Common Misconceptions about ICO Law
stellar.org
stellar.org
That squarely sounds like any Kickstarter or crowdfunding arrangement.
The government has already started to relax the ability for non accredited investors to invest in startups and that was under the last administration. These rules are recent but they are there, they are very limited though and ICOs blow the top off of those rules.
ICOs are forcing the SECs hand and I think it show cases the interest that exist in the public to get into these early stage startups. I won't be surprised if the rules are relaxed even further to legalize these types of coins even if they are considered securities, especially under this administration.
Everyone is saying that you are limiting yourself by offering an ICO. You are giving away zero equity for the promise that your product and service will offer these people something in most cases, that is just like a kickstarter. Furthermore, nothing stops you from raising money after the ICO.
Anyway, this is a fantastic new vehicle for startups and I believe it will absolutely change the game. The VCs are a little mad because they are being shut out of the best rounds, where they would normally get the most equity.
At the end of the day what matters most is if startups can start get funding and hire people and add value to the economy. That is what the SEC has to balance with the public interest on the other end.
ICOs are not like a kickstarter for the same reason the SEC cares about them: as a buyer of tokens your capital can arguably be seen as an investment which is expected to generate a capital return based on a market clearing price determined by the value attributed to a going concern. Also if we are being honest here, the high dollar amounts and high volatility we are seeing also matter greatly in terms of guessing if the SEC is going to expend resources on this. Once a few of these crater and hundreds of millions of dollars are lost I'd expect regulatory intervention to happen rapidly.
And 2008, 1999, and 1929 called and take issue with your claim that the most important thing for the SEC (and all of us) to consider is startup funding and not the public interest. The exposure of individual investor capital to undisclosed risk, due to a lack of prospectus, legally required accounting practices, financial statements, etc, can cause major negative effects on all of us if and when capital is mis-allocated, particularly if it is tied to derivatives, is overleveraged, or there are other potential market contagions due to price correlations to similar assets, etc.
When you consider the role of the SEC and the history of speculative bubbles, run an ICO without strong legal protections, based on precedent, at your own peril, I say.
Ponzi schemes are forcing the SEC's hand, and I think it showcases the interest that exists in the public to get into these early stage pyramid schemes.
The fact that the public is interested in something doesn't make the SEC say "oh, ok, that's fine then". The SEC's job isn't to get out of the way of the public. The SEC's job is to get in the public's way, in order to protect the public from scams -- which means the more public interest there is in something, the closer the SEC will be looking at it.
You are incorrectly saying that ICOs are a Ponzi scheme. When they are in fact too new to be labeled as anything. If they were in fact all Ponzi Schemes then people would already be in jail.
Secondly the SEC is there to balance both sides of the equation. Companies interests and the public dumping money into scams.
Well it was the SEC that oddly of all the ICOs published an opinion on the DAO, the one ICO that was hard forked (erased from existence). Though if the DAO wasn't erased, based on the SEC opinion it is fair to say they would have brought a case right? I mean its not exactly fair for them to conclude the DAO was an illegal sale of securities and then not enforce the law.
Separately, we have instances of the SEC contacting ICOs and informing them they are in violation of the law and the ICO investments being returned to investors...so I think the SEC has fully weighed both sides of the equation.
Certainly the comment you are responding to did not say ICOs are ponzi schemes, they just simply applied your ICO logic to another situation, but truthfully many ICOs will turn out to be ponzi schemes and outright fraud, and likely the DAO was neither (surely it would be fraud if they were the hacker) but they still were likely violating securities laws.
This is a dot com bust waiting to happen, isn't it? People are rushing in with money to something new and exciting. I recall reading about some huge investments in absolutely nonsense dot com companies in the 90s.
Any prices listed on that page are intended to be recent; a price there means that people are trading that token now for that amount.
Does this mean that some "coins" have 100% of their inventory known at the beginning and instead of people guessing correct hashes, they have to simply buy them from a central authority?
It might be helpful to make a distinction between cryptocurrencies (some popular ones being Bitcoin and Ethereum) and tokens (Augur being one) which operate predominantly through Ethereum smart contracts. (Disclaimer: I own some of each of these, but I mention these ones specifically because I think they bring some innovation and are better examples than most of the ideal purpose and decentralized nature of cryptocurrencies/tokens. There's a lot of contenders in this space which are unsound and really only exist as an item to speculate on.)
Cryptocurrencies like Bitcoin need some way of verifying the valid transaction history and generally solve this through proof-of-work mining. In order to incentivize people to mine and to solve the problem of distributing amounts to users, the system is built so mining generates currency for the miners. Generally there is no privileged party in the system with the special power to mint arbitrary amounts as they wish. (Some like Ethereum did do an ICO-style sale at the beginning to raise money and to jumpstart getting Ether into people's hands. Generally I've thought this type of thing has been pretty scammy as a lot of innovation-less pump-and-dump altcoins have done this kind of thing and it's not exactly decentralized, but Ethereum has actually delivered on some technical innovation so I'm a bit conflicted.)
