
Sand Hill Exchange Fined $20,000 by SEC - warrenmar
http://blog.sandhill.exchange/post/120465743273/sand-hill-exchange-fined-20-000-by-sec
======
ivanplenty
I don't understand: "Sand Hill Exchange" accepted items of real value (USD and
BC) that could be used to "purchase" (or bet on) things named after real
securities that trade (or are expected to trade) on public markets for a
profit.

I would be surprised if a regulatory body _didn 't_ come after this setup.
There is a very bright regulatory line around gambling and investing in most
countries that a typical person should have known about. What am I missing?
Why should I sympathize with Sand Hill Exchange?

~~~
pjg
The issue here isn't whether "real-value" was used or not. Technically kids
selling lemonade on street corner on a Sun afternoon need a business licence.
Do we prosecute them for illegal activity ? Do we arrest their parents ?

Does the punishment befit the crime. These guys had limits on what the users
could do. Anybody - yes even the SEC - could take a look and see it wasn't a
platform for massive illegal trading. They could order a cease and desist.
Better yet "cap" the volume to its no more than "tiny gaming level". But
imposing a 5 digit fine on founders who are working without pay, without
funding ? That's not just stifling innovation, but fear mongering.

~~~
mpyne
> Does the punishment befit the crime.

The title says they only got a $20k fine. Am I misreading it? Was this a
lemonade stand run by an 8 year old, or by grown adults who are able to use a
search engine and Wikipedia?

------
refurb
This blog has more details: [https://medium.com/@eiaine/how-startup-growth-
hacks-resulted...](https://medium.com/@eiaine/how-startup-growth-hacks-
resulted-in-a-formal-investigation-from-the-sec-cd04598fe58)

It's a funny read....

 _Another thing I learned: If you’re gonna try to make yourself look like a
legitimate financial institution, you’ll be prosecuted like a legitimate
financial institution. And when that happens, you sure as shit better have the
legal resources of a legitimate financial institution._

 _The Commission accused us of acting as unregistered broker-dealers, selling
security-based swaps, offering swaps on an unregistered securities exchange._

~~~
billyhoffman
And this:

 _" Without a corporate barrier to protect us, the penalty was personal. How
high would the fine go if we did not settle?"_

Doing this without an incorporated company is just clown shoes. Surely they
must have had one, but a quick skim of their TOS doesn't reveal a company name
or Doing Business As entity. I don't understand why an SEC fine would be
against the people and not the entity.

~~~
mpyne
> I don't understand why an SEC fine would be against the people and not the
> entity.

Are you sure that it's really not clown shoes? I mean, ordinarily I'd agree
that _surely_ no one would be crazy enough to run a securities exchange
without incorporating, but the quote you linked from their post seems to imply
otherwise.

~~~
billyhoffman
It's possible. Years ago I knew a few security folks who were moonlighting as
independent security consultants. They did an assessment of a financial
institution, caused some downtime, and there was a lawsuit. Turns out they
hadn't incorporated and it was pretty terrible for them.

Let this be a lesson. Always Always Alway create a business entity. Separation
== protection

------
chernevik
The SEC should have said "Very clever, kids, but, ah, no. Knock it off." A
fine here is ridiculous -- the participation was capped at $250, this clearly
wasn't intended to take in serious amounts of money. The SEC can't let
something like this go on, but it can be less hamfisted in its handling.

Really the right thing here would have been a visit by SEC staff, asking a lot
of questions and pointing out some security law violations, at which point the
operators go "umm, didn't think about that, we'll be good". But that approach
doesn't let the bureaucrats justify 100 hours of browsing on their time
sheets, does it?

The injunction to obey security laws going forward does make sense, it gives
the SEC leverage if these same people actually do pop up later as scammers.

Some journalism on what they were doing:

[http://www.bloombergview.com/articles/2015-03-11/how-
should-...](http://www.bloombergview.com/articles/2015-03-11/how-should-a-
bank-be-)

[http://ftalphaville.ft.com/2015/03/10/2121090/sand-hill-
is-t...](http://ftalphaville.ft.com/2015/03/10/2121090/sand-hill-is-the-new-
wall-street/)

~~~
rhino369
20k fine is nothing. They were let off with a slap on the wrist, probably
because they were willing to cooperate.

~~~
elaineo
We understand that we did some unacceptable things. We get it. As individuals,
we don't have $20k. The fine is not just a slap on the wrist, it's financially
ruinous.

