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SEC tightens the noose on ICO-funded startups (decryptmedia.com)
174 points by ilanhz on Oct 10, 2018 | hide | past | favorite | 150 comments

The SEC seems to be sorting the list of ICOs by level of criminality and size, and working down the list. First they went after the ones which were large, obvious, out and out criminal enterprises. As in [1], or "they really didn't have the real estate and diamonds they said they had." And [2], or "they really didn't have deals in place with PayPal, Boeing, and Disney".

Then the SEC went after the ones that were merely flaky. As in [3], or "a blockchain based food review service with in-app purchasing of tokens". This actually got going, not that anybody used it much. They hired a "YouTube influencer" and claimed “199% GAINS on MUN token at ICO price! Sign up for PRE-SALE NOW!”

Along the way, the SEC found some ICOs from the usual suspects in the penny stock market. Those got shut down.

Then they started sending out letters along the lines of "Hello, ICO promoter. What you're doing is probably illegal. Do you want to give the money back now, or do we bring out our big hammer?" This stopped a lot of potential ICOs.

If you haven't seen it, see the SEC's fake ICO site.[3]

I have yet to find an ICO that resulted in a real, operating, profitable business that wasn't some other cryptocurrency/blockchain based thing. We're not seeing ICOs to build factories or farms or do real stuff.

[1] https://www.sec.gov/news/press-release/2017-185-0

[2] https://www.sec.gov/news/press-release/2018-94

[3] https://www.investor.gov/additional-resources/news-alerts/pr...

[3] https://www.howeycoins.com

"that wasn't some other cryptocurrency/blockchain based thing."

This is probably intentional on the part of all of the promoters, investors, and potential users. The idea of the cryptocurrency world is to completely replace the existing global financial system; if a company uses an ICO to build a business that then takes payment in dollars, they've lost, and their backers will be very angry. The whole point is for the ICO token to be the primary means of payment for services within the company's ecosystem, and the backers are rewarded by having an advance claim on those services by virtue of owning the tokens.

The question I'd look at to see whether an ICO is a scam or not is "Are goods or services of non-monetary value being exchanged for tokens?" I suspect the answer to this is negative for the vast majority of tokens, but it's also pretty early in the development cycle: most ICO-funded companies are <1 year old, while it typically takes 2-3 years to build something somewhat useful.

I think the larger issue here will eventually be that the concept of 'the code is law' breaks down when you need to rely on the actual law and law enforcement to to enforce your 'code law'.

I think that's most likely true, but the wildcard is that "actual law" is breaking down for an increasing number of people. There is an increasing perception that existing government institutions and law enforcement are a tool for the wealthy & powerful to oppress the poor, and - whether I agree with that perception or not - when it comes to government legitimacy, perception is reality. This trend comes from outside of cryptocurrency, and is driven by things like international terrorism, perpetual war, drug cartels, state corruption, Occupy Wall Street and the continuing anger that few if any of the Wall Street Bankers that got us into the global financial crisis were punished for it, the Tea Party, police brutality, a legal system that's unaffordable for anyone that's not rich, increasing political polarization, filter bubbles, and the rise of authoritarian governments. Cryptocurrency's just stepping into the void left behind when institutions fuck themselves up; if they continue fucking up, it's only a matter of time before you start seeing crypto-legal systems with automated drone enforcement.

If you suggested in the late 1990s that people would be spending real money for cryptocurrency, I'd think you were crazy. (Actually, Cryptonomicon did suggest exactly that, and I thought that particular plot point was crazy.) Now, I'd give it maybe an 85% chance of being a crazy passing fad and a 15% chance of being the social organizing principle of the 22nd century.

Well, actually the job of the SEC is to oppress the rich.

> crypto-legal systems with automated drone enforcement.

Or read Snow Crash by Neal Stephenson and experience it today. :)

I was thinking more Diamond Age, but yes.

There are few ICOs that have even resulted in working cryptocurrency things. I for one am absolutely shocked by the hideously poor quality of the stuff ICOs were used to fund. Excluding obvious scams the remainder seem to be solutions in search of a problem or meandering boil the ocean pipe dreams. None seem well executed, and most dont seem to have shipped at all.

I wonder how much of that is actually a symptom of the whole ICO funding model, i.e. you need increasingly "boil the ocean pipe dreams" to stand out from the competitors, which in turn leads you to raise increasingly large sums, but as the sums raised increase the incentive to actually deliver anything decreases (bearing in mind the money is raised in advance and there is no external oversight to put any pressure on delivering anything).

Yes, I think incentives matter.

A similar perverse incentive exists in the VC funding world that was parodied in HBO's Silicon Valley series-- namely an incentive against booking revenue early in the game. When you are "pre-revenue" then the mind can go wild with speculation, but as soon as you book revenue those become hard numbers and if they're unimpressive it turns people off. It's incredibly irrational of course, but investors are not on average more rational than other people.

In the ICO world an analog of this is that ICO projects that do ship inevitably suffer from hype deflation since the very first version of anything is never up to the hype that was used to sell it. So there's a dis-incentive to ship. Shipping means contact with reality, so failure to ship leads projects to wander off into scope-creep lala-land and never deliver anything.

I also think the large sums raised could cause pathologies that lead to project failure like ballooning scope, excessive hubris, over-hiring, or factional conflicts among founders. Too much money can defocus a project and too many new hires can actually reduce productivity.

Some ICOs are clearly frauds, but the rest I think are victims of these and other perverse incentives in the system.

Starting companies is hard. Rational investing is hard. Rationally investing in new companies is hard^2.

Was Lunyr (the creator of the MUN token) ever federally investigated? I haven't heard much from them for about a year.

Yes. They shut down the ICO within hours of being contacted by the SEC and gave all the money back.[1] The SEC was satisfied with that.

[1] https://www.sec.gov/litigation/admin/2017/33-10445.pdf

You have two [3]s, just fyi

>>We're not seeing ICOs to build factories or farms or do real stuff.

