Legality of IPOing securities on GLBSE

[ribuck]

IIUC, the very basics of contract law require only agreement between legally recognized entities: a natural person, or an incorporated entity (corp, partnership, etc.)

For what it's worth, a partnership is not an incorporated entity. Perhaps you are thinking of a limited liability partnership (LLP).

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[Bitcoin Oz]

http://www.bankrate.com/financing/banking/can-facebook-compete-with-banks/  I wonder if you could create a facebook share market game ?

[Stephen Gornick]

So here's an example of a situation relevant to this conversation:

BTCSYN reports a $12k (1,852 BTC) theft
 - http://bitcointalk.org/index.php?topic=92142.0

BTCSYN is a GLBSE asset, with multiple people (from Canada) listed as being the asset issuer.

So the "CEO" had $12K USD of [the "company"'s] funds on Mt. Gox, didn't have two-factor authentication enabled, and the funds got stolen.

A day or so later, shares were dumped on the exchange and currently GLBSE has halted trades for the asset.

And now, there are pissed off "investors".

If BTCSYN was an LLC or corporation and suffered this loss, it might consider liquidating, and returning whatever is left to the shareholders and that's that  (except, if there were some lawsuit for negligence, but that's a separate concern).

So here, you have multiple people that received money from the IPO.  If there were a "shareholder" suit filed, it would go after those named as the issuers.  I'm not a lawyer and have no idea how such a suit would be decided.  I'm not even asserting that the "shareholders" try to take this through the legal system -- the amounts are too small for an attorney to take this on contingency, and the "shareholders" are likely from many different jurisdictions.

There will be a day where the party (or parties, in this instance) that "issued" an asset on GLBSE finds themselves faced with a court case.

[kiba]

So the "CEO" had $12K USD of funds on Mt. Gox, didn't have two-factor authentication, and the funds got stolen.

Ouch! Such an elementary mistake and shame on investors not doing their due diligence.

[Bitcoin Oz]

So the "CEO" had $12K USD of funds on Mt. Gox, didn't have two-factor authentication, and the funds got stolen.

Ouch! Such an elementary mistake and shame on investors not doing their due diligence.

Its hard to know the truth in that case. Hard to prove whether the coins were stolen or simply withdrawn by the account owner. No way to tell really.

[Stephen Gornick]

For what it's worth, a partnership is not an incorporated entity.

With a "company" on GLBSE being unincorporated, do those buying "shares" of the asset become partners then?

Partners are jointly and severally liable for debts, right?  So let's say I buy a share of a mining asset (not a bond, let's say, but described instead as owning a share of the mining operation), and the mining operator did a bad job with the electrical wiring, someone gets injured and sues successfully.   Am I now liable for that debt?  (I'm not talking limited up to the $5 that the share was worth, I'm referring to actually getting named in a suit having to defend myself as a partner in this mining operation.)

Is this one of the possible outcomes?

[sunnankar]

With a "company" on GLBSE being unincorporated, do those buying "shares" of the asset become partners then?

Partners are jointly and severally liable for debts, right?  So let's say I buy a share of a mining asset (not a bond, let's say, but described instead as owning a share of the mining operation), and the mining operator did a bad job with the electrical wiring, someone gets injured and sues successfully.   Am I now liable for that debt?  (I'm not talking limited up to the $5 that the share was worth, I'm referring to actually getting named in a suit having to defend myself as a partner in this mining operation.)

Is this one of the possible outcomes?

Not likely. There would probably need to be a partnership agreement formalizing the partnership, rights, duties, responsibilities, etc.

If anything the GLBSE issues are creating personal debts for the issuers which would be tied to the identity of the documents submitted. Of course, if there is identity theft then the victim would not be liable.

[Stephen Gornick]

Not likely. There would probably need to be a partnership agreement formalizing the partnership, rights, duties, responsibilities, etc.

So in the absence of a formal agreement there wouldn't be a default classification for these?   This surely is something that has been seen. This wouldn't be the first time multiple people unknown to the entrepreneur have put money in towards a venture, without any formal legal structure being formed first.

[Stephen Gornick]

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.

Prescient:

Nefario has, without a shareholder motion and in violation of the bylaws and GLBSE ToS, decided to close down GLBSE.
[...]

He is also illegally using user deposits to pay for his lawyer.

[...]

Since Nefario refuses to give complete details about his legal concerns and he has been acting strangely, I feel that it is somewhat possible that Nefario is working under some sort of plea bargain and is gathering IDs for future prosecution.

[toffoo]

This thread has taken some interesting twists and turns, but it seems we can now end this thread exactly where we probably should have seen coming from the very beginning:

GLBSE has been closed

I'm sorry to inform all our users that GLBSE is no longer able to continue operating, and has now closed.

Q: What does this mean if I'm an issuer?

We will do everything in our power to make the process of moving off GLBSE as smooth as possible, we are currently working on a simple, safe, and easy to use method that will allow you to continue your relationship with your asset holders

Q:I'm a GLBSE user, what about my assets and my bitcoin?

You will be able to get back your bitcoin, and if you want to reveal your username, email, and a bitcoin address to accept payments with, you can continue your relationship with the issuer of any assets you hold.

