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SEC Shuts Down Munchee ICO
- eximius 9y agoFor better or worse, this sets a fairly clear precedent. Will be interesting to watch people try to get around it.
- deweller 9y agoI am a co-founder in the cryptocurrency space. Our lawyers were smart and advised us against releasing a utility token ICO because they predicted that these SEC actions would be coming. Our approach to "get around" this is to file all the necessary paperwork for a legal security and then only sell the token to accredited investors.
- IncRnd 9y agoDid they discuss Title IV of JOBS with you?
- homakov 9y agoWhat are the steps and costs to do same? Who is accredited investors btw?
- tptacek 9y agohttps://www.sec.gov/files/ib_accreditedinvestors.pdf https://www.sec.gov/files/ib_accreditedinvestors.pdf Generally: earning over 200k/yr, or having a net worth over 1MM excluding your house.
- komali2 9y agoWait, and people are arguing that this process isn't an arbitrary class lock out?
- tptacek 9y agoI don't know what "class lock out" means, but the restriction is pretty obviously there to prevent people from staking their livelihoods and financial futures on unvetted offerings. The idea is that people who have high incomes or high net worths (a) either are financially sophisticated, or can trivially afford financially sophisticated advisors, and (b) are unlikely to be staking so much on a single deal that their long term outcomes will be at risk.
- komali2 9y agoHow do you correlate existent material wealth with any of your claims? What's to stop an inheritor from making a poor investment with all their capital? Or a lottery winner? Or ANYBODY with that kind of money, really? Why is it presumed that at "arbitrary net worth 1 million," a person is "financially sophisticated?" If the sec wants to I guess "protect people from themselves," why don't they have an actual certification system that is based on a demonstration of knowledge? Finally, why aren't people with a net worth of under 1 million protected from other poor financial decisions, since in your mind they are not "financially sophisticated" and thus are more likely to engage in payday loans or other predatory financial institutions?
- tptacek 9y agoActually, I agree that the RegD numbers are arbitrary. They should be much higher: they haven't tracked inflation. A person with 200k in annual income in 2017 is by no means necessarily in a position where they can safely invest in securities that have exempted themselves from disclosure requirements to their investors.
- DennisP 9y agoOn the other hand, someone with $150K income and $800K net worth can easily afford a $5K investment, and is probably sophisticated enough to not be completely stupid about it. It makes more sense to use percentages rather than a fixed cutoff (and in fact that's what the JOBS Act does).
- whataretensors 9y agotldr; 10000% returns are limited to club members only
- tptacek 9y agotldr; exemption from SEC disclosure laws that protect investors of all classes are limited to club members only.
- Alex3917 9y ago> Our approach to "get around" this is to file all the necessary paperwork for a legal security and then only sell the token to accredited investors. How does this square with the SEC commissioner's statement yesterday that not a single ICO has registered to do a security offering?
- Kubuxu 9y agoBy requiring all investors to be accredited you are exempt from the long registration process with SEC. The law in question is "Rule 506(c) of Regulation D", see: https://www.sec.gov/fast-answers/answers-rule506htm.html https://www.sec.gov/fast-answers/answers-rule506htm.html
- deleted 9y ago[deleted]
- sillysaurus3 9y agoCan you give a brief checklist (or notes, or anything at all) regarding the necessary paperwork? What's involved?
- 52-6F-62 9y agoSo basically, follow the existing law that governs securities and investments. I personally don't see a big problem with that, considering the laughable scams that have occurred over the past six months. I am curious, though, how that works with proposed international investors. (I'm not well educated in the financial space) I hope that these actions clear house of the scams, and open room for good projects to exist without some shade of doubt cast over them—at least not for the reasons there exists some kind of shade now.
- gst 9y ago> I hope that these actions clear house of the scams Wouldn't the scams just get launched from other countries that don't have to care about the SEC?
- thrill 9y agoJust like the valid entrepreneurial efforts will.
- abritinthebay 9y agoSure, and they’ll join Nigerian Email Scams where they belong
- erikpukinskis 9y ago> I personally don't see a big problem with that It protects the monopoly the investor class has on investments like these.
- indubitable 9y agoThis also deters entrepreneurship from otherwise less established entities. The risk with regulations like this is that in attempting to keep out the scammers, you also end up keeping out smaller by otherwise completely authentic entities. In the worst case you end up keeping out smaller players, yet the scammers find creative ways around the system. Take, for instance, patents. They were initially envisioned as a way for independent inventors to ensure their ideas were not stolen. But a century of absurdly complex rules and regulations paired with extreme fees mostly keeps out very small scale inventors. On the other hands, the scammers are seemingly as active as ever and completely inappropriate patents are still regularly granted. So what have we truly accomplished?
