The reasons why Bitcoin securities can’t be regulated by the SEC

[MPOE-PR]

"As stated in various other venues, MPEx does retain ample counsel. We’ve proactively prepared a defensive litigation plan and written as well as oral arguments in order to be able to defend our position as well as the interests of the larger Bitcoin community in multiple relevant jurisdictions.

After much internal debate, and in the light of recent developments (by which I mean the misguided actions of one patently incompetent and emotionally unstable individual behaving in a manner consistent with mid-age onset schizophrenia) I’ve decided to prepare and release a limited statement detailing in principle our considered position on some matters of interest.

The reasoning is that while it is both unwise and uncommon for legal arguments to be disclosed before actual litigation due to the obvious advantage this confers on the other party, nevertheless it would seem the community could significantly benefit by some general framework to consider things within. In balancing this later need with the former imperative I think MPEx is behaving generously to its environment while at the same time not significantly endangering its own position.

What follows is not a legal document per se, because it has been much abridged, it lacks significant devices, references etc and for this reason it shouldn’t be included in litigation as-is. It would be in the best case an amicus brief."

(Continued...)

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[kjj]

Interesting theory.  Seems a bit pyrrhic though.

[SlaveInDebt]

Who is in your counsel and what credentials do they hold? What measures do you have and will have in place to prevent an immediate seizure/closure prior to you fighting your arguments in court?

[pyrkne]

I'm about to go out, but will be reading later.

[evoorhees]

I find this relatively, though not entirely, compelling.

Indeed it is hard for me to argue that Bitcoin is -not- a game... for any number of people involved in Bitcoin may consider it a game and how can one argue with them? The issue of title is also very interesting. Does anyone actually own bitcoins? Is possession of something all that is required to prove title? And if so, Bitcoins aren't really possessed are they... it's the keys which are possessed.

All very confusing. I wish the government would just leave this system alone.

[markm]

Heh this is basically the same argument the Galactic Nexus Uberplan (GNU) folk favour when deploying Martian BotCoin and similar cryptocurrencies (including the Hacker nation's national currency, Bitcoin, from which the Martians derived the technology) on backwards worlds such as the planet known as Earth during such planets' pre-Milieu transition period.

-MarkM-

[RandomQ]

Thanks for the Great info, I'll use it if I ever have to defend myself. 

[burnside]

I've been doing a lot of research mysel recently.  I agree with most points made in your article.

The most damning of all for the SEC is that I do not believe they could consider bitcoin a currency, for any jurisdiction to consider it a currency (legal tender) would surely have to accept it as payment against tax debt, etc.

However, that may not improve things:

They could consider it a commodity.  Something does not have to be a real, tangible item to be a commodity.  In the USA energy is a commonly traded commodity.  Thus I suspect asset issuers in the USA would be subject to regulatory controls by the Commodity Futures Trading Commission (CFTC) on the bitcoin side, AND the SEC for the regulations around how they have to deal with their shareholders.  Simply trading a security using a commodity does not release that security from regulatory requirements.  If you want to be legit, there's likely no getting around the fact that we're dealing with securities.  Their definition of a security is pretty complete:

Code:

(1) 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 good (GREAT) news is that the new JOBS act in the USA makes crowdfunding a whole lot easier and as far as I can tell, having read through several summaries of the stipulations, the securities issued (using commodities) will fit just fine into the new exchange I'm working on.

Code:

The JOBS Act creates a new exemption from registration for securities sold via crowdfunding offerings, so long as certain criteria are met, namely:

(A)  no more than $1,000,000 is raised via crowdfunding in any 12 month period; and
(B)  no single investor invests more than a specified amount in the offering, namely:
    i.  the greater of $2,000 or 5% of the annual income or net worth of the investor, as applicable, if the investor has annual income or net worth of less than $100,000; or
    ii.  10% of the annual income or net worth of the investor, as applicable, if either the annual income or net worth of the investor is equal to more than $100,000, capped at a max of $100,000 invested.
(C)  the offering is conducted through a registered broker or “funding portal” (a new term made up by the JOBS Act); and
(D)  the issuer registers with the requirements below.
    (a)  name, legal status, address, website, etc.
    (b)  names of directors, officers, and 20% stockholders
    (c)  “a description of the business of the issuer and the anticipated business plan of the issuer” – the devil is really in the details of this one, and it remains to be seen whether the SEC will require this “description” to be 4 pages or 40 in order to be sufficient
    (d)  prior year tax returns, plus financials – see below for details
    (e)  description of intended use of proceeds
    (f)  target offering amount, deadline, and regular progress updates through the life of the offering
    (g)  share price and methodology for determining the price
    (h)  a description of the ownership and capital structure of the issuer, including a lot of detail about the terms of the securities being sold, the terms of any other outstanding securities of the company, a summary of the differences between them, a host of disclosures about how the rights of shareholders can be limited, diluted or negatively impacted, “examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions”, and a disclosure of various risks to investors

Much of that could be accelerated for the asset issuers via pre-prepared documents or a "registration wizard".