We will begin retuning bitcoin once we have recieved all coins from the GLBSE treasurer that manages the GLBSE cash reserves. BitcoinGlobal (GLBSE's partent company) shareholders and board voted for them to be returned immediately, we are awaiting compliance with this order.

Unfortunately I did not have the foresight to completely protect myself from these kinds of risks, and now, like many others around here, I will be suffering at least a short-term or probably permanent loss on our investments at GLBSE.

[Vladimir]

Those accusing Nefario in breach of "GLBSE bylaws" perhaps should also get familiar with this contract law concept http://en.wikipedia.org/wiki/Illegal_agreement

[rebuilder]

Those accusing Nefario in breach of "GLBSE bylaws" perhaps should also get familiar with this contract law concept http://en.wikipedia.org/wiki/Illegal_agreement

Not really relevant. The accusations were not made in the context of planning legal action, but in the context of determining community action.

[cbeast]

IANAL, but I don't get the problem here. Nefario is not dealing with any country's legally defined currency. How is GLBSE any different than FB games or MMORPGs? It seems to me he is just being hassled by schmucks that don't like games without fairies and epeens. I don't see them shutting down Eve or WoW for all the scams they have. Sure, he may be indicted, but he may also be acquitted, amirite?

[Peter Todd]

IANAL, but I don't get the problem here. Nefario is not dealing with any country's legally defined currency. How is GLBSE any different than FB games or MMORPGs? It seems to me he is just being hassled by schmucks that don't like games without fairies and epeens. I don't see them shutting down Eve or WoW for all the scams they have. Sure, he may be indicted, but he may also be acquitted, amirite?

Because they're advertised as games, and the developers running them don't officially support full convertibility of the in-game credits  to and from fiat. Even then lawyers are looking into the extent to which securities laws and anti-money-laundering laws apply to virtual games, for instance "AML Magazine - Only in the Virtual World" http://www.amlmagazine.com.au/amlwr/_assets/main/lib90004/only%20in%20the%20virtual%20world_issue%2031_dec11.pdf

You know, you can break securities laws and anti-money-laundering laws by trading in commodities or other valuable items too. For instance it's been suspected that many of the sky-high prices seen in the international fine-art market, and the plethora of anonymous buyers, are actually due to the ability to store and transfer wealth through art, or even straight-up money laundering schemes.

No court is going to believe Bitcoins aren't valuable if them being valuable serves the purposes of a securities fraud investigation.

[cbeast]

IANAL, but I don't get the problem here. Nefario is not dealing with any country's legally defined currency. How is GLBSE any different than FB games or MMORPGs? It seems to me he is just being hassled by schmucks that don't like games without fairies and epeens. I don't see them shutting down Eve or WoW for all the scams they have. Sure, he may be indicted, but he may also be acquitted, amirite?

Because they're advertised as games, and the developers running them don't officially support full convertibility of the in-game credits  to and from fiat. Even then lawyers are looking into the extent to which securities laws and anti-money-laundering laws apply to virtual games, for instance "AML Magazine - Only in the Virtual World" http://www.amlmagazine.com.au/amlwr/_assets/main/lib90004/only%20in%20the%20virtual%20world_issue%2031_dec11.pdf

You know, you can break securities laws and anti-money-laundering laws by trading in commodities or other valuable items too. For instance it's been suspected that many of the sky-high prices seen in the international fine-art market, and the plethora of anonymous buyers, are actually due to the ability to store and transfer wealth through art, or even straight-up money laundering schemes.

No court is going to believe Bitcoins aren't valuable if them being valuable serves the purposes of a securities fraud investigation.

Most of the GLBSE businesses were worth at most a few thousand bucks. It isn't worth the time of anyone to prosecute anything. Boys-night-out poker games move more money than most GLBSE IPOs.  Money laundering? What money? Sorry, I don't believe this is a legitimate threat. We'll have to wait until Nefario tells us what is happening. In the meantime, the next generations of decentralized exchanges will evolve and that will be the end of threats from government bullies.

[Peter Todd]

Because they're advertised as games, and the developers running them don't officially support full convertibility of the in-game credits  to and from fiat. Even then lawyers are looking into the extent to which securities laws and anti-money-laundering laws apply to virtual games, for instance "AML Magazine - Only in the Virtual World" http://www.amlmagazine.com.au/amlwr/_assets/main/lib90004/only%20in%20the%20virtual%20world_issue%2031_dec11.pdf

You know, you can break securities laws and anti-money-laundering laws by trading in commodities or other valuable items too. For instance it's been suspected that many of the sky-high prices seen in the international fine-art market, and the plethora of anonymous buyers, are actually due to the ability to store and transfer wealth through art, or even straight-up money laundering schemes.

No court is going to believe Bitcoins aren't valuable if them being valuable serves the purposes of a securities fraud investigation.

Most of the GLBSE businesses were worth at most a few thousand bucks. It isn't worth the time of anyone to prosecute anything. Boys-night-out poker games move more money than most GLBSE IPOs.  Money laundering? What money? Sorry, I don't believe this is a legitimate threat. We'll have to wait until Nefario tells us what is happening. In the meantime, the next generations of decentralized exchanges will evolve and that will be the end of threats from government bullies.

