"When we looked at raising another round [of VC funding], we asked ourselves how do we answer the question about how we will become a profitable business [...] We didn’t have an answer we really believed."
... so instead they decided to raise money from unsophisticated investors in an unregulated market, where nobody asks such inconvenient questions! No surprise that the SEC is upset.
You literally can't make this any easier for the SEC. There's not much of a defense when you repeatedly admit that you're attempting to raise money by issuing something you market as an investment opportunity.
There are other ways of addressing fraud besides violating people's right to freely contract with other consenting adults, like punishing those who commit fraud to deter others from committing the crime, and public education campaigns.
The idea that the government has a right to deem a certain class of investors as "unsophisticated", and thus better off deprived of the right to decide for themselves what to invest in, and prohibit an entire class of interactions, on the basis that too many instances of that class are fraudulent, upends basic principles of liberal society.
The poorest households in the US spend 9% of their income on lottery tickets, showing that you can't legislate people out of misusing their funds. If anything, the attempt to do so deprives them of better investment opportunities, and better opportunities to learn how the investment world works.
And this isn't free market idealism. The crypto/token investment market has become vastly more sophisticated over the last 4 years. Token sales that would have raised millions 4 years get nothing today. People need to have a bit more faith in other people, and in freedom.
Kik is choosing not to become a “public” company in that they don’t want to file disclosures. They’re trying to circumvent the rules that show they’re operating above board.
can being the operative word. There is a very significant market for investments where "sophisticated" – er – Accredited Investors get access to purchase securities that are not available to the public.
Frustration from people who want to but cannot access this market is real and arguably valid, a balancing act between preventing fraud and granting access which is tipped a bit too far towards not necessarily preventing fraud but restricting access for the benefit of a few. (on the other hand before you go public there is a benefit to only having investors that really know what they are doing, the rabble of small time less knowledgable investors can be a business risk before your company is ready for the public)
What I am saying is that the people spouting nonsense come from a place where there is truth, but so many people know so little about it that good discussions are hard to come by.
The reality is if you’re a high profile founder with a great idea and traction you can get money from mostly everyone while maintaining a nice clean cap table. If you aren’t, you then raise from “suckers” (see the ICO market).
It's as though some of the libertarian leaning commenters think these rules were brought in because the government was tired of seeing so many poor people become wealthy. The reality is the government was tired of seeing so many poor people get rekked and thrown into the welfare system, what little of it there is here.
tl;dr: getting rich isn’t easy and deregulation is likely to cause more harm than good.
So us, poor unsophisticated plebs, can’t invest in anything until post IPO. Which seems to be way after the majority of the gains have been captured.
Ironically people are trying to build fully automatic DAOs, such that the use of funds is fully transparent. Effectively baking in the reporting into the organization.
And also after the point where most of the failed companies have collapsed. Don't let survivorship bias run your investment decisions.
“The poorest households in the US spend 9% of their income on lottery tickets, showing that you can't legislate people out of misusing their funds.”
You’ve explained why it’s urgent that we outlaw lottery tickets. For most of USA history Protestant and Catholic leaders were unified in their opposition to all forms of gambling, and so lottery tickets were unthinkable for most of USA history. And every progressive activist that I know personally would like to see an end to lottery tickets and other forms of de facto regressive taxation. Lottery tickets, like other forms of gambling, tend to undermine habits of thrift and sobriety.
I agree with your implied analogy — ICOs are like lottery tickets. That’s why they should be banned.
Not all of them, though maybe nearly all of them.
There is nothing at all wrong with using a crypto-system to distribute ownership of your business. The SEC is actively working to make this a reality. It is just a different market to do the same thing.
There is however so very much wrong with doing this outside regulation. Black market shares of your company are bad. Making up the nth new coin and selling its nonsense to the unwise in pump and dump schemes is wrong. In order to do so legally you have to be extraordinarily careful to completely divorce yourself from the US financial system and doing business on US soil.
Banks themselves are starting to use crypto-coins to operate. They're just a tool, when used in the right way they aren't an exciting anarchist revolution usurping The Man, they're just a different sort of database/API. JPMorgan is setting something up for business-to-business transactions because they think it could be a better replacement for the current complex frameworks they have for keeping track of money.
Most ICOs are like bad lottery tickets, but it's not the technology underlying it at fault.
Actually in most countries lotteries are pretty heavily regulated to ensure that they are indeed redistributing a share of ticket sales as winnings and are also fairly selecting winners. ICOs are like unregulated lotteries that might intend to keep the proceeds from all "investments" to themselves and/or unfairly distribute to insiders like the "influencers". Opportunity makes a thief.
Imagine if anyone could buy $5 worth of stock for the product they're buying at 7-11. Over-time these small purchases would let them amass a sizeable base of assets, and all the while they'd have a stake in parts of the real economy, which would incentivize them to invest time in learning how it works. The educational value alone would be enormous.
Instead we foolishly prohibit people from participating in many of the most lucrative sectors of the economy, which corrals them into low-value dead-end activities like playing the lottos. If you want someone to grow, you don't over-protect them. That applies to raising children, and it applies to governance of the public at large.
Yeah, and in ten years they might get $14, which will just give some extra profit to their creditors when they file for bankruptcy for unpaid medical bills, or be captured in a civil forfeiture. And if somehow they managed to keep it and actually save a couple grand, that just means they'll become ineligible for SNAP and lose much more in benefits.
People play the lottery because it represents something more than slaving yourself to make scraps. They are not stupid, and know the system is design to keep you poor, and that hoping to escape by amassing a few bucks is almost as delusional as expecting to win the lottery.
How is that any different than matching two numbers on a lotto ticket and winning $10, or $1000?