Decentralized prediction markets, CPU-renting markets and ad networks aren't doing real stuff?

Blockchain-based tokens provide little advantage for representing claims to real assets like factories and farms. Where they're most useful is as currencies in decentralized autonomous organizations, since they are programmable and thus can be used in smart-contract enforced compensation/incentive mechanisms.

In contrast, any token representing a legal claim to a real physical asset would certainly not be a utility token. It would be a traditional security, and thus would find much less of an advantage in being on a blockchain, since it can't take advantage of smart-contract based enforcement, given its dependence on the traditional legal system.

That might change in the future if large liquid securities markets appear on the blockchain, but right now the low-hanging fruit is utility tokens for use in decentralized applications.

> All of this SEC action may sound like very bad news for ICOs, but many in the industry have a more optimistic take: regulatory clarity will bring growth

It will be an interesting test I suppose. If ICO’s are in fact a novel technology that offers some kind of advantage, then this statement will be correct.

If the entire and total value of ICO as a concept was that it was a means to sidestep existing regulations by pretending they didn’t exist, then this statement will prove laughable.

Personally, I lol’d

As someone whose generally bearish on crypto currencies, I do see one clear benefit to ICOs over traditional exchanges. Namely the fact that you can trade them 24 hours a day, 7 days a week, from anywhere in the world with an internet connection, in any currency (theoretically) and on no fixed exchange (although it's likely that the number of exchanges will be limited to reduce price instability).

> you can trade them 24 hours a day, 7 days a week, from anywhere in the world with an internet connection, in any currency (theoretically) and on no fixed exchange

This describes securities, generally. You and I can transact to trade shares of Uber in renminbi on a Saturday. We can transact, over the counter and using a broker, to trade shares of Apple in Canadian dollars the following day. The Apple trade would need to be reported to the national ticker, for transparency purposes, but that’s about it.

We concentrate public equity trading into fixed windows and currencies to increase liquidity. It’s a convenience. Privately-negotiated trading is still common for large blocks of public securities.

The obvious difference is transactions without a third party. You can also verify ICO token integrity on the blockchain yourself (via open source apps).

The obvious question is whether that actually matters all that much for securities, since the broker/exchange adds negligible risk and overhead for the buyer relative to the trust in the public company needed to buy a stake in it and the costs of meeting regulatory requirements for public companies.

Anybody who's more worried by the potential complications of T+2 settlement when purchasing blue chip stocks than the Wild West world of ICOs shouldn't be investing.

That is indeed the right question to ask.

Maybe it's less about trust and more about permission. With token based securities I could trade with whomever I choose whenever I want.

Interesting to see how it turns out in the end.

What happens if a trade that is illegal under the law of the country of the seller/buyer/exchange? The courts would be completely powerless to undo the transaction. Again it seems to me the main and only attraction is evading regulation.

And you can maintain custody, so somebody isn't loaning out your shares.

There's a 95% accurate O(1) solution to determine if an ICO transaction has integrity.

You can trade pretty much any security 24/7 these days, and people do.

Many futures exchanges are open 24 hours on weekdays (perhaps with 15 minute gaps), but not weekends. Can you link to one that's open on the weekends?

Practically any retail/spot forex exchange I thought?

you just described the FX derivatives market, which btw cannot work without regulation and enforcement and monitoring bodies with real consequences for bad actors.

I haven't seen an FX exchange that trades through weekends, since Oanda stopped offering weekend trading back in 2012.[1] Can you link to one?

1. https://www.leaprate.com/news/oanda-suspends-weekend-trading...

Recently congress members have written to the SEC asking for clarity on crypto: https://www.chepicap.com/en/news/4016/15-members-of-congress...

They want to draft legislation for regulatory clarity. So we can be sure ICO's will be addressed in that.

I was really pessimistic about security tokens because no exchange could legally trade them, but now a few exchanges are getting certified so it may be possible to dump these tokens. How many buyers there will be is still in question.

Malta have very well defined laws about ICO's on the books from November 1st, the UK and USA have been disasterously vague about guidance for what constitutes a security so far, which doesn't help anyone except the bankers.

I think the issue of what constitutes a security is very well defined in the US...it’s just no one has framed their token in such a way it’s not a security (despite all the claims to the contrary) and otherwise the ICOs have not complied with securities laws because...well move fast break things.

I’m not sure why a company doesn’t just come out and do an ICO: a) with a token that’s not a security or b) a token that is a security and comply with securities laws.

> a token that is a security and comply with securities laws

Because if you do that, there's no point having an ICO. Just do an IPO - the token is an expensive, pointless distraction from their mission to democratize the world's dogsitters, or whatever they want to do.

> Just do an IPO

A token is virtually frictionless and costs nothing to setup or trade globally, dividends can be paid out directly to token owners.

An IPO is an incredibly lengthy, arduous process requiring a small army of lawyers and accountants simply to offer shares to a restricted subset of sophisticated investors in one country.

You are referring to an STO and not an ICO.

Because the only reason for tokens is to create a little confusion that allows people to think they'll be allowed to violate securities laws.

They have, see https://coinlist.co/

If your innovation requires a new monetary system, it is probably a Ponzi.

No they haven't. They've said from the beginning that if it looks like a security, smells like a security, walks like a security and talks like a security, then it's a security.

It's people trying to play the, "Well, it's different cause it's on a computer!" game that are muddying the waters.

That's my impression too.

Emily Post had this great rant on how people act like every new technology is exempt from the rules. Her examples at the time was the cellphone in movie theaters. Everybody knew not to talk loudly in the movie theater before the arrival of cellphones, but suddenly plenty of people thought it was ok to a) have a ringing phone, and b) answer it. Eventually everybody got it together again and nobody does that anymore. People figured out how to generalize politeness for the new technology.

It seems like the same deal here. Investment regulation applies when you're selling a piece of your operation. It still will.

The scale of filesharing was irreversibly expanded by the internet, and in particular, by BitTorrent. Some technologies fundamentally change the difficulty of enforcing prohibitions against particular types of activity.