Short term though, I suspect my exchange is going to be a virtual stock exchange trading in virtual currency and virtual securities.  It will join the ranks of 100's of other sites out there that let you play stock trading simulations to study and learn about the financial industry's terms and trading process.

edit: made it easier to read.

[Bugpowder]

Great find burnside!  Makes me sweat a little less

[markm]

Yes, basically if a company gets all its ducks in a row to be able to legally issue actual real world securities then deployers of game currency game stocks game bonds game commodities etc trading platforms should have no problem deploying the same game-tested software on behalf of such a company as a convenient platform for trading their legal registered securities.

In the meantime, lets get on with play-testing these platforms so they will be well debugged and have users very familiar with them by the time any companies do go through the registration process required to be ready to issue real securities.

-MarkM-

[MPOE-PR]

Who is in your counsel and what credentials do they hold? What measures do you have and will have in place to prevent an immediate seizure/closure prior to you fighting your arguments in court?

Pretty much none of your business on the first score. As detailed in the FAQ on the second.

Heh this is basically the same argument the Galactic Nexus Uberplan (GNU) folk favour when deploying Martian BotCoin and similar cryptocurrencies (including the Hacker nation's national currency, Bitcoin, from which the Martians derived the technology) on backwards worlds such as the planet known as Earth during such planets' pre-Milieu transition period.

-MarkM-

Mark baby...when you talk to me I can never make heads or tails of it. S'okay if I just nod?

Thanks for the Great info, I'll use it if I ever have to defend myself.  

Isn't really intended for that use. If you have to defend yourself in court you absolutely should hire a lawyer.

@Everyone: the discussion of the thing itself should really be carried on in the comments section of the article, I don't really have the authority to comment much.

[ciuciu]

Who is in your counsel and what credentials do they hold? What measures do you have and will have in place to prevent an immediate seizure/closure prior to you fighting your arguments in court?

Pretty much none of your business on the first score. As detailed in the FAQ on the second.

Heh this is basically the same argument the Galactic Nexus Uberplan (GNU) folk favour when deploying Martian BotCoin and similar cryptocurrencies (including the Hacker nation's national currency, Bitcoin, from which the Martians derived the technology) on backwards worlds such as the planet known as Earth during such planets' pre-Milieu transition period.

-MarkM-

Mark baby...when you talk to me I can never make heads or tails of it. S'okay if I just nod?

Thanks for the Great info, I'll use it if I ever have to defend myself.  

Isn't really intended for that use. If you have to defend yourself in court you absolutely should hire a lawyer.

@Everyone: the discussion of the thing itself should really be carried on in the comments section of the article, I don't really have the authority to comment much.

His credentials are porno website operator. He host his website fraudulently on a US domain under a false name and address. You are all safe!

[SlaveInDebt]

Who is in your counsel and what credentials do they hold? What measures do you have and will have in place to prevent an immediate seizure/closure prior to you fighting your arguments in court?

Pretty much none of your business on the first score. As detailed in the FAQ on the second.

I can respect the anonymity but how about their credentials then. Thanks for the link.

His credentials are porno website operator. He host his website fraudulently on a US domain under a false name and address. You are all safe!

 

[DeathAndTaxes]

I've been doing a lot of research mysel recently.  I agree with most points made in your article.

The most damning of all for the SEC is that I do not believe they could consider bitcoin a currency, for any jurisdiction to consider it a currency (legal tender) would surely have to accept it as payment against tax debt, etc.