~~~
anigbrowl
No it isn't, people leave college with many times that amount of debt. Split
it up between you, ask to get into a payment that's capped at a % of your
income, work it off over a year or two. Make copies of your bank statements
and your tax returns to confirm that you are in fact poor. You could probably
make the money back in speaking fees or writing an e-book about your
experience and what you learned (rather than how pissed off you are).

Yeah, it's a lot of cash, but I've been billed more than that for a night in
the ER when I didn't have insurance. And seriously, it was up to you to think
about the fact that this was bound to attract regulators' attention and that
the time they spent on you is currently being picked up by taxpayers. I know
you want to compare yourselves with bucket Shops, which you think played an
important role in democratizing/disrupting finance a century ago, but this
whole idea of 'a chance for regular folk to get in on the action!' is
unfortunately the same sort of psychology that con artists use to qualify
their marks.

Honestly, if one of you had done an ask HN about whether this was a viable
thing people here would have told you why not and what you needed to do to be
legit.

Edit: come to think of it, I'm surprised your mentors int he Accelerator
didn't point out this very obvious pitfall to you.

~~~
chernevik
> it was up to you to think about the fact that this was bound to attract
> regulators' attention

Oh please, these people are what, 22? 25? They are supposed to know the basics
of security law off the tops of their heads?

They got an idea and spun it up in a weekend. Yes, on reflection, allowing
this sort of thing opens all sorts of loopholes for bad actors. And it had to
be shut down. But it isn't as if this was done by a bunch of associates at
Sullivan & Cromwell, or the interns at Goldman Sachs. They did something fun,
it got afoul of the securities laws, whatever. Explain the legal breech and
practical problem and tell them to pack it up, boom, we're done.

But bureaucrats are basically sycophants and / or bullies. They aren't in the
job to protect the public. They're in the job to make money by connections,
and to push around people without the knowledge or stones to tell them to fuck
off.

~~~
tzs
> Oh please, these people are what, 22? 25? They are supposed to know the
> basics of security law off the tops of their heads?

No, but they should have known that it might be relevant and done some
research online and/or talked to a lawyer.

Later, when Matt Levine, who is a columnist from Bloomberg and a lawyer, wrote
about them in his column and said that he could not see how it is legal,
specifically mentioning SEC and CFTC regulations as problem areas, that should
have been a giant freaking clue that they should investigate these things.
Instead, they tweeted "Cool! NYC banker hipster @matt_levine is hating on us.
We must be getting too mainstream :)".

~~~
chernevik
Because we should all talk to lawyers before we do anything.

~~~
tzs
I said do research online and/or talk to a lawyer.

And we are not talking about doing just "anything". We are talking about a
very specific thing: starting a company that is going to take real money from
people, and help them do risky things with it--a company that depending on how
you look at it is a securities company or a gambling company or a prediction
market. According to their FAQ, they planned to have no limits on how much
money someone could put into this, and they were aiming for very high volume,
so if it had worked out they would be dealing with vast amounts of money.

All of those are highly regulated areas, and it is hard to believe that anyone
who had even glanced in the general direction of doing a company in any of
those areas would not be aware of that.

So are you _seriously_ suggesting that it is reasonable to start a company
that is going to handle, you hope, vast quantities of money for a vast number
of people in a highly regulated industry, and _NOT_ do any online research or
seek legal advice to make sure that you are legal?

And do you _seriously_ think that when a prominent writer who covers your
field and _is_ a lawyer _tells_ you he can't see how your business is legal,
it's reasonable to mockingly dismiss that?

~~~
chernevik
My understanding is that this was a project -- not really a company, never
intended to make a lot of money.

Now if that is wrong -- if they intended to generate real revenue and profit
off this thing, and raise money -- then yes, they're idiots.

But if this was something put together as a project, something fun and
interesting to do, then I understand why they didn't consult a lawyer.