Tokens are systems implemented on pre-existing cryptocurriencies for tracking arbitrary limited units that can be exchanged and traded like a cryptocurrency. They rely on the infrastructure of the cryptocurrency they're implemented upon. So a token implemented on Ethereum smart contracts doesn't need to be mined; it's just important that Ethereum continues to be mined, and also transactions involving the token generally require small amounts of Ethereum to pay for transaction fees. The idea of most popular tokens is that they can or will be used to interact with a decentralized system made of Ethereum smart contracts. For example, there are various popular tokens intended to be used as the currency for decentralized prediction markets (a fancier type of betting site basically that lets you do things buy/sell out of your positions).
Tokens don't need specific mining in order to verify their transaction history, so for getting tokens into user's hands, the old solution (mining rewards) doesn't work. So I guess that gave an excuse for lots of token developers into doing ICOs / initial limited sales. At least a lot of these tokens nowadays have more of a plan that involves becoming a decentralized system and bringing innovation than run-of-the-mill pump-and-dump altcoins in the past. Though it's to be seen how many end up being vaporware and how many actually take off.
So a price indicates someone listed them on their exchange and someone else is trading them - but what else?
Does that imply they succeeded? What was achieved other than the ICO and the listing itself?
If the tokens have a price in that list, it's because people are buying and selling them and value them for some reason. Maybe the tokens have direct utility for doing things in some decentralized smart-contract-based system, or people believe that such a system is arriving in the future based on word of the dev team. The tokens with no listed value now probably aren't being traded by anyone and aren't being valued by anyone, and it's probably because the plan for the system they were set up for turned out to be vaporware / devs ran off / devs never really existed / people lost faith in the devs / the idea turned out not to be feasible or need tokens at all, etc.
I mean consider the alternative: for projects that never get launched, what does the SEC do? Right now the mental model seems to be "they read the ICOs landing page, look into the team, and audit the half-finished github repo to decide if it was on track to become a utility or a non-utility" -- this seems hilariously disconnected from reality. In that scenario does anyone think that clever choices of project framing on a HTML page and some half-finished code will keep them out of jail if they are sitting on millions of dollars of money collected from the public?
My guess is the SEC will basically let things brew for a while and then start bringing the hammer down on projects that don't go anywhere other than make the founders rich. If you find yourself in court defending yourself against the SEC, you better hope you have evidence to show you at least tried to ship the "utility" you promised.
If this is right, it should be quite frightening to those raising ICOs: you may be handcuffed tightly to the project since in order to prove that your tokens were not securities you'll need to have shown a good faith effort to realize the vision as outlined at the time of the ICO. And don't forget, even if you actually execute on things, this assumes you managed to design the project in such a way that you are truly building a "utility token", which is on its own still has yet to be defined by the SEC.
What this means in English is even if you decide somewhere along the way the project is a bad idea, not only can you not walk away without potentially increasing risk of prosecution of securities fraud, but you also may not even be able to significantly pivot! Considering that most startups pivot at least once, you are basically undermining your changes of success significantly (IMHO) by raising money this way vs traditional means.
Unless the concept you use to raise the ICO:
- sticks the landing perfectly with market fit (hard or maybe impossible, given what we know about lean startup development in 2017, especially for such early emerging technology as blockchain tech)
- ultimately manages to be considered a "utility token", something we don't yet even have a definition for
I think you may be in trouble.
IOW, once you start learning what the market actually wants, you may be forced to choose between a high risk of project failure (if you don't pivot) or a high risk of going to jail (if you do pivot.) And even if you don't pivot, and hell, even if your project takes over the world, maybe you screwed something up in your positioning and your token is considered a security, so you go to jail anyway. Ouch.
ICOs basically force you into a number of startup anti-patterns (IMHO)
- Publically promising a product before building or shipping anything, which is the opposite of customer development. (And unlike typical crowdfunding, given the current speculative market, I don't take a successful ICO as any indication of consumer interest in the project itself whatsoever.)
- Having an extremely large number of people financially invested in the project too early, which is a huge distraction and prevents flexibility
- Inability to pivot or wind down the venture due to reasons stated above
- Excessive capitalization, leading to overspending, lack of urgency to find product market fit, etc.
The money is nice, and the value in retaining control of the cap table shouldn't be understated. Smart, seasoned entrepreneurs will probably utilize ICOs in a disciplined way to great benefit, probably by paying an army of lawyers to protect them and run the ICO. But there's going to be a lot of negative outcomes for many others I think.