Legality of IPOing securities on GLBSE

[toffoo]

I'm curious if any legal experts here in the forum have an opinion on the legality of issuing Bitcoin securities on the GLBSE.

Activity is picking up over there since the GLBSE 2.0 release and some "real money" is starting to change hands, both in turnover and issuance, and the "deal calendar" seems to be heating up.

I'm in discussions with some others about hopping on the bandwagon and doing an issue of our own, but we're frankly a bit nervous about the legality and potential ramifications of doing an issue there, albeit virtual.

I am no securities lawyer, but I did work a number of years in the financial industry in both USA and UK as a registered representative, and I know that taking money from the public as an "investment" and offering "securities" in return is a highly regulated activity in pretty much every legal jurisdiction.

Now, I suppose that it can be argued that all these Bitcoins are just funny money, and these securities being issued in Bitcoins are just virtual and therefore don't count because they only exist in the cyberworld.  Any way you slice it, it's a bit of a grey area at the time being.  But whether or not this stuff violates the current letter of the law, it certainly appears to me to violate the spirit of the law.  Whether or not you consider Bitcoin a currency, or legal tender, or whether it has real value or not, consider this: if I went around offering unregistered investment securities to people, I think I'd eventually get locked up, irrespective of whether people paid me in U.S. dollars, Zimbabwean dollars, gold, or popsicle sticks!  The securities industry is right up there with the nuclear power industry in terms of sectors with the most government regulation, and I don't see how this stuff will avoid BigBrother's long arm for long.

I recently addressed these concerns with nefario (who runs the GLBSE) and he seemed to have a pretty relaxed attitude about it.  He said that while they try to avoid listing anything involved in obviously illegal activity, it is the responsibility of the issuer to determine the legality their securities issue in their own jurisdiction.  At this juncture, it's probably fair to say that none of the many existing GLBSE stock and bonds issues have been registered with the SEC, or sold with a prospectus (with the usual disclaimers), or paid the teams of investment bankers and securities lawyers the fancy coins necessary to get this done.  Running a securities exchange is also usually a highly regulated activity in the real world, but of course government regulation is basically nonexistent thus far in our virtual one.

This wonderful new technology, the invention of the distributed crypto currency, has opened the door to a number of activities that clearly straddle a grey area in our current legal systems, but in my opinion this business of issuing unregulated investment securities seems like the type of thing they'll bring the hammer down on, hard, sooner rather than later, exposing the issuers, investors, and/or exchange operators to significant legal risk ... especially if things go wrong.

Thoughts?

[gabbynot]

I couldn't agree more with all your concerns.  Reading thru some SEC guidelines here:

http://www.sec.gov/info/smallbus/qasbsec.htm#eod6

it appears that all of GLBSE's issuers are probably breaking some laws regarding unregistered securities if sold to US investors.  The specific securities may not technically have to be "registered", but they most certainly would need to provide offering statements.

I'm far from a securities lawyer, but I would agree that GLBSE will get some SEC attention at some point in the future.

[kronosvl]

the biggest problem is that glbse has at least 1 server in US. This was one of the most important legal argument for megaupload shutdown.
You can't exactly restrict US users, at most US tickers. But the server in US is a problem IMO.

edit: and .com could be a problem

[cbeast]

edit: and .com could be a problem

If the USA dictates dotcoms, then it can be moved to a domain not controlled by the USA. QED.

[Vladimir]

IANAL, but it seems that anyone who lost any money on GLBSE has a valid claim against someone, probably GLBSE (they potentially could be considered as UK agents of all the offshore issuers of "securities"). I take it if you are located in UK and lost anything on GLBSE you can ask FSA to make you whole (at expense of GLBSE, most likely). I would guess it is pretty much the same in most jurisdictions.

here is some fun reading:

https://www.google.co.uk/search?q=financial+promotion+act
http://www.legislation.gov.uk/uksi/2001/1335/contents/made
http://www.salans.com/en-GB/Locations/~/media/Assets/Salans/Publications/2006/20060407-Making-financial-promotions-in-the-UK.ashx (just random comment on the relevant legislation, no affiliation)

P.S. Argument that Bitcoin is not money or that it has no value and therefore you can promote unlawfully or illegally assets denominated in BTC is just silly.


