / "I can't understand this rationale so I'm going to dismiss it" attitude here certainly isn't going to get us anywhere either.

I think we both agree that allowing anyone to invest without an accreditation is probably harmful, however don't you think it's worth discussing/investigating the negative externalities of such an accreditation?


What are the negative externalities of accreditation?


Aren't restaurant review coupons in some sense the ceiling on how too-good-to-be-true these ICO deals can be? I mean: that business is obviously not going to work. A reasonably sophisticated person can only put money on it in the hopes that someone dumber will buy it off them in a week or two.

Your argument hinges on the assumption that the government should protect people from this outcome. If they make a bad bet, it's their bet to lose.

Right now, churches ask for thousands of dollars via mail. People send them with the hopes that they are "planting a seed" and to "watch that seed grow." All of this behavior goes on without society collapsing.

What's the key difference? Why do people need to be protected when suddenly they have a chance of winning real returns, however remote?


View few people mortgage their houses and send the proceeds to a church expecting to pay for their kids college tuitions.


The laws exist for a good reason, and it's because historically many folks with insufficient means lost their shirts due to such scams. A judgment was made that between restricting such risky schemes to those with the means to handle that risk ("the rich") and letting people lose their shirts, restricting such risky schemes was the lesser of two evils.

And I tend to agree.


Can we be clear that the law does not restrict "risky schemes", but rather "schemes that refuse to follow disclosure laws"? There are thousands of publicly traded companies and a lot of them are batshit. What allows them to trade without SEC molestation is that they (a) register, (b) publish audited financials, and (c) follow the SEC's rules about promotion.

The difference between a restaurant review coupon ICO and a pink sheet biotech firm isn't risk. Both will almost certainly fail. The difference is that the ICO refuses to publish audited financials, and demands the right to shoot Youtube videos extolling a once-in-a-lifetime opportunity to 9x an investment.

That's what the SEC is protecting retail investors from.


Aren’t ICOs covered under Reg CF of the JOBS Act though? That was the whole point of the JOBS act: to provide access to capital that an entrepreneur normally wouldn’t be able to obtain.

An ICO is not a bad alternative to pre-seed funding.


I don't know how many other restrictions apply, but apparently for RegCF, you can only take small amounts from non-accredited investors, and you have to raise less than 1MM.


Why would your ICO have been worth anything at all during an acquisition? If it isn’t tied to equity in the company (to avoid securities violations) then what exactly would have given it value in an acquisition? Who would have bought it from you for more money and why?


I meant conceptually. If the startup ecosystem embraces ICOs, then that type of thing can happen.

Right now we'd just have to settle for "If Oculus got acquired, the price probably would have gone up." But you could imagine starting a company that promises to incorporate tokens into the structure somehow: Perhaps the founder would say they'll only sell to acquirers that are willing to offer token holders $x, where $x is based on the price over the last month before being acquired. Then it'd be in the founder's best interest to sell as little of the token as possible to cover operations, since otherwise it reduces their chances of getting acquired -- just like normal investment.

Also it incentivizes founders to make the company do well: if they can tap into funding when needed (because they have premined coins they can sell), they're less beholden to the valley. That means a smart 18 year old can single-handedly launch and fund a company; no permission needed from some cabal of investors.

Moot was 15 when he launched 4chan. If you believed in its future, you could've (a) supported it by buying their token, and (b) possibly made some return on that belief.

Obviously, all of the normal caveats apply: most investments don't work out. But everyone knows that.

If I want to put $2k into a company, why is the government stepping in to stop me? I can go waste $2k at the casino or squander it however I want. It's my money.

Bitcoin itself can be thought of as an ICO. When people buy Bitcoin, we're buying into Satoshi's vision for the future. It's not merely because it's useful. So why is that legal, but ICOs aren't?

The overall point is that this is a powerful model, and it could become even more powerful. The rest of the world is embracing it, so the US could find themselves left out by getting too draconian.


If the ICO tokens are tied to some reward on acquisition, then how is it any different from other securities? May as well just sell equity at that stage (perhaps through something like seedrs, which accepts small investments too). If it’s basically just a security like any others, why should it bypass the regulations?

If it walks like a security and it quacks like a security, then everything else is just a technicality: it’s a security.

Also, what benefit does using a cryptocurrency even buy you here other than as a technicality to attempt to sidestep the laws?

