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Question: Will ICO tokens eventually be delisted by major exchanges & investors shun for the reasons explained in the linked blog?
agree - 8 (72.7%)
disagree (for reason stated in thread) - 3 (27.3%)
Total Voters: 11

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Author Topic: Future ICO Woes & Alternatives to ICOs for Fundraising  (Read 1789 times)
Hyperme.sh
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September 26, 2017, 09:05:14 AM
 #1

Future ICO Woes & Alternatives to ICOs for Fundraising

(I didn’t vote in the poll)
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September 26, 2017, 09:14:37 AM
 #2


This thread is a duplicate.

Please refer to this thread on the same topic:
https://bitcointalk.org/index.php?topic=2167197.msg21709287#msg21709287

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September 26, 2017, 08:49:04 PM
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Quote from: James A. Donald — the first person to interact with Satoshi Nakamoto on the mailing list
Every website reporting on the altcoin boom and the initial coin offering boom has an incentive to not look too closely at the claimed numbers. Looks to me that only Bitcoin and Steemit.com have substantial numbers of real users making real arms length transactions […] The crypto coin business is full of scammers, and there is no social pressure against scammers, no one wants to look too closely, because a close look would depress the market. There is no real business plan, no very specific or detailed idea of how the coin offering service is going to be of value, how it is going to get from where it is now, to where it is going to usefully be […] Nearly all of them are furtively centralized, as Bitcoin never was. They all claim to be decentralized, but when you read the white paper, as with Waves, or observe actual practice, as with Steemit, they are usually completely centralized, and thus completely vulnerable to state pressure, and quite likely state seizure as an unregulated financial product, thus offer no real advantage over conventional financial products. When you buy an initial coin offering, you are usually buying shares, usually non voting shares, in a business with no assets and no income and no clear plan to get where they will have assets and income, as in the dot com boom.




Absolutely false accusation. The quoted linked blog contains the accumulation of years of my research on this issue which has canonical threads that predate yours by years. There’s a depth of analysis in the linked blog which far outstrips your recent thread discussion.

Additionally this thread contains a poll and yours doesn’t.
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September 28, 2017, 02:34:30 AM
 #4

Quote

Two of you guys sent this to me. My stance is it probably has some validity but with many possible caveats:

https://tzero.com
https://www.cryptocoinsnews.com/retailer-overstock-will-issue-company-stock-on-to-blockchain-platform/

Their blockchain explorer isn’t showing any recent trading activity for the stock they issued in 2016:

http://ledgerexplorer.t0.com/static/search.html

Note StartEngine is also entering this arena (I may try to call them to get some clarifications on my understandings):

https://www.crowdfundinsider.com/2017/08/121005-crowdfunding-platform-startengine-will-enter-initial-coin-offering-space/

But there are very complex caveats that I am going to have to try to distill after I sleep. For example, these tokens even if registered can’t be traded every where as a cryptocurrency to non-accredited investors while still restricted. I think regardless of if the issuing project is still functioning as a common enterprise or not (i.e. still ongoing development which the investor’s profit expectation relies one). Also there are issues with investors from countries outside the USA, as the securities may not be registered for investors there (yet if they’re no longer securities because the funds are no longer being pooled back to the common enterprise given the “horizontal commonality” definition, then perhaps it doesn’t matter in some jurisdiction but this is complicated). Also registering securities with the SEC incurs much more initial and ongoing compliance costs for the issuer common enterprise. Read today’s changes to my prior Filecoin post for some details:

https://bitcointalk.org/index.php?topic=2159815.msg21676934#msg21676934

I am extremely sleepy right now and not coherent enough. Will be updating my blog with some corrections to reflect those edits I made to the Filecoin post.

Quote from: myself at Crypto.cat
Appears I have been overzealous and have an important oversight. Apparently holding registered securities for 3 years that were obtained from an issuer, underwriter, or dealer, removes any restriction on who they can be resold to. And apparently unrestricted securities can be traded P2P if the funds transferred (i.e. BTC exchanged for the token) are not being pooled into a common enterprise! I need to sleep first, then do some more research to make sure I understand all the nuances such as impact of issuance under different exemptions and what impacts that being securities have on whether exchanges such as ShapeShift will shun them. This still might not be a solution for me to sell premine, I need to study more after sleeping.

Also the AML requirement for issuers to register as a MSB when selling to investors could perhaps be met by selling on an exchange or ICO platform that is a registered MSB instead of spending on goods & services.

However, my stance (that they will be illegal to trade in any way) against ICO tokens not held for 3 years remains valid, because the “underwriter” (distributor) restriction is transitive indefinitely for those who don’t hold for that duration:

http://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?article=1743&context=wlulr#page=8

And apparently if we issue the premine under an exemption (such as Regulation D, A+ or CrowdFund) and do not register them with the regulators, then they are forever illegal to resell to non-accredited investors until an IPO registration (but really I’m ignorant of these details).

However, another huge factor has occurred to me. If the person transferring the premine does not sell it to an investor and instead spends it on goods & services, then I think indeed it has been converted from a security into currency! Aha! Yes because there is no investment contract in terms of what has been transferred. Wow. But will the SEC concur that a spend is not a resale?

But then the follow-on problem is how can I be sure that those who I issue the premine properly converted it to currency when they disposed of the tokens. And thus would exchanges be wary of listing the tokens if they can’t be sure that all units are currency and not securities (that require dealers/exchanges to register and regulate the securities). But if selling the securities to another investor doesn’t pool the funds transferred to a common enterprise, then perhaps those are no longer securities if (the investor is accredited or) the holder is not an issuer, underwriter, or dealer. But again per the link above, the seller is an underwriter if the original (and transitive violations) seller has not held the token for “sufficient length of time” (~3 years).

This is very complex. Need to sleep first.

I believe there are additional complications. For Regulation CF and A+, once 2000 shareholders (i.e. shareholders may split their holdings when they trade some of them) and/or $25 million valuation are exceeded, the company that issued the shares have much more significant ongoing compliance with the SEC.

And what happens to the securities if that company is no longer in existence? I need to research that.

Apparently the shares become deregistered:

Through Tuesday, the SEC had suspended trading in 163 delinquent filers and permanently revoked the registrations of 409; to some extent, the two statistics overlap.

So registering tokens as securities encumbers them with centralized common enterprise reporting for them to remain legally tradable apparently.

https://www.sec.gov/fast-answers/answersdfnctcohtm.html

This is perhaps why the Filecoin SAFT employed a warrant to separate the company shares from the token (even if that makes those tokens initially securities as I argued).

Securities and ICOs are complicated mess (hornet’s nest).
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September 28, 2017, 08:30:24 AM
 #5

TZero, a subsidiary of Overstock, announced on Wednesday, September 27, the launch of the first exchange that will provide a platform for the exchange of tokens issued in the initial crypto derivative (ICO) offers that comply with the guidelines of the Commission of Securities and Securities Regulatory Authority (FINRA) of the same country.
The exchange will be launched in partnership with RenGen LLC and Argon Group.
In short, the exchange will offer a legally approved and regulated alternative to a major ICO stock exchange, such as the New York Stock Exchange and the Nasdaq.
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September 28, 2017, 06:04:56 PM
 #6

TZero, a subsidiary of Overstock, announced on Wednesday, September 27, the launch of the first exchange that will […] offer a legally approved and regulated alternative to a major ICO stock exchange, such as the New York Stock Exchange and the Nasdaq.

Did you not see that I was analysing that press release in my prior post? I quote myself:

Quote

Two of you guys sent this to me. My stance is it probably has some validity but with many possible caveats…



I will continue my analysis by quoting from the 1933 Securities Act:

Section 2(3) The term ‘‘sale’’ or ‘‘sell’’ shall include every contract of sale or disposition of a security or interest in a security, for value.

Section 2(7) The term ‘‘interstate commerce’’ means trade or commerce in securities or any transportation or communication relating thereto among the several States or between the District of Columbia or any Territory of the United States and any State or other Territory, or between any foreign country and any State, Territory, or the District of Columbia, or within the District of Columbia.

Section 2(11) The term ‘‘underwriter’’ means any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking;

EXEMPTED TRANSACTIONS
Section 4(a) The provisions of section 5 shall not apply to—
(1) transactions by any person other than an issuer, underwriter, or dealer.
(2) transactions by an issuer not involving any public offering.

PROHIBITIONS RELATING TO INTERSTATE COMMERCE AND THE MAILS
Section 5(a) Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly—
(1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or
(2) to carry or cause to be carried through the mails or in interstate commerce, by any means or instruments of transportation, any such security for the purpose of sale or for delivery after sale.

And the 1934 Securities Act:

TRANSACTIONS ON UNREGISTERED EXCHANGES
Section 5. It shall be unlawful for any broker, dealer, or exchange, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce for the purpose of using any facility of an exchange within or subject to the jurisdiction of the United States to effect any transaction in a security, or to report any such transaction, unless such exchange (1) is registered as a national securities exchange under section 6 of this title, or (2) is exempted from such registration upon application by the exchange because, in the opinion of the Commission, by reason of the limited volume of transactions effected on such exchange, it is not practicable and not necessary or appropriate in the public interest or for the protection of investors to require such registration.

REGISTRATION REQUIREMENTS FOR SECURITIES
Section12. (a) It shall be unlawful for any member, broker, or dealer to effect any transaction in any security (other than an exempted security) on a national securities exchange unless a registration is effective as to such security for such exchange in accordance with the provisions of this title and the rules and regulations thereunder. The provisions of this subsection shall not apply in respect of a security futures product traded on a national securities exchange.

[…]

(j) The Commission is authorized, by order, as it deems necessary or appropriate for the protection of investors to deny, to suspend the effective date of, to suspend for a period not exceeding twelve months, or to revoke the registration of a security, if the Commission finds, on the record after notice and opportunity for hearing, that the issuer of such security has failed to comply with any provision of this title or the rules and regulations thereunder. No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked pursuant to the preceding sentence.

Conclusions:

  • Anyone (including issuers and underwriters) that transfers (i.e. spends) a fungible token (which was issued as a security) in a bona fide transaction in exchange for goods or services isn’t disposing nor transferring a security (regardless whether the security was registered, issued under an exemption, or illegally issued as an unregistered security), because the payee (who receives the token) isn’t entering into an “investment contract” because the payee treats the transaction as income not for a profit expectation on the token.
  • Anyone (including dealers, issuers, and underwriters) may sell a fungible token (which was issued as a registered security) while that security’s legal registration is maintained.
  • Tokens issued (legally or illegally) as unregistered securities (or whose registration has been revoked) may only be sold by those who aren’t dealers, issuers, and underwriters, unless those tokens are no longer securities.*

    Anyone obtained the tokens from the issuer or another underwriter, with the intent to resell them is an underwriter. Thus for unregistered securities to be legal for resale, they must have been held by some holder other than the issuer for 3 years so as to make it clear they weren’t originally held with an intent to resell them. If so held for 3 years, then when the tokens are sold, they’re no longer securities if the funds aren’t pooled into a common enterprise presuming the “horizontal commonality” definition.
  • Exchanges must be registered if they offer public trading (i.e. non-accredited investors allowed) of tokens which are securities. There’s no legal way for any (registered or unregistered) exchange to offer public trading of unregistered securities.