If the analogy you're drawing is mp3s to money, it's not a good one. Money has been digital much longer than music; SWIFT was formed in 1973. [1] The MICR E13B font, the machine-readable numbers seen at the bottom of every check, was adopted as a standard in 1958. [2]

Further, since cryptocurrency's use in actual commerce is a rounding error, I don't think cryptocurrencies are even at the mp3 level yet. To be useful to most people, cryptocurrencies need to be turned into real money, which makes enforcement easy enough. It's especially easy here, in that ICOs are big public launches.

Really, anything taking significant amounts of money from non-accredited investors needs to be quite public, because individually they don't have much money. Which again, makes enforcement easy. And also makes it clearly under the domain of the SEC unless they are careful to exclude American investors.

[1] https://en.wikipedia.org/wiki/Society_for_Worldwide_Interban...

[2] https://en.wikipedia.org/wiki/Magnetic_ink_character_recogni...

No I was making a more general point: that technology can fundamentally and irreversibly change the relationship between people and the government, resulting in certain classes of laws becoming easier or harder to enforce.

Did this general point have some relevance to the discussion? If not, I would like to take this opportunity to point out that water is generally wet, and that food can fundamentally taste good.

It's directly relevant to your point that technology has a honeymoon period of being exempt from the rules before the rules adapt to reimpose the previously in place controls. I was saying that's not the universal progression.

again, the only place ICO would be safe is those under the rule of Russia or China, otherwise all other countries face extradition to the US.

US has proven again and again they will touch anyone anywhere (except china and russia), and its a losing battle to go up against an organization that has unlimited resources with capabilities that grow constantly.

Had an interesting conversation if you have been involved in any ICO sales and live in North America, seek legal counsel immediately. Do not listen to idiots telling you this is good for the space, they don't know just how much reach SEC has when it comes to securities fraud. The investigation will likely span many years but they will eventually get to your ICO and will hit you with wire fraud and felony, which won't go away and it will impact your employment and possibly overseas travel.

If you were one of those companies that helped ICO launches, there's a good chance you will see jail time accordingly.

Remember, the SEC has the manpower and allegedly a technology to uncloak elaborate laundering on the open ledger, which opens up a whole new can of worms called anti-money laundering orgs that become activated.

Im glad I walked away from ICOs.

The SEC can't impose jail time as punishment for securities law violations, as their tools are limited to civil sanctions (see, e.g., the slam dunk case they had against Elon Musk). However...they can refer cases to the DOJ for criminal prosecution (see Martha Stewart, Elizabeth Holmes, etc.).

I would be very surprised if anyone not engaged in fraud or tax evasion or money laundering saw jail time. Of course, that leaves like 2 ICOs.


Did you only take money from them? I mean, were you similar to a simple contractor who was paid money for code? If so, you won't be referred to DOJ. (You still may have some administrative troubles with SEC, but at a time like this, I'd count only being in trouble with the SEC as a "win". Fines, fees, and/or work restrictions are preferable to prison in my own opinion.)

If you got a small piece of the ICO itself as remuneration, then it's time for you to "shut up and lawyer up."

I am not a lawyer myself, but I'd imagine that one thing a lawyer would advise you to do in that situation is to stop talking about your potential involvement in that activity on law enforcement accessible internet forums.

What about buyers/traders via exchanges? I'm guessing they're the victims of the scam, and won't face fines, fees? Probably a dumb question. I'm not versed in this.

Ethics aside, yeah they should be worried. The "I was only following orders" claim usually only applies when those orders were lawful.


Employees are not responsible for every legally questionable thing their company does. That said, I mean, of course a person is responsible for any crimes they may have personally committed. It doesn't matter that your company told you to do it. To believe the law would work any other way is incredibly naive. If this really is how people are thinking about ICO's, then I would strongly urge anyone with possible involvement to go consult briefly with an attorney about that involvement now. Just to better understand how things work. Because right now there is some pretty bad information floating around.

If your lawyer recommends it, then get out in front of the problem. You may even be able to reach a settlement with the SEC. (Which, needless to say, is far better than having to reach a "deal" with the DOJ.)

It is true that "employees are not responsible for every legally questionable thing their company does".

However, a person need not commit a crime personally to be held accountable. Conspiracy charges merely require that a person engaged in otherwise legal actions (e.g. coming up with a list of potential investors, working on code for a demo, etc) had known that the project may circumvent the law in any respect. The bar for prosecution for federal conspiracy charges is extremely low.

Being prosecuted for working on code for a demo feels like being prosecuted for building a kitchen because the chefs didn't wash their hands.

If the bar is if they "had known that the project may circumvent the law" then is playing dumb enough to avoid liability? I don't find it morally acceptable that engineers have to take on the legal risk of their superiors' decisions unless it's some kind of extremely blatant doomsday device.

>I don't find it morally acceptable...

HN User icostoss is right though. What you find morally acceptable, has no bearing on RICO statutes. RICO only requires that you knew, or should have known, what an ICO was used for. Which would probably be borne out by your electronic communications trail. It's pretty much open and shut.

But it would never get that far unless an engineer worked for an ICO that took in a lot of money, AND that engineer was dumb and decided not to try and settle with the SEC.

Hopefully, no one is that dumb.

(I suppose there is a chance that the SEC just wants to make an example of your company, so they'd refer you anyway despite your attempts at a settlement. But that would just be bad luck. Like being the guy who gets pulled over on the interstate for speeding. Sure, everyone else is doing it, but the cop is just trying to make a point.)

So what am I supposed to do as somebody who works for an employer? Consult a lawyer with every ticket I get?

Not sure why my comment was flagged but thanks for this discussion. Helped me dodge a bullet.

From the article:

> subpoenas... focusing on those that failed to properly ensure they sold their token exclusively to accredited investors...