Maybe the laws should be relaxed to open it up to more laypeople, but given how easily people get burned and scammed at this stuff, I’m not fully convinced (penny stocks anyone? Or even Bitcoin: yes some people got rich and others will get rich in the future, but there’s a very high chance that a lot of laypeople who bought in recently because of the price surge are going to lose a lot of money). The point of “accredited investor” is that they can afford to lose their investments.


Someone with $800K in savings who makes $150K/year can easily afford to lose a $5K investment, but is not an accredited investor.

That's why we have the JOBS Act now. I'm hoping some ICOs start using it.


And yet, that worthless fraudulent garbage is one of the few ways to get rich.

The worthless fraudulent garbage is an even a better way to get poor. Which is why there is a financial test to make such investments: “does this person have that kind of money to piss away?”


But that should be a percentage of net worth, rather than a binary function that flips at an arbitrary $1M.


As Mason said to Dixon, “ya gotta draw the line somewhere”. Percentage of wealth as a measure misses one key aspect: accumulating a million dollars isn’t that hard. You can either work a middle-class job and not piss away every penny as fast it comes in, or you’re so loaded that a million dollars is what you keep in the checking account for emergencies. In the former case, you don’t get $1MM being an idiot at finances. Yeah, that leaves out the gal with $900K, but see first sentence. For the latter, you lose $500K, who cares? You’ll still eat tomorrow.

Of course there are numerous counter-examples. Rap artist M. C. Hammer comes to mind. A rich person can afford a bad investment or two, but not a string of them.


> You can either work a middle-class job and not piss away every penny as fast it comes in

"Middle class", using the conventional definition of 67%-200% of median household income, is about $40k to $110k a year. The median within that range is about $65k. Let's say you pay about 25% in taxes, and manage to save 1/3 of what's left. That's about $16k/year, which means it would take that household an entire lifetime to save up a million dollars.


which means it would take that household an entire lifetime to save up a million dollars.

Well, then, I guess they best not be pissing away what little they have on dodgy ICOs. I mean, perhaps I’m wrong on the math, but you still haven’t convinced me of the case that those making $65K/year should get to dump their retirement money into dodgy investments. Rather, you’ve furthered the case against.


> That's about $16k/year, which means it would take that household an entire lifetime to save up a million dollars.

~23 years if you add $16k a year and compound at 8% (below average S&P return for our lifetimes). If you increase contribution along with pay increases the time to a million will be less, small changes in return % also make a huge difference.

Not exactly overnight, but also completely doable.


The line of thinking here seems to be that, to get to $1M, you probably have learned a lot more than someone making only $50-60k a year. So not only would you have the capital, you'd also have the common sense not to make a poor investment.


People with a million dollars are no better at detecting bad investments than people without. If anything, they're worse because they imagine themselves to be far more sophisticated than they actually are. I've witnessed this time and again.


Frankly I think there's also some sort of "sympathy level" in the law.

If a little old lady living on a fixed income loses all her meager savings to a huckster we feel a lot worse for her than if a Wall Street 1%er with three houses loses all his savings to the same huckster.

Which might not be the fairest or most logical way to legislate, but laws are about feelings as much as anything else.


But it also continues the idea "Only the rich may get richer. These things are not for the little guy."

Unless we want to equate "Not having a great deal of money as someone who is too stupid to know how to invest."


Except this entire discussion was kicked off by trying to evade reporting and disclosure regulations.


> And yet, that worthless fraudulent garbage is one of the few ways to get rich.

...for the founders of said fraudulent garbage and perhaps a small number of very lucky people.


Everything you just said is shockinly wrong.

The issue with Kickstarter is that it gave you no ownership interest in Oculus. Your $400 was just a pre-order. But at least it's a pre-order! Whereas the issue with ICOs is that they give you no ownership interest. Your $400 is just a donation.

"The $400 would've become quite a handy sum by the time Oculus got acquired."

Only if you had purchased equity. An ICO is not equity. You're literally about being taken for a ride, and responding by wishing you could have been taken for a bigger ride, with fewer protections.


> If Oculus had done an ICO instead of a kickstarter, my $400 wouldn't have been merely a preorder. The $400 would've become quite a handy sum by the time Oculus got acquired.