With real-world investing, especially in micro-caps, they have a chance to hit it big as well, and make millions. So it has the same dream escapist aspect. And it provides a much more solid grounding for the future than throwing money in a game that you are mathematically guaranteed to lose if you play long enough. Investing is not a game of pure chance, and it is not zero sum. With enough skill, you can actually make money, and your skill can improve over time, and doing so actually improves how the economy as a whole allocates capital.
That's immediately spendable; it doesn't sit somewhere where it can be taken (by illegal or legal means). That's also one of the reasons why people join susus instead of just saving, for example.
> With real-world investing, especially in micro-caps, they have a chance to hit it big as well, and make millions.
There's no change of making millions in a day, or week. The few "rags-to-riches" trading millionaires progressively amassed their money over at least a few years. But that means losing benefits, which people can't afford to risk. Like I said, the system is designed to keep them there, and they know it.
>>There's no change of making millions in a day, or week. The few "rags-to-riches" trading millionaires progressively amassed their money over at least a few years.
Crypto-assets have seen many thousands of percent gains in a matter of days. I don't know if you could turn $2 into a million in one week the way you can with a lotto, but the gains I think are substantial enough to compete for lotto spending, especially considering that odds of gains can be improved by the buyer through research and analysis.
The gvt lotto was not created before people played lottery, it was invented because people want to play chance games anyway and that's a great way to build roads at the same time.
I think the real market could be potentially more exciting than lottos, if regulations didn't prevent securities from being marketed the way lottos are. In a way, the token sale frenzy demonstrated that.
Counterpoint: The government declares which investors are savvy or not ("accreditation" based on the rules) only partly because they believe certain people are unqualified to make certain investment decisions based on knowledge. The other major factor is whether an investor is more likely to lose amounts material to their survival.
Two items to consider:
1. A person making enough spare income to take such risks is someone who likely won't suffer nearly as much if the risk goes south. Someone making 200,000/y (ok, excluding SF/NY since apparently legislators hardcoded a value like idiots) or who has 1mil assets after the primary home will probably feel pretty bad if a 25,000 investment goes to zero, but they probably won't be going on public assistance.
2. That said, regarding qualification to actually make the decision, a person who has the net worth or the income flow to qualify for accreditation may also be in a better position to invest in concepts being developed by people with past track records or increased odds of success. This may be a general result of being connected to such people (what you might call "the old boys' club," but this can broadly apply to any network of people) or may simply stem from being better positioned to evaluate/diligence the concept e.g. because they're applying their specialized knowledge to evaluate a new idea which they feel has value.
Idealism is one thing, but if you're more likely to be preyed upon because you don't have the knowledge or connections to make more informed investment decisions and are more willing to increase the tax burden on your fellow person as a result of investment decisions gone sour, that's where the government steps in to protect the general population.
As a reminder, this is one of the few responsibilities the government actually has in any society, even the most libertarian.
Anyway, this isn't really a debate. If you disagree, you're empowered to do what you wish; I've made my counterpoint above and don't intend to go further.
You're just rewording what I said.
What you're promoting is based on a principle that is roundly rejected when applied in every other sphere of life.
>>As a reminder, this is one of the few responsibilities the government actually has in any society, even the most libertarian.
Protecting people from their own bad judgement is not a responsibility that the government has in a free (libertarian) society.
That's why we let people read whatever literature they want, no matter how toxic the ideas it promotes, and to eat as much as they want, exercise as little as they want, engage in as much unprotected sex as they want, and drink and smoke as much they want.
When it comes to crime, the government does have a role in protecting people, but the way it traditionally protects them is by intervening when someone reports a crime in progress, or punishing individuals after they've committed a crime, to create a deterrent effect, not by prohibiting people from venturing into dangerous areas of the city, or prohibiting certain types of relationships that are more likely to lead to criminal incidents.
Preemptive restrictions applied to innocent people is not how crime is addressed in a free society.
I don't know where you get your ideas of what libertarians are or aren't but, the general basis of libertarianism is that government gives your recourse for physical harm, defrauding via lies of commission (on principle and independent of the individual's ability to protect themselves), and typically property rights (though libertarians often disagree why). Generally the truth is considered to be an absolute defense against an accusation of fraud, and the justification of fraud is not a function of government having to 'bail people out', and in general, libertarianism does not consider it the role of government to "protect the general population". Typically, libertarians believe this under the premise that so often governments have done (and continue to do) shady things under the "guise of protecting the general population".
Approval-encumbered interaction is not consistent with how free society works, where people are presumed innocent, and not burdened with restrictions, until proven guilty.
Speech used to be like that. You had to get approval from the state, before being allowed to publish. This was to prevent things like libel. It was called Prior Restraint. Eventually courts ruled it violated the Freedom of Speech, and we are all vastly better for that ruling.
In practice it's also not flexible enough for innovation.
It regiments only one acceptable way to establish an informed and consensual interaction, which precludes innovative new ways opened up by technology.
You might liken an underground ICO to a bug chaser party where some participant doesn't even know what that is.
That kind of stuff is a real problem, and there are plenty of scenarios where government prohibition isn't overstepping. In those cases, we're not protecting you from yourself, but rather protecting everyone else from you and your poor decisions that make your misfortune a burden to society.
The vast majority of people applauding restrictions on securities offerings would vote against any party that advocated similar restrictions on high-risk sexual activity. That shows that most people are just conforming to the popular viewpoint, and not independently and critically thinking about the issue.
That is dangerous, because these issues are too complex, and too important, to decide on nothing more than what position is the popular fad. They have very significant consequences for huge numbers of people. We as a society need every single voter to fully understand the principle behind every law, and be able to justify it, because the consequence for violating the laws is that a person has their property seized, or their freedom taken away.