* Even though the funds of the resales are not pooled to the common enterprise per the requirement of the “horizontal commonality” definition, the Securities Act restricts resales which are an extension of distribution of the issuer by underwriters. However, arguably if the common enterprise has ceased and/or the tokens were previously spent on goods or services, the restriction no longer applies because the distribution no longer applies to the former “investment contract”. The Securities Act doesn’t allow dealers (aka exchanges) to offer trading for securities with revoked registrations, but presumably this is because there’s not clarity as to whether speculators would be basing their profit expections on the resurgence of the common enterprise and reinstatement of registration.

So the Overstock/TZero news merely means that they will streamline registration of token sales under the Securities Act. These issuers will need to maintain the compliance with the SEC in order for those tokens to be legal for dealers (aka exchanges registered with the SEC) to trade. The registered securities tokens will not be tradeable on the unregistered exchanges we have now.

Tokens issued as registered securities is an ongoing centralization requirement and not suitable for a permissionless, enduring cryptocurrency that will trade on centralized registered exchanges (aka dealers) and unregistered exchanges — i.e. not legal for dealers if registration is not maintained and not legal for unregistered dealers unless they have an exemption (presuming the SEC and other nations will begin to crackdown with their preexisting securities regulations as China recently did). Unregistered exchanges (i.e. not registered dealers) can only legally trade tokens which aren’t securities. Also if the tokens (issued as registered or unregistered securities) were never held for 3 years, then every user transitively becomes an underwriter and thus it is illegal to trade the tokens even on decentralized exchanges (which I pointed out in my blog could be hypothetically enforced on investors who comply with tax reporting). However, it is always legal (w.r.t. to the 1933 Securities Act) to spend any tokens for goods or services (and it also avoids AML regulation).


Also bear in mind that the Overstock/TZero option will not be viable for 99.9% of the ICOs that are being issued in our ecosystem, because those issuers do not want to comply with all the disclosure limitations (e.g. they can’t make non factual hyped claims) and oversight on their use of the funds raised. In short, the speculation in our ecosystem doesn’t want realism because the reality is that none of the projects are actually attaining any adoption or use other than selling empty speculation bags to greater fools.

Quote from: James A. Donald — the first person to interact with Satoshi Nakamoto on the mailing list
Every website reporting on the altcoin boom and the initial coin offering boom has an incentive to not look too closely at the claimed numbers. Looks to me that only Bitcoin and Steemit.com have substantial numbers of real users making real arms length transactions […] The crypto coin business is full of scammers, and there is no social pressure against scammers, no one wants to look too closely, because a close look would depress the market. There is no real business plan, no very specific or detailed idea of how the coin offering service is going to be of value, how it is going to get from where it is now, to where it is going to usefully be […] When you buy an initial coin offering, you are usually buying shares, usually non voting shares, in a business with no assets and no income and no clear plan to get where they will have assets and income, as in the dot com boom.


Essentially the only way I can see to issue an unencumbered cryptocurrency by token sale, is to enforce on the decentralized ledger that the tokens can’t be sold for 3 years and that all tokens were held by those who aren’t issuers nor underwriters after that 3 year restriction. The 3 year holding period seems to be consistent in the UK also, which is the other significantly developed market for securities. That at least makes it sure that the token is legal for all use, spending, and trading in a decentralized context (regardless whether it’s registered with regulators). However, even with this precaution undertaken, unregistered exchanges (i.e. not registered dealers) might still be wary of listing tokens which were originally issued as securities (before the 3 year freeze on the decentralized ledger) unless perhaps the regulators provide more clarity (and registered dealers exchanges don’t offer trading in non-securities, but they may continue to offer trading if the said tokens were registered as securities and registration has been maintained and not revoked). And it’s possible some jurisdictions’ regulators might claim that the tokens remain securities indefinitely (because it can’t be proven that the prior or future efforts of said common enterprise don’t remain relevant to investors’ investment decisions, c.f. my blog for a quote of jurisprudence in a dissenting opinion). And because it can’t be proven that all the tokens were at some point spent on goods and services (thus removing their securitization).

Additionally although afaics not strictly required by the law, it would be advantageous to also insure that ecosystem is sufficiently decentralized that the common enterprise that pooled the funds of the original token sale is no longer the basis of investors’ expectation profits.

Quote
been trying to follow ico related stuff on the legal side as i am in the usa. i have to be careful that all my crypto stuff is legal etc for taxes and such.

As explained above and in the blog for this thread, the ICO issued tokens so far have made all the holders underwriters and thus illegal traders. The exchanges trading these are illegal and going to be in trouble. Especially for someone in the USA, I would stop trading these ICO issued tokens. And wait for token sales that are compliant as I wrote about above in this post.

Non-securitized Issuance Without Proof-of-work

Tokens can also be issued/distributed by spending them for goods or services to avoid the “investment contract”, but the payee must have some reasonably liquid market to exchange them, otherwise it would be construed they’re holding them with a dependency on their future exchange value and the value they transferred to the issuer or underwriter was an investment in those tokens. As another way to avoid the Howey test requires of an “investment contract”, tokens can be distributed by giving them away where the recipient acquires them only for their utility (such as a currency) and not to resale them to another investor, and/or any value (the recipient transferred to the common enterprise, such as their ongoing use and promotion of the common enterprise) is not managed solely by centralized managers who the recipient relies on.

Disclaimer: IANAL. This isn’t legal advice.



Re: Don't be afraid of ICOs

What are your thoughts on this?

Study the facts.

Be afraid of every token sale which is not locked on the blockchain for 3 years before trading (or unless it’s a registered security and you only expect to sell it to other investors on registered exchanges). Your token will likely get delisted eventually from exchanges (unless it can be registered which is not the case for all the current token sales). Legal and criminal implications for you personally possibly for illegal trading on unregistered exchanges.

Crackdowns are coming eventually. China just the first salvo of what is coming from regulators in major nations.

Steem started dropping when the Poloniex wallet got disabled for "maintenance". That was 2 months ago, and I think when a lot of people realised they couldn't withdraw their Steem from Poloniex, they sold it for bitcoin, which they could withdraw. And the Steem price hasn't really recovered, because the wallet on Poloniex hasn't been re-opened.

It's a shame when exchanges mess with coins like that.

That’s an example of what is going to happen to all ICO issued tokens when the delistings come forth.

And STEEM is still trading on Blocktrades and Bittrex, so imagine the utter collapse towards 0 of the STEEM price if it had been delisted from every significant exchange.

Everybody going to get plenty of warnings but they will ignore the warnings of course.



Quote from: from Crypto.cat private chat
Quote from: Hyperme.sh
Bitcoin, Litecoin, Bitcoin Cash, and other tokens issued competitively with proof-of-work aren’t securities, because none of the funds paid for tokens was pooled into a managed common enterprise.

I'm just more thoroughly reading through your assessment and so my own summary is that essentially you have tokens issued as “securities” and then tokens which are not considered securities due to the way in which they were distributed.

Can you maybe highlight or make clearer why tokens such as ETH and the these ETH derived ICO's are considered securities? I know they are like crowd fundings and many of them are simply IOUs with some promise of a valuable token/platform in the future. Also, please clarify why the token for your Hypermesh project can't be issued similar to BTC to avoid these legal issues. (I haven't read through the XxXX (technology for Hypermesh project) details yet, but I assume it's because of the way it's mined or lack thereof.) Thanks!

The secret Gist link I provided to my yet unpublished blog about XxXX (technology for Hypermesh project) has nothing to do with the securities issue. XxXX is the technology for my decentralized ledger that enables it to achieve true decentralization unlike how proof-of-work and proof-of-stake must become centralized (oligarchy) controlled as explained in that Gist. XxXXis one of my many technological and marketing advantages. But I don’t want to go off on explaining that right now. Let’s stay on the securities and fundraising issues for now.

Tokens are securities if they’re issued as “investment contracts” as per the Howey test and “horizontal commonality” as explained in my recent Steemit blog. That requires the funds transferred are pooled and managed by the issuer(s) who manage the common enterprise. The DAO, ETH, and ERC-20 ETH token sale tokens all seem to be issued as securities (some portion of ETH was issued by proof-of-work though).

Securities can be traded P2P (i.e. not on public exchanges) by those who aren’t issuers, underwriters, or dealers/exchanges regardless if they were registered or not (even if they were illegally issued). But the problem is that every trader of the token becomes an underwriter if the token wasn’t held for 3 years by someone in the chain downstream from the issuer. So basically the only way I can see to issue a security that remains legal to trade P2P, is for it to be locked on the decentralized ledger (aka blockchain) for 3 years after issuance. So afaics, any token which was a security and wasn’t locked for 3 years, is thus illegal to trade for anyone any where, except for those securities which were registered. Registered securities can be traded by anyone P2P and on registered exchanges (but not on unregistered exchanges) but only for as long as their registration is maintained by the issuer (with annual reports, etc). None of the token sales have been registered (and the token sales up to now afaics haven’t even be issued legally with correct exemptions so they can never be registered). The securities which aren’t registered but locked for 3 years, can afaics subsequently trade legally P2P, but whether they can trade on unregistered centralized exchanges is unclear. I reasoned that perhaps they can.

Tokens issued by proof-of-work or the other means I explained at the end of my recent BCT post, aren’t securities and thus can be traded legally P2P and on unregistered exchanges.

It’s quite a convoluted mess to wrap one’s mind around. I hope that explanation helped you better understand my recent posts:

https://steemit.com/cryptocurrency/@anonymint/future-ico-woes-and-alternatives-to-icos-for-fundraising
https://bitcointalk.org/index.php?topic=2208231.msg22330424#msg22330424

P.S. I want to research more the 3 years issue after I sleep.

P.S.S. For my Hypermesh project’s token (which has been renamed as you know to a shorter name which we have not yet announced), the premine is locked for 3 years. The onboarding tokens which are issued to users who signup are issued as I explained in the section Non-securitized Issuance Without Proof-of-work. I explained why issuance that way makes them not securities. So the Hypermesh token is issued in two ways, the premine is a security and the onboarding tokens are not. So for 3 years, there’s no ambiguity whatsoever because all the unlocked, tradeable tokens were issued not as securities and so the tokens can be traded P2P and on unregistered exchanges (just like Bitcoin and other tokens do now). After 3 years, the premine is unlocked for trading, but even though it was a security, then since it was locked for 3 years, then no one is an underwriter and thus it can be legally traded P2P. Whether the project’s token (including onboarded tokens since all tokens are fungible with each other) can be traded on unregistered exchanges after premine is unlocked is a matter of intepretation, but there will be a decentralized exchange built into my project any way:

Quote from: Hyperme.sh wrote in Crypto.cat
…There’s no benefit for us to register the premine as securities, because they must be held and not traded for 3 years (and maintaining registration is the antithesis of a decentralized ledger). However, as I wrote in that BCT post linked above, its possible the ecosystem will be so decentralized after the said 3 years, that those premine can no longer be construed to be securities. And thus the unregistered exchanges wouldn’t delist our token if that is the correct interpretation. In any case, if we assure that all premine that was held for 3 years was held by those who aren’t the issuer and/or that all premine held by the issuer were never sold and always spent for goods and services, then after the 3 year period our token will continue to be legal to spend and trade in a decentralized context (and we’re planning a built-in decentralized exchange any way).