~~~
anigbrowl
It would have been fine as long as they were running it with fantasy money,
like many of the other play markets out there. When you create a mechanism for
people to put real money into it, though, that's like the difference between
breadboarding some electronics with a battery or DC adapter, and plugging
straight into the wall socket. Once you take in money, for whatever purpose,
you're operating some sort of business - and the laws surrounding issues are
money transmission, transacting with bitcoin vs national currencies and other
topics are discussed _frequently_ on HN.

------
foobarqux
On Twitter several months ago, the financial columnist Matt Levine said
something along the lines of "Sand Hill Exchange can't possibly be legal" and
one of the founders replied saying "You've got it all wrong, you just don't
understand what we are doing".

Some things really are as simple as they seem on their face.

~~~
cjensen
After reading Levine's column [1] and Sand Hill Exchange's response [2], I'd
have to say they were amazingly clueless.

[1] [http://www.bloombergview.com/articles/2015-03-11/how-
should-...](http://www.bloombergview.com/articles/2015-03-11/how-should-a-
bank-be-)

[2]
[https://twitter.com/sandhillx/status/575659746507649024](https://twitter.com/sandhillx/status/575659746507649024)

~~~
sfrechtling
Especially interesting in light of this, their analysis of traffic from the
sec: [http://sandhill.exchange/blog/sec-
analysis](http://sandhill.exchange/blog/sec-analysis)

------
shawnee_
_... where people could throw pocket change on valuation wagers._

 _We never had any intention of operating in a regulated industry, nor do we
have the resources required to do so._

"Oh, it was just for shits and giggles" ... when there's real money involved?

A peek at archive.org shows the sales pitch at the time of the SEC traffic /
tracked visits. I'm not seeing anything about "for entertainment purposes
only" here:

 _The mission of Sand Hill Exchange is to democratize startup investment.We
believe the startup ecosystem benefits when everybody can participate in
startup growth. Our vision is to extend the power of public markets to private
companies._

[source:
[https://web.archive.org/web/20150315015146/http://sandhill.e...](https://web.archive.org/web/20150315015146/http://sandhill.exchange/)]

~~~
jboy55
I love this bit, "Sand Hill Exchange is backed by notable Silicon Valley
investors, providing sufficient capital to guarantee deposits."

Yet, in a comment in this thread, a $20,000 fine was financially ruinous.

I hope they immediately refunded everyone their BTC, this is how 'innocent'
people end up running Ponzi schemes.

~~~
alextgordon
They said that they had $10k in the bank; $1.5k had been 'invested'; and the
fine is $20k. So... yes?

~~~
jboy55
$10k in the bank is hardly "Sand Hill Exchange is backed by notable Silicon
Valley investors, providing _sufficient capital_ to guarantee deposits."

Because they got fined $20k, and now they have no backing for the $1.5k of
deposits they have taken.

------
ghall
SHX founding team member here. It's been great to read everybody's comments.
I'm not going waste my time weighing in on whether we were clever hackers or
bozos -- the truth, as always, lies somewhere in the middle.

I did want to share some additional facts, which will come to light when the
statement of facts gets published.

    
    
      (1) We had exactly 55 paying users, who had deposited $1550 and 15.6 BTC.
    
      (2) All but 5 of these users were friends, family, or members of our accelerator.
    
      (3) Our private beta test had been in operation for 7 weeks.

~~~
logicallee
I'm sorry you've been given a hard time here, but with good reason. :)
Securities law is really important for startups - they're the thing that
enables your accelerator to exist, they allow you to exist and raise money and
have protected investors for the next thing you do. So a lot of people here
care a lot about it. Keeping it fun is one thing, but moving into monetization
with fake trading histories - well, clearly you've learned that's another.
Good luck with your next project.

------
jakejake
On the other hand, $20,000 for national publicity is probably a deal. It looks
like the site is running again using only fantasy money.

An interesting thought is that the site itself wasn't making any money on the
trades when there was real currency - which was illegal. But as a purely
fantasy VC game they can make money on subscriptions, advertising, etc - which
is legal.

~~~
MaysonL
As well as potentially attract some capital…

~~~
ghall
Have you ever tried fundraising with four Silicon Valley VCs subpoenaed in an
SEC case against you?

It's a bit like advertising you have an STD on your Tinder profile.

------
namecast
Something I just realized - why is this being handled by the SEC and not the
CFTC? Don't prediction markets fall under the CFTC's jurisdiction, e.g.
Intrade?