P.P.S.

It is a criminal offence to fail to comply with the FSMA [Financial Services and Markets Act 2000], the enforcement of which is overseen by the Financial Services Authority

P.P.P.S.

any breach of the Financial Promotion Restriction can be punishable by an unlimited fine and up to two years’ imprisonment; and
the same penalties can be applied to all officers who have consented to the breach.

[Matthew N. Wright]

IANAL, but it seems that anyone who lost any money on GLBSE has a valid claim against someone, probably GLBSE (they potentially could be considered as UK agents of all the offshore issuers of "securities"). I take it if you are located in UK and lost anything on GLBSE you can ask FSA to make you whole (at expense of GLBSE, most likely). I would guess it is pretty much the same in most jurisdictions.

here is some fun reading:

https://www.google.co.uk/search?q=financial+promotion+act
http://www.legislation.gov.uk/uksi/2001/1335/contents/made
http://www.salans.com/en-GB/Locations/~/media/Assets/Salans/Publications/2006/20060407-Making-financial-promotions-in-the-UK.ashx (just random comment on the relevant legislation, no affiliation)

P.S. Argument that Bitcoin is not money or that it has no value and therefore you can promote unlawfully or illegally assets denominated in BTC is just silly.


P.P.S.

It is a criminal offence to fail to comply with the FSMA [Financial Services and Markets Act 2000], the enforcement of which is overseen by the Financial Services Authority

P.P.P.S.

any breach of the Financial Promotion Restriction can be punishable by an unlimited fine and up to two years’ imprisonment; and
the same penalties can be applied to all officers who have consented to the breach.

Silly Vladimir. Didn't you hear? Bitcoin is fake money (as long as the government is the one asking, otherwise it's real money tomorrow when someone important asks).

[matthewh3]

Eventually shit will hit the fan in one way or another. There are several outcomes I can think of:

1. It gets shut down.

2. It continues to operate on a semi-illegal basis being constantly bombarded by legal bullshit. (similar to thepiratebay)

3. It transitions to a TOR hidden service and fully embraces illegality. Invest in cannabis grow operations today!

I hope for point 2, but 3 would be entertaining to watch as well.

I've already asked Nefario for an I2P "eepSite" and a Tor ".onion" site and he was up for it.

[alatus]

.bit domain wolud be a secure minimum, but eepsite is definitely better. +1 for it!

[mc_lovin]

edit: and .com could be a problem

If the USA dictates dotcoms, then it can be moved to a domain not controlled by the USA. QED.

may I recommend..

.ca!!

[davout]

watching

[jgarzik]

I am no securities lawyer, but I did work a number of years in the financial industry in both USA and UK as a registered representative, and I know that taking money from the public as an "investment" and offering "securities" in return is a highly regulated activity in pretty much every legal jurisdiction.

In the USA, JOBS Act that relaxes these requirements significantly, both WRT investor requirements and in solicitations you may make.

IMNSHO, USA just legalized GLBSE on April 5, 2012.

Now, I suppose that it can be argued that all these Bitcoins are just funny money,

Irrelevant.

and these securities being issued in Bitcoins are just virtual and therefore don't count because they only exist in the cyberworld.

No, the GLBSE securities are not "issued in bitcoin."  A security is a thing, a unique and independent legal entity.  That GLBSE makes it easy to buy and sell with bitcoins is incidental; GLBSE could just as easily use USD or EUR or gold or bananas.

If GLBSE tightens up its boilerplate and some requirements (i.e. investor limit), it is quite possible that an IPO on GLBSE could be a fully legal security in the US.