Note I just realized we should probably unlock the premine gradually so the market could gauge the level of premine selling so hopefully less potential the market could panic and sell off in anticipation if premine holders don’t intend to cause a sell off.

Disclaimer: I’m not advertising any sale of anything. Nothing has been decided yet. Just sharing/brainstorming/researching ideas at this point.
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September 29, 2017, 03:08:06 AM
 #7

Yet again, I prophetically I warned everyone:

Reuters report South Korea has banned all forms of initial coin offering

http://v.media.daum.net/v/20170929100212900

What it says is "Korea will ban any kind of ICO." It is official from the Government.

We had many warnings that this was coming (which my blog from Sept 2 had mentioned South Korea’s warning):

https://www.cryptocoinsnews.com/south-korea-tightens-bitcoin-regulations-will-punish-icos-report/ (Sept. 4)
http://www.the-blockchain.com/2017/09/04/south-korea-plans-crackdown-icos/ (Sept. 4)
https://cointelegraph.com/news/china-forces-icos-to-return-funds-as-korea-warns-of-punishments (Sept. 5)

I had been reiterating these warnings this week.

Including my warnings a few hours ago:

Re: Will ICO fundrising survive at 2018+?

There are so many fears and rumors around ICO. I think that ICO format is very convenient for projects as well as for investors. There are too many scam ICOs and I understand what is the point of the governments fear. But I wonder what do you think about ICO in 2018+. Will it survive?

Probably not for those which are not issued in a more compliant way.

Study the facts.

Investors are risking legal and criminal culpability for illegal selling on unregistered exchanges.

Crackdowns are coming eventually. China just the first salvo of what is coming from regulators in major nations.

Steem started dropping when the Poloniex wallet got disabled for "maintenance". That was 2 months ago, and I think when a lot of people realised they couldn't withdraw their Steem from Poloniex, they sold it for bitcoin, which they could withdraw. And the Steem price hasn't really recovered, because the wallet on Poloniex hasn't been re-opened.

It's a shame when exchanges mess with coins like that.

That’s an example of what is going to happen to all ICO issued tokens when the delistings come forth.

And STEEM is still trading on Blocktrades and Bittrex, so imagine the utter collapse towards 0 of the STEEM price if it had been delisted from every significant exchange.

Everybody going to get plenty of warnings but they will ignore the warnings of course.
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September 29, 2017, 11:55:00 AM
 #8

Right now we're in the Wild West Capitalism ICO phase. I expect the market to get somewhat regulated over time as gov regulation catches up. However, the cat is out of the bad and there is no turning back anymore. 
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September 29, 2017, 04:58:45 PM
 #9

EDIT: see my latest post on this.



Right now we're in the Wild West Capitalism ICO phase. I expect the market to get somewhat regulated over time as gov regulation catches up. However, the cat is out of the bad and there is no turning back anymore.

I presume you voted No in the poll and are justifying your No vote with the bolded (my emphasis added) assertion.

You do not seem to understand the point that the authorities do indeed have the power to compel investors to not trade illegal ICO issued securities, because investors have to report their itemized capital gains on tax reporting.

I guess we will find out how significant tax avoiding cash markets are if authorities delist and make illegal the trading of unregistered securities (i.e. ICO issued tokens that were not registered).

Personally I am not against the rise of decentralization. I am just trying to be pragmatic and understand implications and how to best position for the outcome.

As my prior posts in this thread explained in great detail, the future of ICOs are registered securities, but these will only trade on registered exchanges, but each nation has a different registration policy for both securities and the exchanges of securities. This will be a huge non-fungible mess (analogous to how stock trading is not international). And if the issuer does not maintain compliance and reporting, the registration can be revoked and then it is illegal to trade the token to other investors (unless the token had been held for 3 years by everyone). That is an unworkable mess. Nothing like the global ICO trading we have now.

@CoinHoarder’s summary and I agree that just like in the Dot.Com bubble burst, most of the ICOs will end up worthless and useless.

Note Australia has just pointed out that my blog is correct and that most ICOs are securities per the pooled funds and common enterprise test. Every nation is preparing to crackdown on unregistered ICOs.

Disclaimer: IANAL. This isn’t legal advice.



Re: ICO's killing crypto

[…]

Not that extreme. They’re just going to use the ICO regulation to increase the digital tracking of everything we do:

In December meanwhile, more stringent identification of virtual currency holders who convert funds to fiat will come into being, with the onus on businesses to ensure they can identify customers behind the conversions.

Banks will also monitor “unusual” cashflow events.

“We will start the transaction by confirming the identity of the bank and monitoring the flow of funds,” the official continued.

“It will facilitate tracking of funds … and provide a basis for preventing money laundering such as suspicious transaction reports."

Japan on it's move to regulate cryptocoins, has started licensing exchanges operating inside it's jurisdiction.
https://www.bitsonline.com/japanese-exchanges-licenses/

Quoinex becomes the first to get such license followed by bitflyer.

So, are we going towards more kyc, identity verification, source of income, income tax, profit tax, remittance tax?
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October 02, 2017, 06:10:55 AM
 #10

Even Austria and Switzerland got into the ICO crackdown mode.

And Singapore’s banks are also going after the bank accounts of those facilitating ICO issued projects.
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October 04, 2017, 05:37:25 AM
 #11

Re: Bittrex's delisting Bitshares (is it a SEC action)?

Quote
2‍. Bitshares is a TXSRB clean token and will not be subject to SEC or other government crackdowns (happening right now!)

No where do I see the TXSRB explain why a “Fat Protocol” token fails to meet the Howey test.

What is the logic?



Quote from: johnsmith
3‍. Bitshares is being used to create the STOKENS exchange for issuing and trading SEC-compliant tokens. Most/all ICOs will be moving to Bitshares instead of Ether in the future as companies are forced to follow the rules set by the SEC and other government/regulatory agencies. Already there are many ICOs happening on Bitshares - Smoke, Kexcoin, Bitspark, Satoshi.fund, Bondonblockchain, Crypviser, YOYOW from the top of my head - many more on the go!

7‍. China is shutting down centralized exchanges; the US and other countries will follow soon. SEC has recently filed charges against a US based-ICO and they are using it to build a model to crack down on all the other ICOs. Decentralized exchanges are the future of trading crypto and Bitshares is the No. 1 DEX on the planet by any metric - transactions per second, scalability, security, volume, adoption, speed, number of assets, etc.

Well there is a likely reason to delist it if an exchange is concerned about securities regulations exposure.

Stokens are the TXSRB’s attempt to subvert nation-state regulations and create a global self-regulated authority, but that does NOT make them SEC-compliant. It makes them a competitor to the SEC’s jurisdiction.

All I see is dire warnings from the TXSRB and no details about solutions:

As we move forward we must both create legal coins and clean up the old mess created by the Swiss, Singapore and other countries who skirted security laws globally.  There is a possible path forward with the SEC if nothing nefarious occurred in a company.  For those who pumped and dumped, where insiders sold or manipulated markets, where advisors took broker/dealer fees of 25% and added no real value, where investors were purposely lead astray or worse, you can expect no free ride.  For the Swiss law firms who represented the bad firms I personally hope they're held personally liable when SEC v. Traffic Monsoon finishes and global jurisdiction and class action lawsuits become the new thing.

A mess was created in Switzerland and cloned in Singapore, Gibraltar, Luxembourg, Estonia and similar countries who promised to magically transform companies into not being companies, with the sole purpose of avoiding global securities & exchange laws, KYC/AML, taxes and provisions to protect investors from fraud. That anyone in Switzerland wants to represent a regulatory authority to tackle the problem they made fortunes creating, now that the founders they guided could face fines and jail time, is sad and ironic.

[…]

(2) Once/if tokens trading on an exchange are deemed securities an exchange must comply with the SEC & FINRA or cease operations and that would include delisting identified toxicoins deemed as illegal, unregistered securities in the hands of non-accredited, un-documented, un-KYC/AML'd individuals who could be bad characters. More than likely the exchange would be shut down as well or at least investigated and sued by the SEC for non-compliance. Hopefully users would have time to take their tokens before/if assets are frozen.

The very bad news is that potentially most tokens and exchanges are illegal and could be investigated or shut down, and the founders/lead engineers/lawyers brought before US courts, regardless of being distributed or autonomous, based on a SEC victory in SEC v. Traffic Monsoon, which could literally see that outcome any day.

The dominoes are falling.  On July 25th the SEC let the world know they think some tokens are securities and specifically the DAO token.  India, China, Japan, Singapore… announced they are going to regulate some tokens as securities and will likely decide which tokens are, or are not, securities. The SEC could begin investigating individual tokens, creating great inconvenience, cost and damage to the value of that token with the potential years of uncertainty about the outcome weighing on the minds of that specific token’s owners.  There is also uncertainty for centralized exchanges, and perhaps even decentralized exchanges, who allowed the DAO token to trade; or how about all of the tokens that will/may be deemed securities trading on those exchanges now.

[…]

The TXSRB is a private organization but is subject to any government-imposed regulations to the extent an applicable governmental regulation or law applies, supplemented by the internal regulation put in place by the TXSRB.
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October 04, 2017, 04:58:58 PM
 #12

This is perhaps why the Filecoin SAFT employed a warrant to separate the company shares from the token (even if that makes those tokens initially securities as I argued).

Securities and ICOs are complicated mess (hornet’s nest).

New ADA Token

That same legal risk (and risk of future delisting) that applies to the Filecoin SAFT, I believe may also apply to Charles Hoskinson’s new ADA token.

Per my prior post, note these former Ethereum founders have been “involved with” the Swiss transgressions of global securities law and even they are involved with that TXSRB presumed attempt to defy nation-state regulators and form their own global self-regulatory body. What are these guys thinking  Huh We can’t defeat the corrupt power of nation-states by walking directly into the jurisdiction of “their” JUST-US laws already on their books regarding securities and AML. Instead we must paradigm-shift away from securities issuance which is what proof-of-work does.

So this group issued ADA vouchers primarily to Japanese investors (and btw their websites are designed so they can’t be captured by archive.org nor archive.is!), which afaics have no purpose other than to be exchanged for ADA tokens which are now being sold to US investors on Bittrex!

Afaics, this is a violation of Regulation S safe harbor exemptions because even though the vouchers were offshore transactions and were not directed sales in the USA, the exchange of the vouchers for tokens (which are now offered for sale to USA person on Bittrex) is just an obfuscation of the economic reality of the “investment contract” per the Howey test!

