
Move Over Kickstarter, Crypto-Equity Is the Next Frontier - MichaelAO
http://panampost.com/belen-marty/2014/07/04/move-over-kickstarter-swarm-crypto-equity-is-the-next-frontier/
======
toufka
>What is the legal status of the investments promoted by your platform? How
will they be treated by the Securities and Exchange Commission?

>Just like bitcoin, we’re launching it entirely outside the system.

That's very naive. The government doesn't regulate 'The Dollar', and it
doesn't regulate 'The Stock Market' \- it regulates transactions, exchanges &
financial instruments. Just because you don't play within existing
infrastructure doesn't mean you can play without any rules. As an idea this is
really clever - but I don't think one should intentionally disregard the
(often useful) existing boundaries. Nor say so in an interview.

~~~
Jd
Swarm founder here. We have a very unusual organizational model that allows
people to represent the Swarm without having an "official" status within the
organization, which means that we are always at risk of some degree of
misrepresentation. After this specific interview I issued a "Legal Action
Plan" that specifies the particulars of our near and long-term legal strategy,
such that no one makes faux pas like "we’re launching it entirely outside the
system."

That said, a lot of these subtleties are lost on non-native English speakers,
which at the moment is probably the majority of the Swarm.

The full letter can be read here:
[https://docs.google.com/document/d/1b6krYF6rMECtTwmTjbcZWZ0l...](https://docs.google.com/document/d/1b6krYF6rMECtTwmTjbcZWZ0lrIbfuLO37NayMLmyVVA/edit)

~~~
patcon
I feel like you've likely come across this regulation-related op-ed penned by
Skype's previous COO, but just in case: [http://www.coindesk.com/bitcoin-
regulation-lessons-early-day...](http://www.coindesk.com/bitcoin-regulation-
lessons-early-days-skype/)

> To put it bluntly – every bitcoin actor should be reading the law very
> carefully and finding the loopholes. You should all invest a great deal of
> time in this – it is hugely important. For example, are you really moving
> ‘currency’ or are you simply exchanging some sort of token?

> Companies need to just carry on doing what they are doing, if they can make
> a case for themselves that they don’t need regulation, they shouldn’t even
> go near it. ... [They] should read the rules, argue why they are not covered
> by the rules and use that analysis as a defence, but they should only ask
> for permission if they are sure it is necessary.

Regardless, great positions.

~~~
Jd
Yes, one of our legal counsels actually recommended that we read that article
once. And then again. And again until it sank in.

It sank in. ;)

------
Aerospark
I feel sorry for the pre-sale investors, there is a very high probability that
they will not see their BTC back. If you are considering investing, be
careful.

The platform charges 2% fee to all projects funded, 1% to investors, 1% to
founders. The investors hold a total of 100,000,000 swarmcoin and the presale
is at a rate of 5250 SWARM/BTC. At that rate, the platform would need to do
over $1 billion in sales to just get a ROI, something that took kickstarter
over 5 years.

~~~
Cyther606
I do too. In the history of Bitcoin public offerings, never has a single
company outperformed holding BTC itself over a modest time frame. SwarmCo is
raising a boatload of BTC up front for a risky venture, and taking 1/3 of the
funds to pay salaries.

Startups are all incentivized to do BTC public offerings, but no one is
incentivized to actually deliver products. IPOs are the easiest way to "earn"
BTC. It's cringeworthy how so many of these pseudo-IPOs focus on the marketing
and the limited time buy opportunity without so much as producing a working
prototype. I'm always astounded by the amount of BTCs that get raised. It just
reeks of unsophisticated investors getting sheered.

From the perspective of SWARMCO, once you raise thousands of BTCs, you're
golden. Your investors shoulder all the risk, because the moment they
irreversibly send you the most liquid and stable crypto asset, you can
effectively disappear, or keep delaying "two weeks" as Butterfly Labs is
infamous for doing. If anything goes wrong, just ask Mark Karpeles for advice.

~~~
kolinko
Source?

Satoshi dice outperformed holding btc, and that was during the period when btc
skyrocketted from 10 to 100. Also, but I may be wrong here, asicminer did a
similar trick.