And Oculus could have just as easily took your $400 and vanished without a trace. Or you could have unknowingly purchased shares that were worthless to begin with.


Or maybe your Oculus ICO would have been worthless because it wasn't an equity offering...


> And yet, that worthless fraudulent garbage is one of the few ways to get rich.

They are a much, much better way to get poor. There's a reason we have the laws we do: a long history of amateurs getting taken to the cleaners by professional fraudsters.


> It protects the monopoly the investor class has on investments like these.

False.

If anything, it exposes consistently larger "chunks of value" to the risk involved in the investment. Given accredited investors are used to evaluating risk it simply allows the to participate freely in the unknown risks of these types of investment vehicles without getting smaller investors involved in the mix. (It also prevents them from using their position against lower investment amounts made by lower accredited individuals.)

The "protection" afforded here is to the common investor, who by definition does not carry a large store of value with them. By preventing them from investing directly, by way of limiting their involvement based on their stored values, the SEC is protecting the "collective stored value" of the lower classes. And, this makes sense, given the dollar's value is based in part on what people are willing to pay for a given set of objects. This is the responsibility of the Fed to US.

An analogy would be the Yap allowing their children to go and mine Rai Stones by themselves. No sensible society would allow this to occur, given the dangers. And, yes, I'm comparing lower accredited investors to children, when considering the amount of knowledge they may carry with them regarding risk.


But you can bet $20,000 on the single spin of the roulette wheel and the expected value is negative.

If you are allowed to do investing when young and at low levels, like many other things in life, you could learn some great lessons and maybe you won't sell your 1/2 million dollar IRA investments for 1/4 million in a market downturn.


And yet anyone can buy 3x leveraged ETF/ETNs and not understand how the products are structured. Some of those products, due to the structure, will always lose value over time as the futures used to replicate them are normally in contango.

So some financial products where they will always drift to zero are fine, but investments in companies that have a chance to profit aren't allowed.


You can create a company that has ludicrously limited opportunities to return its capital, and sell those to the public. You simply have to comply with the SEC's registration and disclosure rules --- in particular, you have to publish quarterly audited financials confirming your limited prospects.

That is the difference between the "3x leveraged ETF" and the "company that has a chance at profit" in your example, not some weird value judgement the SEC is making.


Who the hell in the "lower classes" is investing their money? Even a good share of middle class Americans have no investments at all or so few that their net worth is either negligible or negative. The idea that the SEC needs to be "protecting" these people when buying lottery tickets and cigarettes is legal is laughable.


That phrase, and the combination of 'monopoly' and 'investor class' tends to jar me because as I see it the truth is exactly opposite to the sentiment expressed. Rather than protect the 'investment class' it protects people who can't afford to lose all of their investment.

Part of the problem is a sort of systemic survivor bias where the accredited investors rarely talk about all the times they lost all of their investment, and instead focus on the ones where they made money (the more disproportionate the better). The reality is the most of the investment opportunities that are offered only to accredited investors lose money, and what that translates to is that most people, if allowed to invest in these things, would lose money they couldn't afford to lose.

It can be hard to see that when an angel investor crows about a huge payday from someone they helped get started. And in hindsight it is "easy" to see how that deal made perfect sense. But imagine if you were allowed in on Uber's last fundraising round and now they are in danger of a 40% 'down round' courtesy of SoftBank? That second mortgage you took out on the 'hottest startup in the bay area' starts looking like you're going to have to pay it back by your own labor.

Another argument I have heard made is "Hey, it's my money and who are you to tell me how to invest it?" (note told in the first person even though the 'you' reading this or commenting on it may have never made such an argument). I totally understand and resonate with that argument, but when you do invest it with someone who was very slick and had you completely believing that they could turn dog poo into gold, and it turns out after you lost your entire investment that they never really could and there was evidence in their books or history that, had you known, you never would have invested. Then you want them punished some how, but for what? Lying through omission and tricking you out of your money? And we have a system for that, its a bunch of regulations, imposed by the SEC, which allows the SEC to fine or jail people who violate them. And they include things like FD or Full Disclosure rules which demand they cannot lie to you by omission or it is on them. And if an investment is legit and they want to offer it to non-accredited investors, then the person selling the securities will go through the necessary hoops and there won't be an issue selling them to you.


> Rather than protect the 'investment class' it protects people who can't afford to lose all of their investment.