The idea of an accredited investor in this context seems either a little silly or like a major philosophical problem for tokens, depending how you view it. What does it mean to be an accredited investor, anyway? From Matt Levine[1]:

> Under U.S. law, some financial products, like hedge funds and private-company shares, are generally available only to "accredited investors." There's no actual accreditation -- there's no test -- it's just that if you have enough money you're "accredited." The theory is partly that if you have a lot of money you can afford to lose some of it on dumb private investments, and partly that if you have a lot of money then probably you know things about money and won't make dumb private investments. Both of these are terrible theories: If you have a lot of money, you still can't afford to lose all of it in dumb private investments, and there are plenty of rich dentists who don't know much about investing. The result is that it is both too easy to be an accredited investor, in that unsophisticated investors can be accredited, and too hard, in that fancy investing products are available only to the rich. (Rich-ish: The threshold is basically $200,000 in annual income or $1 million in assets.)

1: https://www.bloomberg.com/view/articles/2015-12-21/fraud-bon...

The point is not to protect individuals, but to protect society from the blowout of every possible stupid investor getting wrecked all at the same time, by limiting the pool of stupid investors. With enough advertising, working and middle class people can be convinced to mortgage their house, their property, their cars, etc. to shovel debt into a stock market that would never go down because the advertisers told them so. That's how the Great Depression started, and this has repeated itself in every market that didn't restrict some investments to accredited investors.

Is it blunt? Sure. But it's better than repeating 1929.

Personally, I think we should stop sheltering people from being able to make stupid mistakes. Then maybe people will learn to be a little more skeptical about everything.

On balance, it's everyone's right to be stupid and burn their money to the ground. But realistically, in the interconnected world we live in, that will often involve burning other people as well and that's not something that should be OK. The housing crisis had greedy unchecked bankers, but it also had greedy unsophisticated (in a financial sense) individuals over-leveraging themselves and we all paid the price as taxpayers. Some people lost their homes and some people merely got a slap on the wrist, and however you feel about each, we ALL paid for it.

The "greedy unchecked banker" narrative is cute, but it completely absolves the distortive effects government policies had on the market before the crash. This included incentivizing subprime loans, Fanny Mae and Freddy Mac, and previously bailing out banks (a signal that your risk will be subsidized in the future).

There is no rule that the State must step in during bad situations, in fact many would argue that the government stepping in makes things worse. We don't all have to pay the price.

The market needs those corrections to learn. If the government steps in every time, it doesn't have a chance to.


The government needs to step in to prevent a total collapse. When the government refused to step in to rescue Lehman Brothers (precisely because of the moral hazard problem you allude to), all hell broke loose.

Since the expectation (correctly) is that government will step in, we need regulation (before a crash) that limits risk taking, for example capital requirements (=equity) for banks.

Your narrative has been, in my opinion, comprehensibly refuted by, for example, Anat Admati & Martin Hellwig in *The Bankers' New Clothes" [1], or Krugman already in 2008 [2]. An overview over the debate is given in [3], including this quote from Krugman:

> “for any public figure to go with the Congress-did-it argument at this stage is for him to reveal both that he is grossly ignorant about the central policy issue of the day and that he gets his ‘analysis’ from right-wing flacks.”

This is not to say that government policy has been perfect; but taking the government out of the equation is not going to fix anything.

[1] http://bankersnewclothes.com [2] https://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r... [3] https://www.outsidethebeltway.com/bloomberg-dont-blame-banks...

As long as everyone makes different stupid mistakes that blow up at different times, sure.

If some measurable fraction all go at once? That's suddenly a problem for the rest of us.

I will refer you again to 1929, before people were sheltered from making "stupid" mistakes. That lack of shelter did not prevent the great depression.

I'd put it differently than Levine. An accredited investor is one who can afford enough advice to somewhat level the playing field with scam artists. That serves the interests of both individual investors and of society, which wants to minimize the ROI of scams.

He's right that there could be more sophisticated tests for "knows what they're doing". But this one has the advantage of being very simple and easy to enforce.

Cooley's invention of the Simple Agreement for a Future Token (SAFT) [1] was genius. Not only did they earn fees on selling people the boondoggle, they'll also cash in on defending every company, and every employee at said company, who unlawfully sold these securities.

[1] https://saftproject.com/static/SAFT-Project-Whitepaper.pdf

Isn't this just an interpretation of the law? Yes, the SEC may try to enforce their view of the law, but is it actually the correct one?

It only takes one SAFT token company to take things to court, and have a judge rule in their favour, to basically legitimise all tokens - no?

(Note: I have no clue who is right here, but just because it's the SEC doesn't mean they are automatically right. Same applies to the IRS etc)

No, you're absolutely correct. However, the inverse is also true. The SEC only needs to win one case to set precedent for all SAFTs. Given that the SEC is the one bringing the cases, it would seem obvious that they would establish sound precedent before going after the murkier cases. I'm not sure I'd want to tie my wagon to anyone who used a SAFT.

or go to prison if you lose.

The SEC does not have the authority to bring criminal cases; only civil. They can refer to the DoJ for criminal prosecution.

More likely, Cooley will see massive legal malpractice lawsuits if any of their crypto clients get sued by the SEC or DOJ. While not likely to kill the firm, those sorts of suits could result in significant client and partner losses.

Genius would be devising a legal framework for your clients to do an ICO legally, not expose yourself to potential liability for legal malpractice and expose your client to potential civil/criminal liability.

The great hope of the JOBS act was to allow unaccredited ("mom and pop") investors to get exposure to early-stage startups, in a safer way, so that the huge gains went to average people instead of well-connected rich people and VC's.

The problem currently with crowd-funded securities offerings is the overall cost of capital (legal and regulatory), lack of liquidity post-raise, and that most of the good opportunities are scooped up by hungry VC's chasing returns in a fast money, low-interest environment. When the world is awash in easy capital, crowdfunding is simply too much of a hassle for solid companies.