~~~
Cyther606
Over a very short time frame, you mean? Show me a single example of a Bitcoin
stock price chart that looks anything like this:
[http://bitcoincharts.com/charts/bitstampUSD#rg730zczsg2012-0...](http://bitcoincharts.com/charts/bitstampUSD#rg730zczsg2012-02-01zeg2014-02-01ztgCzm1g10zm2g25)

ASICMiner is in the gutters, as is literally every other Bitcoin stock. Who
benefited from the company going public? Over a short time frame, those who
exploited the pump and dump; over a modest time frame of 1-2 years, the
company profits at the expense of investors, every single time, without
exception.

------
mattbarrie
There are very specific laws regarding the hawking of shares to the general
public without variously being registered securities or having an offering
document. While I could see this take off, I doubt it would be used by legal
companies unless it could fit within some crowd funded equity carve out.

------
paul
If the actual business is still centralized, what prevents the operators from
simply ignoring the crypto-shareholders and keeping all profits and assets for
themselves?

------
drcode
The problem with these tokens is that at the end of the day there is no direct
link between a token and the asset they're linked to- Unlike a stock, which
gives you voting rights and other privileges.

Mind you, there is nothing wrong with a completely "unlinked" asset per se
(Bitcoin has proven that) but an unlinked asset's price will, all things being
equal, quickly undergo a price-discovery process that will capture the
majority of future expected returns. Hence, the price for these equities at
any moment in time has no expected return beyond the early floating exchange
rate. Therefore, its true future returns should be modest (the same as
equivalent cryptocurrencies) and it will have only modest potential as an
investment.

Bottom line: If the coin doesn't give me any "special powers" like a stock
certificate does, it has little upside potential compared to any other
cryptocurrency- Hence, it makes more sense to invest any capital I have in a
more established currency, like Bitcoin.

(And for those arguing "Yes, hempcoin/newcameracoin/etc DOES have value and
special powers beyond Bitcoin because my hempshop/newcamerashop/etc doesn't
take bitcoins but does take this specialty coin" then it should be obvious
that you'd be able to perform a JIT purchase this coin using bitcoins through
an exchange, which means Bitcoin holders have access to the same "special
power", without needing to be long-term holders of the asset.)

These types of coins will only become interesting once cryptocurrency contract
technology becomes more developed, so that these coins can give holders more
extensive special rights regarding the asset/project the coins are linked to.

------
tew28
This would almost certainly fall under the definition of security under the
'33 Act.

Besides this, the questionable practice of calling this coin "equity" and
representing that it entitles holders that gives them some kind of ownership
stake in companies funded with this coin on the website, while putting the
disclaimers within another document, creates the impression that the issuers
want people to think this is equity so they can raise BTC. As the founder has
said in a comment, the majority of the swarm consists of non-native speakers
at the moment, so this distinction would be lost on them. There seems to be
demand for something like this, but the lack of details or research into
relevant laws give me plenty of pause.

Can the founder (Joel) clarify his affiliation as well? His swarm bio at
[http://swarmcorp.com/team.html](http://swarmcorp.com/team.html) lists
"#Harvard #Brown #Penn" but his LinkedIn profile seems to indicate that he did
not actually get a degree from all of these institutions.

~~~
Jd
There are lots of reasons for pause and our choice of the term "cryptoequity"
was certainly because it does evoke the fuller idea of the potential behind
these cryptoassets, something that you don't get with the weaker but more
accurate "cryptotoken."

Although we've issued various statements clarifying the issues including a
manifesto, cryptoequity whitepaper, and legal action plan, it remains fairly
complex and something that is probably not approachable to the ordinary user.
I'm hoping that changes with the video explanation that we are launching on
July 10th.

As for me, I have my B.A. from Brown and M.A. from Penn and a smattering of
various other institutions including Harvard.

------
spb
> The crypto-equity platform is enabled through bitcoin 2.0 technology

Oh, _please_ tell me this isn't going to start becoming a thing people say.
Please. I can't bear the thought of another "Web 2.0" buzzword bubble.

