6 ms·

The Colony token sale would have been committing securities fraud

77 points by sjcsjc 9y ago

sjcsjc 9y ago
Interesting discussion of the legalities. They say they're not doing the sale until they have a fully functioning platform that relies on tokens to function.
- proofofstake 9y ago
  But that's putting the cart before the horse. You need the ICO to get enough investment to build out your platform, when you have a fully functioning platform, who still needs investment? And if a platform is a prerequisite: Just build the barest possible platform MVP, much like a pre-launch landing page.
  - AndrewKemendo 9y ago
    His point is that token sales aren't investments in the sense that you are talking about because that would, in his words, be securities fraud. The token is a "currency" that people are buying into through some exchange rate to participate in a market with token denominated currency.
  - femto113 9y ago
    When you have $250,000,000 with no clear nor enforceable legal obligation to the people who gave it to you, who still needs a fully functioning platform?
    - rwallace 9y ago
      Hopefully ethics will prompt most founders to make a good-faith attempt to deliver value for money, but in case anyone is tempted otherwise, bear in mind that the legal obligation may turn out to look much more clear and enforceable in court than it does on HN.
zekevermillion 9y ago
First, I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise. If the protocol is already specified, and the token has clear utility. I don't know if that's the case here, but just taking the article at face value. Second, even if a particular token represents a security, offering it to the public is not "securities fraud" in and of itself. Fraud is a material misstatement or omission. What the author is talking about would be an unregistered securities offering, which if no exemption is available, would be illegal. Illegal but not necessarily fraudulent per se. This is not to say that Colony should have an ICO. I don't know anything about their specific case. But this article is not useful to anyone else trying to make a similar decision.
- collinvine 9y ago
  > I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise Are you a lawyer? Because it wasn't the opinion of the author; it was the opinion of their lawyers. > offering it to the public is not "securities fraud" in and of itself. Right. In the US, you can abide by the new-ish JOBS act for crowdfunding from non-accredited investors. You'd be selling a security. The problem with token sales is that they are trying _not_ to be securities. This may not be "fraud", but it is likely in violation of securities laws. > this article is not useful to anyone else trying to make a similar decision. The takeaway is that no project going forward should do a pre-functional token sale.
  - zekevermillion 9y ago
    Yes, I'm a lawyer. I'm not your lawyer though. And it doesn't matter -- even non-lawyers are capable of reasoning about legal topics. You do not appear to be a lawyer, yet you have an opinion. The takeaway from this article is just wrong, b/c it implies that the SEC thinks token presales are all inherently fraudulent. That is not correct. Many ICO's are illegal securities offerings, probably. And many are also fraudulent. These two things often overlap. They are not equivalent though. Howey is a FACT DEPENDENT TEST. That means, if you are planning any kind of token offering, you have to get advice about your specific circumstances. As a heuristic, "stay away from ICOs" is pretty solid. No one will be harmed by this. Many people will be harmed by participating in crappy ICOs, either as promoters or buyers. However, HN is a forum for technical discussion, and I'm criticizing the technical basis of that article.
mattbeckman 9y ago
I understand the why, but ICO regulation is shifting the power of crypto from anyone (low-, middle-, upper-class) into upper-class only. For example, the Filecoin ICO for U.S. participants was restricted to accredited investors, which required a proof of income above $200k/year. Obviously, ICOs are risky, and we can all see why someone with less income probably shouldn't invest as much money as someone making over $200k. However, preventing someone in a lower income bracket from making ANY investment feels like economic stratification.
- beepboopbeep 9y ago
  As if the power of crypto doesn't lie in those that can afford server farms.
- jMyles 9y ago
  I assert that this is the entire point of all economic intervention by the state.
- the_stc 9y ago
  Yep. And then Filecoin doesn't even sell equity! It's gross. With our company we're trying to do right by investors. We're completely in violation of the SEC memo. In fact, that's what galvanized us to 100% offer shares instead. We were going to do it before, but the SEC really set us straight: If we're going to be in violation of regulations we might as well make the most of it.
  - Sangermaine 9y ago
    Are you saying that instead of an ICO, you've now decided to do an unregistered share offering, and you're knowingly doing this in violation of the law? You do realize you can face criminal penalties for this, right?
    - wmf 9y ago
      Based on previous comments it sounds like their business is fundamentally illegal anyway (prostitution?) and thus it's pointless for them to comply with SEC regulations. But this approach doesn't generalize.
s73ver_ 9y ago
So, what do you do with these "tokens" once you've bought them? Let's say I get 10 tokens. What happens then?
- wmf 9y ago
  They go up ~10x (don't ask why; you don't want to know) and then you sell them.
erikb 9y ago
In a high risk game like this, where the rules are actually not established yet, you always risk going to jail. No amount of lawyers can protect you. The only safety is marching forward quickly so you will be one of the top three players in this game. Number one will make the profit, number two will find a way to live, number three will be bought be either no 1 or no 2. However if you lack behind so far, that you are nuicance but don't have any real market share, you actually just need to get rid off. So what they are doing is the opposite of what they should be doing. They should invest their money and grab market share, get as many investors on board as possible, fine tune their market strategy and technology so they can beat whoever they consider competition. Short: They should earn their place at the top. What they do instead is waste the money to buy imaginary safety (the law about Coins is still uncertain, what can a lawyer do) and then even use it as an excuse to not move forward. There's zero chance to win this way.