I presume they have good attorneys and may also be well connected in FinTech, but I predict the way this will play out is ADA tokens will become highly regulated.

This is not cryptocurrency in the (popular interpretation of the) spirit of Satoshi Nakamoto (although “Satoshi” had a sinister hidden objective which is just now coming to light), as they admit. As well, their Ouroboros ledger technology is not decentralized.

IMO, Charles has lost the plot. I am of the opinion that their group and project(s) are headed not in the direction of world changing paradigm-shifts but rather encumbering the tokens and ecosystem with rigor mortis regulatory morass right into the lap of the evil motherfucking powers-that-be and the morass of centralization that retards degrees-of-freedom and permissionless network efforts.

I am going the other direction towards scalable, permissionless, decentralized!

Seems proof-of-work was specifically created to avoid encumbering the tokens with regulation, so that it survives as a globalization phenomenon (which is one of the big hints as to who created Bitcoin). I expect the nation-states’ TPTB (regulators, fat cats, etc) are going to have an eventual feast on these token-sale-issued tokens (no matter how they were obfuscated with vouchers and SAFTs).

These “useful idiots” are playing right into the plan of how Bitcoin would globalize (while necessarily becoming entirely centralized mining as has recently been proved in research!) while the scammers would drive the excuse for massive regulation:

It's a very good time to be a money launderer, and you can thank cryptocurrencies

Cryptocurrencies have exploded in popularity in recent years that has led to a red-hot fundraising trend where start-ups bring in millions of dollars in capital by issuing virtual tokens to investors in exchange for money.

Initial coin offerings (ICOs) have become a primary means of fundraising for projects built on blockchain technology. Companies create and issue digital tokens that can be used to pay for goods and services on their platform or stashed away as an investment. They put out whitepapers describing the platform, software or product they're trying to build, and then people buy those tokens using widely-accepted cryptocurrencies (like bitcoin and ethereum) or fiat currencies like the U.S. dollar.


All of that is done without any regulatory oversight, and that has regulators — and members of the financial industry — worried about the potential of widespread money laundering and fraud.

ICOs are enabling the media to associate cryptocurrency and blockchains with money laundering, terrorism, North Korea, World War 3, etc..

I think the differences in approach here is due to different world view of the negative value of democracy and the reality of democracy (i.e. what really happened on 9/11 that everybody really wants to sweep under the rug).

Let the competition of ideas, designs, concepts, and financial structuring ensue.

Disclaimer: IANAL. This is not legal advice.
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October 07, 2017, 04:32:10 AM
 #13

The plot thickens.

Well connected New York attorneys are for sale to issue incorrect opinions on ICOs?

Will governments be fighting between themselves over the spoils of “stealing” from ICOs?

Disclaimer: IANAL. This is my n00b ramblings, not a legal advice.
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October 07, 2017, 11:56:02 PM
 #14

Oh my why didn’t I think of this.

Air dropping after the fact, the token sale issued tokens, could be a way to convert an illegal security into an unencumbered token!

Is this the way to issue an ICO and get away with it without actually encumbering the future of the tokens?

Actually I did think of this before but I was thinking that the new tokens need to be held for 3 years because I was thinking the same issuer (of the ICO) would issue also the air drop. But if the new issuer is non-affiliated with the ICO issuer, I think this air drop might be the way to convert the illegal ICO tokens to legal tokens.

If a Token is a security, is a fork the same as a share split?

I’m thinking that if the new issuer is non-affiliated with the prior one, then no it isn’t a split. The investment contract was with the original issuer and common enterprise. The new non-affiliated issuer has no investment contract with the investors in the ICO.
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October 07, 2017, 11:59:24 PM
 #15

If a Token is a security, is a fork the same as a share split?
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October 08, 2017, 04:23:28 AM
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Oh my why didn’t I think of this.

Air dropping after the fact, the token sale issued tokens, could be a way to convert an illegal security into an unencumbered token!

Is this the way to issue an ICO and get away with it without actually encumbering the future of the tokens?

Actually I did think of this before but I was thinking that the new tokens need to be held for 3 years because I was thinking the same issuer (of the ICO) would issue also the air drop. But if the new issuer is non-affiliated with the ICO issuer, I think this air drop might be the way to convert the illegal ICO tokens to legal tokens.

If a Token is a security, is a fork the same as a share split?

I’m thinking that if the new issuer is non-affiliated with the prior one, then no it isn’t a split. The investment contract was with the original issuer and common enterprise. The new non-affiliated issuer has no investment contract with the investors in the ICO.

Afaik this is what DecentralizedEconomics is doing with his YourChain project,
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October 08, 2017, 08:34:36 AM
 #17

I believe the future of cryptocurrency cannot thrive without a commercial ecosystem to work with, such as the one that Ethereum's ICOs are creating.

In the conventional world, we have physical gold, fiat currencies, and enterprises/corporations working together as one thriving system.

If the future is without the ICOs, it would be like a world where we have physical gold and fiat currencies, but without enterprises/corporations.

Despite posing the highest level of scam and fraud, I believe the ICOs will remain the most rewarding sector of the crypto world.

Imagine this scenario whereby you have all the BTC, LTC, ZCASH in the world, and nothing else.

On the other side, another person has all the enterprises in the world, and nothing else.

Somehow you will have the need to acquire some of the products and services produced by the enterprises.

And enterprises being profit-oriented, will not sell you its products/services at fair price, but at a profit.

Thus the change of wealth will ultimately be a net positive flow from you (the one having all the cryptocurrencies in the world) to the person with all the enterprises in the world.

Buying BTC is like buying physical gold.

Buying LTC, BTH, ZCASH, DASH, etc is like buying the USD, GBP, YEN, etc.

Buying ICOs is like buying shares of enterprises and corporations.

And the level of reward you will get from the ICOs will depend on participating in legitimate ICOs with viable commercial projects.

Just my speculation.


     
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October 08, 2017, 08:47:07 AM
 #18

Many government around the world are now looking into crypto currency its self. I am sure many nation don't understand it yet. Ico are still going to be here.

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October 09, 2017, 12:06:16 AM
 #19

Oh my why didn’t I think of this.

Air dropping after the fact, the token sale issued tokens, could be a way to convert an illegal security into an unencumbered token!

Is this the way to issue an ICO and get away with it without actually encumbering the future of the tokens?

Actually I did think of this before but I was thinking that the new tokens need to be held for 3 years because I was thinking the same issuer (of the ICO) would issue also the air drop. But if the new issuer is non-affiliated with the ICO issuer, I think this air drop might be the way to convert the illegal ICO tokens to legal tokens.

If a Token is a security, is a fork the same as a share split?

I’m thinking that if the new issuer is non-affiliated with the prior one, then no it isn’t a split. The investment contract was with the original issuer and common enterprise. The new non-affiliated issuer has no investment contract with the investors in the ICO.

Afaik this is what DecentralizedEconomics is doing with his YourChain project,

I hope not. On further analysis, it appears to not solve anything.
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October 09, 2017, 06:22:08 AM
 #20

Proof-of-work Case

Let’s think about what makes proof-of-work distribution not a security:

1. it’s issued by competitive decentralized algorithm which is resistant to non-objectivity in terms of value awarded to whom, so no one entity or colluding group is an issuer (thus no common enterprise)

2. the funds expended for mining are not pooled by a common enterprise (i.e. no horizontal commonality)[1]

So actually if a group colludes to sneakyinstamine, then the reasons above can both be subverted. The reason #2 is subverted because the future appreciated value of the tokens is pooled.

So this is why a reasonably diverse fair launch is critical for proving that the issuance is sufficient diversified.

Note however that in the case of even for example Bitcoin and Monero, the circle of initial miners when the issuance rate was greatest was much smaller than the eventual diversification. The key is that the mining continued for a long duration to enable the distribution to become sufficiently diversified. But the possibility of more exclusive distribution in the early phases wasn’t entirely (provably) eliminated.

So it seems that an initial mining period that is somewhat more exclusive (due to lack of awareness of the market) is not antithetical to avoiding a common enterprise and securization of the tokens. Whereas, the securization issue is more dubious if the initial more exclusive phase of mining is perpetuated with a subterfuge scheme that continues to funnel much of the ongoing issuance to the same exclusive group in an uncompetitive manner that can’t reasonably be competed with mathematically, such as the Dash sneakyinstamine followed by compounding of ongoing issuance flows to masternodes. Yet without significant forensics or insiders squealing due to for example the SEC’s whistleblower bountry program, perhaps securities enforcement against Dash could be difficult to prove.

[1] Even though they don’t form a common enterprise, I originally thought the AML regulations singled out issuers of (even decentralized) virtual currencies as being money transmitters (subject to registration as MSBs) if they dispose the mined tokens to another person without employing an AML regulated exchange instead of spending them on goods & services, But a more recent AML guideline clarified that it’s not being an issuer that is relevant to money service businesses classification, but rather whether one is acting as an exchanger for others as service/business to the others. IOW, if you regularly offer to convert exchange real currency or other virtual currencies, then AML regulation applies. So doing such exchanges on an AML compliant exchange would eliminate any potential culpability. Note my reading of the AML guidance is that miners of decentralized virtual currencies are issuers (they created new money supply by mining and issue the tokens to themselves), but they’re not administrators because they don’t have the power to redeem tokens in order to reduce the money supply.
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October 09, 2017, 07:18:28 AM
 #21

Why not go the whole fuck the system fully anonymous decentralised route? I mean the legal frameworks are there to take freedom away and over regulation of the FED from the crash that they ultimately caused, why play their game.

Decentralise the app and sell the token on a dectralised platform. To me that's more attractive anyway.


Tip us off if you do though.  Cheesy

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October 09, 2017, 09:25:42 AM
 #22

Why not go the whole fuck the system fully anonymous decentralised route? I mean the legal frameworks are there to take freedom away and over regulation of the FED from the crash that they ultimately caused, why play their game.

I’m somewhat expert on anonymity, and not only do I doubt the issuers can maintain their anonymity (besides if it were my project, I could not easily hide that I am working on it as a developer and still develop it collaboratively in open source with all comers), but the money all becomes black.

What the hell will you be able to do with black tokens when cash is soon outlawed? You won’t be able to use any your gains to buy real world assets and the masses will run away from your token like the plague.

I don’t think people understand what is coming in terms of clawbacks from unregistered financial activities.

We are headed into very difficult times and so we need a token system that isn’t illegal.
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October 09, 2017, 01:26:53 PM
 #23

Why not go the whole fuck the system fully anonymous decentralised route? I mean the legal frameworks are there to take freedom away and over regulation of the FED from the crash that they ultimately caused, why play their game.

I’m somewhat expert on anonymity, and not only do I doubt the issuers can maintain their anonymity (besides if it were my project, I could not easily hide that I am working on it as a developer and still develop it collaboratively in open source with all comers), but the money all becomes black.

