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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 - 9 (75%)
disagree (for reason stated in thread) - 3 (25%)
Total Voters: 12

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Author Topic: Future ICO Woes & Alternatives to ICOs for Fundraising  (Read 1837 times)
Fatoshi
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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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Hyperme.sh
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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
Last edit: October 10, 2017, 10:00:05 PM by Hyperme.sh
 #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
Last edit: October 23, 2017, 08:18:57 PM by Hyperme.sh
 #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
Last edit: October 21, 2017, 12:39:16 PM by Hyperme.sh
 #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
Last edit: December 09, 2017, 11:31:36 PM by CornCube
 #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
Last edit: December 09, 2017, 04:07:07 AM by CornCube
 #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
Last edit: December 10, 2017, 04:31:06 AM by CornCube
 #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
Last edit: January 21, 2018, 07:25:59 PM by CRED.me
 #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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