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Sand Hill Exchange Fined $20,000 by SEC

77 points by warrenmar 11y ago

mhluongo 11y ago
It's a shame. How much did the SEC spend chasing an unfunded startup? EDIT: I don't expect to stem the downvotes, but the SEC's time is better spent policing large-scale financial crime. Consider the opportunity cost here.
- minimaxir 11y ago
  Keep in mind that per the post, the SEC only sent a C&D after they tried to make money off of it. At that point, it's no longer a funny joke.
  - elaineo 11y ago
    Whoa... Sand Hill Exchange never tried to make any money off the site. We did let people put their own money on the line.
    - minimaxir 11y ago
      > It is an enjoyable experience, but when we pushed aggressively to monetize we received a cease and desist from the SEC.
    - dragonwriter 11y ago
      > Sand Hill Exchange never tried to make any money off the site. We did let people put their own money on the line. You should probably correct your own announcement, then, since you say "when we pushed aggressively to monetize we received a cease and desist from the SEC". Allowing people to use their own money without trying to keep any of it isn't "monetizing" as that term is usually used of a service.
      - elaineo 11y ago
        That is fair. That's a mis-statement on our part. We should have said "we allowed users to monetize." Once again, Sand Hill Exchange never charged any sort of commission or took any revenue or profit. User deposits were limited to 1 bitcoin, or ~$250. Most users put in less than $10.
    - rrrx3 11y ago
      So, by fabricating entirely false financial pictures for companies, > We created bots to trade against incoming orders. They were like my friends. I even named them! My favorite was the “Jesse Livermore” bot. Opportunistic to a fault. > The bots would run every day and place orders against each other so the market looked like it was exhibiting lots of price movement and volume. For added credibility, we randomly generated trading histories for each company going all the way back to last year. So we had historical price and volume in addition to streaming quotes for chart data. and by then letting people speculatively place their own money into the already unbalanced and illegal equation, you somehow managed to wipe your hands of any responsibility for their actions? What in god's name are you smoking? You got off easy with a 20k fine. You belong in prison.
      - jboy55 11y ago
        Who knows if one of the creators had some options in one of the companies with 'fake' histories. They very well could be in prison. In fact, its amazing they continue to run the site, even without accepting money, creating 'fake' data and fake investors to show fake growth of something tied to a real security (you can still trade private stock), is inviting a shit tonne of legal hassles. "Oh hey, here's a list of private startup stock I own, can you please create some fake data to show a huge interest on your site so I can drive the private sale price and generate some sales?"
      - deleted 11y ago
        [deleted]
  - cookiecaper 11y ago
    Why should the founders of SHX be punished for trying to make a little bit of profit? We like to whine about how burger-flippers don't get paid enough to literally lift a spatula but we're happy when the SEC goes after a few creative entrepreneurs trying to get ahead? Why shouldn't they be entitled to the profit their product can generate? As long as they weren't actively making misleading or fraudulent claims (e.g., leading users to believe they were actually investing in the companies), they should've been left alone. And by the way, a lot of people make money off of jokes. [1] [1] http://en.wikipedia.org/wiki/Comedian http://en.wikipedia.org/wiki/Comedian
    - rrrx3 11y ago
      Completely fabricating equities, along with their histories, activities, and level of market interest isn't fraudulent? Oh, ok.
    - rsynnott 11y ago
      > we're happy when the SEC goes after a few creative entrepreneurs trying to get ahead? That's one of the best euphemisms for 'fraudster' I've ever seen. > As long as they weren't actively making misleading or fraudulent claims Did you read the article?
- rubyn00bie 11y ago
  Well in all (sad) honesty, that's probably the only sort of violator they can go after. The banks and corporations have more than enough money to "avoid" (not violate) the SECs rules and regulations, as well as defend themselves. An unfunded startup seems like a big win for a department which can't enforce anything helpful for the average citizen.
