
The Colony token sale would have been committing securities fraud - sjcsjc
https://blog.colony.io/the-colony-token-sale-7ac14c845bc0
======
zekevermillion
First, I do not agree that pre-selling a purely functional token is
necessarily an offering of securities under Howey or otherwise. If the
protocol is already specified, and the token has clear utility. I don't know
if that's the case here, but just taking the article at face value.

Second, even if a particular token represents a security, offering it to the
public is not "securities fraud" in and of itself. Fraud is a material
misstatement or omission. What the author is talking about would be an
unregistered securities offering, which if no exemption is available, would be
illegal. Illegal but not necessarily fraudulent per se.

This is not to say that Colony should have an ICO. I don't know anything about
their specific case. But this article is not useful to anyone else trying to
make a similar decision.

~~~
AlexCoventry
> I do not agree that pre-selling a purely functional token is necessarily an
> offering of securities under Howey or otherwise. If the protocol is already
> specified, and the token has clear utility.

I agree it's not _necessarily_ going to be deemed a security, and I am not a
lawyer, but from my reading of Howey and related decisions I would say whether
an instrument is deemed a security will come down to how it was marketed and
what the general expectation and intent of the purchasers seemed to be. Since
Howey emphasizes that only the function of the instrument matters, not the
form, I would say that _even if_ a cryptocurrency has use value, it could
still be deemed a security if a large fraction of its purchasers mainly expect
to achieve a passive profit by buying it. After reading the blog post, I can
see why the Colony developers are being cautious

~~~
jon_richards
Do concert tickets count as securities? What about when most of the tickets
are bought by resellers using bots? Genuinely asking, seems like a badly
worded law.

~~~
AlexCoventry
That's an interesting question. Based on this huge back and forth I think it's
a gray area, where the details of the instrument matter a lot:
[https://www.sec.gov/divisions/corpfin/cf-
noaction/ticketrese...](https://www.sec.gov/divisions/corpfin/cf-
noaction/ticketreserve091103.htm)

I don't know that it's a badly written law so much as one which gives its
enforcers and arbiters a lot of latitude to decide its jurisdiction because
the bad behavior it's trying to control is so hard to pin down legislatively.
The law could certainly be abused, and probably has, but the cases I've read
have left me with nothing but admiration for the wisdom and consideration with
which it's been applied. And that's despite the fact that I have a generally
libertarian bent and a general dislike of over-broad laws.

------
mattbeckman
I understand the why, but ICO regulation is shifting the power of crypto from
anyone (low-, middle-, upper-class) into upper-class only.

For example, the Filecoin ICO for U.S. participants was restricted to
accredited investors, which required a proof of income above $200k/year.
Obviously, ICOs are risky, and we can all see why someone with less income
probably shouldn't invest as much money as someone making over $200k. However,
preventing someone in a lower income bracket from making ANY investment feels
like economic stratification.

~~~
the_stc
Yep. And then Filecoin doesn't even sell equity! It's gross. With our company
we're trying to do right by investors. We're completely in violation of the
SEC memo. In fact, that's what galvanized us to 100% offer shares instead. We
were going to do it before, but the SEC really set us straight: If we're going
to be in violation of regulations we might as well make the most of it.

~~~
Sangermaine
Are you saying that instead of an ICO, you've now decided to do an
unregistered share offering, and you're knowingly doing this in violation of
the law? You do realize you can face criminal penalties for this, right?

~~~
the_stc
Exactly. Being ethical is more important than being legal.

To be fair, our entire business model is illegal in the US, and mostly illegal
in many countries. We already have to deal with the penalties for running an
escort agency.

On the plus side, it's a good business model so our chance of success is
pretty high. If we end up having good returns, there will be less complaints
and we'll be less of a target for the SEC organically.

We intend to be the first blockchain-funded cypherpunk unicorn. It would set a
bad precedent if we didn't treat investors fairly.

~~~
KGIII
You know you're going to prison, right?

SEC doesn't much care if you did right by investors. Hell, you're helping
prove intent - right here in this post. Add conspiracy to your charges, by the
way.

Seeiously, consult a lawyer. You're going to go to prison.

~~~
the_stc
It's our view that the SEC part won't be what pushes us over the edge. 100%
what we're doing is not legal, it's in our business plan. SEC won't care if
investors are OK, yes. But if investors are OK, they won't be filing
complaints and there will be less pressure to go after us. Not a defense! Just
a delaying factor. Prosecution isn't free. Far easier to shut down ICOs that
aren't operating as proper anonymous extrajurisdictional companies. They can
go after us, but it's a terrible ROI for them.

But that is not what we're counting on!

