
Common Misconceptions about ICO Law - omarchowdhury
https://www.stellar.org/blog/3-common-misconceptions-about-ICO-law/
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quickthrower2
> In California, the risk capital test considers whether there is attempt by
> an issuer to (1) raise funds for a business venture or enterprise (2)
> through an indiscriminate offering to the public at large, (3) where the
> investor is in a passive position to affect the success of the enterprise,
> and (4) the investor’s money is substantially at risk because it is
> inadequately secured.

That squarely sounds like any Kickstarter or crowdfunding arrangement.

~~~
capybaraz
The SEC & state authorities have limited prosecutorial resources -- my guess
is they'll exercise prosecutorial discretion to only go after fraudulent
schemes

~~~
Waterluvian
I would intuit that if they have limited resources, they'd want to make an
example out of the ones they do go after.

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fowlerpower
Look the ICO space is way too young for all the judgment people are passing on
here. The SEC clearly wants to let this play out. No one has gone to jail yet.

The government has already started to relax the ability for non accredited
investors to invest in startups and that was under the last administration.
These rules are recent but they are there, they are very limited though and
ICOs blow the top off of those rules.

ICOs are forcing the SECs hand and I think it show cases the interest that
exist in the public to get into these early stage startups. I won't be
surprised if the rules are relaxed even further to legalize these types of
coins even if they are considered securities, especially under this
administration.

Everyone is saying that you are limiting yourself by offering an ICO. You are
giving away zero equity for the promise that your product and service will
offer these people something in most cases, that is just like a kickstarter.
Furthermore, nothing stops you from raising money after the ICO.

Anyway, this is a fantastic new vehicle for startups and I believe it will
absolutely change the game. The VCs are a little mad because they are being
shut out of the best rounds, where they would normally get the most equity.

At the end of the day what matters most is if startups can start get funding
and hire people and add value to the economy. That is what the SEC has to
balance with the public interest on the other end.

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cperciva
_ICOs are forcing the SECs hand and I think it show cases the interest that
exist in the public to get into these early stage startups._

Ponzi schemes are forcing the SEC's hand, and I think it showcases the
interest that exists in the public to get into these early stage pyramid
schemes.

The fact that the public is interested in something doesn't make the SEC say
"oh, ok, that's fine then". The SEC's job isn't to get out of the way of the
public. The SEC's job is to get _in_ the public's way, in order to protect the
public from scams -- which means the more public interest there is in
something, the _closer_ the SEC will be looking at it.

~~~
fowlerpower
I agree with you that the SEC is there to protect the public.

You are incorrectly saying that ICOs are a Ponzi scheme. When they are in fact
too new to be labeled as anything. If they were in fact all Ponzi Schemes then
people would already be in jail.

Secondly the SEC is there to balance both sides of the equation. Companies
interests and the public dumping money into scams.

~~~
will_brown
> If they were in fact all Ponzi Schemes then people would already be in jail.

Well it was the SEC that oddly of all the ICOs published an opinion on the
DAO, the one ICO that was hard forked (erased from existence). Though if the
DAO wasn't erased, based on the SEC opinion it is fair to say they would have
brought a case right? I mean its not exactly fair for them to conclude the DAO
was an illegal sale of securities and then not enforce the law.

Separately, we have instances of the SEC contacting ICOs and informing them
they are in violation of the law and the ICO investments being returned to
investors...so I think the SEC has fully weighed both sides of the equation.

Certainly the comment you are responding to did not say ICOs are ponzi
schemes, they just simply applied your ICO logic to another situation, but
truthfully many ICOs will turn out to be ponzi schemes and outright fraud, and
likely the DAO was neither (surely it would be fraud if they were _the hacker_
) but they still were likely violating securities laws.

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chinathrow
Related question: Is there a tracker list somewhere displaying
failed/busted/sued/abandonned ICOs out there?

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Animats
Cryptocompare has an ICO list with a "completed" section.[1] The ones with no
price listed had something bad happen.

[1]
[https://www.cryptocompare.com/ico/#/completed](https://www.cryptocompare.com/ico/#/completed)

~~~
Waterluvian
Wait wait wait... Is this list just a list of current ICOs, not a whole list
of all the cryptocurrencies currently or previously traded?

This is a dot com bust waiting to happen, isn't it? People are rushing in with
money to something new and exciting. I recall reading about some huge
investments in absolutely nonsense dot com companies in the 90s.

~~~
AgentME
ICO (Initial Coin Offering) just refers to the specific phase where the
company sells tokens for a limited amount of time in order to get the tokens
into the hands of users. For most, simultaneously or later, the company
creates a smart-contract system that the tokens are to be used in. (The tokens
may act as a limited currency to get the smart-contract system to do something
for you, the tokens may have voting rights over how the smart-contract system
can be upgraded, etc.) An ICO being complete just means that the token
generation/selling by the company is over. Users are free to buy and sell the
tokens between themselves at this point, and use them in the smart-contract
system whenever it's live.

Any prices listed on that page are intended to be recent; a price there means
that people are trading that token now for that amount.

~~~
Waterluvian
Hm, interesting. Thanks for sharing. I was confused by the concept of an ICO
because looking at Bitcoin, it's been dolling out new coins on a regular basis
via. mining (slowing over time), and people weren't buying them.

Does this mean that some "coins" have 100% of their inventory known at the
beginning and instead of people guessing correct hashes, they have to simply
buy them from a central authority?

~~~
AgentME
Yeah pretty much.