What the hell will you be able to do with black tokens when cash is soon outlawed? You won’t be able to use any your gains to buy real world assets and the masses will run away from your token like the plague.

I don’t think people understand what is coming in terms of clawbacks from unregistered financial activities.

We are headed into very difficult times and so we need a token system that isn’t illegal.


All true but I just think regulations arent there to protect anyone any more than patriot acts are to protect anyone. So even after you have jumped through all their hoops they will if they want to make up a reason to stop what you are trying to do. Satoshi was right to disappear otherwise im.sure he would already be dead if they could of stopped him before he launched btc. Maybe in big turning ppints in history you just cant work within the system illegal is only what the last guys decide is illegal.

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October 09, 2017, 05:43:40 PM
 #24

All true but I just think regulations arent there to protect anyone any more than patriot acts are to protect anyone. So even after you have jumped through all their hoops they will if they want to make up a reason to stop what you are trying to do. Satoshi was right to disappear otherwise im.sure he would already be dead if they could of stopped him before he launched btc. Maybe in big turning ppints in history you just cant work within the system illegal is only what the last guys decide is illegal.

Agreed. That is why it is important to issue the token such that it is not encumbered by any laws. This is the advantage that proof-of-work issued tokens as I explained, is they have no centralized issuer thus can’t be securities unless there is some sneakyinstamine.

I’m working on an objective issuance that achieves the same legal implications as proof-of-work, but distributes the tokens to non-nerds and doesn’t expend value on electricity. So that we get the legal advantages of proof-of-work, yet with the distribution advantages of onboarding the masses. Steem was the first to do this by employing “decentralized” voting to award the issuance to users, but as I explained the flaw is that algorithmically (mathematically) it is impossible to design voting that spends from the collective, which can’t be controlled by the whales, thus Steem’s distribution is non-objective and thus can be argued to be common enterprise of the whales who participated in the sneakfastmine. This is why I have for example urged others to divest of Steem. Certainly I like the goals and experiment Steem was attempting to achieve.
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October 12, 2017, 11:22:54 AM
 #25

Thus the SAFTs that were sold in the Filecoin ICO encumber the Filecoin tokes as securities. Thus the Filecoin tokens are useless and can’t be actually used decentralized (unless hypothetically the common enterprise ceases as explained below).

[…]

Here are the narly details from an attorney:

The question here is whether a token issued pursuant to the terms of a security/investment contract (i.e. the SAFT) is itself also an investment contract. (Which, to this week’s SAFT offering’s credit, is briefly acknowledged in the PPM).

[…]

There is no way to convert a security into a non-security (except as aforementioned the common enterprise ceases), because that would circumvent the entire point of the law. The investors are not investing in SAFTs but in the Filecoin tokens they receive for the SAFTs. Without the Filecoin tokens, the SAFTs are worthless. The Howey Test states it will always look at the economic reality and ignore any tricks that attempt to obfuscate the economic reality.

It is difficult to divorce the money and exchange component from “utility tokens,” as app-coins are sometimes called, particularly in the context of a speculative ICO where the token allocation is pre-sold to persons who could not possibly consume them all and are purchasing the coins with the expectation of profit on re-sale.



For this reason, my personal view is that most ICOs – even the “utility coins” – are unlikely to escape regulation by jurisdiction-appropriate rules regarding public offerings, financial promotions and unfair trade practices. I have held this view since 2014 but then again I’m pretty conservative.

[…]

[…] the blockchain industry’s thinking has over-emphasized complying with regulations that govern the initial issuance of tokens, and has neglected to address the impact of all of the regulations that apply on a continuing basis.


I’m reviewing the arguments for the SAFT which I had previously discussed in the context of Filecoin, as excerpted above.

The above quoted argument against fully-functional tokens because of a dominating profit expectation, is rebuked in the following SAFT white paper. I was pleasantly surprised to read their logic about free market preponderance, but the problem is the court is going to interpret this, unless the developer has entirely ceased activity before the tokens are issued.

Here are some excerpts from the white paper which I find particularly noteworthy:

Common Enterprise

Direct token presales often admit of a common enterprise. Courts are split on what is the correct threshold for finding the existence of a common enterprise. The majority of courts apply the so-called horizontal commonality test.²³ Under this approach, a common enterprise exists where multiple investors pool assets and share together in the profits and risks of the enterprise.²⁴ A minority of courts instead apply the vertical commonality test. There are two variations on the vertical commonality formulation. Under the narrow vertical commonality variation, a common enterprise exists where the fortunes of the investors are bound up with the actual fortunes of the promoter or issuer of the security.²⁵ Under the broad vertical commonality variation, a common enterprise exists where the fortunes of the investors are bound up with the mere efforts of the promoter or issuer.²⁶

[…]

Vertical commonality is rarer. To be sure, token purchasers might rely on the efforts of the developers to create the network, but that fact might support the “efforts of others” prong of the Howey test, not the broad variation of the vertical commonality prong, in which the fortunes of the investors must be bound up with the efforts of the issuer. Likewise, narrow vertical commonality is rare, since the purchasers’ profit from the token sale is rarely dependent upon the ultimate profitability of the developers or their entity. The value of a truly decentralized network is decoupled from the financial success of the original developers.  Moreover, the mission of many developers’ entities is to expend all of its resources to develop an open, permission-less network that acts as a public good, slowly and expectedly entering insolvency as it does so.

The above quote really opened my eyes as to how easily it is to avoid the vertical commonality definition of the common enterprise. And of course the more frequently cited horizontal commonality definition requires the developers pool the funds.

Expectation of Profit

How much expectation of profit is permissible before the arrangement satisfies this prong? In United Housing Foundation v. Forman,³¹ a purchaser of shares in cooperative housing almost certainly expected to sell the shares for more than the purchase price. So, without a doubt, that a profit motive is present is insufficient. Still, Forman can teach us more: It stands to reason that the purchaser likely would not have purchased the shares at all if he expected to lose money or merely break even upon resale. After all, what purchaser would buy a home knowing that it would be underwater when he decided to sell? Even if profit was a necessary outcome of the transaction for a prospective purchaser, it would be insufficient to satisfy this prong of Howey.
To satisfy this prong, the purchaser’s expectation of profit must predominate the expectation of using the thing purchased.³²

The above is supporting the notion that if users are obtaining the token for use, i.e. they actually need to use it, even though they will still have a profit expectation, it doesn’t meet the Howey test.

From the Efforts of Others

Thus, an already-functional utility token is less likely to be a security for two independent grounds. First, it is more likely that purchasers have bought them to use them (since, unlike pre-functional utility tokens, they can be used immediately to satisfy
imminent needs). Second, purchasers who buy them with an eye toward profit upon resale can expect those profits to be determined by a variety of market factors that predominate the efforts of the seller in updating the token’s functionality.

Critics of sales in this category might argue that the expectation of profit from resale on a secondary market is just speculative activity seeking capital appreciation. These critics might cite myriad federal court decisions holding that an expectation of mere “capital appreciation” on a secondary market, is sufficient to satisfy the Howey test.³⁴ This oft-repeated criticism does not stand up to scrutiny. At heart, the criticism collapses the “efforts of others” prong into the “expectation of profit” prong. It does so by relying on decisions which do not actually turn on the secondary market appreciation issue, and do not analyze it in much depth. Decisions that do so repeatedly hold that an expectation of profit from the mere increase in value on a secondary market is not from the “efforts of others.” In Noa v. Key Futures, for example, a case involving a forward contract for silver bars, the Ninth Circuit found no expectation of profits from the efforts of others because once the purchase of silver bars was made, the profits to the investor depended primarily upon the fluctuations of the silver market, not the managerial efforts of Key Futures.³⁵ SEC v. Belmont Reid, a case involving a forward contract for gold coins, held similarly because profits to the coin buyer depended primarily upon the fluctuations of the gold market, not the managerial efforts of others.³⁶ In another case involving a futures contract for sugar, a federal court in New York held the presence of a speculative motive on the part of the purchaser or seller did not, on its own, evidence the existence of an investment contract.³⁷

To be sure: Gold, silver, and sugar are different from tokens in important ways. For example, in the case of a token sale, the seller may continue to improve the network and the secondary market price of the token may appreciate as a result. This characteristic is not shared by precious metals or sugar. So should utility tokens really be treated similarly?

For already-functional utility tokens, we think so. Because there is no central authority to exert “monetary policy,” the secondary market price of a decentralized token system is driven exclusively by supply and demand. Supply and demand can be
due to a variety of factors. One of those factors could be the efforts of the development team creating the token’s functionality; but once that functionality is created, any “essential” efforts have by definition already been applied. It
would be difficult to argue that any improvement on an already-functional token is an “essential” managerial effort.

Furthermore, the market effect of a mere improvement on an already functional utility token is likely dwarfed by the multitude of other factors that act on it. For example, the value of a token that powers a decentralized market for buying and selling graphics processing power in real time would likely fluctuate depending upon, among many other factors, the retail or wholesale availability of high-powered professional graphics cards.³⁸ The value of a token that entitles a token holder to one box of the
seller’s razor blades might fluctuate with the popularity of beards in the company’s target markets.³⁹ The value of a token that permits users to store encrypted passwords conveniently on a blockchain might increase when a high-profile data breach
is announced or decrease when a major keylogging botnet is disabled.⁴⁰ Indeed, the value of bitcoin, another (mundane example of an) already-functional utility token, often fluctuates with changes in global geopolitical instability. The forces that could affect supply and demand for a functional utility token are countless. Supply and demand for functional tokens are affected by a variety of forces that determine the price on a secondary market—just like demand for gold in the commodity cases. It is no coincidence that blockchain tokens have been referred to as “digital gold.”⁴¹

[…]

Likewise, the secondary market price of a pre-functional utility token could also be determined by a great variety of factors. However, the application of the technical and managerial efforts of the seller is likely the predominant factor in the price of a pre-functional utility token until it transitions to being a functional utility token. The purchasers of a pre-functional utility token are, by and large, reliant on the efforts of the seller to develop functionality. These sellers have not yet expended their “essential” efforts. Those efforts are still required to deliver functionality, and therefore profit

Regarding the above, in my research I remember reading jurisprudence case law arguments that collapsing the “from efforts of others” into the “expectation of profit” prongs of the Howey test is not valid. So their argument above is compelling that once the token is trading then its free market driven price is susceptible to many market factors, not just the efforts of the developers of the decentralized ledger. I also confirmed with a securities attorney that the securities law generally gets out of the way when the free market is in control.

Although a similar argument could be formed about company shares trading on exchanges, being driven by many free market factors, the distinction being made above is that of a commodity wherein I had defined a commodity:

Commodities don't have to be physical. A commodity is defined to be a fungible good whose supply is not controlled by any one entity:

"A reasonably interchangeable good or material, bought and sold freely as an article of commerce."

"A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type"

"a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (as brand name) other than price"

[…]

Duh, Bitcoins are fungible, so they can qualify as a commodity. Non-fungible digital content such as MP3s can not be a commodity.