In comes ICO's. It fixed a lot of the issues with crowdfunding. Low cost to start (just deploy a smart contract), instant liquidity, and global capital raising. Obviously there are tons of issues (breaking securities laws, sketchy companies, bubble mentality, and why actually do any work when you already have the money, among many others). But this shows that demand for small seed-stage companies is there.

The recent JOBS 3.0 act[0] will make 2 important changes to merge crowdfunding and ICO's. One is the change to accredited investor laws to allow people to prove investor competence without meeting arbitrary income / asset requirements. This was to solve the paradox of twenty-something MBA's on Wall Street giving professional advice on investments to wealthy people without they themselves being able to invest.

The second important change is to create "venture exchanges", which have been theoretically possible before, but have never been created. This will provide liquidity to early-stage startups at new regulated crypto exchanges like Coinbase, Poloniex, etc. I believe that blockchain, at a bare minimum, enforces standard protocols. Whether security trading needed blockchain or not to have protocol standardization accomplished is a separate argument, but either way the technology encouraged and allowed it to happen organically. Strict protocol enforcement of assets (ERC20, etc.) allows crypto exchanges all over the world to inter-operate, and allows securities to be traded much more freely all over the world as each country's crypto exchanges match their rules with local security laws. This will allow offerings based in the US to be bought and traded legally in Japan, South Africa, the EU, etc. It will also allow smaller companies to raise capital more cheaply by tapping into a global pool of investors.

[0] https://www.dandodiary.com/2018/07/articles/securities-laws/...

> Obviously there are tons of issues (breaking securities laws, sketchy companies, bubble mentality, and why actually do any work when you already have the money, among many others). But this shows that demand for small seed-stage companies is there.

It’s worth noting that absolutely nobody is confused about there being demand for highly speculative investment in small sketchy seed stage companies.

That demand has been around, literally, for hundreds of years. The entire point of this category of securities laws is to prevent people from meeting that demand, since doing so tends to have disastrous outcomes.

Disastrous for anyone other than those who jumped in without doing their due dilligence?

My main gripe with the whole "accredited investor" thing is that its literally legalized classism (and I'd argue a violation of the equal protection doctrine, but that's another theory), as the income requirements eliminate a huge swathe of investing for anyone but the 1%.

Nothing is stopping an uninformed investor from loading their net worth into a single reuglar stock (you know, those perfectly safe instruments that never ever lose their value and leave you with nothing), so I really, truly don't see what these requirements are protecting anyone from, or why that protection is necessary.

If it's really about protection, then education and nondiscriminatory licensing based on testable knowledge would fill that goal, but instead we have income minimums.

As a society we believe that allowing people of modest means to be swindled out of their savings is an unacceptable outcome and have enacted a large battery of laws to avoid it.

These laws came about from very real and serious experiences that were, in fact, catastrophic for many communities. It's a real live problem, and it goes back a long way.

If you want to argue about the details that's great, but any discussion has to start with the reality that an unregulated market leads to really unwanted outcomes here.

You can also do the "who cares if people want to get swindled let them" approach, but recognize that you've been outvoted on this topic, we've decided to protect people like we try to protect people from unsafe food, consumer products scams, and many other situations.

I'm not sure that OP was referring to people being swindled, specifically, so you speaking on behalf of society (the "we" stuff) probably wasn't needed.

I think it is understood that the regulations are in place to mitigate risk for the most vulnerable. Whether this has been the right implementation (income vs some other means) is what I think OP was getting at.

As a society we don't believe anything. Some people believe marriage is between a man and a woman. Some people believe marijuana should be banned for the good of the population. Some, like you, believe that we should prevent poor people from making investments that the government has not vetted.

>>If you want to argue about the details that's great, but any discussion has to start with the reality that an unregulated market leads to really unwanted outcomes here.

Are you saying that the discussion has to start from the premise that on the balance, the outcome of unregulated markets is less desirable than that of a regulated market? Because I would strongly contest that premise.

>If you want to argue about the details that's great, but any discussion has to start with the reality that an unregulated market leads to really unwanted outcomes here.

Then it's a good thing nobody here, least of all me, asked for "unregulated markets". Literally your entire post is either responding to points I didn't make, or makes arguments I already addressed, making this exchange a complete waste of time for both of us.

If you have the means to do proper due diligence, then you can find a way to get your investment dollars into the hands of someone who can invest for you, even if you can't meet the requirements to be an accredited investor. While we have many laws that propagate classism in the US, I have a hard time thinking this particular law doesn't overwhelmingly protect those who might otherwise jump on a "stock tip" their buddy told them about.

> other than those who jumped in without doing their due dilligence?

Diligencing private securities is expensive. Getting information is expensive, the legal work is expensive, the negotiations are expensive. This is fundamental to the lack of reporting requirements and standardisation. Small checks simply don’t make sense in these markets.

It's a form of classism that mostly serves to ensure that it's the rich who get fleeced with wealth management and hedge fund schemes, most of which underperform broad market investment vehicles that have never been cheaper for retail investors.

I continue to believe that knowledgeable professionals being locked out of investments (sometimes for projects they have meaningfully contributed to!) because they aren't literally millionaires (per US accredited investor reqs) is a much bigger scandal than any shitty ICO.

Here's hoping some version of the Jobs Act 3.0 passes the Senate (before getting stuffed with a bunch of bs)...

Venture exchanges will have more work to do past "the protocols match" - regulators look at the security (the coin) as well as the exchange.

> One is the change to accredited investor laws to allow people to prove investor competence without meeting arbitrary income / asset requirements.

No one, absolutely no one should sit on their thumbs waiting around for regulatory clarity from a slow moving ship unless they have too much to lose. It's time to up the ante and move out of the US. If they keep adding laws instead of deleting them the exodus of seed stage companies is a near-term likelihood.

It doesn't appear that the quantity of laws on the books or the nanny state are preventing seed stage companies from leaving our stable mature market. There must be something else keeping them here in droves. hmm?

The "utility token" meme was hilarious in the community basically talking itself into the idea that the SEC was going to write a bunch of new laws and/or interpret the existing ones in the most favorable light to those raising ICOs. Playing with fire.