Also, I think your analogy is inappropriate. People investing in crypto tokens is not going to do damage anywhere close to that done by "bug chaser parties". It's just money, if that (much of it is in the form of other crypto-tokens, so we're not even talking about fiat currency being risked).
Even if you accept that people bankrupting themselves is a terrible outcome for society, the fact remains that people have plenty of other ways to blow their money. I can't see how these investments not being prohibited would make the problem any worse.
But what a lack of prohibitions and a free market in soliciting and making investments would do is provide people with valuable exposure to the real investment world, and allow them to get a better understanding of how marketing hype, and speculative bubbles work, and how to identify real value. It would also allow people in much lower socio-economic groups to raise capital.
Finally, no one is saying that victimizing behaviour, like fraud, should be legal. The question is, how do you address predatory behaviour. The answer in the West has traditionally been to punish those convicted of committing it. Cookie-cutter rules that subordinate every participant in an industry to a centralized gatekeeper, are disproportionate to the threat of fraud and inconsistent with the principles of a free society, like the presumption of innocence and the freedom of association and contract.
They overly regiment the market, which inhibits innovation, and create barriers to entry to various sectors of the economy that exacerbate income inequality.
if they had raised money by telling a story that they didn't believe to the VC's to raise money from the VC's, then they would have been guilty of something by their own words: but they didn't, and their point in saying that was they did not do that. Instead, they pivoted...
The money they raised in the ICO has the SEC upset, but not for the reason your example refers to, but simply for lack of registration.
It is also the scammers fault for scamming, and they face their own set of consequences.
I also think there is this bizarre double talk on HN where people say sophisticated investor status shouldn't be a thing while also condemning ICOs, which is exactly what happens when sophisticated investor status isn't a thing.
It's a misnomer because it implies there is some kind of knowledge or skill threshold required.
What it really means is "has enough money they can afford to lose some".
In reality, there are plenty of people who have tons of money and not a clue how to invest it well.
It's not. "Accredited investor" is the official term. "Sophisticated investor" is a higher finance-colloquial bar, typically requiring one follow institutional best practices (e.g. legal and risk reviews).
Who even bought this stuff? Doesn't this throw up all the red flags of a scam ICO?
A buddy of mine from my home town called me up and needed a developer to work on his "crypto-currency hedge fund." This guy has always been a bit dodgy on looking for the least amount of resistance to the most money.
I tried tell tell him all the reasons it was a bad idea. He claims he had done all the research (guy is not a programmer, couldn't pass Anatomy I the two times he took it in an attempt to start his career as a radiologist .. for the money -- sure as hell couldn't do the maths).
He told me investments would be a minimum of $250k and he was promising (yes promising) 120% returns. ... I told him he needed to be careful, because with that type of pitch, he would most likely end up in a ditch somewhere two to to the head .. or jail .. and he should hope for jail.
Besides telling him it was a bad idea, I told him he couldn't afford me. He told me he'd pay more than whatever I was making. I told him what I made .. and that I wouldn't take anything in crypto currency. That ended that.
He had several tens of thousands in different crypto currencies (before the BTC bubble broke in 2018). So in response to your question: this kind of person.
I'm no lawyer, but it certainly seems like Kik worked to circumvent these laws in order to raise a bunch of money to keep their business alive. I look forward to seeing where the SEC investigation/trial goes.
Which is counterproductive, really. Natural selection is the only effective cure for stupidity known to the mankind. Stupid people should be allowed to make stupid mistakes and suffer all the consequences.
What’s amazing is they raise nearly $100M selling the token, spent $5M in legal fees and then began raising additional legal fees (over $5M to date) from the public to continue to fight the SEC and anticipation of future litigation with the SEC.
They raised $100M and can’t be bothered to use that for their own legal fees...And the public is apparently happy giving them millions more, it’s insanity.
I believe it was Einstein who defined insanity as performing the same task over and over and expecting different results.
If you invested/bought Kik because you wanted a “position” to make money on it, then it fits the definition of a security, so by throwing more money to fight the SEC to claim it’s not a security is a losing battle by your own “position”.
The real irony is that the Kik token probably was structured as a non-security utility token, it’s only the CEO statements/marketing of the token as something that will become extremely valueable to investors that will come back and haunt them.
Not Einstein. It's a quote from a 1981 Narcotics Anonymous pamphlet.
Look at all the payment integrations that've been added to platforms like Facebook lately. It isn't cryptocurrency, but the idea seems to be pretty similar.
I think the SEC is interested in the conditions around their ICO, the misleading tactics, and the aftermath of it, more than the fact that they did an ICO
That is not to say, this is the only kik users, it's just the only instances I anecdotally saw people advertise their kik handles, and it didn't leave a good impression. This ICO stuff made me think of that.
Myself, for a long time I believed tech startups are micro-R&D for new technologies. Couple years of HN and in the local startup community later, I finally realized that a lot of Internet startups tend to turn investor money into business model R&D - i.e. ever more innovative ways to break an existing market and siphon off enough wealth to get flipped and net the founders FU money. Regular people don't know any of that; they don't understand how the game is played, or why - they only enjoy free web services and cheap pirate taxi rides.
They were from about 1970 to 1998. Then came the dot-com boom.
During that period, most VC firms made money. Now, VC funds as a a class are a net lose.
It seems like you might of repeated yourself...
This is the cryptocurrency roosters coming home to roost, no?
According to the SEC it was also an illegal offering of a security, and its receiving special treatment bc they considered it to have matured and no longer be considered a security, therefore grandfathered its grandfathered in unlike any other ICO.
No one else is going to have the good fortune of being able to offer an unregistered security then mature into a non-security with the SEC acting first.