~~~
Jd
I personally strongly dislike the term "Bitcoin 2.0" although I still use it
quite frequently, primarily because I don't know of any other succinct way to
describe all of the second generation functionality that is currently being
built on top of the blockchain.

~~~
saraid216
... "Bitcoin-based"?

------
adventured
There's nothing particularly revolutionary about this concept. It existed for
nearly two centuries before the SEC locked down rules on investing.

The sole reason it hasn't existed the last 20 or 30 years is due to the SEC,
not the lack of someone 'inventing' it. Their rules restrain the ability to do
it.

Anonymous investing was extremely common prior to the SEC taking over full
control of investing laws. It was trivial to set up anonymous shell entities
and hide who owned what, making it practically untraceable.

------
dobbsbob
[http://swarmcorp.com/faq.html](http://swarmcorp.com/faq.html)

Is this Legal?

"We believe this falls into section 1(d) of our Cryptoequity whitepaper,
meaning it is allowable under U.S. law and is probably not problematic
elsewere"

This is 1(d): _People can redeem cryptotokens at some point in the future for
some service in the network. [Legal assessment: Probably fine, may limit
upside of “equity” growth]_

So it's "probably legal" which doesn't instill much confidence

~~~
higherpurpose
I don't think Kickstarter was clear-cut legal, either, was it? I think they
needed to have a law passed that essentially legalized "crowdfunding".

~~~
liveoneggs
kickstarter doesn't allow you to offer equity, but the JOBS act + the SEC did
change this year to allow non-accredited investors (people with less than $1M
in assets) to buy into a company directly; and for a company to market equity
in the style of kickstarter.

Here are the new rules: For income below $100,000, invest a max of $2,000 or
5% of income or net worth For income over $100,000, invest a max of 10% of
income or net worth Investments made in a Title III crowdfunding transaction
can’t be resold for a period of one year

~~~
yourmailman
Note people, these laws are not yet in effect and are still liable to change.
Equity Crowdfunding for the public (non-accredited investors) is ILLEGAL,
unless done through a intrastate crowdfunding exemption.

------
kriro
It may work, it may not. I have my doubts but I'm very happy this exists. We
need more radical thinkers like this.

------
tzs
@corpselord420: your interesting comment is unreadable by most HN readers,
because you appear to be hell banned. Only people who have enabled "show dead"
can see it (or any of your other comments--looks like you got banned with your
first comment).

~~~
dang
We unkilled that comment.

We think there's a place for unkilling comments on a case-by-case basis and
will probably implement a way for users (like, in this case, tzs) to indicate
when to do so.

~~~
tzs
If you do that, how about also changing the style for killed comments made
visible by the show dead option so that they are readable? Right now, they are
given the .dead style, which has color #dddddd, making them hard to read.

If someone turns on show dead, presumably it is because they want to read the
dead comments. Making them visible but hard to read seems kind of obnoxious.

~~~
dang
Seems like a fair suggestion. I'll add it to the list.

------
warcher
I really am a fan of the idea of all these crowd-sourced equity ideas that are
getting hatched.

As a boots on the ground business guy, however, the potential for fraud and
abuse is staggering. I have seen things go down with 'accredited investors'
trying to get into the startup gold rush that are unbelievable. To me, at
least. And these same guys are on kickstarter right now, where there's no
accountability whatsoever, cleaning up.

All I can say about the regulation of equities is that it's an ugly solution
to a very real white collar crime problem.

------
Nursie
For anyone interested in micro-equity I found a site called
[http://crowdcube.com](http://crowdcube.com) recently. It doesn't have any
cool crypto aspects but it is basically kickstarter with real equity (rather
than just a speculative pre-order).

It's UK only at the moment. I guess that must be because regulations make it
difficult in the USA.

But there's no blockchain aspect so I guess it can't be as cool as SWARM...