The SEC doesn't create law. Courts do. It can claim anything it wants, but until its argument is tested by a court, it's not law.

There continue to be strong legal arguments for utility tokens not being securities:


This attitude of deferring to regulatory agencies, which have their own set of institutional biases, on the question of the applicability of securities laws to smart-contract executed issuances of digital tokens that confer zero legal title to a common enterprise, is dangerous to liberty and innovation.

Courts don't create the law, they interpret it (...except in India, where the Supreme Court actually does make laws). The Legislature writes the law.

A security doesn't require a common enterprise, it simply requires that one thing represents an interest in something else. The underlying asset is usually financial or intangible in nature, but that isn't required. There are more specific rules and exceptions, but those vary by jurisdiction.

A security doesn't require a common enterprise, it simply requires that one thing represents an interest in something else.

True, it even works with past and future music royalties.

David Bowie (together with his financial manager and an investment banker) was probably the first to come up with securisation of non-tangible assets.[1]

It's a fascinating story.

[1] https://www.bbc.com/news/business-35280945

Courts create common law, which determines how statutory laws are interpreted.

>>A security doesn't require a common enterprise, it simply requires that one thing represents an interest in something else.

Investment into a common enterprise is the second prong of the Howey Test.

True, but the Howey test is not the the sole test of determining what a security is. Context matters.

Courts don't create laws. They just come up with new rules that you can't break without going to prison. No laws, though.

"This attitude of deferring to regulatory agencies ... is dangerous to liberty and innovation."

I'm just checking that that's really what you meant to say.

The ellipses replace pretty important context.

Sounds good to me.

Utility tokens aren't securities, but the problem is that there are no utility tokens. Everything calling itself a utility token isn't, because they're all marketed as investments (maybe with the exception of SiaCoin).

MaidSAFE is making a utility token

Chevron deference.

Plenty of real companies making real revenue offer JOBS Act compliant equity crowdfunding, such as https://invest.hylete.com/ though they don't come with the promise of the moon or Lambos or any implied notion of anything at all besides an opportunity to invest in a business. But you do get a real equity claim that's worth something.

But, as per usual, human greed trumps all, and many latched onto incredibly terrible ideas created by woefully unqualified individuals because of a bull market, cognitive dissonance out in full force. History sure has a way of repeating itself.

I wonder how much money the SEC has been bringing in this year—probably a record year. Does anyone know how this is reported?

I don't think the SEC takes the money from people - the SEC tells them to give it back to investors.

Before we say everyone is going to jail and add to the fear-mongering. Like any tech company who are placed on the fringe-- DLT/ Blockchain included -- get a good GC/Lawyer. They can easily shepherd you through the ever changing matters of remaining compliant.

Given the amount of stunning fraud in the ICO market, it was only a matter of time before it was regulated just like every other security. The interesting question is whether or not ICOs have any actual value beside fraud.

I wish the SEC would investigate NEM. I was an initial stakeholder. They refuse to release coins to hundreds of stakeholders who missed some un-publicised deadline a couple of years ago.

If you have a ICO startup it would be pretty stupid to be in the USA.

Why? Just follow the law. You can easily launch a Reg D 506(c) offering.

If you "just" use Reg D, then you can't take money from non-accredited suckers so you'll raise far less money and your security token can't trade on any exchange (yet).

Well, there is no dependency between being able to take money from non-accredited "suckers" and the total amount one can raise. You can raise a shit ton of money with accredited investors only. It's just more complicated.

ICO's were just a cash grab by unscrupulous entrepreneurs. SEC should police the hell out of this stuff, that's their job.

it seems like there can be no bad news to crypto. any piece is taken as good for the space but they should read the fine print, the SEC is putting an end to all ICO

And by "tightens the noose", they mean, "Advise to follow existing securities law, like everyone else".


"From the SEC’s perspective, there is no lack of clarity. The sniff tests are the same as they have been for decades. The SEC is applying the same securities laws to ICOs that it always applies."

“Everybody’s holding their breath for the SEC to create some kind of coin rule, and they’re not going to,” says a securities attorney at one high-profile Silicon Valley firm. “They’re applying the same laws, the same statutes, the same rules, to stocks and bonds and everything else.”

In other words, "what part of "no" did you not understand."

It's hard to find a successful ICO, in the sense that they did whatever they said they were going to do, and did it profitably. From Medium's list of "successful ICOs:"

ICONOMI is held up as a successful example, but they're a "digital asset management platform". They probably should have a broker/dealer license.

Solve.care claims "Solve.Care makes healthcare affordable and easy for everyone". All they have is some kind of "physician wallet".

Truegame is gambling.

Play2Live is like Twitch.tv, except that it costs to watch.

StopTheFakes.io: "Token sale is finished. Thank you for your participation". It's like Mechanical Turk looking for copyright infringement. On their actual site, "http://web.stopthefakes.co/", no new tasks since 2017.

This is pathetic.

They need to create new regulation, not cack-handidly apply old regs to entirely different technology

The regulation is fine. It's just that it's not always easy to predict how it will be applied since the SEC behaves in some very strange ways when it comes to ICOs.

A lack of precedent makes this the biggest challenge. New regulation would have the same problems.

Why do they? There's nothing special about an ICO, other than it's "on a computer". When it comes to the concept of investing, they're not doing anything new.

Well, tokens sold on ICO mean nothing and does not represent share of the company, or anything at all. They are just vapour.

Personally i don't think that ICOs should be banned or regulated - if anything, they are frequently done by anonymous or fake identity people and cashed out using monero, anyway.

Just explain people that they are a scam, and a crime if (unlikely) caught, just like they explained about nigerian prince scam.

opportunities, ICOs, money; flowers, bees, and honey.

just because you're callin' that pollen dust -- don't mean your allergic nose won't sneeze bust.

Where does all of this leave Brave’s BAT token?