  - mhluongo 11y ago
    Good point -_-
  - dragonwriter 11y ago
    > Well in all (sad) honesty, that's probably the only sort of violator they can go after. Well, lets check that by looking at the SEC Enforcement Division webpage [0], and a couple of the news for the past week: * Merrill Lynch Admits Using Inaccurate Data for Short Sale Orders, Agrees to $11 Million Settlement [1] * SEC Charges Deutsche Bank With Misstating Financial Reports During Financial Crisis [2] [0] http://www.sec.gov/enforce http://www.sec.gov/enforce [1] http://www.sec.gov/news/pressrelease/2015-105.html http://www.sec.gov/news/pressrelease/2015-105.html [2] http://www.sec.gov/news/pressrelease/2015-99.html http://www.sec.gov/news/pressrelease/2015-99.html
    - jboy55 11y ago
      I like this one, touting the benefits of microcap stocks got someone fined $4.6 million. I can only think the shit that would have come down if the founders had a stake (exercised options) in one of the companies on their exchange then created 'fake historical' data about it. http://www.sec.gov/news/pressrelease/2015-100.html http://www.sec.gov/news/pressrelease/2015-100.html
    - Dylan16807 11y ago
      Add "in a meaningful way" to "go after". Here they are charging a fine-per-revenue ratio of infinity percent, while the fines for really big bad actions are proportionally so small that they're almost meaningless.
    - deleted 11y ago
- jdmichal 11y ago
  Do you really think the SEC would have offered a $20,000 settlement if this was a major banking corp instead of an unfunded startup? Of course not. If they even did offer a settlement, it would have been an extremely large number. The SEC knew this was small fish and so offered the settlement to clear it off the plate. Furthermore, at what point does it suddenly become OK to chase after a financial security law violation? Is there a valuation limit? Cash flow limit? War chest limit? What exactly is the qualification to no longer be "a shame"?
  - mhluongo 11y ago
    I don't know the answer to that, but this is the same problem any new fintech company suffers. Regulations often benefit incumbents and don't scale to new services testing the market. See eg anything related to bitcoin. How much do you think it cost them to go after Sand Hill?
    - jdmichal 11y ago
      The thing is, I don't care how much it costs the SEC to do their job. Their purpose is not to be a profit center based around prosecuting financial law violations. And actually, I'm very happy about that, because profit incentives in law enforcement creates very perverse incentives for the individual actors involved.
      - refurb 11y ago
        I get your point, but profit has nothing to do with it. The SEC has limited resources. I think the grandparent is questioning whether this is the best use of them.
        dragonwriter 11y ago
        Honestly, I think nipping violations like illegal marketplaces in the bud -- getting them to conform or shutdown before they become major issues with widespread harms, is probably one of the most efficient uses of SEC resources. It's cheaper in direct costs than dealing with them once they become major problems, and results in less innocent people being harmed by both the violation and the enforcement action (while someone is culpable for any violation, when its by a firm there are going to be lots of innocent employees, customers, etc., who aren't doing anything culpable that are going to be negatively impacted by the enforcement action, however necessary it may be.)
- rosser 11y ago
  Only pursuing large-scale financial crime because "opportunity cost" just tells the crooks to play disposable, small-scale games.
- anigbrowl 11y ago
  I'm guessing it cost $19,995, incidentally.
refurb 11y ago
This blog has more details: https://medium.com/@eiaine/how-startup-growth-hacks-resulted-in-a-formal-investigation-from-the-sec-cd04598fe58 https://medium.com/@eiaine/how-startup-growth-hacks-resulted... It's a funny read.... Another thing I learned: If you’re gonna try to make yourself look like a legitimate financial institution, you’ll be prosecuted like a legitimate financial institution. And when that happens, you sure as shit better have the legal resources of a legitimate financial institution. The Commission accused us of acting as unregistered broker-dealers, selling security-based swaps, offering swaps on an unregistered securities exchange.
- dalek2point3 11y ago
  +1 this was also quite funny: http://sandhill.exchange/blog/sec-analysis http://sandhill.exchange/blog/sec-analysis
  - MichaelGG 11y ago
    Takes a certain amount of arrogance or cluelessness to see a bunch of visits from the SEC and decide they're looking for jobs or otherwise impressed with your "engagement".
    - mhluongo 11y ago
      Pretty sure that's the joke...
    - spiffyman 11y ago
      That article was published today. I'm guessing this is just a cheeky swat back at the SEC. Especially since the original article prefaces the link with "Your tax dollars at work."
      - MichaelGG 11y ago
        Oh, wow. Takes a lot of cluelessness to not notice it was a joke.
- 11y ago
ivanplenty 11y ago
I don't understand: "Sand Hill Exchange" accepted items of real value (USD and BC) that could be used to "purchase" (or bet on) things named after real securities that trade (or are expected to trade) on public markets for a profit. I would be surprised if a regulatory body didn't come after this setup. There is a very bright regulatory line around gambling and investing in most countries that a typical person should have known about. What am I missing? Why should I sympathize with Sand Hill Exchange?