Name a non-ICO-infrastructure ICO that isn’t a scam.
None of this stuff is ready for the mass market because scaling is so limited, but that's on track to get about 1000X better over the next two years.
Quick search of “ethereum escrow” returns no real implementations that avoid fees or human intermediaries. Every single blog post I’ve read that tries to sketch an alternative is incredibly poorly thought through and still vulnerable to fraud. That is why they are just blog posts and not real, not because it’s “still early days.” I think it’s fair to say trustless escrow is vaporware.
Programmable consensus and smart contracts are easy to learn concepts.
*Also one should know it is offensive to call another's work vaporware. Especially, when one is relying on anecdotes. Next I'm going to be told IBM and Google are wasting their time and shareholder money on blockchain.
So yes, fair to say it's vapor i.e. not a real thing. That may be harsh but it is a fair and supported criticism, whereas your prior comment merely engaged in unsupported mockery.
There are projects with a very high potential to provide those building blocks in development right now, like Matter Labs' use of zero-knowledge proofs to scale Ethereum:
But yea it's all very speculative right now. I speculate it will work, but it'll depend on what the various players in the industy actually accomplish.
Ethereum is the reason there have been so many ICOs in the past 3 years.
Are most ICO's scams? Yeah sadly.
Are there lots of scams on Kickstarter/indiegogo/etc? Yes sadly.
But an ICO itself isn't necessarily a scam (although I concede 99% of them are)
The problem is that most of them are run by scammers, which do promise profit.
In an ICO, I get a... theoretical security? A kik kin coin that may or may not have value?
You don't back an ICO because its "value will go to the moon", you back an ICO because invents a new way for -- Creators to get paid instead of using advertisements, creative ways to organize some kind of distributed system.
The scam comes from them not completing their promises and leaving with the money and no "product". The coin's value is irrelevant (as long as it isn't 0)
A lot of 'investors' are firm believers in the Great Fool theory of investment. Basically they are completely aware that it is a scam, they're just banking on the fact that they can get in, take some profit, and get out before the rest of the world catches on that it is a scam.
Is that a good or bad thing?
There was a short period of time when there was immense profits to be had from buying and quickly flipping obvious scam ICOs.
Probably if they had invested in the right lobbyists and the right lawyers, they would have been able to engineer a level of indirection that this wouldn't have attracted attention.
Maybe they actually have, and will lose this case as millionaires.
My guess is that a lot of this money is dirty. There are also tax reasons, where money needs to be invested or is even expected to be lost.
AFAICT many/most ICOs operated like this. Not all, certainly but the "raise money through hype about future values, with products far off or non-existant" model appeared to be the dominant one in '17 and '18.
I personally feel that rando cryptocurrency vs Uber post IPO has similar alpha, but obviously quite different beta.
North Korea probably.
> 167. [...] Kik declined to sell Kin to investors from certain countries, including Canada, China, Cuba, and North Korea.
> Eileen Lyon, Kik's General Counsel commented, "For the reasons set forth in our Wells Submission, the SEC's complaint against Kik is based on a flawed legal theory. Among other things, the complaint assumes, incorrectly, that any discussion of a potential increase in value of an asset is the same as offering or promising profits solely from the efforts of another; that having aligned incentives is the same as creating a 'common enterprise'; and that any contributions by a seller or promoter are necessarily the "essential" managerial or entrepreneurial efforts required to create an investment contract. These legal assumptions stretch the Howey test well beyond its definition, and we do not believe they will withstand judicial scrutiny."
I know a lot of other actions around the country are pushing the limits, hoping to get a favorable ruling and establish precedent (see: case vs. ACA being unconstitutional).
Is encoding a set of account values into a genesis block posted on GitHub a security offering?
They're so fucked. Good riddance.
The SEC usually acts but the penalties are usually for 1/100th of the profits.
If Kik loses here they're just going to make them pay $1M 'penalty' and move on.
>The SEC seeks a permanent injunction, disgorgement plus interest, and a penalty.
So they're seeking $55,000,000 USD of US investor funds, plus interest, plus a penalty.
That would bankrupt Kik and decimate the future of the project.
People with skin in the game clearly think it's a big deal. Kin's price tanked by 25% today, and that's after a long decline since the Well's notice. That trading volume is telling too. They turned over about 10% of the outstanding shares. By comparison, a typical day for GOOGL is 0.5%.
I'm not saying the company should be bankrupted, but it has to hurt them enough that they wouldn't want to risk trying again.
As for their being no legal way to rob a bank, there are a whole bunch of folks from the 2009 mortgage crises who would beg to differ.
9-120.000 - ATTORNEY FEE FORFEITURE GUIDELINES
Not many folks say "Oh man I don't want the SEC to sue me, I'm gonna get creamed in court!"
A number of smaller ICOs just settled with the SEC and refunded the money to investors when they got a Wells Notice. Those are all the folks who said "Oh man I don't want the SEC to sue me, I'm gonna get creamed in court." Kik is different in that they have deep pockets, strong legal counsel, and a product that's been out there for 8 years.
Except they don't. The only money they have is from an unregistered sale of securities which was only undertaken because they HAD NO MONEY. Their product costs more to run than it makes, and is irrelevant to the SEC lawsuit.
Lawyers know that they cannot be paid with that money. If they lose it will be forfeited. Similarly you can't rob a bank and use the money to pay your lawyer.
> It’s not like anything will happen to the executives.
That's absolutely not true. It's not unreasonable to expect that the SEC might refer people to the DOJ for criminal prosecution and jail time would send a nice signal.
