...In a way, the exchanges (even if they eventually become a frontend for open transactions) will always act as a sort of filter for keeping the junk out. At least they should. I'm still working on the terms for LTC-GLOBAL, but there will be significant restrictions in place to keep funds from cross-investing in each other and bringing down the entire exchange economy. Would love to discuss other possible restrictions that (a) do not hamper legitimate companies trying to crowdfund and (b) do impede fraud or inadvertent destruction of investor value. (please post suggestions to the LTC-GLOBAL thread tho:
https://bitcointalk.org/index.php?topic=101694.0)
I am not sure if this has already been mentioned, but default contracts should be in place. There are only so many investment types and having a default contract which an asset creator inputs their variables using a simple form would be great.
I read through the thread on GLBSE about default contracts. Because the contract is between the asset issuer and the share holder, I worry that having been in on the drafting of the contract, there may be some liability if something important gets missed. Some contract examples for issuers to cut and paste would be really nice though.
Also, work on putting some kind of insurance on the assets. I don't think central insurance "companies" would work for bitcoin assets at this stage. Instead, my suggestion is to create a simple binary trading platform where investors can hedge their risk of a collapse of a security or failure of an operator to fulfill its contractual obligations.
I have been thinking very seriously about having a feature on assets that the asset issuers could turn on that would act as insurance on each individual asset. It would work like this:
- asset issuer checks a box at creation time saying "I want insurance".
- asset issuer sets the value of insurance they want. (should be roughly IPO price times number of initial shares released)
- the initial value of insurance desired results in an immediate up-front charge to pre-load the insurance fund. (eg, 250 LTC on top of the 250 LTC creation fee)
- asset gets approved, and from there on every single trade has an "insurance fee" percentage tacked onto it of say, 0.1% or 0.2%.
- the insurance fee would go into an insurance wallet dedicated to that asset. the value of the insurance wallet and the fact that the asset is insured would be prominently displayed on the interface.
- when the insurance wallet reaches the pre-determined value of the insurance requested, the insurance fee is no longer charged.
- if the asset issuer later defaults, the insurance fund is dispersed to current shareholders.
Thoughts?
I tend towards believing that sort of system is pretty pointless. The funds that go into the insurance in effect come from investors (other than the token initial payment) - but are assigned to whoever currently owns the shares. If we consider the two extreme cases first, it may make clear while the fund doesn't do much worthwhile:
1. Right after IPO when all initial shares have been sold. At this stage the insurance fund will hold 250 LTC +0.1-0.2% of share purchase price. This is the point at which a quick scam is going to run off. The 0.1-0.2% comes from the current investors - so if the fund defaults all they're getting back is 0.1-0.2% of what they originally paid + 250 LTC/number of shares. Contributing the original 0.1-0.2% has gained them no benefit over just buying the shares at 0.1-0.2% less and keeping the other 0.1-0.2% themselves in tehir own wallet with the ability to use it at any time they choose.
2. Now consider many years down the road - where the insurance pool covers the entire IPO price. That money is not producing any revenue - but is assigned to the current share-holders. That means that (if we take a share which dividends out all profits for simplicity) the price of those shares has to have doubled (as each share is now backed by twice the IPO price - half as working capital, half as insurance). But income is only being generated from the half of that revenue which is in the hands of the company - AND there's no way shareholders can ever get hold of that half other than through the company defaulting.
COntinuing with case 2 - now consider this from the perspective of a new investor. He has the option of investing in this insured company or in another company which has been running as long but doesn't have the insurance fund.
Company 1 (insured) - has shares costing 1 LTC and 1 LTC of insurance backing each share. It trades at 2 LTC.
Company 2 (uninsured) - has shares costing 1 LTC and 0 LTC of insurance backing. It trades at 1 LTC.
Both have the same apparent level of risk of default.
So he can buy the insured share - or instead but an insured 1 and keep the equivalent of the insurance money himself in his own wallet, accessible at any time (and able to be able to be used to produce more profits).
Obviously the share prices would NOT be double for company 1 than company 2 - but if it is NOT double then that just makes company 1 an even worse investment - as it means cash being spent on the purchase/transfer of company 1 shares is not ending up being reflected in the company's share-price.
A more likely scenario long-term is that company 1 ends up with shares only valued slightly higher than company 2. I believe this would be the case - given they both have same assets and generate same revenue and the only premium on value for company 1 is in the insurance which MUST be valued at below 100% of value unless you KNOW an immediate default is going to occur - at which stage the REST of company's value becomes worthless. What that means is that the vast majority of the insurance payments going into the fund have added no value to the stock - making company 2 the better investment all along UNLESS you believe the risk of default is high. And if you believe the risk of default is high the NEITHER is worth investing in early.
In short : Company 1 only becomes a good investment when the insurance fund is maxed but has no great impact on the share price due to default being seen as highly unlikely. Company 1 is a significantly worse investment in early stages because you get nothing of note back if it defaults - and the insurance premium (which can't have its full value rationally reflected in the share price) means you make a loss when you sell the share on (compared to company 2).
Looking at it from an entirely perspective, consider the following.
Investor one invests 1000 LTC every day in new shares - always in insured ones on which 0.1% (1 LTC) is taken for insurance.
Investor two always invests 999 LTC every day in new uninsured shares and puts 1 LTC into a cold-wallet every day.
Which of them is better off? I'd say invest two is better off. He has immediate access to LTC every day and doesn't have the (no matter how small, non-zero) risk of the exchange failing and keeping his insurance funds. Investor 2 has actually "insured" himself not just against the share defaulting but also against the exchange defaulting.
Personally I'd be investor 3 - who invested 1000 LTC in uninsured shares. If I believe my investments will make a non-zero profit then it makes more sense than leaving any in an insurance fund (whether my own cold-wallet or an exchange-run one).
Any insurance plan which involves LTC sitting around generating no income is automatically bad value in my book. There's actually a danger that such plans would HELP scammers - as it's a really cheap and easy way for a scammer to ptove (to those who don't think it through) that they're real. Whilst the actual genuine businesses would reject it - as it's simply a bad way for their investors' funds to be used and devalues their shares in relation to the capital invested them compared to uninsured companies.
For similar reasons to the above paragraph I'm not a big fan of "ID verification" as a means to determining whether a company is legitimate. It detracts from what I see as the two real things potential investors should be looking at:
Does the business have a plan which will actually make a profit?
Is the business verifiably able to do what it claims it would be doing?
From my perspective, looking at most of the scams, the red flag has nothing to do with whether they were verified or not. The common thread to a lot of them is that they never provided any credible and verifiable means by which they would make money. That includes pass-throughs to unidentified magic-money-making enterprises and the development of websites with no credible evidence that they could ever be monetarised sufficiently to generate the sort of revenue they'd need for the capital they were asking for. If a company can make money doing what it says it'll be doing then that's a much better incentive for me to invest than whether they produced IF (fake or not) or have some sort of insurance policy that decreases my earnings whilst they don't default and doesn't give back much if they do.
What SHOULD be verified is when a company claims to be associated with a real world company -as one of the bonds on LTC-GLOBAL does. Amazingly people are asking for proof of hardware - but not for the very basic prrof I'd want (before investing) that they actually ARE working in behalf of that company. If something that is verifiable is claimed then no way am I investing until it's verified. I'm not saying the exchange should do that - but it amazes me that investors will see someone say "I'm working for company X - here's their website" and not think "well OK - let's see something up on that website confirming what you say."