- dangero 9y agoBut how are you going to make the coin available for liquid trading in the future?
- s73ver_ 9y agoCan I ask why you'd still go ahead with a token after all that, instead of doing a normal security? With all the same reporting and other regulations as a security, what does being a token get you?
- subroutine 9y agoYou mean, exactly like authorized shares of common stock? How is this any different than traditional corporate capitalization? Did you set aside a large pool of tokens for a potential investor who prefers convertible equity? A reserve for an option pool? How will employee stock options..erm..sorry..'token options' plan work? If your company is successful, and a great offer comes up to exit, what's the plan for M&A using tokens? Most importantly, why would investors want coin over stock? Are they given all the same legal company equity rights as traditional stock?
- deleted 9y ago[deleted]
- Nursie 9y agoYeah that doesn't sound so much a workaround as it does "doing things properly"
- cptaj 9y agoWhat I don't like is the "accredited investors" part. That just means its going to be just as hard as getting stock which is prohibitive to a lot of investors in the world.
- Lazare 9y agoIt's slightly sad - and quite funny - that "following the law" is seen as a novel, intriguing approach that can set you apart from the competition. :)
- dreit1 9y agoIs this possible? Hold ICO, sell like 5% to accredited investor. The rest is reserved for team. Sell 35% on the open market at a fixed price.
- pmarreck 9y agoGood news: ICO's are now technically a security! Bad news: ICO's are now technically a security!
- bluesign 9y agoWill be easy, i think to evade: - setup a system that looks like it will increase value of your token over time (as MUN case: “As more users get on the platform, the more valuable your MUN tokens will become”) - don't make any promises about increase in value/income about your token. - let people discover and share, or promote on side channels. IANAL but as far as I searched, I guess as long as you don't make any value increase claims etc, you are totally safe
- deleted 9y ago[deleted]
- nugget 9y agoI'm confused; if you can't use ICO proceeds to fund operations, then what can you spend them on? Where is the money supposed to go?
- mc42 9y agoI believe this is part of their announcement on how the SEC will be handling ICOs, but IANAL. https://news.ycombinator.com/item?id=15902054 https://news.ycombinator.com/item?id=15902054
- CPLX 9y agoThe money for funding operations is supposed to flow through a registered or otherwise legal security instrument, which this ICO was not. The law hasn't changed, just the supposedly innovative ways of pretending the law doesn't exist.
- PeterisP 9y agoThe money can (and probably should) go to fund operations, however, you're supposed to register such ICOs with the SEC and follow the proper process just as any other release of securities to investors.
- csomar 9y agoNope. You can use the ICO like the IPO. You just need to follow the regulation required. Obviously, they opted for an ICO to avoid that.
- azernik 9y agoRelated to this bigger HN submission from yesterday ("Statement on Cryptocurrencies and Initial Coin Offerings"): https://news.ycombinator.com/item?id=15902054 https://news.ycombinator.com/item?id=15902054 That statement was released on the same day as the Munchee decision, and the Munchee decision is linked from the statement Context (the Munchee decision is in footnote 6): "I urge market professionals, including securities lawyers, accountants and consultants, to read closely the investigative report we released earlier this year (the “21(a) Report”)[5] and review our subsequent enforcement actions.[6]"
- thisisit 9y ago> In short, Munchee was undone by two things: depending on the token sale as a vehicle to raise cash for operations and using the typically spammy and scammy marketing efforts most ICO floggers use now, tactics taken directly from affiliate marketing handbooks. It seems that most ICO do both the things. If not a self-inflicting post about the token growth but at least the raising cash for operations part.
- pm90 9y ago> It seems that most ICO do both the things. That doesn't make it OK. I think what's happening here is that ICO's are raising large enough funding to finally warrant involvement by the SEC.
- mrwong 9y agoThats a good thing, more companies will leave US Jurisdictions faster to take advantage of the funding liquidity the open Token markets provide. Just like Mathematicians and Engineers were leaving the soviet union in droves to pursuit a better future.
- ceejayoz 9y agoThese rules aren't new in the slightest. Anyone who thought ICOs would allow them to evade the SEC was always deluding themselves. Despite these long-standing rules, the US still seems to do just fine attracting new corporations.
- bunderbunder 9y agoMost these companies are very clearly focusing on a US market first, so their pool of likely coin buyers is Americans. I'm guessing that many of them also want to keep the option of getting additional rounds of funding by selling equity rather than scrip. If leaving US jurisdiction reduces the capital markets that are most important to them, then I doubt they will decide that it's worthwhile to do so just for the sake of being able do ICOs.