Don't you think this would come out at trial? Sounds like the only reason they came out with an unregistered ICO was in order to generate revenue it needed to continue operating. That's a huge red flag for me if I'm an SEC investigator
>the company’s management predicted internally that it would run out of money in 2017. In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens. Kik sold its “Kin” tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors. The complaint alleges that Kin tokens traded recently at about half of the value that public investors paid in the offering.
I would hope that nobody is putting money into crypto that they need to live on. But for money that you aren't going to need for years, there's a good chance that some form of cryptocurrency will end up replacing much of the current financial system, and it makes sense to diversify bets across them.
Losing half of your investment's value and the dotcom bubble are nothing compared to crypto losses for some unfortunate investors, unfortunately.
Plenty, if not most of the cryptocurrencies out there... are down >95% from their peaks in late 2017/early 2018.
Is the idea something along the lines of the double forces of greed and fear causing the perfect bubble? The one that doesn't pop because it eats its own downside on the way?
Why won't governments just shut down the on-ramp exchanges if the space ever looks like more than a way to gamble or make hidden-ish transactions?
My reasoning is this:
Fundamentally, the financial industry is about time, risk, and trust. The reason the industry exists is to shift productive capacity from individuals that are able to bear it now, to enterprises that may or may not pay off later, in a way that everybody who contributed to the success of an enterprise gets paid off later (when they need the funds) and gets to do it again. Currency is an information-carrying device that both lets you shift production from the consumer to the person best able to provide the service (medium of exchange) and records that a person provided valuable services at some point in the past so that they can claim services in the future (store of value). Stocks and bonds are both different ways of transferring money that people don't need now to people who can do useful things with it now, in a way that the investor can receive a payoff later. The banking system does the same, but with institutionalized, standardized practices. The insurance industry spreads risk from people who cannot bear it now across people who can; the futures & derivatives markets transfer that risk from firms who cannot bear it to firms who can.
When I look at the ICO boom of 2017, I saw the beginning of a functioning financial system. All the basic elements were in place - the ability to transfer value and claims of future value between participants, the ability for people with an excess of credit (assets) now to fund the development of projects that may pay off later, and the trust that if those projects were successful, they would benefit. It's all in a very rough form - the network got clogged such that it took ridiculous times for transaction confirmations, most of these projects continued to fail and end up worthless (I actually have hard data on this - roughly 90% of ICOs are either scams, failed, infeasible, or otherwise abandoned, while 10% are still going concerns 2 years later), there've been a bunch of hacks of exchanges and smart contracts, market manipulation is rampant, and cryptocurrency prices look like a roller coaster. Basically, we're making all the mistakes of 19th-century finance again: the crypto market looks a lot like the stock market did in the 1840s.
But we're doing it without needing any people involved in transactions. That's hugely powerful, in a world that software is eating. Finance is a $13T industry accounting for ~20% of world GDP and employing millions of incredibly high-paid people. In the sense of crypto being a cheap software-only competitor for extremely high-paid people, it's quite attractive.
And all of the problems that happened in 2017 are fixable. There are already lots of people working on the cryptocurrency scalability problem, between Bitcoin Lightning, Ethereum Casper, and new consensus algorithms like DPoS and SCP. People are working on the energy consumed by PoW, too - almost all new coins are proof-of-stake. Distributed exchanges like the 0x protocol remove the need to trust third-parties with your funds; you can keep them all in your own wallet. Continued bugfixes to Solidity shore up smart contract security. Stablecoins like MakerDAO and USDC remove the volatility of pricing in terms of crypto. Oracles provide a way to get more "facts" onto the blockchain so that smart contracts can rely on a disinterested third-party to make decisions on data. Each bubble distributes more crypto out of the hands of early-adopter whales (other than the Satoshi-coins, these account for less than 15% of total Bitcoin supply) and into the hands of ordinary people.
I think that governments if they acted now could shut down the fiat on-ramps to crypto, but I don't think they will. Too many people that use it for legitimate investment purposes, who will be very upset if they do. Government always tends to react a little too late to the social changes presented by new technology - we're only now seeing a backlash to the Internet, 30 years later, and at this point it's a little late to shut off the net even if certain governments are trying. Besides, if a technology makes the group of people who adopt it more efficient than the people who don't, the former will outcompete the latter. At some point, once people are directly selling goods for crypto and getting paid in it, it becomes too big to fail. I think that's a few years off (I expect crypto adoption to be slower than WWW adoption, because finance is more fundamental to society than communication is), but ultimately I think the ability to fund & partake in the benefits of new ventures without needing permission from Wall Street or Sand Hill Road will outweigh all the downsides of crypto.
The ICO is a way to raise money out of chumps without giving anything in exchange, but it's not more efficient, faster or better in any way than an IPO. It's just shadier.
With an ICO, you lock up some of that money supply in speculators' wallets, in exchange for the initial capital infusion. As the normal use-value price of the currency rises, they will sell and take their profits, injecting money back into the economy.
The wrinkles right now are that a.) nobody really knows how to value a currency with few-to-zero users and b.) a lot of these projects didn't deliver. That meant that a number of people lost their shirt in 2017 (actually, I suspect that number is less than commonly reported: I think most ICO investors were early Bitcoin and Ethereum hodlers who had already cashed out their initial investment into the bubble and then had some play money to diversify). But if you can pick winners now, when all the initial hype has disappeared, you stand to make a fair bit as people start using these platforms for real commerce.
This seems right to me. We can avoid things like accredited investor status and allow small amounts of capital to be invested without needing much legal overhead. And (for better or worse), ventures funded this way will also have a market price and never be private in the sense of today.
Of course, ICOs or whatever they morph into will need to be much more like securities than they were 2 years ago. Investing without actual equity makes little sense to me. To make these more reasonable, companies will need to know they aren't breaking securities laws when they issue. Once they know that, the ICOs can look less insane.