In general, even excluding securities law, GLBSE could create contracts between all market participants, where everyone has a click-through agreement (==contract) describing basic rules.

[DeathAndTaxes]

I don't think GLBSE is in violation of the law or at least not yet.

The determination if a security exists (and thus is subject to regulations of selling and promoting a security) is the Howey Test:

http://en.wikipedia.org/wiki/Securities_and_Exchange_Commission_v._W._J._Howey_Co.

Murphy then formulated one of the U.S. Supreme Court’s earliest tests to determine whether an instrument qualifies as an "investment contract" for the purposes of the Securities Act (which later came to be referred to as the Howey test):
* investment of money due to
* an expectation of profits arising from
* a common enterprise
* which depends solely on the efforts of a promoter or third party

Is Bitcoin money?  Has any US court given an opinion that Bitcoin IS money?

If the SEC was to try and indict the operators of GLBSE they would need to show that Bitcoin is money.  If it isn't money then it isn't a security.  For example in the game "Eve Online" corporations exist and they control assets sometimes massive amounts of assets who's market value is in the tens of thousands of dollars.  I doubt that SEC would find that those corporations would need to issue shares.  Any profits intended or realized aren't money.

On crowdfunding & the Jobs Act yes the law will loosen regulations.  The SEC hasn't written those regulations yet and almost certainly the regulations while "loose" compared to current regulations will still be "significant".  There will requirements related to KYC, AML, limits on funding, limits on number of investors, due diligence requirements on the exchange, surety bond requirements, licensing requirements, etc.

In other words driving down the cost of an IPO from tens of millions to tens of thousands.  I don't see that helping GLBSE or at least not until Bitcoin is significantly bigger.

[Stephen Gornick]

IANAL, but it seems that anyone who lost any money on GLBSE has a valid claim against someone,

I wonder if some of these listings, even though they are structured as "shares" of "assets", are no different than a normal contract between two parties.   Party A can contract with Party B to buy some GPU hardware and apply electricity where then party A receives the agreed upon net results of that activity as "dividends".

I too am not a lawyer and won't even speculate as to whether or not a regulator would or could do anything for someone who lost funds "investing" in an "asset" on GLBSE.  Following is a recent example of where the UK and the U.S. (SEC) went after fraud by an online business operating from the UK.  The SEC asserts jurisdiction because:

Conduct by the defendants occurring outside the United States had a foreseeable substantial effect within the United States.

 - http://www.onwallstreet.com/news/stock-picking-SEC-2678481-1.html?zkPrintable=1&nopagination=1
 - http://www.sec.gov/litigation/complaints/2012/comp-pr2012-72.pdf (SEC complaint)

Of course, this was an easy case for the agency -- there was evidence of pump and dump fraud occurring, the fraudsters misrepresented what they were doing and didn't disclose their positions to their customers, they weren't licensed brokers, etc.  

Consider something like SATOSHISDAEMON "asset" on GLBSE.  If the horse doesn't perform well enough the "asset" share price will drop, potentially resulting in a complete loss of funds.  Offering this "investment vehicle" to the public might be in violation of securities regulations in certain jurisdictions.  But I doubt a complaint to the SEC in hopes of recouping losses would result in much of anything in response, nonetheless the agency going in to try and "disgorge" funds from anyone.

As far as being able to use the legal system for relief would, I suspect, make the words in the contract for the "asset" really important.  There is no such legal concept of having a share of a "project".  (Thank Kickstarter for spreading that type of thinking.)  So let's say a programmer has this idea, say to develop a bot that will do market arbitrage, and then creates an "asset" on GLBSE-- there doesn't seem to be anything the shareholder has a claim to.  Slavery is illegal, and illegal contracts are unenforceable using the law so a "shareholder" has no valid claim against the programmer's assets or income (including profits or revenues from any other projects the programmer might be involved in).