The problem is that this isn't a binary. To protect the hapless grandparents from losing their retirement, it also restricts knowledgeable but not rich people from making informed decisions for themselves.


> To protect the hapless grandparents from losing their retirement, it also restricts knowledgeable but not rich people from making informed decisions for themselves.

Welcome to living in society. It is all give and take.


That's not an excuse for lazy policy.


Care to do better, taking into account the system that existed before it, the political climate at the time, the priority of the legislation vs other legislation, and all the other complex factors involved.

It’s easy to play armchair politician or legislator online....


How about:

- apply the same financial disclosure rules we use for public exchanges?

- or require insurance against failures to properly report risk


I am not sure I understand your point. Do you feel that accredited investors that lose money on their investments are either not knowledgeable or not informed?


My point was pretty clear I think. There are people who are knowledgeable and informed about various investment opportunities who are not in the >$1MM net worth range. There is no good reason that those people should not be able to rationally take on the risk of an early investment. There are better ways to protect the uninformed than a blanket cut off.


you call it "investor class monopoly" (if such thing exists), I call it protecting citizens who can be easily duped


Yet they don't protect people from pay day loans or from gambling. They only 'protect' intelligent people from getting out of the system they've rigged.

They also don't protect workers from getting worthless secondary 'common' stock.

Keep regurgitating their lies. It's working for them.


When you take out a mortgage to bring more capital to a craps table, literally everybody involved knows you have a problem. The same is obviously not true for securities and speculative assets.


That's completely different. Those are regulated so you know the exact deal you are getting up front.


The common stock is one of the most direct way of screwing workers. I guess anything is okay as long as it is part of fine print.


It's basically "think of the children!" except you extend childhood to all of life. Perfect, really.


You can sell securities to anybody, including (presumably) children. You simply have to register them with the SEC and follow the disclosure rules all the other thousands of publicly traded companies have to follow.

Heck, after the JOBS Act, it got even easier to do this under Reg A+, which allows for a lightweight IPO for raises under 50MM --- which describes most ICOs.

What's happening in this thread is simply special pleading for a particular type of enterprise to be exempt from those rules.


It's mindboggling how people are perfectly OK with raising 50-200 million dollars with an ICO, when they don't have a team, or a working product, but they can't possibly afford the expense and hassle of compliance, auditing and disclosure.


There are two things here:

* It's not OK to raise 200M with no team and product;

* Compliance only creates obstructions, not protection.


RegA+ companies don't require SEC proxy statements, director and 10% stockholder reporting, SOX independent audits, SOX internal controls documentations, or SOX CEO certification. Pretty much all they're required to do is create a quarterly audited financial report. How is that "obstruction, not protection"? What kind of company that ordinary people should invest in can't produce an audited financial report? Charities and nonprofits product audited financials!


Thanks for bringing this up. I didn't realize just how lax the rules regarding being a Regulation A Plus company are.

You don't need to be an accredited investor to invest in one. You just need to limit your investment to no more then 10% of your salary, or net worth, whichever is greater.

There are currently over 150 Reg A+ companies in the United States. I am eagerly waiting for people lambasting how the accredited investor rule keeps out little people... To explain why little people aren't falling head over heels to invest in RegA+ corps.


Reg A+ is indeed easier than an IPO. I've seen some companies doing that, and it's 1 year pushback, to say at least.

One year is an insanely long time these days!


Except the majority (let's say 99%) of all adults have zero financial literacy


Yet they are expected already to operate as if they do. What's one more thing?


The "investor class" are prepared to handle loss. This isn't free money that oligarchy are keeping from the poor. Perhaps the floor is currently too high, but you should absolutely have savings before you consider investments where you stand to lose. In other words, an "investment class".


It's almost predictable how people will respond here to a comment like this...

You're 100% right.


Indeed. "Investor class" just means having enough saved, or enough income, that you are prepared to make investments where you can lose money. It's like saying those with FICO's over 480 have a monopoly on the ability to get a car loan, or that those with basic math skills have a monopoly on programming jobs.


> It's like saying those with FICO's over 480 have a monopoly on the ability to get a car loan, or that those with basic math skills have a monopoly on programming jobs.

Wrong. It's like saying there is a LAW requiring a certain credit score or a certain set of math skills. I don't have anything to add on whether investor accreditation is fair or not, but comparing federal law and regulations to loan or hiring opinions/choices is disingenuous. The comparison to predatory loan regulations or legal certification requirements for hiring would in fact be more apt.