I buy the transaction cost argument in this sense. But I think there might be too many other issues for this to come about. Though I'm currently not confident enough in bill or bear status to bet either way.
Let's grant that scaling can be solved and volatility will not remain incredible like today. I think there are maybe deeper issues.
There's a lot of emphasis on 3rd party risk mitigation in the crypto world. But this new world reopens more 2nd party risk than it minimizes 3rd party risk to my first approximation.
Governments exist as dispute resolvers and preventers (military/police and laws/rules being the functions a government must have to be a government). They protect citizens from outside threats, but much more often from each other. In crypto, the permanence of a transaction is a primitive. But this makes scamming and various forms of theft even more attractive. People like the comfortable feeling of a government protecting them from financial fraud. If cryptocurrencies became the main currencies, I think they won't be able to look as loose and free as they do today. Even ignoring the funding of criminal activity, people want a way to reverse bad faith transactions. They'll demand oversight I think.
It's hard for me to imagine the hypothetical end state crypto financial world being anywhere near as libertarian-feeling as today's cryptocurrencies. Digital money is a government's dream. A government issued or one in which governments have a back door allows perfect monitoring of transactions and monetary policy controls.
The whole thing just seems too early to be predictable or investable to me. It's just for momentum trading today in my current view.
Though this is an idea space that forces me to change my mind back and forth. It's too complex to remain a settled, comfortable member of the landscape.
(To be fair, the SEC is pretty much the one government agency that Uber did not piss off - it's just the IRS, FBI, DoJ, and almost every local government in America that they're in trouble with.)
That doesn't really sound like a security to me...
We could have a privacy-oriented chat platform with a cryptocurrency "small cash" type of transaction system built on top. Combined with some informal craigslist style mini-stores, which flourished in China via Wechat.
I'm sure FB/WhatsApp could do it via normal payment channels, probably involving Visa/Mastercard. But the privacy story is awful for such a critical piece of software. Assuming they could pull it off. Maybe Kik could take up the privacy flag?
WSJ made a nice video of how Chinese people live "cashless" via WeChat in Shenzen: https://www.youtube.com/watch?v=75AXINUL47g
Granted, if Kik went bust tomorrow those tokens would most likely have no value, since their use is tied to Kik's messenger app. But in theory you would still own the tokens and could transfer them to anyone who would accept them.
I feel like most services that aim to replace another one ... just want that information for their own purposes, not the customer's benefit.
No most people don’t raise a $100M in violation of securities law...or even “testing” security laws, especially when Kik could have obtained the SECs opinion through a No Action Letter request.
Why didn’t Kik avail themselves to the law and process before raising $100M from the public?
> First of all, you have to consider the SEC’s normal process for that sort of thing. It is very difficult and it takes a very, very, very long time for the SEC to give that kind of forward-looking advice, usually in the form of a no action letter. I mean, here we are in 2019 and they have only just recently released what I think is the very first no action letter relating to a cryptocurrency and that matter has been pending for well over a year.
> So it’s not practicable in a business that’s moving as quickly as this business was in 2016, 2017, to go and ask the SEC for a no action letter like that because the process just takes too long, and in a situation where in our view it’s quite clear that what we were doing is outside the scope of the SEC’s authority, we don’t generally think we have to go and ask the SEC’s permission to engage in business activity that is outside the scope of their authority.
I empathize with what Mr. Gibbs is saying, and—if he speaks the truth—feeling, but it was Kik's choice to run a "quickly moving business" in a highly regulated arena.
People make the same arguments about security/privacy ("too much of a hassle in a quickly moving startup"), safety ("we can't afford to put two people in this test vehicle for autonomous driving") and so forth.
Kik might be right in this specific case, but in general "We're moving too quickly to deal with red tape" is not an argument.
First your citing the Cooley attorney who advised the company...of course he is going to justify his own legal advice.
It’s not going to look good when the court determines Kik knew if could have sought clarification from the SEC but didnt Because the SEC no Action Letter process wasn’t practical.
Let’s also keep in mind Cooley is the Firm that developed the SAFT (security agreement for future tokens) released their SAFT whitepaper into the wild telling startups to use their SAFT legal framework to raise money with ICOs legally and these are some of the first companies the SEC targeted for enforcement actions.
They threw out some free legal advice and people used it?
I guess you get what you pay for.
I remember the story of the startup executive who thought he maybe got odd advice from his CFO about stock options but was assured that "this is how it is done". He went and asked a local attorney effectively "I don't see how this could be legal."
So they didn't do it, little while later his CFO had to resign, because they were going to jail for doing the same stock option (basically massive back dating) plan at another company.
For anyone curious, I think the parent poster is thinking of Ben Horowitz: https://a16z.com/2014/02/06/why-i-did-not-go-to-jail/
>I guess you get what you pay for.
Then again, Kik, Cooley’s paying client also ended up in an SEC enforcement action (they claim they already spent $5M in legal fee prior to the SEC bringing the case).
I’m not so sure the issue is how much the clients paid for Cooley’s advice so much as the advice itself.
Supposedly Kik did seek clarification from the SEC and didn't get any. Then they received an enforcement action which is supposed to include details about the problems involved and the actions to be taken, but it contained none of those. Since then, they have been working for a year to get any kind of detail from the SEC, and the SEC has declined.
Personally, I think the root problem is that it seems the SEC is wildly under-funded and over-loaded. If a politician ran on a platform of election & campaign-finance reform + fund up the IRS & SEC; you couldn't call me a single-issue voter, but maybe a "2-issue voter" in that dream scenario.
The SEC also enforces gag orders on settlements to hide the proceedings and discovery from the public which only allows them to continue their abuses of the system.