Basically we asked: What if everything related to sex work was legal? What
would the inevitable startup look like? With modern privacy tech, we can
attempt to try it. We can ignore legal issues by operating
extrajurisdictionally and anonymously.

This article discusses our technical setup: [https://medium.com/@PinkApp/pink-
app-trading-latency-for-ano...](https://medium.com/@PinkApp/pink-app-trading-
latency-for-anonymity-and-other-techniques-815ee21c6da4) \- excuse the
clickbait title. Please let me know the flaws you see! Latency could be a
killer, but we think we can mitigate it.

The core team, people that know real-world ID, are very few. Within a few
months we plan to move nearly exclusively to high-latency communication
methods.

By having trustless contractors run public-facing aspects of the business, the
core team's opsec attack surface is drastically reduced. We have contingency
plans, so even in case of arrest or death, the system can be restored from
backup. Maybe one day there will be private mature smart contracts and we can
codify it. Meanwhile we'll rely on lawyers and other trusted parties.

It may sound crazy ... a libertarian cypherpunk dream. But think how if you
told people that it'd be popular to send non-refundable Internet money to a
hidden internet service that promises to give it to an anonymous drug dealer
on the other side of the planet to mail you drugs via the US Postal Service
and that people would willingly trust them and it'd all be safer than using
the street ... well people would have called you crazy! Yet it's popular and
darknet services do exist that haven't had their operators busted.

~~~
KGIII
> It may sound crazy ...

I don't offer an opinion on your business methods, recovery methods, or even
the morality.

Instead, I point out that you're going to go to prison. As noble as you think
your cause, they most absolutely will not care. Also related: I'd not count on
jury nullification.

You do what you've got to do, but you _are_ going to prison if you follow up
on this plan. There are a few things one shouldn't play with; firearms,
nuclear weapons, and the SEC.

If you're okay with long term incarceration and fiscal penalties that could
bankrupt Bill Gates, knock yourself out. If you can be tied to your online
messages declaring intent, it's really going to make for an angry judge. I've
seen angry judges, they remind me of honey badgers.

Seriously, I highly recommend you seek legal council from a qualified legal
professional licensed to practice in your jurisdiction. Morality and consumer
complaints aren't actually things the SEC care about. They are only marginally
less aggressive than the IRS.

~~~
the_stc
I never suggested morality will prevent a judge or jury. Just that doing fewer
bad things results in fewer complains results in less likelihood of spending
prosecutor effort on us. But probably when our share price hits $25+ we'll be
big enough that someone will decide to go after us for real.

If our opsec fails, I'll end up in prison, very probably. That's what
contingency plans are for: the project can keep operating without me.
Meanwhile that's going to take a ton of effort and time, so I can the project
to a point where I'm not vital.

Lawyers opinions are the same. No lawyer will advise their client to be the
founder of an illegal enterprise. This is not much of an insight. Other than
that, most lawyers are not capable of assessing opsec risk.

------
sjcsjc
Interesting discussion of the legalities. They say they're not doing the sale
until they have a fully functioning platform that relies on tokens to
function.

~~~
proofofstake
But that's putting the cart before the horse. You need the ICO to get enough
investment to build out your platform, when you have a fully functioning
platform, who still needs investment?

And if a platform is a prerequisite: Just build the barest possible platform
MVP, much like a pre-launch landing page.

~~~
femto113
When you have $250,000,000 with no clear nor enforceable legal obligation to
the people who gave it to you, who still needs a fully functioning platform?

~~~
rwallace
Hopefully ethics will prompt most founders to make a good-faith attempt to
deliver value for money, but in case anyone is tempted otherwise, bear in mind
that the legal obligation may turn out to look much more clear and enforceable
in court than it does on HN.

------
erikb
In a high risk game like this, where the rules are actually not established
yet, you always risk going to jail. No amount of lawyers can protect you. The
only safety is marching forward quickly so you will be one of the top three
players in this game. Number one will make the profit, number two will find a
way to live, number three will be bought be either no 1 or no 2. However if
you lack behind so far, that you are nuicance but don't have any real market
share, you actually just need to get rid off.

So what they are doing is the opposite of what they should be doing. They
should invest their money and grab market share, get as many investors on
board as possible, fine tune their market strategy and technology so they can
beat whoever they consider competition. Short: They should earn their place at
the top.

What they do instead is waste the money to buy imaginary safety (the law about
Coins is still uncertain, what can a lawyer do) and then even use it as an
excuse to not move forward. There's zero chance to win this way.

------
s73ver_
So, what do you do with these "tokens" once you've bought them? Let's say I
get 10 tokens. What happens then?

~~~
wmf
They go up ~10x (don't ask why; you don't want to know) and then you sell
them.