~~~
chippy
Do you think that SWARM would operate easier in the UK?

~~~
Nursie
As I understand it, in the USA you can only attract public investment either
by gong fully public and being regulated as a public corporation, or by
attracting individuals of high net worth. From what I understand this is
considered a consumer protection mechanism, such that you can't lose the farm
(literally) by investing in private equity schemes.

So far as I know, this restriction does not exist in the UK. So yes, if SWARM
operated in the UK with UK investors it might have an easier time.

Personally I don't really see the need for the crypto aspect, and AFAICT
investment regulations are usually a good thing, but whatever floats your
boat.

------
qq66
Without some force of law to ensure dividend distribution back to
shareholders, equity doesn't really exist except at the pleasure of
management.

------
grondilu
Pretty sure it's illegal in most countries. So it can only work for businesses
that are themselves illegal.

------
eterps
[http://bitshares.org](http://bitshares.org)

------
dmix
> Susanne Tarkowski Tempelhof on SWARM, a Revolutionary Crowdfunding Platform

I've learned to skip any article that has 'revolutionary' in the title or
subheading.

------
corpselord420
this reminds me of a metafilter comment from 2012 (because it's literally what
is described in the comment): "There are very interesting things you can do
with bitcoin that nobody is doing yet.

Bitcoin is fundamentally a globally synchronized ledger. Think of it this way,
every single bank in the world has their entire transaction history available
for the public, live. You can use that ledger for more than just exchanging a
single currency on that ledger.

Because you can accurately trace the transaction history of coins, as
everything is logged, you can overload the coin to have other contractual
properties, simply by creating a document that says the 0.00000100 coins
derived from this single transaction counts as 100 shares of freely tradeable
common stock (you'd need something like a last-in-first-out order specified in
the contract).

By tracing who owns individual shares, you can then give voting rights to
those addresses (and because they have crypto signature built in, you can vote
on board members, etc. Further, since you know the addresses for bitcoin
ownership, you can issue dividends. The dividends can be priced in bitcoin, or
more interestingly, the dividends can be denominated in US DOLLARS. You can
specify 0.00000001 bitcoin as 1 share of an ETN, making 1 share equal to 1 USD
backed by a bank.

Because bitcoin supports complex transactions, you can conduct a single
transaction of 1 share for 1 USD in a single atomic transaction, with no need
for complex clearinghouses as we do today.

Here's where things get crazy: by using distributed hash tables, such as what
people use to find peers in bittorrent DHT, you can build a trading floor. The
trading floor can have bid-ask spreads (although only the ask side can run
without escrow), this means you can build an entire stock exchange with
functionally no actual middlemen beyond the distributed bitcoin transaction
ledger. All you would need to do is broadcast on the DHT peer-to-peer network
an open bitcoin transaction that says "I will accept any transaction that pays
me 3 bitcoin for this specially marked 0.00000001 bitcoin that is 1 share of
stock in ABC Corp.", which is supported in bitcoin's protocol.

Here's also where things get creepy: if you had a nation-state that recognized
this as a valid corporate structure, you could build a company in which
ownership is completely unknown. Also, if a hedge fund that invested in these
companies, and created a machine learning algorithm that invested successfully
and bid on computing power (paid for in bitocoins), and the hedge fund owner
was ran over by a truck, you'd have an independent entity surviving on the
network with complete agency, with no human control.

There are a lot of creepy things that can happen, a lot of possibly good
things (reducing middlemen in banking), either way, we've only begun to
scratch the surface of what bitcoin means. If you think it's exclusively the
domain for a bunch of wackjob gold bugs hating on the Federal Reserve, I think
you're underestimating what bitcoin may be able do in the future." some other
points: -undetectable stealth takeovers; this is a huge part of the sec's job
and it will be fucking chaotic -- stealth sell shares to yourself to
artificially depress the prices and boom. but that doesn't really matter
because: -no legal accountability to shareholders woops! -stealth collusion
and market manipulation across different corporations by stealth monopolists
-like someone else said this literally only has utility for criminal
enterprises because its baldly illegal in the US and probably every other
country

------
company
No its not.