- hyprCoin 9y agoI don't think this is a good thing. We are going to lose some of the brightest next generation startups to lesser jurisdiction areas due to regulation created in the 40s. I really do not care for the accredited investor scam.
- s73ver_ 9y agoThe JOBS Act changed some of those thresholds. However, there is exactly zero reason why the reporting and transparency regulations should be thrown out, regardless of whether you're doing a paper security or a crypto coin.
- hyprCoin 9y agoWhy should a global decentralized currency be beholden to local regulation? I guess the lesson is to do a fair launch and run nicehash to control a large percentage of the network. Then you don't have to abide by SEC regulation as the coin does not represent a centralized organization.
- philfrasty 9y ago„Munchee was able to return all $15 million to the 40 investors...“ Is this number correct? 40? 375.000$ on average seems unlikely...
- fludlight 9y agoThey probably had a lead investor who put in $10m, two or three who put in $1m, and so on. The last 20 probably contributed less than $20k each.
- igorgue 9y agoDecentraland probably had 2 investors, Tezos god knows... So yeah it's not that unheard off in the ICO market.
- oh_sigh 9y agoA lot of people have a ton of btc and don't really view it as real money
- albertgoeswoof 9y agoProbably, this is one reason why a lot of the ICOs are being scrutinised. A small number of investors buy up the tokens, the ICO then sells out in record time and looks like it’s some kind of amazing hot tech. As soon as the tokens become tradeable, the value is immediately several times higher (due to the hype) and the original investors cash out a large portion of their investment. Due to the immense amount of capital they can then rinse and repeat on every token sale and spread out their portfolio across the entire crypto space. If a token does skyrocket they’re invested enough to still profit.
- pcmonk 9y agoThe article is very misleading here. The cease-and-desist letter is clearer[0]. They intended to raise $15 million, but the SEC stopped them within a day of their ICO launch, when they had only raised about $60,000 [0] https://www.sec.gov/litigation/admin/2017/33-10445.pdf https://www.sec.gov/litigation/admin/2017/33-10445.pdf Fact 27
- elmar 9y agoWhat about CryptoKitties? is it a security using the "Howey Test"?
- stale2002 9y agoNo. Crypto kitties exists right now. They aren't using the money to fund future development. They aren't making promises about what the money will be used for. What you see is what you get.
- RexetBlell 9y agoYes, because they pay dividends in the form of new baby crypto cats.
- shawabawa3 9y agoThat's not how it works. The kitty tokens are more like a product than a security I think as each kitty token is unique, but I'm not a lawyer
- joering2 9y agoThat's considered collectibles. Take this difference, for example: if you buy a collectible Ford Shelby GT from 1964 and you pay 10x more what the previous owner paid, you do so with hopes that its a good investment into collectible that eventually someone will give you a better price in the future. Your asumption/feeling of security (hence name "securities" btw) is not guaranteed by anything more than hope that someone will eventually pay more (they never may be such person). Meanwhile if you buy Ford stock with the same purpose of re-selling it later down the road for hopefully higher price, you are being reassured aka "secured" by the company financial standing, their technical analyze, current market value, future strategy for the corp, etc. If these are phony then hopefully/supposedly SEC steps in to protect you from what most likely will turn out to be scam. Collectibles (genuine one of course) do not come with guarantee/security that their current value (what you personally gave for) will remain in the future, or be repriced higher.
- PatientTrades 9y agoThe hype will die down as the SEC gets involved and regulations are pursued. Smart time to take profits in my opinion. Many will be left holding the bag as we see a correction to more sustainable levels. Bitcoin is here to stay, but these prices are not rational, driven purely off of emotion.
- elmar 9y agoWhat Is the Howey Test? - FindLaw http://consumer.findlaw.com/securities-law/what-is-the-howey-test.html http://consumer.findlaw.com/securities-law/what-is-the-howey... "The final factor of the Howey Test concerns whether any profit that comes from the investment is largely or wholly outside of the investor's control. If so, then the investment might be a security. If, however, the investor's own actions largely dictate whether an investment will be profitable, then that investment is probably not a security." Howey Test https://youtu.be/9lTS1Zofw8w https://youtu.be/9lTS1Zofw8w
- motbob 9y agoThat quote is slightly misstated. It makes it sound like gold bars would be securities (since any profit from reselling gold would be "largely or wholly outside of the investor's control" since the market for gold is so large and relatively volatile). Rather than asking whether the potential profit is outside of the investor's control, the question is whether the profit is within the control of some other person or group. The example that sticks in my mind is the idea that fruit trees can be securities if they are maintained and harvested by non-investors and the fruit sale profits go to the investors.
