
Goodbye ICOs, hello ILPs? - raleighm
https://www.careyolsen.com/briefings/goodbye-icos-hello-ilps
======
lordnacho
> While debate around the use of ICOs continues, Initial Loan Procurements
> (ILPs) have emerged as a new fundraising method. Similar to an ICO but in
> the form of loans rather than coin acquisitions, ILPs enable borrowers and
> creditors to enter into a loan agreement through legally binding smart
> contracts. With an ILP, a creditor's investment is contractually tied to the
> performance of the company and eliminates the wild swings of volatility that
> have been associated with a vast number of ICOs. In simple terms, as long as
> the company makes a profit, the creditor gets annual returns.

> Two Estonia-based companies, Blockhive and Agrello, have formed a
> partnership to provide the first ILP of its kind, 'Blockhive'. Blockhive's
> model removes the issuance of tokens (in the anticipation of future
> appreciation of those tokens) and replaces it with a contractual entitlement
> to 20% of their annual operating profits.

That sounds more like equity to me than a loan.

Whatever the structure, it isn't new. Putting it in a fancy blockchain is new,
but the agreement to pursue some endeavour and share in the revenues, either
as an obligation or as a percentage of profits, is ages old.

And just as old is the fact that you have to actually do what you said with
the money, or else it's fraud.

~~~
wdewind
> Whatever the structure, it isn't new.

But now maybe it's order of magnitude or two cheaper and so you can do a whole
bunch of them where you used to be able to only do a few. Does that change
anything? I really don't know, maybe, maybe not. Maybe it makes it practical
to break a company up into many many smaller pieces and allow investors to
provide more specific investments, or many smaller companies in general, due
to greatly reduced legal/operational fees? And maybe that let's you do
something cool? Imagine if facebook (or more likely whatever is post facebook)
had hundreds of smaller investment vehicles that mapped to teams and projects,
and we could all choose not to invest in the privacy invading ones? Or at
least had to more explicitly do it?

Sure, it's not philosophically completely novel: structural changes like this
fractalize throughout technology and ultimately boil down to "that's just
this, but one level of abstraction up," which makes it easy to understand, but
doesn't necessarily make it useless. Sure, there's nothing new under the sun,
the internet is, after all, just a really fast xerox machine, and we already
have libraries.

I don't look at crypto currency and think, "Oh this is obviously the future,
fiat currency and banks are bullshit" and I don't even fully buy the argument
I made above myself. But when I look at all the criticism to crypto, it looks
a helluva a lot like 1993 and "The internet is a fad" all over again. "It's
slow, it's shitty, it wont scale, it doesn't solve any real problems for real
people, it's better having publishers/banks intermediate this stuff anyway"
etc. etc.

We'll see.

~~~
JumpCrisscross
> _now maybe it 's order of magnitude or two cheaper_

Keeping track of investors and paying them dividends isn’t even close to the
most expensive part of fundraising. This is akin to starting a car company
differentiated solely by the material of the muffler.

~~~
wdewind
Sure, that's true if you are raising from a few, relatively speaking, large
investors, and also only if you care about fundraising as a one time event,
instead of funds management as an ongoing process. The entire point of ICOs
seems to be to raise from many small investors at once, perhaps skirting,
among other things, accredited investor laws.

Even for large companies: say we want to do my crazy invest at the team level
idea: I don't really agree it would be simple to operationalize all of that
money flow, and I do actually think having a blockchain could help if that is
your goal, which is a big if.

I'm not here to hard sell anyone on crypto, but I also am not comfortable with
the wholesale dismissal of it either, so I'm definitely hoping a lot of people
disagree with me and we can tease some of this stuff out.

~~~
hndamien
Accredited investor laws are disgusting. Personally, I'd much prefer to hold
securities, tokens, equities, currency on-chain than via some broker.
Similarly as a way to accept dividends as well. Having a compliant way of
performing this would be fantastic.