So the more important question probably isn't "Is it legal to IPO and be listed on GLBSE" the better question is, why would anyone be an investor in a "security" where there's nothing real that is owned?

[cbeast]

I am so sick and tired of people being afraid of what might happen. Does anyone think that the inside traders that steal trillions care about getting caught? Bitcoin is an open ledger, so there is always at least some transparency. Regulators should be thanking Nefario for showing us the future of investment structures.

[Stephen Gornick]

But I doubt a complaint to the SEC in hopes of recouping losses would result in much of anything in response, nonetheless the agency going in to try and "disgorge" funds from anyone.

Looks like there are a few factors that make a huge bit of difference as far as what action, if any, a regulator might take.

For instance, where is the exchange?  With GLBSE, they've acknowledged a proxy server being located in the U.S..   Does that make it a domestic transaction if the investor is in the U.S.?   It might be arguable that a rational person would believe that this proxy meant that the transaction occurred within the U.S..

Another factor is is the location of the company ("asset", as GLBSE describes it)?

Perhaps a listing for a "company" that is located in the U.S. might be something that would concern a regulator whereas a listing for a GLBSE asset located outside the U.S. would not, regardless if a U.S. investor was defrauded.

And where is the investor from?  So apparently, foreign investors who buy shares in a U.S. company but make the share purchase outside the U.S. are not entitled to protection by the SEC, even if fraud had occurred (that's if I am understanding the Morrison decision correctly):

"Study on the Cross-Border Scope of the Private Right of Action Under Section 10(b) of the Securities Exchange Act of 1934"
 - www.sec.gov/news/.../929y-study-cross-border-private-rights.pdf
 - http://www.sec.gov/news/speech/2012/spch041112laa.htm

[PatrickHarnett]

I deal with securities, have done a registered prospectus for a venture, and raised money from the "public".  Fortunately I am not in the US, but there are a number of interesting cross-border issues.  However, Bitcoins are still monopoly/play money as far as most jurisdictions are concerned.  You can't pay taxes with them, and acceptance is very limited.  At this stage, it is not illegal because it's more like an online game than a regulated activity.

I would like to provide a counter example - did you know that Neopets.com has a stock exchange?  (neopets.com was at one stage in the top five internet sites - no idea where it is now)  I had some interesting discussions with my daughter about portfolio tracking, day trading and risk when she was playing with it.  Yes, you can invest real money because people can sell neopoints.  Issuing securities to children (minors) in an unregulated exchange is far worse than GLBSE (that's mock horror by the way)

(I also notice via a google search that Second Life has a stock exchange)

[Nefario]

Never heard of Neopets

[bearbones]

Thinking about a GLBSE IPO. Will probably do it despite any fraudulent claim any government makes to control what I do with my work.

Speaking of 'any government', what claim does the SEC have over GLBSE? If a company registered in a friendly country goes through an IPO on GLBSE, which is not based in the U.S. either, why should they care? Scratch that. Policemen of the world and all that. Why should we care?

[PatrickHarnett]

Never heard of Neopets

That means you were not aged 10 in 2004.

As at now, they have over 13,000 members online and 276 million pets - that stat is right next to their stock exchange index!

[theymos]

I would like to provide a counter example - did you know that Neopets.com has a stock exchange?  (neopets.com was at one stage in the top five internet sites - no idea where it is now)  I had some interesting discussions with my daughter about portfolio tracking, day trading and risk when she was playing with it.  Yes, you can invest real money because people can sell neopoints.  Issuing securities to children (minors) in an unregulated exchange is far worse than GLBSE (that's mock horror by the way)

The Neopets stock exchange is nothing like a real stock exchange. The stocks are for fictional companies, and the prices fluctuate randomly according to certain probabilities per stock, without regard for actual supply and demand. It's just gambling.

IIRC Neopets has had some legal trouble involving anti-gambling laws, but it's against their ToS to buy/sell neopoints, so I guess it's legal.