There's an argument to be made that it was irresponsible for the SEC to wait this long to clarify their position on enforcement. My guess is they want to deflate this nonsense slowly instead of pop it. It metastasized into a somewhat 'too big to fail' situation before they had time to react properly.

>It metastasized into a somewhat 'too big to fail' situation before they had time to react properly.

What harm could come from indicting scammy ICO pushers too quickly, or those who had crowdsourced too much money?

Hypothetically it might have caused a "blockchain winter" scenario where investors refused to invest in anything, even legit stuff like Filecoin.

I never had strong feelings one way or the other on the SEC until recently. Now, from their unjustified behavior due to Elon's tweets (what's more important to our future as a planet, punishing someone for a gray area tweet they could have chosen to go either way on, or letting Elon continue to innovate at full capacity?) to ruining ICOs, I feel like we'd all be better off if the SEC was reduced by at least a factor of half along with the number of regulations they enforce.

The laws need to change. The SEC should only get involved when someone defrauds another party through misrepresentation. Mandatory disclosure, registration, and KYC requirements are all infringements on the right to privacy and free contract.

That the poorest households spend 9% of their income on state-run lotteries, yet people can't try their hand at investing their own money in businesses/projects that haven't been vetted by a centralized government agency, shows the opportunistic and disingenuous appeal to virtue that's used to sell the public on the need to be controlled.

> The SEC should only get involved when someone defrauds another party through misrepresentation.

So basically ICOs, then.

Exactly. The average ICO made buzzword promises much more insane and fraudulent than even Theranos.

As someone who watched all this quite closely back in the day I cannot believe the amount of money these hucksters pulled out of people and still are to this day.

>>As someone who watched all this quite closely back in the day I cannot believe the amount of money these hucksters pulled out of people and still are to this day.

I don't like people promising the moon to hype up speculative investments, but there are non-government solutions to this, like reputation markets.

In fact we see these non-government solutions working already: token investors today are unrecognizable from those that were giving a website with a white paper $40 million worth of cryptocurrency in 2016. This transformation has occurred completely independently from any regulatory action. The collective intelligence of the market has increased from hard-won lessons in the need to do due diligence, and the emergence of numerous sites for rating token sales (mind you, there's still a lot of room improvement in the curation market).

Regulations can obviously address some of these problems too, but any restriction on how consenting parties choose to interact is going to have massive unintended consequences, and in my estimation the unintended consequences do much more harm than what's alleviated by the regulations.

Also worth mentioning is that the regulations that the SEC is trying to impose on token sales go far beyond prohibiting issuers from promising big gains. They try to micromanage how an offering is conducted with inflexible cookie cutter rules that inhibit innovation and make the entire market dependent on a centralized gatekeeper, which is a monopolistic and fragile situation prone to systemic failures.

It's obvious to me that a free society should not tolerate this level of control being exerted on how people engage in voluntary interactions with other consenting adults.

The problem is that the idea that we ought to be free to do with our money what we wish threatens many powerful special interests, so we get a never-ending stream of rationalizations and emotional appeals for restricting people's contracting rights, and for funnelling commerce through centralized gatekeepers.

I mean, ok. But you are basically arguing that fraud should be allowed, because it is between "consenting adults".

If that's what you want, fine. But you should be open and honest about the fact that you believe that financial fraud should be legal.

And I'd like to point out that fraud is not a new concept. It is something that has been explored in many aspects of society, and most people oppose fraud. Fraud on a Blockchain is still fraud.

Fraud by definition is non-consensual, since it means someone not consenting to a material fact that was withheld from them about the interaction. It's fundamentally theft through misrepresentation of facts and should always be illegal.

Someone saying "We believe this token will go up 200% in two years" is probably not a misrepresentation of facts, and thus not fraud, and should probably be allowed, and they should suffer the reputational damage when their predictions don't pan out.

But if we created laws that did prohibit people from hyping up the investment potential of a token they put for sale, or laws that require token sale organizers to disclose the general risks around investing in speculative assets, like requiring them to include a statement on their website like "this is a highly speculative asset that has not been registered with the SEC. Speculative investments have a high likelihood of losing all of their value. It is recommended that you get professional investment advice before making an investment into a speculative instrument like this, and that you avoid investing a large portion of your wealth in them", that would probably be fine. It wouldn't be a major impediment to voluntary exchange.

Like I said though, what the SEC is seeking to do goes far beyond barring token sale organizers from hyping their project's profit potential, or requiring such warning messages on their websites. If that's all the SEC wanted to do, I wouldn't be nearly as opposed, if at all.

If you can prove a token sale organizer defrauded token buyers by misrepresenting facts, then they should face legal consequences.

But painting an entire category of financial transactions as fraudulent, based on crude generalizations, is not just.

"Mandatory disclosure, registration, and KYC requirements are all infringements on the right to privacy and free contract."

No, they don't. This is like saying the 13th Amendment infringes on your right to sell yourself into slavery.

Well the 13th amendment does deny you a right to sell yourself into slavery, so you're not substantiating your claim that these laws don't infringe on your right to privacy and free contract.

In any case, that's an extremely dishonest comparison. In no way is spending money that your past self left to your present self however you wish (e.g. investing in a out-there idea called "Bit Coin" in 2010, instead of wasting it on state-run lotteries that the government advertises), comparable to selling your future self's freedom away. The latter violates the rights of someone who is arguably not you. The former violates no one's rights and should not be prohibited in a free society.

"Well the 13th amendment does deny you a right to sell yourself into slavery, so you're not substantiating your claim that these laws don't infringe on your right to privacy and free contract."

I'm saying your complaint is like that. Yes, it does prevent you from doing that. Nobody cares, however. Just like you are trying to complain that you are prevented from buying a security where you get absolutely no insight, knowledge, or reporting whatsoever. I just cannot take that complaint seriously at all, and any legitimate investment doesn't either.

You wrote:

>>No, they don't.

Now you admit that they do. So you're resorting to misleading rhetoric to try to blunt the common sense argument I'm making, which is that in a free society, no one has a moral right to tell someone else how they can spend their money.