However, that may not improve things:

They could consider it a commodity.  Something does not have to be a real, tangible item to be a commodity.  In the USA energy is a commonly traded commodity.  Thus I suspect asset issuers in the USA would be subject to regulatory controls by the Commodity Futures Trading Commission (CFTC) on the bitcoin side, AND the SEC for the regulations around how they have to deal with their shareholders.  Simply trading a security using a commodity does not release that security from regulatory requirements.  If you want to be legit, there's likely no getting around the fact that we're dealing with securities.  Their definition of a security is pretty complete:

Code:

(1) 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 good (GREAT) news is that the new JOBS act in the USA makes crowdfunding a whole lot easier and as far as I can tell, having read through several summaries of the stipulations, the securities issued (using commodities) will fit just fine into the new exchange I'm working on.

Code:

The JOBS Act creates a new exemption from registration for securities sold via crowdfunding offerings, so long as certain criteria are met, namely:

(A)  no more than $1,000,000 is raised via crowdfunding in any 12 month period; and
(B)  no single investor invests more than a specified amount in the offering, namely:
    i.  the greater of $2,000 or 5% of the annual income or net worth of the investor, as applicable, if the investor has annual income or net worth of less than $100,000; or
    ii.  10% of the annual income or net worth of the investor, as applicable, if either the annual income or net worth of the investor is equal to more than $100,000, capped at a max of $100,000 invested.
(C)  the offering is conducted through a registered broker or “funding portal” (a new term made up by the JOBS Act); and
(D)  the issuer registers with the requirements below.
    (a)  name, legal status, address, website, etc.
    (b)  names of directors, officers, and 20% stockholders
    (c)  “a description of the business of the issuer and the anticipated business plan of the issuer” – the devil is really in the details of this one, and it remains to be seen whether the SEC will require this “description” to be 4 pages or 40 in order to be sufficient
    (d)  prior year tax returns, plus financials – see below for details
    (e)  description of intended use of proceeds
    (f)  target offering amount, deadline, and regular progress updates through the life of the offering
    (g)  share price and methodology for determining the price
    (h)  a description of the ownership and capital structure of the issuer, including a lot of detail about the terms of the securities being sold, the terms of any other outstanding securities of the company, a summary of the differences between them, a host of disclosures about how the rights of shareholders can be limited, diluted or negatively impacted, “examples of methods for how such securities may be valued by the issuer in the future, including during subsequent corporate actions”, and a disclosure of various risks to investors

Much of that could be accelerated for the asset issuers via pre-prepared documents or a "registration wizard".

Short term though, I suspect my exchange is going to be a virtual stock exchange trading in virtual currency and virtual securities.  It will join the ranks of 100's of other sites out there that let you play stock trading simulations to study and learn about the financial industry's terms and trading process.

Before you get so excited the "Jobs Act" crowdfunding doesn't do what you think it does.

1) You will be required to collect KYC and AML information of all participants (primarily for taxation reasons).
2) You will need to be a registered broker dealer (up front cost is in the tens of millions) or a registered crowdfunding portal.
3 and this is the killer)  Crowd funding portals are prohibited from offering ANY trading.  Period.  With no exceptions.

So even registered and licensed by SEC and with all anonymity removed GLBSE wouldn't be compliant under the Jobs Act unless it was a full broker dealer.  As a crowd funding portal it could simply facilitate the selling of the initial offering of securities.  No reselling or trading.

While the crowd funding provisions in the Jobs Act are a step in the right direction and will help small biz raise capital in a more efficient manner those thinking it is some kind of silver bullet are going to be sorely mistaken.   To be licensed under the SEC a "GLBSE like entity" would need to be registered broker dealer with the mountains of paperwork, legal provisions, due diligence, underwriting, and reporting requirements that come with it.

[ab8989]

I believe US Government might recognize Japan Yen is a currency, while US Goverment does not accept it as payment of taxes.

I also believe, that The Bitcoin Foundation is going to make some kind of a definition of what bitcoin is and that definition is going to be embraced by dozens of most prominent bitcoin businesses making that definition pretty hard to beat. If there is ever going to be lawsuits about these issues, you could bet that goverment is going to use that definition as an argument in the lawsuit if that definition suits their purposes. Now anybody could guess whether Bitcoin Foundation is going to define bitcoins as a currency or "play money" in their mission trying to promote bitcoins to mainstream usage as a more modern currency to replace fiat money.

[MPOE-PR]

I believe US Government might recognize Japan Yen is a currency, while US Goverment does not accept it as payment of taxes.

