What's with the buyback clauses in these securities?

[misterbigg]

It seems almost every security has some sort of clause to the effect of:

I reserve the options of either buying back the offering at 105% of the highest price the asset was traded on GLBSE over the prior 360 hours

What's up with that? So all an operator has to do to get out of their obligations is run a false flag of bad news, or visibly mismanage the asset, to drive the price down and then buy the shares back at a discount?

Or in the case of mining shares, if the operator has inside information that the performance of their rig is going to improve dramatically, they can buy out all the shares at a forced discount (not everyone would be willing to sell at only 5% above market)?

What would happen if a "real world" stock had this kind of clause in it? This seems like quite the gimmick. If we want Bitcoin securities to have any sort of legitimacy, these kind of shenanigans need to stop. I mean we're already accepting quite a bit of counterparty risks with the exchange, and the operator of the security, and we need to have this clause on top of that? I call bullshit.

[Carnth]

It seems almost every security has some sort of clause to the effect of:

I reserve the options of either buying back the offering at 105% of the highest price the asset was traded on GLBSE over the prior 360 hours

What's up with that? So all an operator has to do to get out of their obligations is run a false flag of bad news, or visibly mismanage the asset, to drive the price down and then buy the shares back at a discount?

Yes, you are absolutely correct. It is the perfect escape clause for the maintainers of the assets that would leave the investors holding the bag.
I also agree that this clause is ridiculous and needs to stop.

As it is right now (with just about every asset featuring this clause) you have to really trust the maintainer when you choose to invest.

I would invest in more GLBSE assets if they left this clause out and actually took some responsibility.

[Meni Rosenfeld]

You need to distinguish between stocks, expiring bonds and perpetual bonds.

In stocks there is no need for the clause. The issuer isn't taking any risk, and he can at any time close down the company, liquidate the assets and distribute the proceeds to shareholders.

For bonds with a specific expiration date, there is also no need for this - the bond is normally bought back at expiration.


For perpetual bonds this is absolutely necessary. Mathematically such a bond pays out forever. But this isn't practical; most such bonds decay over time, and once the value is low enough it makes no sense to continue physically paying tiny coupons forever if the issuer moved on. Even if the bond does not decay, there can be any number of legal, financial, technical or medical issues that could prevent the issuer from continuing to do whatever the bonds were meant to do - not having an out is much more risk than anyone could bear (and with an out it's still very high risk for the issuer, but at least bounded).

So a buyback clause must exist. The only question is how to do it in a way that makes sure that investors don't lose, relative to what they would have gained if the payout did continue indefinitely. For bonds with a given BTC denomination this is easy - just some multiple of the face value (I usually pick 120%, so in the "worst case" investors would gain 20% in addition to coupons already accumulated).

But mining bonds have no fixed BTC value. When I invented them I figured that a multiple of the traded price is appropriate, as this is the most objective BTC-denominated valuation of the bond. And I'll note that I used 120% of 30-days highest price, which virtually guarantees no loss will occur (some later bonds didn't remain faithful to the principles).

Nowadays I don't think traded price is the best choice, and some multiple of the ELE (extrapolated lifetime earnings) is better. I'll use that if I issue a new series of mining bonds, and I hope other issuers will do the same.

But I don't really buy the "create panic and buy back cheap" argument. If the issuer wants to play dirty he can just abandon his obligations regardless of any buyback clause - the clause doesn't help him much with this regard. He will need to cause the traded price to drop by over 20% and sustain this for a month - hard to do that without doing something really nasty. Also, if he does indeed create panic, he can simply buy bonds on the open market when people dump them, without any buyback clause.

[Carnth]

I wondered about this as well when I began looking into BTC securities as most offerings have it now.
I personally included it in mine so that I ever get a solid offer to take my company private, the option is there.

This is what a motion is for. Raise a motion to sell the asset (hopefully at a nice profit). Shareholders like profit, motion passes, everybody wins.

360 hours is 2 weeks ish, and it is 105% over top price - outside of pure manipulation scenario you mention - that seems really fair.

But I don't really buy the "create panic and buy back cheap" argument....