A common thread among SEC settlements, also in CFTC and CTFB settlements is summed up from a recent SEC agreement
"mak[ing] any public statement denying, directly or indirectly, any allegation in the [SEC’s] complaint or creating the impression that the complaint is without factual basis"
So basically you have no recourse against government agencies whose quasi legal status pretty much makes them immune to the checks and balances as specified in courts. If you want a closer to home comparison, FISA courts operate pretty much the same way. There is no disclosure other than what the government wants you to know and they have the full resources of the US government to take you down, the common tactic is to bankrupt individuals or threaten it to get the deals they want.
As for settlements with the terms "mak[ing] any public statement denying, directly or indirectly, any allegation in the [SEC’s] complaint or creating the impression that the complaint is without factual basis", that's what pleading guilty looks like in a civil enforcement matter. You can't say "yes, we did it, and we'll pay the penalty rather than going to trial" to the SEC, and then turn around and say publicly "we didn't do it".
For example, what if Mr. Howey had purchased the orange grove expecting to eat 10% of the oranges and leave the remaining 90% subject to the leaseback agreement originally at issue. Is the orange grove agreement still an "investment contract" if Mr. Howey eats 10%? What if he eats 50%? 90%?
What if Mr. Howey planned to sell all of the oranges when the market price was over $X per pound and eat any oranges when the market price was below that amount?
That's the Howey grey area in which Kin is operating. Many people likely purchased small amounts of Kin with the expectation that they might use some of it for in-app purchases and hold some anticipating a profit from it appreciating in value.
Other cases that have been litigated in the wake of Howey that you might find interesting, though not necessarily helpful in applying Howey to cryptocurrency:
- United Housing Foundation v Forman (1975) where "stock" issued by a housing corporation that provided a reduction in rent was _not_ an investment contract (or security at all).
- SEC v Edwards (2004) where a fixed-rate leaseback agreement for payphones _was_ a security.
- SEC v Lauer (1994) where the court was... flexible in their interpretation of the Howey test, finding a "common enterprise" existed where there was only one investor.
The Lauer opinion was particularly important for demonstrating that courts look to the "economic reality of the transaction" when determining whether something is or isn't a security.
Interestingly, most of the points you raised (financing innovation, alternative to VCs, etc.) would put tokens such as Kin squarely in the “securities” bucket instead of the “commodities” bucket.
Regulation is coming for cryptocurrency and regulation is needed for cryptocurrency. And the industry would be far better served by working with their future regulators to establish reasonable guidelines rather than fighting them in court.
Regulation is unpopular among the people inside the regulated industry, but it protects society as a whole.
The only industries that really fight regulation are those where there's currently a mad scramble of new startups trying to gain position (see eg. dot-coms in 1999 or crypto in 2019). Nurses don't fight HIPAA, bankers don't fight margin requirements, contractors don't fight building codes, brokers don't fight broker licensing, and daycares don't fight safety standards.
Corporate lobbying has not been that strong in EU, where SEPA wire transfers are fee and merchant card fees reasonable capped. And now as the latest PSD2 directive the banks must give you an API access to your own bank account.
The US literally created the FDIC because banks are allowed to gamble with depositor's money.
Really, the only example you provided that was correct was that daycares don't fight the safety standards imbued into the day care licensing requirements. (Yes, daycare is a licensed business in most states.)
Generally, regulation is not popular amongst the regulated industry. However, the lack of regulation is far less popular than the fear of unregulated competition in some markets where "startups" try to "disrupt" the status quo by imposing externalities on society rather than absorbing them internally as they would if they adhered to regulations.
The HIPAA regulation is literally just a regulation that minimally impacts their handling of patient data, not their professional practice. Their responsibility is literally to follow the data-protection policies set forth by the facilities they work for.
Technically I was once regulated by HIPAA as well...when working for healthcare clients, with respect to patient data.
Regulations may be a net positive overall but there are plenty of examples of bad regulation. The general case does not necessarily apply to any one case and even if it does there's still plenty of room to screw up the implementation. You can't just hand wave and say "well regulation is generally good so therefore this specific regulation must also be good". That's the same flawed logic as using demographic statistics as if they apply to individuals.
I can't believe I'm defending crypto here.
An "investment contract" is just one of many things that fall within the definition of "security":
> The term “security” means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
The SEC's position is that tokens are "securities" under the Securities Act and the Securities Act says that all securities must be registered if they're going to be sold to the public. Since the SEC views the tokens as securities (no different from company stock), and securities must be registered to be sold to the public, then (according to the SEC) an ICO of an unregistered token violates securities regulations.
To that end, the SEC hasn't issued "regulations that govern ICOs" they've issued guidance as to how the _existing_ securities regulations apply to tokens and ICOs. The rules haven't changed, the SEC has just attempted to make it clear that the rules do apply even though they haven't necessarily been enforced.
That guidance has come in the form of a statement for ICO issuers, a 'Framework for "Investment Contract" Analysis of Digital Assets', and a statement on cryptocurrencies and ICOs. All three include language along the lines of:
> This framework represents Staff views and is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. This framework, like other Staff guidance, is not binding on the Divisions or the Commission.
As I mentioned in my comment above, the definition of "security" includes a lot of situations. The Howey test only applies to _one_ of those situations: investment contracts. Since "investment contracts" are a type of "security" an investment contract is subject to all of the same rules and regulations as any other security.
Investment contracts are sort of the catch all category in the definition of "security" and why you'll often hear the term come up with respect to cryptocurrency because cryptocurrency is not specifically included in the statutory definition of "security."
Many types of securities fail the Howey test because they aren't "investment contracts" but they are still a "security" and still subject to the same regulations.