Edit: Since we have the downvoters here, does anybody want to defend
accredited investor laws? Here is some stimulus material -
[https://qz.com/431198/this-is-not-a-typo-only-3-of-
americans...](https://qz.com/431198/this-is-not-a-typo-only-3-of-americans-
are-legally-allowed-to-invest-in-start-ups/)

~~~
JumpCrisscross
> _Accredited investor laws are disgusting. Personally, I 'd much prefer to
> hold securities, tokens, equities, currency on-chain than via some broker_

These are unrelated. You can hold stocks, bonds and commodities in your own
name. It’s inconvenient and carries no advantage over owning them in “street
name”. But that isn’t an accredited/un-accredited difference.

~~~
hndamien
Sure they aren't related, but they are related to the parent comment which
mentions both.

I was just stating that the former is a form of discrimination to restrict
opportunity and increase wealth disparity. The latter is just a preference.
Both were being discussed in the parent comment.

------
FooHentai
Man, the language used in this stuff gets closer and closer to sovereign
citizen quackery every day.

Dodge, wriggle, obfuscate, avoid, confuse, complicate. The only difficulty is
determining whether a given article is written by those deliberately writing
to capture that audience, or by someone who's bought into it.

Much like SC stuff, I'll enjoy watching folks blather this kind of stuff in
front of a judge at some point.

~~~
CryptoPunk
>>Much like SC stuff, I'll enjoy watching folks blather this kind of stuff in
front of a judge at some point.

I don't understand why people get joy out of seeing someone punished for a
victimless crime.

Criminalizing entire categories of economic exchange, based on sweeping and
prejudicial generalizations that they're all scams, is the preemptive approach
to crime that makes for a more repressed society with greater wealth
inequality.

~~~
FooHentai
Hmm. Lemme see if I can understand how you're seeing things here: Do you
believe tax avoidance is a victimless crime?

~~~
CryptoPunk
We could certainly have a discussion about taxation and my views on it, but
I'd rather discuss a more clear cut subject.

That subject is someone being prosecuted under criminal law for offering a
security to another consenting adult without having met the mandated
requirement of having that security approved by the ordained regulatory
agency.

Edit: responding to below:

>>why you might also believe that securities frauds are victimless.

It's not "securities fraud" though. No fraud need happen for someone to be
prosecuted under criminal law for offering a security to the public.

The fact that you label all securities offerings without government approval
"fraud" supports my earlier point that your position is "based on sweeping and
prejudicial generalizations that they're all scams".

~~~
FooHentai
If you believe tax voidance is a victimless crime, it provides insight to me
as to why you might also believe that securities frauds are victimless.

Its not a trick question.

------
JumpCrisscross
> _regulators must act swiftly or risk losing opportunities to newly envisaged
> 'Crypto Nations'_

This is a toxic attitude. “Don’t worry if you’re breaking the law; they’ll
have to change to stay relevant!”

~~~
hndamien
Worked for Uber.

~~~
JumpCrisscross
> _Worked for Uber_

Uber deliberately broke rules in an effort to change them and went into their
fights willing to pay the penalties. That’s civil disobedience. They didn’t
argue the rules wouldn’t be enforced because of regulatory competition or
whatever.

Furthermore, when Uber broke the rules it was _their_ asses on the line. They
had a terrific record of reimbursing drivers who got fined for taxi
violations. With ILPs, in the other hand, we have some rando encouraging
others to take stupid bets.

Night and day.

~~~
ada1981
>> That’s civil disobedience <<

Please refrain from putting Travis K. in the same category as Rosa Parks.

~~~
JumpCrisscross
> _Please refrain from putting Travis K. in the same category as Rosa Parks_

Civil disobedience isn’t inherently good, momentous nor socially activistic.
(See the story behind Homer Plessy [1], who was hired by railroad owners in a
bid to cut costs related to a segregationist state law. It famously backfired
when SCOTUS created “separate but equal”.)