Proving ownership over a quantity of Bitcoins does require possession of a specific pattern of bits. Which is analogous to proving ownership over gold is having possession of a quantity of gold.

[…]

While it is true that shares of bearer stock equity certificates of an individual issuer company are fungible (i.e. there is no name associated with the certificates so they can be freely bought and sold), they are not divisible, not tradeable in an unregulated exchange markets, and are not a fungible money because the value of the stock fluctuates w.r.t. to the performance of the company, i.e. a form of 3rd party liability. Whereas, Bitcoin like gold has no 3rd party dependence, nearly infinite divisibility, trades on unregulated exchange markets.


Since tangibleness and perishableness are not properties that are shared by all commodities, then they are not attributes of commodities. To reiterate, commodities are fungible goods in which no one entity has control over the supply. They key attributes that distinguish commodities from other goods is that they are fungible and that their supply is not a 3rd party dependency, i.e. we don't depend on any one company to get pork bellies, but we do depend on Microsoft for supply of the Windoze operating system. And for money it is most ideal if the supply is inelastic, which is another minor reason Bitcoin is better than gold for money.

Another difference is that the capital appreciation of company shares are usually tied to a dividend expectation (as evident by the popular P/E metric), which obviously relies on the performance of the company to deliver. Whereas, if token pays no dividend, the capital appreciation is not likely coming mostly from the performance the developer if we’re only talking about maintenance upgrades. However, for significant protocol upgrades such as for example recent hype about various Ethereum developments, it’s not entirely clear that the expectation of profits is independent of Vitalik et al. Although one could possibly argue that the capital appreciation of Ethereum has been more do to the efforts of various free market ERC-20 ventures.

FinCEN has published guidance to clarify whether a person dealing in cryptocurrency (which it terms “convertible virtual currency” or “CVC”), would fall under the definition of a money transmitter. In its guidance, FinCEN has stated that users of CVC are not money transmitters, but those who both issue and redeem CVC (administrators) and those who exchange CVC for either fiat or other CVC (exchangers) who accept and transmit funds as a business would be deemed money transmitters.⁵⁴

[…]

Thus, FinCEN now arguably takes the straightforward position that a person can create a CVC and then sell it on its own account without being a money transmitter. The potential application of this reasoning to tokens is obvious. Yet, FinCEN has consistently maintained that “[a]n administrator or exchanger that (1) accepts and transmits a convertible virtual currency, or (2) buys or sells convertible virtual currency for any reason is a money transmitter.”⁶¹

Well selling on a FinCEN compliant exchange likely removes any culpability for being a money services business. Ripple was directly selling and buying virtual currency from various users which thus always makes them a MSB.

The Federal Tax Laws

Tokens, whether CVC or other kinds of blockchain tokens, are generally treated as “property” for U.S. federal income tax purposes.⁶³ Consequently, proceeds from a token sale (whether pursuant to a SAFT or a direct presale) are taxable to the entity⁶⁴ selling the tokens. […] Other taxes, such as sales taxes and the alternative minimum tax may also apply. […] This income can be offset with operating losses (if any) incurred in the year of the token sale (or prior to the year of sale, to the extent carried forward). In addition, the seller of tokens may be able to carry back to the year of sale operating losses incurred in the two years subsequent to the token sale to offset the income incurred in the year of sale.

The above could also be contrasted with a model where the investor instead invest in shares of company (or their own sole proprietorship in joint venture with other such entities) and receive back tokens earned by an app development company that earns tokens from users. In this case, the investment is tax-free (and the issuance of the tokens is not in any way connected to the investment shares), but if all the revenues are going to be paid out to individual contractors any way, then there is hardly any tax difference except for any sales tax and AMT.

If the SAFT so qualifies as a forward contract for tax purposes, then the transaction’s first taxable event does not occur until the tokens are delivered to the investors and the SAFT terminates.⁷⁸

Yet it seems they failed to note that since the token must be fully-functional, then it will have a market price and thus I think the SAFT investors have to pay income taxes for the difference between market price and the purchase price of tokens, because the market price value of the non-securitized tokens has been distributed to the SAFT investors, unlike in the SAFE (on which the SAFT idea was modeled) where a security is delivered and thus is perhaps not an immediately taxable event.

In short, the SAFT provides investors with the right to fully-functional utility tokens, delivered once the network is created and the tokens are functional. The SAFT is very likely a security, namely an investment contract. Once the tokens have been imbued with utility and are genuinely functional, the SAFT investors’ rights in the SAFT automatically convert into a right to delivery of the tokens. For the now-functional utility tokens, there is a very strong argument that the tokens themselves are not securities.
The same should apply to any ultimate sale of the tokens to retail purchasers, whether by the SAFT investors or by the seller.

So vaporware ICOs are securities. Fully-functional tokens if have sufficient free market factors other than just ongoing developer efforts, are probably not securities.

Moreover, since the tokens are not securities and the SAFT is non-transferrable, the investors do not, merely by purchasing the SAFT, risk being deemed underwriters if they resell their tokens.⁷⁵

⁷⁵ Investors are participants in the distribution of the utility tokens following conversion of the SAFT, but the token is not a security. Though the SAFT is a security, they do not distribute it. The definition of underwriter under the Federal Securities Laws is limited to the participation in a distribution of a security, thus SAFT investors need not fall within the definition or risk exposure associated with being deemed an underwriter. See Securities Act Section 2(a)(11), 15 U.S.C. § 77b(a)(11).

So by the above logic, a token which was issued and sold as a security (e.g. pre-functional vaporware ICO), would not necessarily become a non-security when it is sold by investors later when it is fully-functional and has sufficient free market factors other than just ongoing developer efforts, i.e. when the “from ongoing efforts of others” prong of Howey is no longer satisfied. Because the investors could be considered underwriters if they had not held the token for some reason other than to distribute it, which as I had pointed out upthread may require up to a 3 year hold before selling.

The separation of the issuance into a security that has rights for a token (instead of issuing a pre-functional token or promise) and separate issuance of the fully-function token is argued that the investors in the former (e.g. a SAFT) had no intention to distribute a security because the fully-functional token is argued to not be a security because it fails the “from ongoing efforts of others” prong of Howey. Whether the issue of the former security (which can be traded for a fully-functional platform token later) was legal is a separate issue, with for example EOS’ issuance being very suspect of not complying with securities regulations.

Some utility tokens, due to their particular facts or circumstances, may pass the Howey test despite being already-functional. How might this happen? In at least three ways.

First, a seller might weaken its defense against the third prong of Howey by selling tokens predominantly to purchasers who could never put the token to its intended use. This weakens the token’s position as a non-security because it eliminates the consumptive use defense entirely. That is, it concedes the “expectation of profits” prong. For example, consider a network that is only usable by members of a particular industry, like the apparel trade. Perhaps the network ensures genuineness of an article of clothing by tracking its provenance from fabric mill to design house to distributer to retailer , and the token acts as a unique per-item identifier.⁸¹ If the token’s sellers sold that token to the public at large, it would be highly unlikely that members of the public bought that token predominantly to use it. After all, a relatively small portion of the token-buying public operates fabric mills or apparel distributorships. Without more, a plaintiff could argue that token buyers made their purchases predominantly to profit, satisfying the third prong of Howey.

Regarding the above, someone had asked me if they could issue collectible cards in an ICO and I said not unless you only sell them to collectible card collectors and not predominately to investors in tokens. I said any disclaimers will not help, because Howey looks at the economic reality.

Second, a seller might weaken its defense against the fourth Howey prong when the seller significantly over-promises in its sales materials. In such a circumstance, the seller’s efforts to imbue the token with greater utility might still predominate the variety of other market forces acting upon the token’s price. A profit-seeking purchaser might predominantly rely upon the efforts of the seller, even post-functionality, where the seller makes bold promises of developing more sophisticated functionality beyond that present at issuance. Purchasers might rely on those promises and expect to profit from the resulting increase in functionality, thus satisfying Howey’s final prong.

Ah the above might even endanger the EOS Platform tokens as being securities!

A final policy benefit of a robust SAFT framework: Potentially eliminating the impetus behind the mass exodus of crypto developers to foreign jurisdictions. To be sure, the rise of token networks is a global phenomenon.

[…]

Put simply, this is a forfeiture of intellectual capital - a categorical loss for the U.S. and other countries like it, which seek to lead the world in technology innovation.







The SAFT wants to eliminate the utility token argument. Many tokens are NOT securitites and are more like metrocards and software licenses, however the SAFT doesn't care and essentially creates a securities where there is not. As Cooley admits, the token is often not the security while the SAFT always is. So then why add such a regulatory burden and why limit the amount you can raise and who you can offer to (only Accredited Investors (i.e. high net worth)? (rhetorical question)

Furthermore, what protections do the SAFT provide once the tokens are delivered? Are the tokens now treated as restricted securities, meaning that you must hold your tokens for a year or more before selling them? That seems like a major drawback for anyone buying tokens for short to medium term investing.

The quoted portion is ignorant and incorrect bullshit.

The SAFT white paper clearly explains that the SAFT is a way of avoiding issuing a pre-functional token, which is likely to be classified as a security. The functional token that is ultimately issued must be a non-security.

The SAFT shares are the security, not the token.
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October 13, 2017, 03:28:31 AM
 #26

The issue of airdrops revisited based on the arguments in the previously discussed newly issued SAFT white paper.
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October 18, 2017, 09:05:03 AM
 #27

https://www.coindesk.com/obvious-bubble-sec-committee-lashes-bitcoin-icos/

as exchanges tighten their KYC requirements and ban users from countries the U.S. govt doesn't approve (recent Bittrex account lock-ups for example, see the last 5 pages of https://bitcointalk.org/index.php?topic=463202.940)



I see Dan is making a legal argument for the EOS token sale not being a security, so he is essentially arguing that because they did not use the pooled funds for developing the software (which he claims are revenue for a software sale, not an investment in the future value of tokens). The Howey test will look beyond such obfuscations of the economic reality. The economic reality is the investors are depending on Blockone to provide the profit expectation for the tokens. I suppose analogous to the arguments for the SAFT, they’re thinking that the pre-functional tokens are securities (although they claim they’re not and are revenue) and the functional tokens at the time when Blockone is not running the nodes are not securities because Blockone as the common enterprise will have ceased doing the significant efforts. Even if courts and regulators agree with that logic, the pre-functional tokens are clearly securities (as are the shares of a SAFT) and they have clearly been promoted to and sold to USA investors. Also the USA is not the only country with securities laws. And the funds invested were pooled with Blockone regardless whether they used the funds or used prior funds. One of the arguments for the SAFT is that because the pre-functional shares are treated as securities, then the public-at-large (i.e. the non-accredited investors) are protected from the sort of fraud and insufficient disclosure that securities law is designed to protect. So Blockone did not adhere to the protections that would make the SAFT concept worthy to society and regulators, and instead sold the pre-functional token (as an investment contract!) willy-nilly. Dan was asked why they made the pre-functional token tradeable which adds evidence that investors buy it to distribute it as underwriters, and Dan basically gave a nonsense response. This sort of hair-brained stuff from Dan is what boggles my mind. I presume he is thinking that if they have enough money they can afford attorneys and buy off regulators or perhaps even lead an overthrow of the powers that be? In that case, even a $billion is not enough.