For example, employee stock options fail the Howey test because they aren't "an investment of money" and because profits aren't expected "solely from the efforts of a third party." But the Howey test would never be applied to employee stock options because we know "options" and "stock" and "profit-sharing agreement" are all specifically included in the definition of "security." So it doesn't really matter whether employee stock options are an investment contract - they're still subject to the same regulations.
(I guess the SEC could claim they count as "any interest or instrument commonly known as a security" on the grounds that the SEC themselves consider them securities, but that seems a stretch. I don't know why the courts would have bothered making the Howey test if they just wanted the SEC to rule however it liked.)
Correct. Though I get the impression you think most tokens fail Howey and I’m not sure that’s the case. In SEC v Lauer the court found a “common enterprise” where there was only one investor so the court’s application of the Howey test isn’t cut and dry but there’s an expectation the court will apply it to the specific circumstances at issue.
I’m hopeful that, whatever the outcome for Kik, Congress will amend the definition to provide everyone with some clarity one way or the other.
Whether something passes the Howey test and is deemed a security is a different matter, but you can "airdrop" a clear security (which certain cryptocurrencies certainly are), and violate Section 5 of the Securities Act notwithstanding the fact that the value to the issuer was not cash.
The airdropped tokens I've seen did none of those things. Someone simply created a token contract and granted initial balances based on the ETH balances of existing addresses. The new owners don't even have to know the tokens exist.
Going through these measures to understand if what you are issuing is a security is not unusually difficult. It does take time, and often requires seeking good legal advice.
The strategy many of the worst ico's used, of trying to write their way around the very real considerations of securities laws, was poorly thought out and now they are paying the price.
There are many instances of projects that went about this the right way, I.e Filecoin, Ocean Protocol, Cardstack.
Eth meets the Howey test. BTc arguably does not due to its manner of distribution and initiation.
That doesn’t change facts, they simply aren’t going to do anything about it.
Why is that ?
But there is no framework on how exactly one becomes sufficiently decentralized, and because Ethereum had an ICO and is not a security, we know there is a way to do an ICO without needing to be registered. Unfortunately the current regulatory framework is opaque. The SEC "knows them when they sees them" so to speak but cannot explain clearly how to avoid becoming a security.
My hope is that this lawsuit will result in clear guidance on how to become a Bitcoin or Ethereum, which will significantly help boost the industry.
That something could move from "security" to "not a security" in 3 years while preserving the ownership interests of stakeholders should probably tell you that crypto is something new, though, and that existing legal frameworks don't properly capture how it behaves.
The press release says that: "the company’s management predicted internally that it would run out of money in 2017. In early 2017, the company sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens."
I'm guessing that they spent a decent amount of the money they raised through the ICO. If they have to give it back, will they have to take on even more funding from a VC at even worse terms?
I think they are far more worried about being referred at this point. Who cares if you have try to pay back ICO investors? As long as you can stay out of prison, any terms are good terms. I suspect a good many people at Kik will be losing property they own, because this will definitely pierce the veil so to speak. But at times like this, only losing personal cash and property is a win in my book.
That seems remarkably optimistic. The two likely options here seem to be dissolution with heavy fines for all involved, or something even more serious than that.
Is the ICO a scam? Yes, it wasn't legal.
"This filing makes it appear that Kik was attempting to scam investors."
Yes. They were. They pretended their ICO wasn't going to break securities law.
Not everything that's illegal is a scam. If somebody sells me cocaine and I'm happy with the product, it's illegal but nobody was scammed.
Legal or illegal according to the laws in what jurisdiction? As international users, we obviously benefit from decisively reining in any American attempt at extraterritorial expansion. That is why, for example, we support the interdiction of American warships in the Black Sea (Russia) and the South Chinese Sea (China). I am waiting for the good news that either of these countries has finally sunk one of these vessels. That will be party time!
To be fair...
Yes Kik did sell them as investments... claiming rising demand would drive up the price of Kin... which did indeed happen.
The kin tokens increased in value over 10x from the price they were sold to investors at. It didn't last, of course.
I still don't understand why they didn't get SEC approval before offering the token sale, however.
They were savvy enough not to allow Canadian investors for that very same reason... because they're a Canadian company and did not want to get mixed up in unregistered securities sales in Canada.
> Kik has agreed to jurisdiction in the United States concerning disputes relating to Kin.
When selling Kin to the general public, Kik required investors to agree that all disputes about the
purchase and use of Kin would be heard by an arbitrator or court in the United States, specifically in
the State of Delaware.
So they should have known. And maybe they did, thinking that if they tried to register with the SEC their fundraise would not be allowed and the company would almost certainly declare bankruptcy; but that if they did not register, even after the DAO report, they'd at least have a chance of sneaking through, and if they were caught, they might avoid personal liability. Many people disobey the law out of desperation, and if nobody goes to jail, then disobedience becomes even more likely for those in such a situation.
That was my best idea as well as to what they were thinking at the time.
Take money now and worry about the consequences later, or go bankrupt now and worry about that now.
Because what they did was illegal and the SEC would never have approved it. To do it legally, they would've had to only sell to accredited investors and there's no way they raise $100m doing that.
I'm not sure what about all of that makes them seem trustworthy. I guess they haven't been caught selling user data - but given that they allegedly committed fraud to keep the company afloat, I don't know why you would trust them not to.
This was before iMessage too, so the group chat and photo sharing capabilities were attractive. Facebook Messenger barely existed, and there was no such thing as Twitter or Instagram DMs.
Their app has barely changed since then and it’s taken new life as an AIM style messenger where you only need to exchange usernames to communicate. It’s bloated, slow, and has features that are stuck in 2013.