It is simply “the active, professed refusal of a citizen to obey certain laws
of the state, and/or demands, orders, and commands of a government” [2].

[1]
[https://en.m.wikipedia.org/wiki/Homer_Plessy](https://en.m.wikipedia.org/wiki/Homer_Plessy)

[2]
[https://en.m.wikipedia.org/wiki/Civil_disobedience](https://en.m.wikipedia.org/wiki/Civil_disobedience)

~~~
hndamien
This is exactly what you are rallying against here in your quote.

"This is a toxic attitude. “Don’t worry if you’re breaking the law; they’ll
have to change to stay relevant!”"

Uber X enabled a cheaper form of public transport by adding some efficiencies,
but also by actively skirting regulation that was in place for Hire Cars and
Taxis (that also made them more expensive options) that was designed for
public safety.

Following this, Governments changed laws to allow for this new class of driver
with new regulations that lowered the cost of compliance.

This is exactly the same as a new financial instrument designed to allow some
other form of innovative public good that breaches current regulations that
were designed for safety. With the expectation that regulation will ave to
change for them.

In both cases the regulations being breached were designed for some kind of
public safety. The breakers believed they were delivering some kind of greater
good. I'm not saying the method is right or wrong... it appears to get
results.

------
bastawhiz
Let me get this straight. It's a "loan" that's managed as a smart contract
that pays off investors as the company turns a profit.

It would seem to me that in order to make this not just a pipe dream, the
company would have to operate 100% on the blockchain, presumably Ethereum.
Otherwise, how could the smart contract do anything? If I pay one of these
"companies" cash, the smart contract knows nothing about that. I would have to
pay the business in cryptocurrency, and specifically through the mechanisms
defined by the smart contract.

This seems RIPE for abuse. What if they just...don't? Crooked "founders" doing
a chunk of revenue through some off-chain business or anonymously outside of
the smart contract. "Investors" get decreased returns because the business
does not appear to be performing well, all while the "founders" laugh their
way to the exchange.

> To access and transact on the Blockhive platform, users must fully register
> and receive the protocol's Future Loan Access Tokens (FLAT) (transferrable
> loans that can be assigned to third parties) as soon as they lend funds to
> the company.

That sounds an AWFUL lot like a debt security to me. They're not even trying
to hide it at this point. So in essence, they've invented an ICO where tokens
pay dividends over a fixed term, where you just have to pray that the company
is being truthful about their revenue.

This sounds like the setup for a giant pyramid scheme. I can totally see a
company doing one of these "ILP"s and using the revenue from newer "loans" to
pay the interest on older "loans".

------
Taek
This isn't decentralized though. The ILP claims to be a legally binding smart
contract - legally binding implies the use of a government, which involves
courts and all that other sludge that tokens can help us get away from.

As it were, it's not even necessary. The Sia platform (disclaimer: I'm a
founder) has a token which does something similar, but in a fully
decentralized way. Sia is a storage platform, and each time someone forms
contracts on the network, a fee is taken from those contracts and
automatically distributed to the fund token holders. It's a similar model, but
revenue is excluded to the blockchain, and it's fully decentralized.

Tokens are exciting because of what it allows us to achieve in the absence of
any form of government. We can make storage contracts that are roughly
analogous to SLAs, but without needing paper contracts, courts, lawyers,
lawsuits, ambiguity, or drawn out battles about who was right and who was
wrong. The blockchain takes care of all of that in a very compact, definitive,
predictable way.

And no, it's not about skirting regulations or doing things that the law won't
allow. It's about enabling things that the law already enables, but enabling
them in more efficient ways.