Dan’s response to the question about what assurances do buyers of the token have is very incriminating in my opinion. Basically he is admitting they have to obfuscate the economic reality to attempt to evade securities law. In the prior response he stated that they needed to create a distribution, so this implies there is an expectation that some group will launch the live network honoring that distribution, and then they mention they will use the $300 million to develop ecosystem infrastructure and apps, yet then they somehow disclaim that that will be connected with this spontaneous formation of a live network that honors the distribution of the formerly “useless token”. Dan tries to imply that the distribution is distinct from the Blockone common enterprise (which issued the distribution in a token sale) and that the common enterprise is just selling open source software token which anyone might or might launch into a live network, and thus implying Blockone would not be the issuer of the eventual live network tokens and also claiming they are not issuing a security for the pre-functional ERC-20 token. This is clearly a premeditated obfuscation of the economic reality. Buyers of the EOS ERC-20 tokens are clearly expecting the live network to honor their share and they are clearly basing their profit expectation on the efforts of Blockone to develop the software that will form the live network. The current speculative trading on EOS ERC-20 tokens on exchanges is clearly based around those expectations of the ongoing efforts Blockone must complete. What are their lawyers smoking? I want some of that shit.

My understanding is that the securities law attorneys who advise for example Blockone, are paid to provide a legal OPINION. This means their culpability is limited as long as they provided a reasonable justification for their opinion. Yet the culpability for breaking the law will rest on the principals of Blockone, not on the attorney. The attorneys could be fined or in the worst case dis-barred, but the criminal and culpability for returning the $300 million rests on the principals of Blockone and possibility any affiliates and underwriters complicit in the scheme which might include some of you shills in this thread.

Disclaimer: IANAL. This is not legal nor investing advice.
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October 25, 2017, 09:40:29 AM
 #28

'Wolf of Wall Street' warns raising money through ICOs is the 'biggest scam ever'

  • Initial Coin Offerings (ICOs) have become a primary means of fundraising for projects built on blockchain technology.
  • "It is the biggest scam ever, such a huge gigantic scam that's going to blow up in so many people's faces. It's far worse than anything I was ever doing," Jordan Belfort told the Financial Times in an interview published Sunday.
  • So far this year, ICOs have raised more than $3 billion, according to Coinschedule.com.
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December 08, 2017, 04:42:17 AM
 #29

Earlier in November I wrote about that the SEC Chairman Jay Clayton warned that he had not seen one ICO which he didn’t think had all the hallmarks of being a security. And I quoted others on the future of unregulated ICOs being bleak. I had also mentioned an upcoming Berkeley conference where SEC officials would participate in a discussion with some members of the crypto community.

Here is the update on the said conference.

The key point was the SEC reaffirmed what I had quoted previously from others (see above) that the SEC intends to regulate all ICOs within existing regulatory laws and not provide any grandfathering or new paradigms:

they focused on how to use existing regulations to hold compliant token sales and sidestepped nearly every question about the technology not covered by already existing regulations.

"People mentioned there was an elephant in the room that wasn’t addressed — you’re trying to fit a new technology into existing regulations ... instead of changing regulations to fit with the new technology," said organizer Ronen Kirsh.

And they will focus on fraud first, as evident by the first case filed against an ICO scam recently.

Clearly they’re going to have to focus on prosecuting the issuers, promoters, and underwriters (and delisting from centralized exchanges in jurisdictions they can control) but clawing back decentralized private key token ownership will be impossible:

Upon being asked one question about how they'd regulate decentralized exchanges -- a tricky proposition given that there is no entity against which to take enforcement action even if the exchange were to trade unregistered securities -- the four officials looked stumped. After a beat, the audience broke out into laughter.

So that explains why they will focus on clearly prosecutable fraud first, so they can penalize those issuers, promoters, and underwriters who were the key bad actors.

Also the one item they clarified doesn’t mean what most people think it means:

They did, however, answer one big question many had wondered -- whether tokens could automatically be deemed securities simply by virtue of whether or not they were listed on an exchange. The answer: no.

All they’re saying is that if a token isn’t a security when analysed by the Howey test, then it trading on an exchange doesn’t convert it into a security. But that doesn’t mean you can sell a token wherein the buyers have a profit expectation (or significant risk of capital loss per some State “risk test” laws such as California) and expect it isn’t security. For example, a SAFT issued token that launches the token dominated by free market effects (not developer/issuer effects) as explained by Hyperme.sh, would not be a security and thus its trading on an exchange would not make it a security.

The banned Hyperme.sh had already explained that the SAFT could perhaps prevent some tokens from being securities. At the said conference, it was clarified that the SAFT doesn’t allow the pre-functional tokens (aka the SAFT warrants) to be sold to non-accredited (aka not “sophisticated”) investors:

Jeremy Gardner, founder and managing partner of Ausum Ventures, pushed back, asserting the amount of risk the VCs take on is appropriate for them, but not for everyday investors. "Consumers shouldn’t be investing in white papers," he said, referring to the risk involved in investing in extremely early-stage ideas. He also noted that cautious practices like treating sales of future, pre-network tokens as securities via agreements called SAFTs (simple agreement for future tokens) "keeps consumers from being bamboozled." (When asked directly about SAFTs, Fallon referred the audience to the SEC's report on a sister agreement called a SAFE.)

SAFEs were designed for a specific type of startup.

SAFEs were developed in Silicon Valley as a way for venture capital investors to quickly invest in a hot startup without burdening the startup with the more labored negotiations an equity offering may entail.  Oftentimes, for the venture capital investor, it was more important to get the investment opportunity, and possible future opportunities, with the startup than it was to protect the relatively small investment represented by the SAFE.  In addition, the various mechanisms of the SAFE, from the triggering events to the conversion terms, were designed to best operate in the context of a fast growing startup likely to need and attract additional capital from sophisticated venture capital investors.  This may or may not be the case with the crowdfunding investment opportunity you are exploring.

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December 09, 2017, 12:06:48 AM
 #30

Quote
Also the one item they clarified doesn’t mean what most people think it means:

They did, however, answer one big question many had wondered -- whether tokens could automatically be deemed securities simply by virtue of whether or not they were listed on an exchange. The answer: no.

All they’re saying is that if a token isn’t a security when analysed by the Howey test, then it trading on an exchange doesn’t convert it into a security. But that doesn’t mean you can sell a token wherein the buyers have a profit expectation (or significant risk of capital loss per some State “risk test” laws such as California) and expect it isn’t security. For example, a SAFT issued token that launches the token dominated by free market effects (not developer/issuer effects) as explained by Hyperme.sh, would not be a security and thus its trading on an exchange would not make it a security.

Howey doesn’t apply to pre-orders: https://en.wikipedia.org/wiki/Pre-order#In_video_gaming

Because the video game industry pre-orders are not regulated as securities.

The quote reinforces my point: "They did, however, answer one big question many had wondered -- whether tokens could automatically be deemed securities simply by virtue of whether or not they were listed on an exchange. The answer: no."

It matters if the purchases are primarily for investment or use. The SEC will interview various purchasers to collect evidence.

Quote
The following sales do meet the requirements of the Howey test, but are not regulated as securities include: video game pre-sales, Kickstarter campaigns, crowdfunding, pre-sold sporting event tickets, concert tickets, clothing, etc.

Those are all (except crowdfunding) bought for use, not for investment. Those who are selling investments on crowdfunding instead of pre-sales of things for use, are regulated as securities and will get in trouble if they have not complied.

Quote
If a person has good intentions, is honest and upfront, works hard and produces a working product that the pre-order buyers profit from then the issuers have nothing to worry about. If the pre-sale causes massive losses for participants, then maybe the regulators will prosecute.

Regulators will prioritize prosecuting scams and frauds. But even if you do not cause any losses for anyone, a security is supposed to be regulated, so it is risk that your token could get delisted from exchanges in future.

Why not create a great game and market it and make a lot of money? Because you want a lazy way of selling bags to speculators. If so, then do not be surprised when the big boys are jealous that the little guys are stealing their monopoly on selling bags to greater fools.

Selling or pre-selling a game is not a problem. But if the customers are buying it to resell as an investment then you have a problem unless the free market factors dominate the investor’s expectation of profit. See why selling pre-functional tokens are bad in the discussion of the SAFT.

Quote
Collectibles such as baseball cards have been around for ages and are not regulated as securities.

Pay attention to what I wrote above about “unless the free market factors dominate the investor’s expectation of profit”.

As the banned @TPTB_need_war pointed out and the banned @Hyperme.sh pointed out about baseball cards, the issuer is not the dominant factor the investors are reliant on. Rather they are reliant on the baseball player’s future popularity, performance, etc..

An issuer of collectibles on a blockchain would be much better off to release an algorithm on a existing blockchain such as Crypto Kitties did, because if the appreciation of those cards is primary dependent on the issuer’s ongoing efforts then it will be a security under the Howey test.
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December 09, 2017, 12:11:54 AM
 #31

I do see the market push towards projects like polymath. They are a platform for issuing compliant security tokens on the blockchain. IMO I see the crypto world heading towards securities and that's why I'm planning on going in on polymath. https://www.bloomberg.com/news/articles/2017-08-30/it-s-about-to-become-even-easier-to-issue-blockchain-based-coins
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December 09, 2017, 12:16:33 AM
 #32

I do see the market push towards projects like polymath. They are a platform for issuing compliant security tokens on the blockchain. IMO I see the crypto world heading towards securities and that's why I'm planning on going in on polymath. https://www.bloomberg.com/news/articles/2017-08-30/it-s-about-to-become-even-easier-to-issue-blockchain-based-coins

Do note that Polymath will not help for legally issuing ERC-20 app tokens. Polymath is for tokenizing what would have been issued as a security anyway.

The key distinction being that it won’t help you side-step onerous regulations that make most app tokens impossible to issue legally.
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December 10, 2017, 02:59:24 AM
 #33

I see Dan is making a legal argument for the EOS token sale not being a security, so he is essentially arguing that because they did not use the pooled funds for developing the software (which he claims are revenue for a software sale, not an investment in the future value of tokens). The Howey test will look beyond such obfuscations of the economic reality. The economic reality is the investors are depending on Blockone to provide the profit expectation for the tokens. I suppose analogous to the arguments for the SAFT, they’re thinking that the pre-functional tokens are securities (although they claim they’re not and are revenue) and the functional tokens at the time when Blockone is not running the nodes are not securities because Blockone as the common enterprise will have ceased doing the significant efforts. Even if courts and regulators agree with that logic, the pre-functional tokens are clearly securities (as are the shares of a SAFT) and they have clearly been promoted to and sold to USA investors. Also the USA is not the only country with securities laws. And the funds invested were pooled with Blockone regardless whether they used the funds or used prior funds. One of the arguments for the SAFT is that because the pre-functional shares are treated as securities, then the public-at-large (i.e. the non-accredited investors) are protected from the sort of fraud and insufficient disclosure that securities law is designed to protect. So Blockone did not adhere to the protections that would make the SAFT concept worthy to society and regulators, and instead sold the pre-functional token (as an investment contract!) willy-nilly. Dan was asked why they made the pre-functional token tradeable which adds evidence that investors buy it to distribute it as underwriters, and Dan basically gave a nonsense response. This sort of hair-brained stuff from Dan is what boggles my mind. I presume he is thinking that if they have enough money they can afford attorneys and buy off regulators or perhaps even lead an overthrow of the powers that be? In that case, even a $billion is not enough.