That makes sense.


This also deters entrepreneurship from otherwise less established entities. The risk with regulations like this is that in attempting to keep out the scammers, you also end up keeping out smaller by otherwise completely authentic entities.

In the worst case you end up keeping out smaller players, yet the scammers find creative ways around the system. Take, for instance, patents. They were initially envisioned as a way for independent inventors to ensure their ideas were not stolen. But a century of absurdly complex rules and regulations paired with extreme fees mostly keeps out very small scale inventors. On the other hands, the scammers are seemingly as active as ever and completely inappropriate patents are still regularly granted. So what have we truly accomplished?


If you're deterred by this kind of thing, then perhaps you're the kind of "entrepreneur" that should be discouraged. We absolutely do not need any more scammers in this space.


SEC compliance comes with extensive fees, delays, and a century of legalese. Coin offerings do not have to fall in the tens of millions of dollars. It's a practical way for smaller startups to raise small amounts of money. For instance the first company that started Musk's rise was Zip2 - and it was started with money that was in the 5 figures. A coin offering instead of angel investors could have been an interesting option for a similar company now a days. For companies on this scale, having to hire a legal team to ensure compliance is a significant burden.

How much do you think this will end up costing companies to comply with? Ultimately we'd all like to have 100% honest ICOs. But you have to balance the cost of compliance with the expected results. Many ICOs already block American investors and that was before this. How will this effect the rates of scams? How will this effect the rate of perfectly up and up ICOs that are not made available to US investors?


If an ICO is perfectly up and up they should abide by the same regulation as other securities. If you can’t afford the regulation then you can’t afford to sell securities. It seems like ICO boosters have a hard time believing that everyone isn’t a libertarian who wants there to be no regulation on ICOs.


> If you can’t afford the regulation then you can’t afford to sell securities.

People are growing tired of the pay-to-play barriers to entry. Why can't we have the regulations without the financial burdens? (Hint: the answer is not about following the regulations themselves, but artificially limiting supply to make for easier enforcement. Otherwise there are too many to meaningfully regulate.)


No I think people in general are quite happy with the SEC and pay-to-play barriers. The boosters looking to make money of ICOs and such may be tired of the SEC, but that's like saying unlicensed drivers are tired of the cops.


> I think people in general are quite happy with the SEC and pay-to-play barriers

I think you are probably right. But as crowdfunding (er, "crowd investing") becomes more available to the masses and the SEC cracks down on it more, a whole group of people that otherwise were unfamiliar w/ these rules aren't going to remain happy. I would not be surprised to see the barriers relaxed (but not the regulations of course).


"Why can't we have the regulations without the financial burdens?"

If you can find people willing to work for your without pay, you can.


I'm questioning the amount of work required as the burden, not the humans. IIRC, the SEC filings require multi-thousand dollar fees. Many government services do not (or not at that level). Do you believe all of those other government services are making people work without pay? I don't think it's fair that you blindly assume the fees are equal to the administrative costs when it seems clear to me they are set at a level to detract the action.


How many government services require hours of work by lawyers per application?

If you can't cough up a few thousand dollars or take our a small business loan to hire some lawyers, why should I believe that you're trustworthy enough to skirt regulations?


I'm saying the application shouldn't require hours of work by lawyers any more than filing for an LLC or my tax filings require individual lawyer review.

In my head, I read the last statement like "why should the law trust you if you don't have enough money, and why should you be allowed to do something without the law's trust?" I believe enforcement should be reactive on regulation skirting within reason. Akin to an audit, an arrest, or anything else. You agree to abide by laws, you may even sign something or fill out a form to that effect. That there is an extra step to see if you "really" agree seems to be a way to artificially limit filing counts. I admit I am not that knowledgeable on possible history where too many did fraudulent filings requiring this individual-lawyer-review preemption.


> I admit I am not that knowledgeable on possible history where too many did fraudulent filings requiring this individual-lawyer-review preemption.

So youre criticizing an institution while being ignorant of the conditions that caused that institution to come about? I suspect you’re not alone in this thread but this kind of ahistoricity makes it impossible to have any kind of reasonable civic discourse. Democracy demands that we educate ourselves. Read about the Great Depression, the creation of the SEC and why it was needed in the first place. The current situation with ICOs where you have some legitimate businessses and some scams advertising themselves to Main Street investors is very similar to the situation with securities before the SEC.