~~~
bottled_poe
Hmm.. Contracts are between two parties. If it’s not the government providing
recourse in the case of a contract breach, then who? I don’t see a realistic
alternative.

~~~
Taek
The blockchain! For something like file storage, you can use cryptographic
techniques to prove that a party is or isn't holding the data that they were
contracted to hold. This doesn't expand to the physical world well (for
example, how can the blockchain measure whether or not you damaged a rental
car?), but for digital resources like storage, certain types of computation,
and digitally owned assets, loans, etc., you can use blockchain arbitration.

------
quickthrower2
IANAL, but ILPs sure look like a security and quack like a security.

~~~
tomasien
They are securities, without a doubt. Just like convertible debt is both debt
and a security.

------
ohazi
What exactly is "smart" about a contractual entitlement to X% of the profits
of some company? What's to stop the operators from hiding profits from the
automated hands of the smart contract?

How smart contracts are supposed to work:

1\. I decide to enter into some agreement with an untrusted third party.

2\. Both parties put the collateral related to the agreement into some sort of
smart escrow account.

3\. Events unfold. Smart contract system needs to be able to observe and
validate these events somehow.

4\. Depending on what happens, the smart contract system decides who gets the
collateral. Neither party can back out of the deal after the fact, or claim
that some loophole makes the deal void -- the software is the final arbiter.

There's no way to make "give me money, and _if_ I manage to turn it into more
money, I promise to give some of it back to you" into a grifter-proof smart
contract, despite the wishful thinking of anarcho-libertarians everywhere.

This whole thing reeks of sleazebags trying to trick unsophisticated
investors/speculators who are catching on to the idea that "basically every
ICO is a scam" into thinking that they've created a financial product with
less risk. There is absolutely nothing stopping someone running an arrangement
like this from running away with the money, just as with ICOs.

------
AdamM12
Is it just me or is there no "Event of default" clause to these? They state
that there is a maturity date, which is automatically extended unless
terminated, but again not explanation of the creditors rights on default.
Speaking of maturity what exactly happens at that date? Do you get your
principal back? No explanation of what happens then either. Seems like
everyone is trying to end around securities law. I'll stick to my dividend
paying ETFs.

Edit: Read the white paper more in depth. Principal paid at maturity.

Edit2: Seems kinda similar to an ETN (exchange traded note)

------
cellis
Maybe I’m too old school, but can someone explain to me how this is any
different than a stock with a dividend or a bond? Both transferable? Yup. Both
guarantee the holder some percentage of future revenue? Check. Both are
advertised to the public? You betcha! What am I missing?

~~~
gowld
Legally protected against fraudulent activity? Nope.

------
dmichulke
Here's an alternative structure that I have been discussing with one of my
clients:

1\. Start-up defines token buyback rate in terms of revenue (not profit!)

2\. Start-up sells tokens

3\. At every defined interval (e.g., monthly), start-up updates revenue
statistics and buys back tokens according to 1 and destroys them.

This means:

\- it's an eternal bond if you never sell your tokens

\- the actual interest rate payment is done via token buybacks, so it's also
kind of a dividend

\- token value is largely determined by future revenue of company

Some thoughts:

\- Re 1: You have to scale the token buyback according to the number of
outstanding tokens (otherwise the long-term holders benefit relatively more
per time held than short-term holders)

\- You might want to define a cap after which you will stop your buybacks
(still haven't thought this fully through)

\- You may want to start 3rd party audits after some predefined event (to
increase trustworthiness), e.g., after reaching an annual revenue of X

\- This is especially suited if you have some quantified business metric like
"loans repaid", so you don't even have to define it in terms of company
revenue.

~~~
slivym
What do you mean by buyback in terms of revenue?

* For every $X we will spend $0.0001 buying back tokens?

* For every $X we will buy back Y coins?

* For every $X we will buy back Y coins at a set value?

I guess it's got to be the first or third since the second would imply that
the cost of buying back the coins could be greater than the revenue of the
company (let's saying I buy all the coins and refuse to sell them,
whachagonado?)

Basically what you're describing is selling a royalty interest with a fixed
buyback value.