I also believe, that The Bitcoin Foundation is going to make some kind of a definition of what bitcoin is and that definition is going to be embraced by dozens of most prominent bitcoin businesses making that definition pretty hard to beat. If there is ever going to be lawsuits about these issues, you could bet that goverment is going to use that definition as an argument in the lawsuit if that definition suits their purposes. Now anybody could guess whether Bitcoin Foundation is going to define bitcoins as a currency or "play money" in their mission trying to promote bitcoins to mainstream usage as a more modern currency to replace fiat money.

I can tell you for sure that any group of people can make whatever association, foundation or whatever else, but any claim that they "speak for" Bitcoin is outright fraudulent (and yes, we might sue if they do).

[burnside]

Before you get so excited the "Jobs Act" crowdfunding doesn't do what you think it does.

1) You will be required to collect KYC and AML information of all participants (primarily for taxation reasons).
2) You will need to be a registered broker dealer (up front cost is in the tens of millions) or a registered crowdfunding portal.
3 and this is the killer)  Crowd funding portals are prohibited from offering ANY trading.  Period.  With no exceptions.

So even registered and licensed by SEC and with all anonymity removed GLBSE wouldn't be compliant under the Jobs Act unless it was a full broker dealer.  As a crowd funding portal it could simply facilitate the selling of the initial offering of securities.  No reselling or trading.

While the crowd funding provisions in the Jobs Act are a step in the right direction and will help small biz raise capital in a more efficient manner those thinking it is some kind of silver bullet are going to be sorely mistaken.   To be licensed under the SEC a "GLBSE like entity" would need to be registered broker dealer with the mountains of paperwork, legal provisions, due diligence, underwriting, and reporting requirements that come with it.

Yes, I am aware of all 3.

Speaking from the exchange operator's perspective:

1) That's the asset issuer's problem.
2a) I am working on registering in Seychelles.  Will definitely be tackling the broker/dealer registration in Seychelles.
  2b) If Seychelles doesn't work out, there are other options that require a little more money/legwork (Bermuda, Bahamas)
3) I am not targeting becoming a crowdfunding portal.  Most of the good news for crowdfunding is for the Asset Issuers.  

From an asset issuer's perspective:

For my own LTC-MINING issues I am definitely going to have to go through the hoops of registering under these crowdfunding guidelines.  As I go through the process I will document it and hopefully be able to help other asset issuers through the process later on.  Some of it should be interesting, like questions "how much $$ are you raising?".  Do I say $0?  Or do I say 10,000 LTC?  

Edit: (3) should read:

3) Because of (2a) I am not targeting becoming a crowdfunding portal as the SEC defines it.  Most of the good news for crowdfunding is for the Asset Issuers. 

[Aahz]

I believe US Government might recognize Japan Yen is a currency, while US Goverment does not accept it as payment of taxes.

I also believe, that The Bitcoin Foundation is going to make some kind of a definition of what bitcoin is and that definition is going to be embraced by dozens of most prominent bitcoin businesses making that definition pretty hard to beat. If there is ever going to be lawsuits about these issues, you could bet that goverment is going to use that definition as an argument in the lawsuit if that definition suits their purposes. Now anybody could guess whether Bitcoin Foundation is going to define bitcoins as a currency or "play money" in their mission trying to promote bitcoins to mainstream usage as a more modern currency to replace fiat money.

Wait, you're trying to convince me that there are enough "prominent bitcoin businesses" that there can be dozens of "most" prominent ones? 

I may only have a (very) small four figure BTC portfolio, so am clearly not a major player, but I don't think I could name two dozen prominent bitcoin businesses.  At least not that are still operating.  I'm fairly certain most of us can name dozens which have defaulted, defrauded, or simply disappeared.

[Bitcoin Oz]

I find this relatively, though not entirely, compelling.

Indeed it is hard for me to argue that Bitcoin is -not- a game... for any number of people involved in Bitcoin may consider it a game and how can one argue with them? The issue of title is also very interesting. Does anyone actually own bitcoins? Is possession of something all that is required to prove title? And if so, Bitcoins aren't really possessed are they... it's the keys which are possessed.

All very confusing. I wish the government would just leave this system alone.

As a US citizen offering unregulated securities to people its not MPEX getting seized people need to worry about , its the fact the underlying security is issued by a US citizen. Just because you list it on a Romanian stock exchange doesn't make any difference to the men with guns. Its not MPEX they will go after its the people who offer the security.

[markm]

How about get signed notarised statements from all asset issuers solomnly swearing their asset is fully legitimate licenced legal and so on in their jurisdiction? At least that way you have clear fraud to point at if it turns out they lied.

-MarkM-