- jdmichal 9y agoThe fruit tree itself would not be the security. It's the thing which gives the investors the right to their share of profits which would be the security. Or, in other words, a security secures your right of ownership to something else. In a company, we typically call those things "shares". You either own the tree directly, or you hold a security which secures your right of ownership of the tree. So, if you own gold, you don't own a security. You own the actual gold, and that chunk of metal does not secure ownership of any other item. It can be exchanged, of course, for ownership of something else, but that's a function of its value as an object. Now, if you own a share of a gold ETF, that is a security that describes your rights to some chunk of metal.
- delinka 9y agoThis seems, to me (a layman), to indicate that most any ICO will fall under "security." Can anyone provide an example where an ICO would not be a security as defined by the Howey Test?
- option_greek 9y agoI don't get how the SEC differentiates between ICOs and kickstarters (not considering the ICOs that promise their token value to increase over time). How can there be any kind of innovation in fund raising space if the SEC wants every thing to be registered as securities. What bugs me the most is that many ICOs are funded by virtual currencies (btc or eth) and still SEC considers it self to have jurisdiction over the transactions that grown-up individuals do. Instead of considering $1mil net worth investors are accredited, SEC should have a certification test that an individual can take to prove he understands finance. If someone has $1mil, it doesn't prove a damn thing. It could very well be that they inherited it or won in a lottery.
- proaralyst 9y agoI think it's because ICOs give you a tradeable token; kickstarter contributions cannot be traded for profit.
- option_greek 9y agoContributors can as well sell their future orders as backorders on ebay or amazon or directly. Many successful kickstarters had their products sold at much higher prices after they are received (mainly the early bird ones).
- justrobert 9y agoIn that case, the original buyer is the one who is receiving the goods and then sending to their counterparty.
- tptacek 9y agoIf the marketer of a Kickstarter promoted their product as an investment-grade asset, they could indeed have legal problems. People forget that a big chunk of what the SEC is concerned about is marketing and promotion.
- matthewaveryusa 9y agoI'm relatively ignorant but I think it's a matter of fungibility.
- vasilipupkin 9y agowhy is ethereum itself not a security by this logic. Clearly the purpose of buying ETH in the ICO was appreciation, no?
- bluesign 9y agoas long as they don't promote 'increase in value' and 'gain on your investment' they are safe.
- vasilipupkin 9y agobut did they not make any statements implying an increase in value? why would you have participated in ETH ICO if you didn't expect an increase in value?
- bluesign 9y agoYou can expect increase in the value, actually even everybody can expect, but as long as there is no marketing of increase in value, or misdirection it is fair game. If you are investing in real estate, you have an expectation in increase in value, but if the real estate agent is promising you, increase in the value, and promising you to do the all marketing, etc and selling part. Then it is something else. The point is basically intentionally misleading investor.
- vasilipupkin 9y agowhere in the howey test does it say anything about marketing? It is an investment of money There is an expectation of profits from the investment The investment of money is in a common enterprise Any profit comes from the efforts of a promoter or third party
- bluesign 9y ago"Any profit comes from the efforts of a promoter or third party" this part. As long as profit depends on someone else's work. (this third party is not other investors, or market appreciation, this is direct promotion or work)
- jMyles 9y agoI'm disappointed in us, HackerNews. A thread about an ICO being shut down and most people in the thread are luke-warmly celebrating the SEC. Is this the compassion, sophisticated society we're working to build? The SEC, like the rest of the state, is focused on keeping wealth in the hands of the wealthy. This action does not protect anyone's freedom or agency. Instead, it ensures that the only people who benefit from good ICOs (and none of us can now know if Munchee was going to be one) are "accredited investors". This is an insidious phrase which simply means "have a net worth of at least $1,000,000, excluding the value of one's primary residence." This is just another action to divide-and-conquer by class. The internet will not tolerate these hijincks; it will simply shift economy and influence elsewhere. But will we?