Which whilst technically achievable seems like a strange thing to do. Since
when you're starting a company it's very difficult to calculate your margin.
The result would be that you could very well end up finding that the royalty
makes your company unprofitable.

~~~
dmichulke
IMO only the first makes sense. The third would imply a "non-market" setting
which kind of defeats the purpose of an ICO.

The company I talked with was in the loan business, so if you set a target
rate of 10% on every interest rate payment, it's possible it's gonna break
your neck but then you didn't have a very good business model to begin with.

The idea is that after 5 or 10 years you already bought back a decent amount
of your tokens and initially you can set different buyback rates (e.g, X% for
the Xth year up to 10) to "soften the blow" in case you're entering a highly
competitive market (aka shark pool).

The good news is that it's kind of self-regulating: if you underperform, the
tokens will be worth less so your buybacks in terms of coins will be higher
and your subsequent buybacks therefore cheaper.

------
animex
Does this shift into a new type of asset class side-step SEC and other
regulatory scrutiny? Is this a move for ICOs to dodge the current crackdown?

------
beefield
> The ultimate objective is to continue the decentralised crowdfunding
> opportunities that are similar to ICOs, only this time, with improved
> functionality and _without restrictions imposed by regulatory bodies._

Emphasis mine. Why do these people think regulatory bodies exist?

Further, could someone ELI5 how this works. I issue ILP, what is my liability?
Do I pay 20% of my profit in USD? If yes, why the blockchain? Do I pay 20% of
my profits in cryptocurrency? If yes, what cryptocurrency I use and who
defines the exchange rate, and _why_ I would want to pay the profits in
cryptocurrency?

------
lossolo
They offer equity and it will be interpreted as equity so this can be only
available (if you publicly announce that, depending on jurisdictions there is
a maximum of people this can be offered to etc) to professional investors
(minimal capital etc) in most jurisdictions. You can't just offer this to
general public legally even if you call it a loan. It's like running a bank
without license and saying that people are not depositing any money, they are
only borrowing them to us.

~~~
JumpCrisscross
> _You can 't just offer this to general public even if you call it a loan_

Under U.S. securities law, securitised loans are just as much securities as
securitised companies ( _i.e._ stock).

------
juicy-fruit
For some reason I initially read the title as "Google ICO" and damn near blew
my mind.

------
pryelluw
TL;DR: Crypto Bonds

... Initial Loan Procurements (ILPs) have emerged as a new fundraising method.
Similar to an ICO but in the form of loans rather than coin acquisitions, ILPs
enable borrowers and creditors to enter into a loan agreement through legally
binding smart contracts. With an ILP, a creditor's investment is contractually
tied to the performance of the company and eliminates the wild swings of
volatility that have been associated with a vast number of ICOs. In simple
terms, as long as the company makes a profit, the creditor gets annual
returns...

~~~
nemild
But if it's an entitlement to a % of profits, then it is much more like
equity.

~~~
pryelluw
It's a contract to get dividends on a loan that is based on speculation of
profit (not tied to any assets). So, yes, a worse version of equity in a
startup.

~~~
JumpCrisscross
> _a worse version of equity in a startup_

Minus the enforceability or equity and bond claims. So a combination of the
worst elements of equity and debt plus additional negatives. Financial
innovation at its finest...

~~~
pryelluw
It being blockchain based makes it innovative. I mean, it's linked lists 2.0:
electro bugaloo

------
fiatjaf
I thought you were referring to the InterLedger Protocol.

------
JackFr
>Agrello is a legal technology start-up that builds legally-binding, _self-
aware_ agreements on blockchain.

Big, if true.

------
s73v3r_
Nobody has satisfactorily explained why the majority of ICOs are not
securities, and thus should be regulated as one. It all sounds like the
mid-90s and early 2000s situation, where people were taking existing
processes, and getting existing patents for them by adding the magical phrase,
"On a computer".

~~~
snissn
i can't speak to the "majority" but for a hypothetical one - how do you feel
about ICO's as pre-sales of a product?