Sigh. No, I specifically said I am not aware of the historical reason that preemptive gatekeeping was chosen in lieu of normal enforcement. I am unsure how you read it as why the SEC came about. Regardless, it was a tongue in cheek way to say it's an abnormal law enforcement approach not based on failure/need.


I'm sorry, I didn't mean to read your claims uncharitably. I'm not sure I get your point now even though you've told me you were being sarcastic.

> I am unsure how you read it as why the SEC came about.

Visiting your original statement: > I admit I am not that knowledgeable on possible history where too many did fraudulent filings requiring this individual-lawyer-review preemption.

This "possible history where too many did fraudulent filings" is the history immediately preceding the creation of the SEC, the period before and during the Great Depression. Things like ICO scams are exactly what the SEC was created to respond to. Securities with no inherent value driven by speculation. I'm sure many will argue that this is unfair to the law abiding ICOs and that's true. But the SEC prevents a deluge of fraudulent securities from taking peoples money and doing the damage in the first place.


"I admit I am not that knowledgeable on possible history where too many did fraudulent filings requiring this individual-lawyer-review preemption."

I feel you really, really do need to make yourself familiar with that before chastising everyone for not agreeing with your position on these regulations. And if you want to argue that they shouldn't apply, then you need to think long and hard about what makes this situation different, and not just because it's "on a computer".


It's a bad way to enforce these laws. I didn't chastise anyone for disagreeing nor did I say anything was different because something happens on a computer. And I never said the regulations shouldn't apply, but that I think they should be enforced like, say, tax or employment regulations and punish the offenders instead of artificially limiting the players. Maybe you're referring to someone else's comment?

Can you help me become familiar with the historical SEC failure that prevents them from accepting applications for non-accredited investment without strict preemptive oversight? Or more simply why can't I register a security like I register a company? Because my historical understanding is RegD has been there since the beginning of the SEC.


You can. Look at the JOBS Act. There is a provision allowing you to raise money with far laxer rules than going public. Really the only thing you need is a quarterly audited report. And if you can't get that, then no, you should not be raising money.


I had read that it costs several thousand per quarter for those audited reports. Still Title IV is a step forward, I agree. Granted others get to raise money from VCs or crowdfunding without those, just not securities.


If you've got evidence to back up that claim, feel free. Remember, however, that the people the SEC employs for doing this are expensive.


If you're only focusing on the costs of compliance, then you're looking at the wrong thing.

"Coin offerings do not have to fall in the tens of millions of dollars."

The amount of money does not matter; a scam is a scam.

"For companies on this scale, having to hire a legal team to ensure compliance is a significant burden."

That sucks for them. But the alternative is far, far worse.

"A coin offering instead of angel investors could have been an interesting option for a similar company now a days."

Why? If the only reason is that they don't have to comply with the reporting and transparency regulations, then it's not a good reason.

"But you have to balance the cost of compliance with the expected results."

Why? And, quite frankly, why should an ICO be treated any differently than any other security? They are exactly the same; and have absolutely nothing differentiating them from traditional securities.

"How will this effect the rate of perfectly up and up ICOs that are not made available to US investors?"

I'm going to say it won't. Perfectly up and up ICOs will be able to get compliance, and will thus be open to all.


> I hope that these actions clear house of the scams

Wouldn't the scams just get launched from other countries that don't have to care about the SEC?


Sure, and they’ll join Nigerian Email Scams where they belong


Just like the valid entrepreneurial efforts will.


Good projects which will then be only available to accredited (i.e. already rich) investors? This defeats the purpose for me


If you're smart enough to tell a good investment from a scam, why don't you have enough money to be an accredited investor?

Or, in other words, by the time the plebes are jumping in on crazy new financial scheme X, you're well enough into bubble phase that restricting investment is probably fine.


Have you seen the requirements to get accredited? How do you get there starting with a modest capital without taking insane risks?

But beyond that I don’t understand why regulation on investment is seen as ok, but regulation in loans to prevent people to drown in debt (which is kind of worse) is frowned upon. I’m not even the most liberal person, but if people are free to lose more than they have (or buy guns, or destroy their health with sugar, or what else) then why are they not free to put their money where they want?