- jboy55 11y ago
  Indeed, a quick Google for "Prediction Markets" popped up, http://en.wikipedia.org/wiki/Prediction_market#Legality http://en.wikipedia.org/wiki/Prediction_market#Legality But then, tie that to real Securities ... its a miracle they got off with only $20,000 in fines.
- firasd 11y ago
  Well I think sending subpoenas to everyone behind the site and their mentors, and then fining them, is a bit disproportionate as a first step. I think (from the Medium writeup) part of the issue was that the site broadcast itself as more professional-looking and “in business” than it really was. I personally hadn’t realized when I’d seen the site earlier that most of the ‘users’ engaged in ‘trading’ were actually bots for example. Accepting Bitcoin without figuring out regulatory issues was an unwise step for sure.
- wpietri 11y ago
  This is specifically why when we set up http://longbets.org/ http://longbets.org/ we made is so the money always goes to charity. It's also why the Iowa Election Markets got a special waiver to operate. Either they're a market or a gambling operation, and both are heavily regulated in the US. As far as I'm concerned you should have no more sympathy for them than anybody else. Even if this risk really never crossed their minds, their lawyer should have warned them of how problematic this was during their first five minutes in the law office.
- refurb 11y ago
  I didn't know this, but you can write the SEC and request a "no action letter" if you aren't sure about the legality of what you are doing. http://www.sec.gov/answers/noaction.htm http://www.sec.gov/answers/noaction.htm These guys could have started there.
foobarqux 11y ago
On Twitter several months ago, the financial columnist Matt Levine said something along the lines of "Sand Hill Exchange can't possibly be legal" and one of the founders replied saying "You've got it all wrong, you just don't understand what we are doing". Some things really are as simple as they seem on their face.
- cjensen 11y ago
  After reading Levine's column [1] and Sand Hill Exchange's response [2], I'd have to say they were amazingly clueless. [1] http://www.bloombergview.com/articles/2015-03-11/how-should-a-bank-be- http://www.bloombergview.com/articles/2015-03-11/how-should-... [2] https://twitter.com/sandhillx/status/575659746507649024 https://twitter.com/sandhillx/status/575659746507649024
  - foobarqux 11y ago
    I can't imagine how that call went.
  - sfrechtling 11y ago
    Especially interesting in light of this, their analysis of traffic from the sec: http://sandhill.exchange/blog/sec-analysis http://sandhill.exchange/blog/sec-analysis
- evanpw 11y ago
  bloombergview.com is 4th on that list of referrers from Google analytics (here: http://sandhill.exchange/blog/sec-analysis http://sandhill.exchange/blog/sec-analysis). I wonder if some guys at the SEC read his article and said "Hey yeah, that does seem illegal!".
  - caminante 11y ago
    ...and the SEC reads his blog so they make waves to GET on his blog ;-).
zhoujianfu 11y ago
Oi! But, that's why http://exchangel.co/ http://exchangel.co/ never deals in real money, and only gives out bitcoin as prizes (no purchase necessary).
chernevik 11y ago
The SEC should have said "Very clever, kids, but, ah, no. Knock it off." A fine here is ridiculous -- the participation was capped at $250, this clearly wasn't intended to take in serious amounts of money. The SEC can't let something like this go on, but it can be less hamfisted in its handling. Really the right thing here would have been a visit by SEC staff, asking a lot of questions and pointing out some security law violations, at which point the operators go "umm, didn't think about that, we'll be good". But that approach doesn't let the bureaucrats justify 100 hours of browsing on their time sheets, does it? The injunction to obey security laws going forward does make sense, it gives the SEC leverage if these same people actually do pop up later as scammers. Some journalism on what they were doing: http://www.bloombergview.com/articles/2015-03-11/how-should-a-bank-be- http://www.bloombergview.com/articles/2015-03-11/how-should-... http://ftalphaville.ft.com/2015/03/10/2121090/sand-hill-is-the-new-wall-street/ http://ftalphaville.ft.com/2015/03/10/2121090/sand-hill-is-t...
- deleted 11y ago
  [deleted]
- rhino369 11y ago
  20k fine is nothing. They were let off with a slap on the wrist, probably because they were willing to cooperate.
  - elaineo 11y ago
    We understand that we did some unacceptable things. We get it. As individuals, we don't have $20k. The fine is not just a slap on the wrist, it's financially ruinous.