Well, you're absolutely right for the most part, and that's also why online MMORGs don't receive more attention. But keep in mind that people working in these bureaucracies want to show that they're relevant and on the cutting edge of whatever they do - going after new tech can be one way to do that. Also, this comes after Pirate's ponzi has collapsed, and the allegations about how much money was lost in that scam - half a million USD - are for an amount large enough to warrant an official investigation. There is another incentive too: testing the waters. Pirate involved enough money to make some sort of investigation worthwhile, and the people doing that investigation may very well figure it'd be worth going all the way to get some practice before an even bigger scam comes along. It'd also be quite conceivable to give the investigation to a new, junior, officer to both give them some experience, and evaluate their performance before something important comes along.

Heck, I once probably experienced this myself while waiting in the international departure lounge in a country for which I had citizenship for, waiting for a direct flight to a different country for which I also had citizenship for. I was stopped by two officers for what they said was a random customs interview. One officer looked to be in his 50's or 60's, and his name tag said something along the lines of "senior" or whatever, and the other one looked like he was 18 or so. I gave them both my passports and my ticket, obviously showing that neither country could prevent me from entering, and the younger officer proceeded to grill me for the next ten or fifteen minutes about my trip in the exact same way you get entering a country when they're not sure if they're going to let you in.

After that was over, I overheard the older officer discussing his interviewing technique with the younger one...

[niko]

Found on the Internet:

Corporations sell stock to raise capital for many reasons – expansion, new technology, and more.  There are federal laws associated with issuing securities that you need to understand before you print out a bunch of stock certificates and hand them over to someone.
(snip)
In most instances, when you issue stock to yourself, your family, or a few partners, then securities laws to not apply.  You can sell stock to a small group of people without advertising and take advantage of the private offering exemption.

You still have to limit the number of people who have the opportunity to invest in the stock and the stocks cannot be used for immediate resale to other investors.
(snip)
Because the government wants small business to grow, the SEC has made it easier for small companies to get exemptions for selling stock. They developed SEC Rule 504, 505, and 506 to set up the small offerings exemption.

Rule 504 states that you can be exempt if you offer securities of up to $1 million in a 12-month period to any number of investors without providing specific information.

Rule 505 says that you can offer up to $5 million of stock in a 1-year time span, but you can’t use advertising and the investors are limited to a total of 35 non-accredited investors with no limit on accredited investors.

[niko]

^ relevant comment from D&T in another thread:

I would just caution anyone thinking Reg D (Sec rules 504-506) is an easy loophole to think again.  It is a legal mine field and in the US one is subject to both federal securities law and state securities law.  If the company is in VA, the potential investor is in NJ then that is three sets of securities laws (Federal, NJ, and VA) that the offering needs to be compliant with.   Often the states have incompatible requirements.  In VA for example it is simply defacto impossible to offer anything under Rule 504 due to the way the federal and state regulaitons conflict.  Lastly I would point out that Reg D is intended for PRIVATE securities.  Running a trading exchange is going to blow any cover under Reg D wide open.

Generally Reg D really only makes sense if you are looking to raise $5M or more in equity because because the legal and regulatory costs you are going to spend a couple hundred grand just getting the offering off the ground.  Hopefully the "crowdfunding" provision of the Jobs Act will make it easier to RAISE capital but it was never intended to allow to make it as easy as "ebay for stocks" or allow any type of public trading.

[cbeast]

Found on the Internet:

Corporations sell stock to raise capital for many reasons – expansion, new technology, and more.  There are federal laws associated with issuing securities that you need to understand before you print out a bunch of stock certificates and hand them over to someone.
(snip)
In most instances, when you issue stock to yourself, your family, or a few partners, then securities laws to not apply.  You can sell stock to a small group of people without advertising and take advantage of the private offering exemption.

You still have to limit the number of people who have the opportunity to invest in the stock and the stocks cannot be used for immediate resale to other investors.
(snip)
Because the government wants small business to grow, the SEC has made it easier for small companies to get exemptions for selling stock. They developed SEC Rule 504, 505, and 506 to set up the small offerings exemption.

Rule 504 states that you can be exempt if you offer securities of up to $1 million in a 12-month period to any number of investors without providing specific information.

Rule 505 says that you can offer up to $5 million of stock in a 1-year time span, but you can’t use advertising and the investors are limited to a total of 35 non-accredited investors with no limit on accredited investors.

Except on Tuesdays... When it's dark, you can give up to... and then Spock gives you a Vulcan nerve pinch.
Boy do we need Bitcoin.

[Stephen Gornick]

I wonder if the mining bonds and some mining-related assets would be not classified as securities.

 - http://cuttingedgecapital.com/diamonds-gold-and-capital-raising-how-to-fall-outside-the-securities-laws-in-california/

In Moreland v. Department of Corporations, the court found that the sale of gold ore and a contract to refine the ore was not a security under the risk capital test

Isn't that what those "bonds" are?    Aren't those "shares" really just contracts to run electrons through computing hardware?