77 points by sjcsjc 9y ago

Interesting discussion of the legalities. They say they're not doing the sale until they have a fully functioning platform that relies on tokens to function.

proofofstake 9y ago
But that's putting the cart before the horse. You need the ICO to get enough investment to build out your platform, when you have a fully functioning platform, who still needs investment? And if a platform is a prerequisite: Just build the barest possible platform MVP, much like a pre-launch landing page.
- AndrewKemendo 9y ago
  His point is that token sales aren't investments in the sense that you are talking about because that would, in his words, be securities fraud. The token is a "currency" that people are buying into through some exchange rate to participate in a market with token denominated currency.
- femto113 9y ago
  When you have $250,000,000 with no clear nor enforceable legal obligation to the people who gave it to you, who still needs a fully functioning platform?
  - rwallace 9y ago
    Hopefully ethics will prompt most founders to make a good-faith attempt to deliver value for money, but in case anyone is tempted otherwise, bear in mind that the legal obligation may turn out to look much more clear and enforceable in court than it does on HN.

zekevermillion 9y ago

First, I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise. If the protocol is already specified, and the token has clear utility. I don't know if that's the case here, but just taking the article at face value. Second, even if a particular token represents a security, offering it to the public is not "securities fraud" in and of itself. Fraud is a material misstatement or omission. What the author is talking about would be an unregistered securities offering, which if no exemption is available, would be illegal. Illegal but not necessarily fraudulent per se. This is not to say that Colony should have an ICO. I don't know anything about their specific case. But this article is not useful to anyone else trying to make a similar decision.

collinvine 9y ago
> I do not agree that pre-selling a purely functional token is necessarily an offering of securities under Howey or otherwise Are you a lawyer? Because it wasn't the opinion of the author; it was the opinion of their lawyers. > offering it to the public is not "securities fraud" in and of itself. Right. In the US, you can abide by the new-ish JOBS act for crowdfunding from non-accredited investors. You'd be selling a security. The problem with token sales is that they are trying _not_ to be securities. This may not be "fraud", but it is likely in violation of securities laws. > this article is not useful to anyone else trying to make a similar decision. The takeaway is that no project going forward should do a pre-functional token sale.
- zekevermillion 9y ago
  Yes, I'm a lawyer. I'm not your lawyer though. And it doesn't matter -- even non-lawyers are capable of reasoning about legal topics. You do not appear to be a lawyer, yet you have an opinion. The takeaway from this article is just wrong, b/c it implies that the SEC thinks token presales are all inherently fraudulent. That is not correct. Many ICO's are illegal securities offerings, probably. And many are also fraudulent. These two things often overlap. They are not equivalent though. Howey is a FACT DEPENDENT TEST. That means, if you are planning any kind of token offering, you have to get advice about your specific circumstances. As a heuristic, "stay away from ICOs" is pretty solid. No one will be harmed by this. Many people will be harmed by participating in crappy ICOs, either as promoters or buyers. However, HN is a forum for technical discussion, and I'm criticizing the technical basis of that article.

mattbeckman 9y ago

I understand the why, but ICO regulation is shifting the power of crypto from anyone (low-, middle-, upper-class) into upper-class only. For example, the Filecoin ICO for U.S. participants was restricted to accredited investors, which required a proof of income above $200k/year. Obviously, ICOs are risky, and we can all see why someone with less income probably shouldn't invest as much money as someone making over $200k. However, preventing someone in a lower income bracket from making ANY investment feels like economic stratification.

beepboopbeep 9y ago
As if the power of crypto doesn't lie in those that can afford server farms.
jMyles 9y ago
I assert that this is the entire point of all economic intervention by the state.
the_stc 9y ago
Yep. And then Filecoin doesn't even sell equity! It's gross. With our company we're trying to do right by investors. We're completely in violation of the SEC memo. In fact, that's what galvanized us to 100% offer shares instead. We were going to do it before, but the SEC really set us straight: If we're going to be in violation of regulations we might as well make the most of it.
- Sangermaine 9y ago
  Are you saying that instead of an ICO, you've now decided to do an unregistered share offering, and you're knowingly doing this in violation of the law? You do realize you can face criminal penalties for this, right?
  - wmf 9y ago
    Based on previous comments it sounds like their business is fundamentally illegal anyway (prostitution?) and thus it's pointless for them to comply with SEC regulations. But this approach doesn't generalize.

s73ver_ 9y ago

So, what do you do with these "tokens" once you've bought them? Let's say I get 10 tokens. What happens then?

wmf 9y ago
They go up ~10x (don't ask why; you don't want to know) and then you sell them.

erikb 9y ago

In a high risk game like this, where the rules are actually not established yet, you always risk going to jail. No amount of lawyers can protect you. The only safety is marching forward quickly so you will be one of the top three players in this game. Number one will make the profit, number two will find a way to live, number three will be bought be either no 1 or no 2. However if you lack behind so far, that you are nuicance but don't have any real market share, you actually just need to get rid off. So what they are doing is the opposite of what they should be doing. They should invest their money and grab market share, get as many investors on board as possible, fine tune their market strategy and technology so they can beat whoever they consider competition. Short: They should earn their place at the top. What they do instead is waste the money to buy imaginary safety (the law about Coins is still uncertain, what can a lawyer do) and then even use it as an excuse to not move forward. There's zero chance to win this way.