- tptacek 9y agoYou can sell stock to anybody. My kids can (and have) bought stocks. The SEC is not trying to keep securities out of the hands of the little people. Rather, what's happening here is that operators of ICOs would like to exempt themselves from the disclosure rules that apply to all other publicly traded companies. They don't want to register with the SEC. They don't want to spend $5k-$10k a quarter on publishing their financials (those financials would probably be on the cheaper end of the scale, since they'll be disclosing basically no meaningful revenue). Congress and the SEC went out of its way to make streamlined public trading for new enterprises possible with the JOBS act and Title IV. Over a billion dollars of new issuances have apparently happened under Title IV's "mini-IPO" rules, which exclude the most financially onerous costs of IPO for issuances under $50MM (that is: for virtually all ICO-scale raises). Tech startups haven't used Title IV because, by and large, they can get better deals from venture capitalists. That's not a conspiracy; it's simple statistical selection. The best companies have access to the most reliable capital. The flip side of that coin (no pun intended) is adverse selection, which is what you have when a trivial restaurant review application tries to raise $15MM on a new cryptocurrency dedicated to funding restaurant reviews. ICO enthusiasts want to paint this as retail investors being excluded from "10000%" gains. They're betraying themselves right there, by arguing with a straight face that there are 10000% gains to realistically be had by retail investors. Really, what they're making is a special-pleading argument: the companies they back don't have their shit together enough to raise large amounts any other way, and they sure would like to be exempted from the rules that apply to everyone else.
- emodendroket 9y agoIt's about time.
- kelvin0 9y agoSeems to me they were not engaged in anything different from video games which allow you to purchase ingame virtual currency. What's the difference? Genuine question.
- haldean 9y agoFor one, there isn't a market where you can buy and sell them; usually the developer decides on the price, and you can't exchange them back into USD.
- cwkoss 9y agoAlso, the terms of service usually forbid sale between individuals
- tptacek 9y agoIf you promoted an in-game currency as an opportunity to profit on resale, you would have similar legal problems. Especially if, like Munchee, you did it for a video game that didn't really exist yet, so that your in-game currency had no plausible value other than for speculation.
- KyleTokenReport 9y agoTo put this in perspective, Token Report analyzed its database of ICOs and found each one that currently uses similar language to Munchee; or, promises returns to investors. https://medium.com/tokenreport/token-report-whos-been-breaking-the-rules-only-12-icos-opening-this-week-c6820bff9602 https://medium.com/tokenreport/token-report-whos-been-breaki...
- bluetwo 9y agoWhat is the world of blockchain going to look like in a year?
- Kiro 9y agoIs CryptoKitties a security then?
- rthomas6 9y agoThese rules will only apply to companies within the jurisdiction of the SEC, correct? Hypothetically, I don't see how the SEC could shut down ICOs from companies registered outside the US, even from Americans.
- itake 9y agocompanies run into problems if American citizens "invest" in them.
- nickbauman 9y agoI keep hearing pundits talk about cryptocurrencies as being "outside the regulation of any government" over and over. They need to stop saying this.
- zachruss92 9y agoHonestly, i'm kind of annoyed by everyone offering an ICO for [insert irrelevant product here]. It's creating a misleading advertising scheme built on top of a current tech _craze_ that will likely leave a lot of "investors" out of money. The problem is that you're giving money to a relatively unknown company while speculating that the company will create inherent value. Unlike with stocks, you don't have ownership in the company or any voting rights. There is nothing stopping the company's creators from distributing the ICO money to themselves (there might be a board, but since the company isn't public who knows who the board is). In this case the SEC is right to step in so there aren't a ton of unregulated securities going around and a lot of consumers potentially getting screwed. Even with cryptocurrencies like Bitcoin, it can be scary. You're literally getting into the ForEx market, which is known to be one of the riskiest markets in existence. With other currencies, at least they're backed by a government that (at least at least attempts) to regulate it's value and protect it from manipulation. With bitcoin, I saw that 40% of all coins in existence are owned by less that 1,000 people. How do we know that the current price inflations aren't a manipulation (or collusion) to jack up the price, sell for USD, then crash the market? It's not illegal/collusion because Bitcoin isn't regulated. This is definitely a rant, but I have some serious concerns as to where this market is going. Would love to hear other's thoughts.
- Hermel 9y agoICOs are in a hype. But there is real value. First, they can be used to bypass a lot of (but not all) regulation. This is good, because the financial sector is overly regulated (and wrongly regulated). Second, there are applications that are not possible in the traditional financial system. For example, the smart contracts behind the Bancor system (another overvalued ICO) provide automated market-making on the blockchain. These smart contracts have a capital buffer no one can touch and that is used for completely transparent market making, thereby ensuring that you can always buy or sell shares. I won't go into detail, but it basically solves the liquidity problem for penny stocks. In the medium run, I see ICOs as a light-weight alternative to IPOs, but not as a seed-funding instrument. This is non-sense.
- workthrowaway27 9y ago
- aresant 9y agoI just hope that the current ICO bubble doesn't pop so fast that HBO's Silicon Valley misses the opportunity to skewer it next season.
- sebo1994 9y agotural.sadigov.3