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The basic legal rule is that you can't issue "equity" in any venture unless (a) it's registered with the SEC (and certain state authorities) or (b) you fall wit

The basic legal rule is that you can't issue "equity" in any venture unless (a) it's registered with the SEC (and certain state authorities) or (b) you fall within exemptions (accredited investors only, etc.) Swarm obviously doesn't fall under either category, so what they're basically trying to do is claim that they're not actually issuing equity in the traditional sense. Best guess as to what they're arguing is that by making the cryptotokens redeemable for a service (as opposed to actual cash), they're really issuing something closer to gift cards than traditional equity. Gift cards have their own legal issues, but it's not equity. That said, gift cards have limited upside relative to real equity. When the next Oculus is purchased by Facebook, I might be able to redeem by crypto-shares for a free Rift headset, but that's not the same thing as getting X% of the proceeds from the sale of the company. Here's the take-away though: The reason these laws exist is to prevent con artists from selling shares in some fly-by-night operation and disappearing with the money. There's nothing about crypto-equity that makes fraud any less likely than traditional equity. So if you're the SEC, and you see someone selling something that acts like equity, looks like equity, is actually described as equity, and poses the same risks for the buyer that regular equity does, the fact that it might not fit neatly in the traditional definition of equity isn't going to deter you from putting a stop to this.

Jd 12y ago
That's not quite correct. Our model includes a "Decentralized due diligence" aspect (https://bitcointalk.org/index.php?topic=664071.0;topicseen https://bitcointalk.org/index.php?topic=664071.0;topicseen) that we believe greatly reduces fraud potential. Our full plan consists of a variety of fairly novel features, including crowdsourced project screening and fund-locking such raised funds are programmatically unlocked as founders achieve certain milestones.
- andrewfong 12y ago
  I doubt the SEC would buy that argument. Due diligence is orthogonal to equity structure. That is, you could have ventures built around traditional equity structures but with crowd-sourced due diligence, and you could have ventures built around crypto-equity but without any due diligence requirement at all. Put another way, the fact that a publicly traded company permits any shareholder to inspect its books at any time does not eliminate the company's obligation to make regular filings with the SEC.
  - Jd 12y ago
    Completely agree with what you say, so not sure what argument you think I'm making. I'm only pointing out that our system does have fraud prevention mechanisms that do not exist with standard cryptotoken offerings.
    - andrewfong 12y ago
      Point is the same one made two posts ago: High probability that SEC will try to shut this down.
- floatrock 12y ago
  > including crowdsourced project screening and fund-locking such raised funds are programmatically unlocked as founders achieve certain milestones. Both great ideas to get something into production, but how does this provide equity? Specifically, when I hear equity, I think two things: dividends and shareholder voting rights. Both can be coded in on a bitcoin 2.0 DAO platform of your choice, but there's the (unsolved, afaik) question of physical-world enforcement. I've unlocked all my protocol-escrow'd milestone funds, shipped a product, but I now choose to ignore the dividend or voting feature of all the token holders. See you later! One of the benefits of operating within the legal system rather than outside is the investors have a last-resort: they know who you are and can sue. If you operate outside the system in DAO-land, what recourse do I have when facebook buys my cryptoequity-funded CryptoRift Co. and says, "sorry, crypto-tokens aren't equity under US security laws, you get nothing"? Trustless consensus-unlocking escrow for project milestones is a great game-theory trick to get to ship, but it stops short of true equity. To honestly call it equity (guarantee of dividends and shareholder voting rights under threat of legal action), you need to operate within the law, not find loopholes. Or at least have the law legally recognize the voting will of the cryptotokens, which I haven't seen mentioned either.
  - Jd 12y ago
    I agree. It's on our roadmap to build the appropriate tie-ins to the existing legal system to provide benefits that are not only pledged but also enforceable. Among other things we are actively attempting to hire a lawyer (ideally a brilliant younger one) to help figure out how to integrate these cryptoassets with the existing legal system.

Jd 12y ago

That's not quite correct. Our model includes a "Decentralized due diligence" aspect (https://bitcointalk.org/index.php?topic=664071.0;topicseen https://bitcointalk.org/index.php?topic=664071.0;topicseen) that we believe greatly reduces fraud potential. Our full plan consists of a variety of fairly novel features, including crowdsourced project screening and fund-locking such raised funds are programmatically unlocked as founders achieve certain milestones.

andrewfong 12y ago
I doubt the SEC would buy that argument. Due diligence is orthogonal to equity structure. That is, you could have ventures built around traditional equity structures but with crowd-sourced due diligence, and you could have ventures built around crypto-equity but without any due diligence requirement at all. Put another way, the fact that a publicly traded company permits any shareholder to inspect its books at any time does not eliminate the company's obligation to make regular filings with the SEC.
- Jd 12y ago
  Completely agree with what you say, so not sure what argument you think I'm making. I'm only pointing out that our system does have fraud prevention mechanisms that do not exist with standard cryptotoken offerings.
  - andrewfong 12y ago
    Point is the same one made two posts ago: High probability that SEC will try to shut this down.
floatrock 12y ago
> including crowdsourced project screening and fund-locking such raised funds are programmatically unlocked as founders achieve certain milestones. Both great ideas to get something into production, but how does this provide equity? Specifically, when I hear equity, I think two things: dividends and shareholder voting rights. Both can be coded in on a bitcoin 2.0 DAO platform of your choice, but there's the (unsolved, afaik) question of physical-world enforcement. I've unlocked all my protocol-escrow'd milestone funds, shipped a product, but I now choose to ignore the dividend or voting feature of all the token holders. See you later! One of the benefits of operating within the legal system rather than outside is the investors have a last-resort: they know who you are and can sue. If you operate outside the system in DAO-land, what recourse do I have when facebook buys my cryptoequity-funded CryptoRift Co. and says, "sorry, crypto-tokens aren't equity under US security laws, you get nothing"? Trustless consensus-unlocking escrow for project milestones is a great game-theory trick to get to ship, but it stops short of true equity. To honestly call it equity (guarantee of dividends and shareholder voting rights under threat of legal action), you need to operate within the law, not find loopholes. Or at least have the law legally recognize the voting will of the cryptotokens, which I haven't seen mentioned either.
- Jd 12y ago
  I agree. It's on our roadmap to build the appropriate tie-ins to the existing legal system to provide benefits that are not only pledged but also enforceable. Among other things we are actively attempting to hire a lawyer (ideally a brilliant younger one) to help figure out how to integrate these cryptoassets with the existing legal system.