People should have more humility, and not assume their understanding of the world is so far superior to the common man's that they have a right to exert their will on the common man. The call for these types of regulatory restrictions appeals to shallow unthinking narcissism, and nothing more, which is why it needs to be supported with inappropriate and inflammatory comparisons to selling yourself into slavery.

You're not making a common sense argument. Your argument is literally that you're upset that you cannot buy into investments which give you absolutely no insight, information, or any kind of knowledge that would let you actually be able to make an informed decision. That is not common sense one bit, and is just as silly as complaining that you can't sell yourself into slavery. Nobody is going to take an argument like yours seriously.

It's common sense that a free society shouldn't restrict what someone can invest in. You have no idea what insights I have in a potential investment so please do not presume to know. I do not need or want the government to prohibit me from making an investment before it has had a chance to vet it.

What you're advocating is illiberal and paternalistic, and your presumptions about the level of insight that goes into investment made into unregistered offerings are crude and baseless over-simplifications.

>>Nobody is going to take an argument like yours seriously.

That's not true and I don't believe you think it's true. You're literally comparing investing in a speculative instrument not vetted by a government agency with selling yourself into slavery to try to dull the appeal of my argument.

If you thought no one would agree with me, you wouldn't be going to such extreme lengths to counter my claims. You would be comfortable letting them stand on their own merit.

"You're literally comparing investing in a speculative instrument"

Wrong. You're complaining about investments that give you absolutely no knowledge and no information about themselves, making you unable to make an informed decision. That's not even gambling, so don't try to call it investing.

"If you thought no one would agree with me, you wouldn't be going to such extreme lengths to counter my claims. You would be comfortable letting them stand on their own merit."

That line is absolutely false. If it had any merit whatsoever, this wouldn't be an internet forum.

You have no idea how much information the investments you want prohibited give about themselves. Not being registered with the SEC does not imply providing no information, and you want everything not registered with the SEC to be banned. Your ridiculous characterizations of non-registered investments are baseless/dishonest and intended to mislead people about the nature of these controls.

The fact that you have to resort to this, and to comparisons of buying an unregistered investment to selling yourself into slavery, shows that you don't have a solid set of arguments to support your position, and that you're prioritizing your agenda ahead of the truth.

And like I said, your actions belie your claim that no one agrees with me. If you thought no one would agree with me, you wouldn't be going to such extreme lengths to counter my claims. You would be comfortable letting them stand on their own merit.

Exactly this. Half of the regulations the SEC enforces look more to me like nothing but revenue generation and entrenching existing players. Day trading rules are a flagrant example - only rich people are allowed to buy stocks and sell them the same day, not proles.

Former securities lawyer Louis Cammarosano claimed back in July 2017 that 1. token sales are a threat to Silicon Valley and Wall Street, 2. that the SEC doesn't want to bring an enforcement action because they fear that a court will disagree with their interpretation:


I guess time will tell.

In the eyes of SEC, ICOs are nothing more than equity crowdfunding. It means that SEC doesn't like any sale of unlisted assets to unaccredited investors.

By SEC definition accredited investor is an investor who has either $1M of liquid net worth or stable income not less than $200k per year.

Original intent of the government was to bar unsophisticated investors from high risk investments.

While I understand logic of the law - many people are completely financially irresponsible and are not capable of critical thinking (that's what politically correct term "unsophisticated investor" actually means), I find this law extremely frustrating.

For example, I had no chance to buy Spotify when it was well under $1B valuation because the government baby-sitting me by excluding me from opportunity to invest into early-stage startups.

If you want to downvote me on "not capable of critical thinking" and at the same time support barring people from making their own financial decisions, please think twice because it's clear contradiction.

There is a compromise: Why not lower entry level of becoming accredited investor? For example, you could be semi-accredited investor with lower capital but with limits on investments. Or making some government exams on risk taking and investing? Or having special government-approved platform for early-stage investments for unaccredited investors. There are lots of combinations.

Right now, there is a huge hunger among people for early-stage investments. And if you are not making it legal, it just go underground and as a result with more dangers for unsophisticated investors.

Even without the SEC, you would not have been able to invest in Spotify. They had zero interest in taking your money when they could raise money much more easily from professional investors capable of writing 8 figure checks.

It's very important to understand this and the adverse selection problem that would emerge if laws were changed. There's a reason that only scammers did ICOs.

> only scammers did ICOs

This is absolutely incorrect. One of many examples - Tezos.

Oh, I probably overstated a little bit. But I'm confident that 90%+ of them were scams.

Re: Tezos - "Inside the Crypto World's Biggest Scandal"



There's still a token handful of us around who believe in individual rights first and foremost. Not many, but we do exist. And we will win in the end because we have better principles. Don't despair.

As an individual, the only chance you'd have to invest in a hot startup is to be an angel investor, or else close family or really good friends with the founders or VCs. Even accredited investors with 10s of millions got turned away from hot startups like Spotify and Snapchat (back when it was the big kahuna).

And let's be clear: you can still invest in a startup as a non-accredited investor. There is no prohibition on that, or else startups couldn't give equity to employees, contractors, or others (see, e.g., pre-IPO Facebook and Google, and the many famous stories of dotcom millionaires from their respective IPOs).

A year ago, I watched YC lecture for raising capital where Sam Altman or somebody else recommended startup founders NOT raise any capital from unaccredited investors because it may create problems with raising next rounds. In other words, current regulatory environment also promotes discrimination of unaccredited investors.

Employee compensation is different.

P.S. It's amazing how much Hacker News readers are against cryptocurrency, in favor of very big government, very high taxes up to 70% as their Piketty, Krugman suggest to enforce equality of outcome. This community became total opposition of what Paul Graham might thought back in 2007. The only thing is left is to change Hacker News icon to Che Guevara emblem.

Realistically, I don't think intelligent people with no connections can buy into startups or pre-ICOs (the ICO itself is now a scam) anyway. These investments are all arranged privately.

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