Because lots of people losing all of their money on bad investments has effects on the whole economy, see the Great Depression.


But when it’s institutions like in 2008 it’s ok?


No, that's a problem too? Why does everyone respond with "oh so you think payday loans and subprime mortgages are OK?"

Do you actually want to go back to a time before the SEC. That's how you get a Great Depression.


>If you're smart enough to tell a good investment from a scam, why don't you have enough money to be an accredited investor?

Do you not see the obvious chicken-and-egg problem here?


You're a smart guy, solve it.


You mean, exactly like authorized shares of common stock?

How is this any different than traditional corporate capitalization?

Did you set aside a large pool of tokens for a potential investor who prefers convertible equity?

A reserve for an option pool? How will employee stock options..erm..sorry..'token options' plan work?

If your company is successful, and a great offer comes up to exit, what's the plan for M&A using tokens?

Most importantly, why would investors want coin over stock? Are they given all the same legal company equity rights as traditional stock?


> Our approach to "get around" this is to file all the necessary paperwork for a legal security and then only sell the token to accredited investors.

How does this square with the SEC commissioner's statement yesterday that not a single ICO has registered to do a security offering?


By requiring all investors to be accredited you are exempt from the long registration process with SEC. The law in question is "Rule 506(c) of Regulation D", see: https://www.sec.gov/fast-answers/answers-rule506htm.html


Can you give a brief checklist (or notes, or anything at all) regarding the necessary paperwork? What's involved?


But how are you going to make the coin available for liquid trading in the future?


Can I ask why you'd still go ahead with a token after all that, instead of doing a normal security? With all the same reporting and other regulations as a security, what does being a token get you?


It's slightly sad - and quite funny - that "following the law" is seen as a novel, intriguing approach that can set you apart from the competition. :)


What are the steps and costs to do same? Who is accredited investors btw?


https://www.sec.gov/files/ib_accreditedinvestors.pdf

Generally: earning over 200k/yr, or having a net worth over 1MM excluding your house.


tldr; 10000% returns are limited to club members only


tldr; exemption from SEC disclosure laws that protect investors of all classes are limited to club members only.


Wait, and people are arguing that this process isn't an arbitrary class lock out?


I don't know what "class lock out" means, but the restriction is pretty obviously there to prevent people from staking their livelihoods and financial futures on unvetted offerings.

The idea is that people who have high incomes or high net worths (a) either are financially sophisticated, or can trivially afford financially sophisticated advisors, and (b) are unlikely to be staking so much on a single deal that their long term outcomes will be at risk.


How do you correlate existent material wealth with any of your claims?

What's to stop an inheritor from making a poor investment with all their capital? Or a lottery winner? Or ANYBODY with that kind of money, really?

Why is it presumed that at "arbitrary net worth 1 million," a person is "financially sophisticated?"

If the sec wants to I guess "protect people from themselves," why don't they have an actual certification system that is based on a demonstration of knowledge?

Finally, why aren't people with a net worth of under 1 million protected from other poor financial decisions, since in your mind they are not "financially sophisticated" and thus are more likely to engage in payday loans or other predatory financial institutions?


> 'Why is it presumed that at "arbitrary net worth 1 million," a person is "financially sophisticated?'

It's not so much proving they are financially sophisticated as it is saying they have enough that "they are on their own". For instance, I can't recall many people caring about the wealthy who lost so much in the Madoff scandal. Most opinions seemed to be "they should have known better".

> 'If the sec wants to I guess "protect people from themselves," why don't they have an actual certification system that is based on a demonstration of knowledge?'

You can actually be exempt from the income/wealth requirements if you are an investment advisor / registered broker. I believe you can be an executive at the issuer and be exempt to.

> 'Finally, why aren't people with a net worth of under 1 million protected from other poor financial decisions, since in your mind they are not "financially sophisticated" and thus are more likely to engage in payday loans or other predatory financial institutions?'

SEC doesn't regulate those. I agree predatory lending should be reigned in though.


Actually, I agree that the RegD numbers are arbitrary. They should be much higher: they haven't tracked inflation. A person with 200k in annual income in 2017 is by no means necessarily in a position where they can safely invest in securities that have exempted themselves from disclosure requirements to their investors.