But something like this did happen when ASICS were first announced. Although this wasn't done by an issuer, all mining assets tanked.
Even Gigamining was down about 50% AND stayed that low for over 2 weeks. If gigavps really wanted to, he could have taken advantage of the clause at that time and everything would have been "legal" so to speak. I know giga wouldn't do this, but he certainly could have.


There just has to be a better way, a better worded "out clause" for the maintainer that is fair to the investors as well. Because the scenario above can still happen (especially since the block reward halving is coming).

Nowadays I don't think traded price is the best choice, and some multiple of the ELE (extrapolated lifetime earnings) is better. I'll use that if I issue a new series of mining bonds, and I hope other issuers will do the same.

Something like this could work. But I would like to see other ideas as well. Does any one else have suggestions?

[stochastic]

It seems almost every security has some sort of clause to the effect of:

I reserve the options of either buying back the offering at 105% of the highest price the asset was traded on GLBSE over the prior 360 hours

What's up with that? So all an operator has to do to get out of their obligations is run a false flag of bad news, or visibly mismanage the asset, to drive the price down and then buy the shares back at a discount?

Or in the case of mining shares, if the operator has inside information that the performance of their rig is going to improve dramatically, they can buy out all the shares at a forced discount (not everyone would be willing to sell at only 5% above market)?

What would happen if a "real world" stock had this kind of clause in it? This seems like quite the gimmick. If we want Bitcoin securities to have any sort of legitimacy, these kind of shenanigans need to stop. I mean we're already accepting quite a bit of counterparty risks with the exchange, and the operator of the security, and we need to have this clause on top of that? I call bullshit.

The stocks and bonds on GLBSE and the other exchanges are not actually stocks and bonds, they are contracts between the contract creator and the purchaser.  The buy back clause is a way to wind down the security if the issuer does not want to do it anymore.  The purchaser can always sell the contract to another person in the secondary market, but the asset creator cannot just sell it to just anyone.

I put one in my security because if I decide to retire from managing the security and no one else wants to take over, there is a way to dissolve the contract.  Some people could take advantage of the situation, but people should have a level of trust with the asset creator before purchasing the asset.

[Meni Rosenfeld]

But something like this did happen when ASICS were first announced. Although this wasn't done by an issuer, all mining assets tanked.
Even Gigamining was down about 50% AND stayed that low for over 2 weeks. If gigavps really wanted to, he could have taken advantage of the clause at that time and everything would have been "legal" so to speak. I know giga wouldn't do this, but he certainly could have.

There is no advantage to take. The mining bonds prices went down because the market expected ASICs to arrive and correspondingly the coupons from the bonds to decrease. Assuming the market is right, the issuer's debt on the bonds went down anyway, buyback or no buyback. The buyback clause in this case does not cause the investors to lose or the issuer to gain - the loss/gain was due to the hardware advance.

There just has to be a better way, a better worded "out clause" for the maintainer that is fair to the investors as well. Because the scenario above can still happen (especially since the block reward halving is coming).

Once again - anything which affects the profitability of mining causes the bonds to decay whether there is buyback or not. Block halving in particular is a known event and should be priced in to the bond valuation in advance, if there is any drop in the traded price around the time of halving it means the market is irrational.

[misterbigg]

...

The Schwartz is strong with this one!

[Meni Rosenfeld]

...

The Schwartz is strong with this one!

Edit: I understand the reference, not what the OP is trying to say with it.

[organofcorti]

...

The Schwartz is strong with this one!

"Spaceballs" reference.

[misterbigg]

Edit: I understand the reference, not what the OP is trying to say with it.

It was a good analysis. Also, I read your paper regarding the effectiveness of various mining pool payment schemes (also good).

[Meni Rosenfeld]

Edit: I understand the reference, not what the OP is trying to say with it.

It was a good analysis. Also, I read your paper regarding the effectiveness of various mining pool payment schemes (also good).

Thanks.

[misterbigg]

I would like to create a better "out clause" that is fair to everyone envolved should we choose to wind the company down.
- would love your thoughts and opinions on this

Well, 120% instead of 105% would be a good start.

[Carnth]

Well, 120% instead of 105% would be a good start.

And 4 months instead of 4 weeks.