I guess given the nature of the prediction market they could have flipped a
coin to see who fined them first....

------
yueq
You shouldn't have tried to add any monetization like IAP. This is simply a
prediction market with startups. Didn't you know what happened to Intrade.com?

Another example of 'early monetization is dangerous'.

------
zekevermillion
they're lucky that the only interaction was with the SEC for running an
exchange, and not with a prosecutor for operating a gambling website.

------
zhoujianfu
Oi! But, that's why [http://exchangel.co/](http://exchangel.co/) never deals
in real money, and only gives out bitcoin as prizes (no purchase necessary).

------
randomname2
Tangentially related: Former SEC Officials Demand SEC Chief: Stop Protecting
Corporate Cronyism

[http://www.nakedcapitalism.com/2015/05/three-former-sec-
comm...](http://www.nakedcapitalism.com/2015/05/three-former-sec-
commissioners-urge-mary-jo-white-to-stop-protecting-corporate-cronyism-via-
inaction-on-disclosure-of-political-spending.html)

------
zaidf
The real growth hack here is getting investigated by the SEC resulting in more
traffic than $20K would otherwise buy you.

------
akg_67
Looks like both the links to Sand Hill Exchange blog post and Founders blog
post are dead with just a mention of "censored". I wonder what SEC rules did
they violate now, may be not disclosing publicly the terms of settlements.

~~~
jboy55
Their lawyers managed to read it the posts.

With statements like, "Nobody wants to play in a market with zero users, we
realized. So we gave participants the illusion of liquidity."

"We created bots to trade against incoming orders. They were like my friends.
I even named them! My favorite was the “Jesse Livermore” bot. Opportunistic to
a fault."

"The bots would run every day and place orders against each other so the
market _looked like_ it was exhibiting lots of price movement and volume. For
_added credibility_ , we _randomly generated trading histories_ for each
company going all the way back to last year."

Their lawyers realized they were admitting to creating a scheme to defraud
investors to the safety of their market. Or maybe the SEC read it, and
realized that perhaps this wasn't just a simple trading platform, but had a
lot of fraudulent data on it and criminal charges were better.

------
mhluongo
It's a shame. How much did the SEC spend chasing an unfunded startup?

EDIT: I don't expect to stem the downvotes, but the SEC's time is better spent
policing large-scale financial crime. Consider the opportunity cost here.

~~~
jdmichal
Do you really think the SEC would have offered a $20,000 settlement if this
was a major banking corp instead of an unfunded startup? Of course not. If
they even did offer a settlement, it would have been an extremely large
number. The SEC knew this was small fish and so offered the settlement to
clear it off the plate.

Furthermore, at what point does it suddenly become OK to chase after a
financial security law violation? Is there a valuation limit? Cash flow limit?
War chest limit? What exactly is the qualification to no longer be "a shame"?

~~~
mhluongo
I don't know the answer to that, but this is the same problem any new fintech
company suffers. Regulations often benefit incumbents and don't scale to new
services testing the market. See eg anything related to bitcoin.

How much do you think it cost them to go after Sand Hill?

~~~
jdmichal
The thing is, I don't care how much it costs the SEC to do their job. Their
purpose is not to be a profit center based around prosecuting financial law
violations. And actually, I'm very happy about that, because profit incentives
in law enforcement creates very perverse incentives for the individual actors
involved.

~~~
mhluongo
You really should. It's not about profit incentives, it's about proper use of
their resources.

Squashing tiny companies might make them feel better, but it's not impactful.
Going after companies defrauding investors / playing it fast and loose for
millions is how you clean up finance.

~~~
dragonwriter
> Squashing tiny companies might make them feel better, but it's not
> impactful. Going after companies defrauding investors / playing it fast and
> loose for millions is how you clean up finance.

Putting out big fires like that is a good -- but expensive -- way to grab
headlines, sure. Something the SEC definitely needs to do to the extent it
can.

Dealing with small things like a little market that lets you bet real money on
company valuations in a market with deliberately falsified trade histories is
how you _prevent_ something from _becoming_ one of those big fires, relatively
cheaply for all involved, and _before_ lots of people get hurt by it. Also an
important thing for the SEC to do.