    - anigbrowl 11y ago
      No it isn't, people leave college with many times that amount of debt. Split it up between you, ask to get into a payment that's capped at a % of your income, work it off over a year or two. Make copies of your bank statements and your tax returns to confirm that you are in fact poor. You could probably make the money back in speaking fees or writing an e-book about your experience and what you learned (rather than how pissed off you are). Yeah, it's a lot of cash, but I've been billed more than that for a night in the ER when I didn't have insurance. And seriously, it was up to you to think about the fact that this was bound to attract regulators' attention and that the time they spent on you is currently being picked up by taxpayers. I know you want to compare yourselves with bucket Shops, which you think played an important role in democratizing/disrupting finance a century ago, but this whole idea of 'a chance for regular folk to get in on the action!' is unfortunately the same sort of psychology that con artists use to qualify their marks. Honestly, if one of you had done an ask HN about whether this was a viable thing people here would have told you why not and what you needed to do to be legit. Edit: come to think of it, I'm surprised your mentors int he Accelerator didn't point out this very obvious pitfall to you.
yueq 11y ago
You shouldn't have tried to add any monetization like IAP. This is simply a prediction market with startups. Didn't you know what happened to Intrade.com? Another example of 'early monetization is dangerous'.
jakejake 11y ago
On the other hand, $20,000 for national publicity is probably a deal. It looks like the site is running again using only fantasy money. An interesting thought is that the site itself wasn't making any money on the trades when there was real currency - which was illegal. But as a purely fantasy VC game they can make money on subscriptions, advertising, etc - which is legal.
- MaysonL 11y ago
  As well as potentially attract some capital…
  - ghall 11y ago
    Have you ever tried fundraising with four Silicon Valley VCs subpoenaed in an SEC case against you? It's a bit like advertising you have an STD on your Tinder profile.
shawnee_ 11y ago
... where people could throw pocket change on valuation wagers. We never had any intention of operating in a regulated industry, nor do we have the resources required to do so. "Oh, it was just for shits and giggles" ... when there's real money involved? A peek at archive.org shows the sales pitch at the time of the SEC traffic / tracked visits. I'm not seeing anything about "for entertainment purposes only" here: The mission of Sand Hill Exchange is to democratize startup investment.We believe the startup ecosystem benefits when everybody can participate in startup growth. Our vision is to extend the power of public markets to private companies. [source: https://web.archive.org/web/20150315015146/http://sandhill.exchange/ https://web.archive.org/web/20150315015146/http://sandhill.e...]
- reagency 11y ago
  If you squint you can see that they may have felt it was legal to host investo-gambling if they weren't making and profit directly tied to trade activity.
- jboy55 11y ago
  I love this bit, "Sand Hill Exchange is backed by notable Silicon Valley investors, providing sufficient capital to guarantee deposits." Yet, in a comment in this thread, a $20,000 fine was financially ruinous. I hope they immediately refunded everyone their BTC, this is how 'innocent' people end up running Ponzi schemes.
  - alextgordon 11y ago
    They said that they had $10k in the bank; $1.5k had been 'invested'; and the fine is $20k. So... yes?
    - jboy55 11y ago
      $10k in the bank is hardly "Sand Hill Exchange is backed by notable Silicon Valley investors, providing sufficient capital to guarantee deposits." Because they got fined $20k, and now they have no backing for the $1.5k of deposits they have taken.
randomname2 11y ago
Tangentially related: Former SEC Officials Demand SEC Chief: Stop Protecting Corporate Cronyism http://www.nakedcapitalism.com/2015/05/three-former-sec-commissioners-urge-mary-jo-white-to-stop-protecting-corporate-cronyism-via-inaction-on-disclosure-of-political-spending.html http://www.nakedcapitalism.com/2015/05/three-former-sec-comm...
zekevermillion 11y ago
they're lucky that the only interaction was with the SEC for running an exchange, and not with a prosecutor for operating a gambling website.
zaidf 11y ago
The real growth hack here is getting investigated by the SEC resulting in more traffic than $20K would otherwise buy you.
ghall 11y ago
SHX founding team member here. It's been great to read everybody's comments. I'm not going waste my time weighing in on whether we were clever hackers or bozos -- the truth, as always, lies somewhere in the middle. I did want to share some additional facts, which will come to light when the statement of facts gets published. (1) We had exactly 55 paying users, who had deposited $1550 and 15.6 BTC. (2) All but 5 of these users were friends, family, or members of our accelerator. (3) Our private beta test had been in operation for 7 weeks.