On the other hand, someone with $150K income and $800K net worth can easily afford a $5K investment, and is probably sophisticated enough to not be completely stupid about it. It makes more sense to use percentages rather than a fixed cutoff (and in fact that's what the JOBS Act does).


And, in fact, even if you make $50k a year, you can invest up to low-thousands in RegCF regulated issuances, or even more in a Reg A+ mini-IPO issuance.

By and large, the entities pursuing 8-figure ICOs are those that (a) don't want to spend $10,000-$20,000 to engage with the SEC and adhere to their disclosure rules, and (b) aren't credible enough to raise from accredited investors.

What's crazy to me is the notion that a business venture that can't scrap together $20,000 should somehow obviously be entrusted with $15,000,000 of retail investor money.


What I don't like is the "accredited investors" part. That just means its going to be just as hard as getting stock which is prohibitive to a lot of investors in the world.


Is this possible? Hold ICO, sell like 5% to accredited investor. The rest is reserved for team. Sell 35% on the open market at a fixed price.


Yeah that doesn't sound so much a workaround as it does "doing things properly"


Did they discuss Title IV of JOBS with you?


Will be easy, i think to evade:

- setup a system that looks like it will increase value of your token over time

(as MUN case: “As more users get on the platform, the more valuable your MUN tokens will become”)

- don't make any promises about increase in value/income about your token.

- let people discover and share, or promote on side channels.

IANAL but as far as I searched, I guess as long as you don't make any value increase claims etc, you are totally safe


Good news: ICO's are now technically a security!

Bad news: ICO's are now technically a security!


> In short, Munchee was undone by two things: depending on the token sale as a vehicle to raise cash for operations and using the typically spammy and scammy marketing efforts most ICO floggers use now, tactics taken directly from affiliate marketing handbooks.

It seems that most ICO do both the things. If not a self-inflicting post about the token growth but at least the raising cash for operations part.


> It seems that most ICO do both the things.

That doesn't make it OK. I think what's happening here is that ICO's are raising large enough funding to finally warrant involvement by the SEC.


I'm confused; if you can't use ICO proceeds to fund operations, then what can you spend them on? Where is the money supposed to go?


The money for funding operations is supposed to flow through a registered or otherwise legal security instrument, which this ICO was not. The law hasn't changed, just the supposedly innovative ways of pretending the law doesn't exist.


Nope. You can use the ICO like the IPO. You just need to follow the regulation required. Obviously, they opted for an ICO to avoid that.


The money can (and probably should) go to fund operations, however, you're supposed to register such ICOs with the SEC and follow the proper process just as any other release of securities to investors.


I believe this is part of their announcement on how the SEC will be handling ICOs, but IANAL.

https://news.ycombinator.com/item?id=15902054


Is CryptoKitties a security then?


I just hope that the current ICO bubble doesn't pop so fast that HBO's Silicon Valley misses the opportunity to skewer it next season.


What about CryptoKitties? is it a security using the "Howey Test"?


No. Crypto kitties exists right now. They aren't using the money to fund future development. They aren't making promises about what the money will be used for. What you see is what you get.


Yes, because they pay dividends in the form of new baby crypto cats.


That's not how it works.

The kitty tokens are more like a product than a security I think as each kitty token is unique, but I'm not a lawyer


That's considered collectibles.

Take this difference, for example: if you buy a collectible Ford Shelby GT from 1964 and you pay 10x more what the previous owner paid, you do so with hopes that its a good investment into collectible that eventually someone will give you a better price in the future. Your asumption/feeling of security (hence name "securities" btw) is not guaranteed by anything more than hope that someone will eventually pay more (they never may be such person).

Meanwhile if you buy Ford stock with the same purpose of re-selling it later down the road for hopefully higher price, you are being reassured aka "secured" by the company financial standing, their technical analyze, current market value, future strategy for the corp, etc. If these are phony then hopefully/supposedly SEC steps in to protect you from what most likely will turn out to be scam. Collectibles (genuine one of course) do not come with guarantee/security that their current value (what you personally gave for) will remain in the future, or be repriced higher.


Thank you for the explanation -- I was wondering how securities law is written to exempt the classic-Ford case, when "investors" expect a gain in value that isn't e.g. related to dividends but rather popularity quirks. Your distinction makes sense.


You welcome!


I'd say they're more like trading cards than anything.


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