Dan’s response to the question about what assurances do buyers of the token have is very incriminating in my opinion. Basically he is admitting they have to obfuscate the economic reality to attempt to evade securities law. In the prior response he stated that they needed to create a distribution, so this implies there is an expectation that some group will launch the live network honoring that distribution, and then they mention they will use the $300 million to develop ecosystem infrastructure and apps, yet then they somehow disclaim that that will be connected with this spontaneous formation of a live network that honors the distribution of the formerly “useless token”. Dan tries to imply that the distribution is distinct from the Blockone common enterprise (which issued the distribution in a token sale) and that the common enterprise is just selling open source software token which anyone might or might launch into a live network, and thus implying Blockone would not be the issuer of the eventual live network tokens and also claiming they are not issuing a security for the pre-functional ERC-20 token. This is clearly a premeditated obfuscation of the economic reality. Buyers of the EOS ERC-20 tokens are clearly expecting the live network to honor their share and they are clearly basing their profit expectation on the efforts of Blockone to develop the software that will form the live network. The current speculative trading on EOS ERC-20 tokens on exchanges is clearly based around those expectations of the ongoing efforts Blockone must complete. What are their lawyers smoking? I want some of that shit.

My understanding is that the securities law attorneys who advise for example Blockone, are paid to provide a legal OPINION. This means their culpability is limited as long as they provided a reasonable justification for their opinion. Yet the culpability for breaking the law will rest on the principals of Blockone, not on the attorney. The attorneys could be fined or in the worst case dis-barred, but the criminal and culpability for returning the $300 million rests on the principals of Blockone and possibility any affiliates and underwriters complicit in the scheme which might include some of you shills in this thread.

Disclaimer: IANAL. This is not legal nor investing advice.



Anyone care to address these issues here on Bitcoin Forum?

No product, no promises.

So only faith and a high market cap based on air (for now). And Dan Larimer who has launched two successful projects earlier (Steemit.com and Bitshares.com). People have faith in Dan. And the features of EOS.io may give ETH a run for its money.

The question is: do you have faith?

So expectations-of-profit for making an investment in “useless tokens” have been based on faith in Dan Larimer’s ongoing efforts. Sounds like an investment security under the Howey test.

And probable recycling fraud ongoing (also here and here) has been presented that perhaps the “useless” EOS token sale is being gamed in various ways., which the SEC has already indicated would be a priority for future enforcement action.


EOS is an unregistered security that was sold to some USA and EU investors illegally and it will eventually be delisted like all the other ICOs including Ethereum.

Investors are risking legal and criminal culpability for illegal selling on unregistered exchanges.

backseat lawyer by the way

Correct Steemit had Gary Ross a former US Treasury official advising them.

Testnet today, and Mike Novogratz mentioned EOS on CNBC, which means he probably has a position in EOS.  EOS ICO distribution is also more than half over.

Hmm. Another $billionaire involved as a promoter thus potentially culpable to SEC enforcement. Makes one wonder if the regulators are complicit (i.e. have been bought off)?



Create instead decentralized paradigms that avoid legal entanglement:

It is a myth that decentralized 'paradigms' make it possible to avoid legal entanglement.

Well they seem to render the vocal cords of SEC officials unable to speak.



I don't think it's a scam. These are all things that were stated or implied before the ICO.

It’s not strictly necessary for it to be fraudulent for it to be illegal under securities law.

But I bet the SEC can find some fraud and misrepresentation of material facts any way. They’re quite expert at digging out that stuff and even offer huge $millions bounties to those who will provide inside information to them.

Also given that they’re attempting to claim the token sale is not a security issuance, then they will also be subject to consumer protection laws as well. Those complicit in selling MLM bags to greater fools could I guess also possibly be culpable.

I mean basically get involved with something shady and do not be surprised when you end up in some troublesome shit.

And I hope nobody is spending their profits from all these token sales as clawbacks are potentially a threat. And then if you can’t pay back, you’re in deep shit.

So if you’re living in some banana or former-USSR republic, then completely disregard my statements and carry on suckering those in the first world nations into these hot potatoes.

You have got to be kidding me. EOS is not even close to being a security. It promises nothing in return and is an open source software that will be released. You sure wasted a lot of words and don't even understand what EOS is.

The securities law is based on the profit expectations of investors, not what EOS writes in their legal documents which do not reflect the economic reality of the situation.

Do you see Blockone actively ensuring that the EOS tokens will not have any value? Did they sue the exchanges to prevent the tokens from being listed?

Open source does not help them avert the securities regulations, because for one thing they pooled the funds raised and are expected by investors to use those funds to develop the open source.

The investors expectations are proven by the comments in this thread. All the SEC has to do is capture this thread. Note I have archived this thread at archive.is to help the regulators.

As far as US buyers using VPN to get around getting EOS tokens, 99% of other ICO's have allowed the same loophole. They gave the same warnings with even stronger language discouraging US buyers

Nevertheless, the US buyers side-stepped the controls and thus EOS (i.e. blockone) has likely violated the law.

Disclaimer: IANAL. This is not legal advice.

It will be epic if all those funds get frozen and clawed back. Let’s see which “partners in the silicon valley” take the risk of receiving black money and risk a 20 year felony prison sentence per the money laundering laws in the USA for accepting funding that was obtained via illegal activity.

Any other ICO format for a PoS coin would be literally idiocy.

You could have at least done the SAFT and limited it to accredited investors. Then at least you’d have some heavyweight legal research behind you.

But then of course you might not have received $300 million because you would need to know the identity of each person, do a background check, etc..

[…]

I read that EOS plans to show some auditing ostensibly to claim “proof” they were not buying token sales from themselves. But that can be subverted given that tokens were sold apparently without requiring identity checks. Thus it is easy to operate with ETH loans or other ETH the insiders have access to through sock puppets.

I wonder when more people will realize that EOS is a scam.

I couldn't find anything that suggests that EOS is a scam.

1. Claiming they are not subject to US securities laws because they claim they did not sell to US persons, yet it is documented that US persons did purchase the token sale. They refused to do KYC to prevent US persons from participating. Ditto for Chinese, Koreans, UK, Canadians, and other countries which have strict securities laws and are cracking down. So they incorporate in the Caymans and presumably expect to hide behind layers of lawyers. Let’s see how that works out for them and those accomplices affiliates like @chryspano.

2. Running the ICO for a year so they can pump hype about being ahead of schedule, cause the price to jump way up so they can sell, then let the price crash back down so they buy their own ICO. Recycling their money over and over again to extract maximum rents from the ecosystem while ending up with most of the ICO tokens for themselves via numerous sockpuppets same as they did for Steem. Running their tokens through Bitfinex in Hong Kong with that Tether et al scam that Brock Pierce is involved with so presumably they can obscure the disposals of the funds to fiat so as to obscure how their extensive organized crime syndicate is buying their own ICO. Look into the conglomerate structure of the parent companies of Bitfinex and climb down that rabbit hole. Even Dan announced in a blog that they would do this admitting in writing that he is scamming.

3. Documented upthread that the ICO is designed to be algorithmically gamed (details linked upthread) so that this is unfair. Dan was warned about this before launch and chose to ignore it.

4. Terms of the token sale claim that the tokens are not be part of any future software distribution, and that there is no common enterprise because the funds raised are not being used to create such a software distribution, yet in videos  and promotions they claim exactly the opposite that they are using the funds to develop what will be the software distribution. Clearly all the speculators here expect the tokens to be the tokens of the software distribution.

5. Lying about their technology. Ridiculing other experts (including PhDs of computer science from Tendermint, Vitalik, and myself) who write correctly about their technology.

6. Failing to admit that DPoS only functions properly if the stake (tokens) are controlled by an oligarchy of whales.

7. Lying about the past performance of the technology, even having their shills here declare me a liar when I point about that the Steem system has been DDoS attacked numerous times because the zero transaction fee nonsense does not fund the perimeter nodes of the system.

Actually I had always thought that Dan was genuine but just a bit weird/myopic in terms of his design choices and political-economic philosophy. But the premeditated sneakyfastmine of Steem (wherein he wrote a blog in advance announcing they would do that) to grab 50+% of the money supply for an oligarchy of whales caused me to start to doubt whether he was innocuous. But then I realized he did not have much choice because DPoS does not function properly with chaos in voting (he was frustrated the Bitshares governance was not working correctly to approve funding for some of the things he wanted to be worked on) and must be controlled by a like-minded group of whales. And Steem was somewhat interesting because it was the first experiment for onboarding the masses. And the first with a front-end interface and use case outside of just a wallet. So I rolled with it and used the lessons learned (such as my blog mathematically figuring out that voting from minted tokens of the collective can never be fair and must aggregate to the whales) there to guide my project plans. But the $2 billion “useless token” sale and all this distortion of the material facts while ridiculing others in the industry is way over the top and has lowered my respect for Dan even further into the gutter.

it seems the price will not rise high until the ico end

Ah I would not count on that. When BTC peaks, then there might be a lot of FOMO money spilling out into alts. And looking at major alts, there are not that many solid choices. So many speculators are perhaps going to look at ETH at $28 billion marketcap and EOS at $0.5B mcap, and somehow equate the two since EOS will have a first-mover advantage higher transaction volume capability (even though it is just vaporware and a lot of work to get to point that ERC-20 tokens are being issued on EOS someday).

Betting against FOMO-fever is not wise. It will all probably come crashing down someday, but probably not in 2017. I think the prior decline in price before the recent hype about accelerated progress, was probably the down move for 2017. Alts are about to catch a bid after mid-November.

EOS November 6 Technical Analysis and Price Cast, Elliot Wave and Trend Line

https://www.youtube.com/watch?v=-wTvuwrsMH8


Btw, that looks to be a good analysis. Looks very bullish short-term.
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January 12, 2018, 05:42:35 PM
 #34

And the ICO cease & desist orders begin:

https://techcrunch.com/2017/12/12/sec-shuts-down-munchee-ico/

And the European regulator is coming:

http://archive.is/heVFi

G20 coordinated regulation coming:

The international mood toward Bitcoin has continued to tighten, particularly with US Treasury secretary Steven Mnuchin stating that the G20 nations will begin working together to make sure that Bitcoin and other cryptocurrencies are properly regulated.

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