- logicallee 11y ago
  I'm sorry you've been given a hard time here, but with good reason. :) Securities law is really important for startups - they're the thing that enables your accelerator to exist, they allow you to exist and raise money and have protected investors for the next thing you do. So a lot of people here care a lot about it. Keeping it fun is one thing, but moving into monetization with fake trading histories - well, clearly you've learned that's another. Good luck with your next project.
- zyxley 11y ago
  > the truth, as always, lies somewhere in the middle. Not really, in this case. Securities laws aren't the kind of thing you up and ignore just because you feel like it.
- srdev 11y ago
  > I'm not going waste my time weighing in on whether we were clever hackers or bozos -- the truth, as always, lies somewhere in the middle. No, it doesn't always. The truth is not in the middle here; you guys were being breathtakingly clueless. Trying to pass it off as cleverness is just self-delusion, and none of the excuses your team has written are justifiable. You should probably do some honest introspection before taking your next pass on starting up a business. Not doing so is a disservice to yourself.
namecast 11y ago
Something I just realized - why is this being handled by the SEC and not the CFTC? Don't prediction markets fall under the CFTC's jurisdiction, e.g. Intrade? I guess given the nature of the prediction market they could have flipped a coin to see who fined them first....
akg_67 11y ago
Looks like both the links to Sand Hill Exchange blog post and Founders blog post are dead with just a mention of "censored". I wonder what SEC rules did they violate now, may be not disclosing publicly the terms of settlements.
- jboy55 11y ago
  Their lawyers managed to read it the posts. With statements like, "Nobody wants to play in a market with zero users, we realized. So we gave participants the illusion of liquidity." "We created bots to trade against incoming orders. They were like my friends. I even named them! My favorite was the “Jesse Livermore” bot. Opportunistic to a fault." "The bots would run every day and place orders against each other so the market looked like it was exhibiting lots of price movement and volume. For added credibility, we randomly generated trading histories for each company going all the way back to last year." Their lawyers realized they were admitting to creating a scheme to defraud investors to the safety of their market. Or maybe the SEC read it, and realized that perhaps this wasn't just a simple trading platform, but had a lot of fraudulent data on it and criminal charges were better.
- davidgerard 11y ago
  Sandhill blog post: https://archive.is/qVNUQ https://archive.is/qVNUQ Medium blog post: https://archive.is/DOVJZ https://archive.is/DOVJZ

77 points by warrenmar 11y ago

It's a shame. How much did the SEC spend chasing an unfunded startup? EDIT: I don't expect to stem the downvotes, but the SEC's time is better spent policing large-scale financial crime. Consider the opportunity cost here.

minimaxir 11y ago
Keep in mind that per the post, the SEC only sent a C&D after they tried to make money off of it. At that point, it's no longer a funny joke.
- elaineo 11y ago
  Whoa... Sand Hill Exchange never tried to make any money off the site. We did let people put their own money on the line.
  - minimaxir 11y ago
    > It is an enjoyable experience, but when we pushed aggressively to monetize we received a cease and desist from the SEC.
  - dragonwriter 11y ago
    > Sand Hill Exchange never tried to make any money off the site. We did let people put their own money on the line. You should probably correct your own announcement, then, since you say "when we pushed aggressively to monetize we received a cease and desist from the SEC". Allowing people to use their own money without trying to keep any of it isn't "monetizing" as that term is usually used of a service.
    - elaineo 11y ago
      That is fair. That's a mis-statement on our part. We should have said "we allowed users to monetize." Once again, Sand Hill Exchange never charged any sort of commission or took any revenue or profit. User deposits were limited to 1 bitcoin, or ~$250. Most users put in less than $10.
  - rrrx3 11y ago
    So, by fabricating entirely false financial pictures for companies, > We created bots to trade against incoming orders. They were like my friends. I even named them! My favorite was the “Jesse Livermore” bot. Opportunistic to a fault. > The bots would run every day and place orders against each other so the market looked like it was exhibiting lots of price movement and volume. For added credibility, we randomly generated trading histories for each company going all the way back to last year. So we had historical price and volume in addition to streaming quotes for chart data. and by then letting people speculatively place their own money into the already unbalanced and illegal equation, you somehow managed to wipe your hands of any responsibility for their actions? What in god's name are you smoking? You got off easy with a 20k fine. You belong in prison.
    - jboy55 11y ago
      Who knows if one of the creators had some options in one of the companies with 'fake' histories. They very well could be in prison. In fact, its amazing they continue to run the site, even without accepting money, creating 'fake' data and fake investors to show fake growth of something tied to a real security (you can still trade private stock), is inviting a shit tonne of legal hassles. "Oh hey, here's a list of private startup stock I own, can you please create some fake data to show a huge interest on your site so I can drive the private sale price and generate some sales?"