It might be helpful to make a distinction between cryptocurrencies (some
popular ones being Bitcoin and Ethereum) and tokens (Augur being one) which
operate predominantly through Ethereum smart contracts. (Disclaimer: I own
some of each of these, but I mention these ones specifically because I think
they bring some innovation and are better examples than most of the ideal
purpose and decentralized nature of cryptocurrencies/tokens. There's a lot of
contenders in this space which are unsound and really only exist as an item to
speculate on.)

Cryptocurrencies like Bitcoin need some way of verifying the valid transaction
history and generally solve this through proof-of-work mining. In order to
incentivize people to mine _and_ to solve the problem of distributing amounts
to users, the system is built so mining generates currency for the miners.
Generally there is no privileged party in the system with the special power to
mint arbitrary amounts as they wish. (Some like Ethereum did do an ICO-style
sale at the beginning to raise money and to jumpstart getting Ether into
people's hands. Generally I've thought this type of thing has been pretty
scammy as a lot of innovation-less pump-and-dump altcoins have done this kind
of thing and it's not exactly decentralized, but Ethereum has actually
delivered on some technical innovation so I'm a bit conflicted.)

Tokens are systems implemented on pre-existing cryptocurriencies for tracking
arbitrary limited units that can be exchanged and traded like a
cryptocurrency. They rely on the infrastructure of the cryptocurrency they're
implemented upon. So a token implemented on Ethereum smart contracts doesn't
need to be mined; it's just important that Ethereum continues to be mined, and
also transactions involving the token generally require small amounts of
Ethereum to pay for transaction fees. The idea of most popular tokens is that
they can or will be used to interact with a decentralized system made of
Ethereum smart contracts. For example, there are various popular tokens
intended to be used as the currency for decentralized prediction markets (a
fancier type of betting site basically that lets you do things buy/sell out of
your positions).

Tokens don't need specific mining in order to verify their transaction
history, so for getting tokens into user's hands, the old solution (mining
rewards) doesn't work. So I guess that gave an excuse for lots of token
developers into doing ICOs / initial limited sales. At least a lot of these
tokens nowadays have more of a plan that involves becoming a decentralized
system and bringing innovation than run-of-the-mill pump-and-dump altcoins in
the past. Though it's to be seen how many end up being vaporware and how many
actually take off.

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gfodor
My personal (IANAL, speculative) view on this is that the tokens which are
going to be considered "utility tokens" are going to be done so retroactively,
once the founders end up building something useful that is objectively
utility-like.

I mean consider the alternative: for projects that never get launched, what
does the SEC do? Right now the mental model seems to be "they read the ICOs
landing page, look into the team, and audit the half-finished github repo to
decide if it was on track to become a utility or a non-utility" \-- this seems
hilariously disconnected from reality. In that scenario does anyone think that
clever choices of project framing on a HTML page and some half-finished code
will keep them out of jail if they are sitting on millions of dollars of money
collected from the public?

My guess is the SEC will basically let things brew for a while and then start
bringing the hammer down on projects that don't go anywhere other than make
the founders rich. If you find yourself in court defending yourself against
the SEC, you better hope you have evidence to show you at least tried to ship
the "utility" you promised.

If this is right, it should be quite frightening to those raising ICOs: you
may be handcuffed tightly to the project since in order to prove that your
tokens were not securities you'll need to have shown a good faith effort to
realize the vision as outlined at the time of the ICO. And don't forget, even
if you actually execute on things, this assumes you managed to design the
project in such a way that you are truly building a "utility token", which is
on its own still has yet to be defined by the SEC.

What this means in English is even if you decide somewhere along the way the
project is a bad idea, not only can you not walk away without potentially
increasing risk of prosecution of securities fraud, but you also may not even
be able to significantly pivot! Considering that most startups pivot at least
once, you are basically undermining your changes of success significantly
(IMHO) by raising money this way vs traditional means.

Unless the concept you use to raise the ICO:

\- sticks the landing perfectly with market fit (hard or maybe impossible,
given what we know about lean startup development in 2017, _especially_ for
such early emerging technology as blockchain tech)

\- ultimately manages to be considered a "utility token", something we don't
yet even have a definition for

I think you may be in trouble.

IOW, once you start learning what the market actually wants, you may be forced
to choose between a high risk of project failure (if you don't pivot) or a
high risk of going to jail (if you do pivot.) And even if you don't pivot, and
hell, even if your project takes over the world, maybe you screwed something
up in your positioning and your token is considered a security, so you go to
jail anyway. Ouch.

ICOs basically force you into a number of startup anti-patterns (IMHO)

\- Publically promising a product before building or shipping anything, which
is the opposite of customer development. (And unlike typical crowdfunding,
given the current speculative market, I don't take a successful ICO as any
indication of consumer interest in the project itself whatsoever.)

\- Having an extremely large number of people financially invested in the
project too early, which is a huge distraction and prevents flexibility

\- Inability to pivot or wind down the venture due to reasons stated above

\- Excessive capitalization, leading to overspending, lack of urgency to find
product market fit, etc.

The money is nice, and the value in retaining control of the cap table
shouldn't be understated. Smart, seasoned entrepreneurs will probably utilize
ICOs in a disciplined way to great benefit, probably by paying an army of
lawyers to protect them and run the ICO. But there's going to be a lot of
negative outcomes for many others I think.

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wmf
It sounds like a token is not a utility token if it ever trades on any
exchange, which essentially defeats the purpose of the entire ICO concept.

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mhluongo
Why do you say that? There are good reasons to want liquidity for utility
tokens

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EGreg
Because then, it may be found to be a security under the Howey test on the
federal level, as opposed to just the ridiculously overbroad Risk Capital test
used in Western states.

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flavio87
How much time and $ would it cost to register your tokens as a security? Would
it be possible without any financial history? I remember Lending Club was able
to have them registered and offer securities with their peer to peer loans to
unaccredited investors.