    - deleted 11y ago
      [deleted]
- cookiecaper 11y ago
  Why should the founders of SHX be punished for trying to make a little bit of profit? We like to whine about how burger-flippers don't get paid enough to literally lift a spatula but we're happy when the SEC goes after a few creative entrepreneurs trying to get ahead? Why shouldn't they be entitled to the profit their product can generate? As long as they weren't actively making misleading or fraudulent claims (e.g., leading users to believe they were actually investing in the companies), they should've been left alone. And by the way, a lot of people make money off of jokes. [1] [1] http://en.wikipedia.org/wiki/Comedian http://en.wikipedia.org/wiki/Comedian
  - rrrx3 11y ago
    Completely fabricating equities, along with their histories, activities, and level of market interest isn't fraudulent? Oh, ok.
  - rsynnott 11y ago
    > we're happy when the SEC goes after a few creative entrepreneurs trying to get ahead? That's one of the best euphemisms for 'fraudster' I've ever seen. > As long as they weren't actively making misleading or fraudulent claims Did you read the article?
rubyn00bie 11y ago
Well in all (sad) honesty, that's probably the only sort of violator they can go after. The banks and corporations have more than enough money to "avoid" (not violate) the SECs rules and regulations, as well as defend themselves. An unfunded startup seems like a big win for a department which can't enforce anything helpful for the average citizen.
- mhluongo 11y ago
  Good point -_-
- dragonwriter 11y ago
  > Well in all (sad) honesty, that's probably the only sort of violator they can go after. Well, lets check that by looking at the SEC Enforcement Division webpage [0], and a couple of the news for the past week: * Merrill Lynch Admits Using Inaccurate Data for Short Sale Orders, Agrees to $11 Million Settlement [1] * SEC Charges Deutsche Bank With Misstating Financial Reports During Financial Crisis [2] [0] http://www.sec.gov/enforce http://www.sec.gov/enforce [1] http://www.sec.gov/news/pressrelease/2015-105.html http://www.sec.gov/news/pressrelease/2015-105.html [2] http://www.sec.gov/news/pressrelease/2015-99.html http://www.sec.gov/news/pressrelease/2015-99.html
  - jboy55 11y ago
    I like this one, touting the benefits of microcap stocks got someone fined $4.6 million. I can only think the shit that would have come down if the founders had a stake (exercised options) in one of the companies on their exchange then created 'fake historical' data about it. http://www.sec.gov/news/pressrelease/2015-100.html http://www.sec.gov/news/pressrelease/2015-100.html
  - Dylan16807 11y ago
    Add "in a meaningful way" to "go after". Here they are charging a fine-per-revenue ratio of infinity percent, while the fines for really big bad actions are proportionally so small that they're almost meaningless.
  - deleted 11y ago
jdmichal 11y ago
Do you really think the SEC would have offered a $20,000 settlement if this was a major banking corp instead of an unfunded startup? Of course not. If they even did offer a settlement, it would have been an extremely large number. The SEC knew this was small fish and so offered the settlement to clear it off the plate. Furthermore, at what point does it suddenly become OK to chase after a financial security law violation? Is there a valuation limit? Cash flow limit? War chest limit? What exactly is the qualification to no longer be "a shame"?
- mhluongo 11y ago
  I don't know the answer to that, but this is the same problem any new fintech company suffers. Regulations often benefit incumbents and don't scale to new services testing the market. See eg anything related to bitcoin. How much do you think it cost them to go after Sand Hill?
  - jdmichal 11y ago
    The thing is, I don't care how much it costs the SEC to do their job. Their purpose is not to be a profit center based around prosecuting financial law violations. And actually, I'm very happy about that, because profit incentives in law enforcement creates very perverse incentives for the individual actors involved.
    - refurb 11y ago
      I get your point, but profit has nothing to do with it. The SEC has limited resources. I think the grandparent is questioning whether this is the best use of them.
      - dragonwriter 11y ago
        Honestly, I think nipping violations like illegal marketplaces in the bud -- getting them to conform or shutdown before they become major issues with widespread harms, is probably one of the most efficient uses of SEC resources. It's cheaper in direct costs than dealing with them once they become major problems, and results in less innocent people being harmed by both the violation and the enforcement action (while someone is culpable for any violation, when its by a firm there are going to be lots of innocent employees, customers, etc., who aren't doing anything culpable that are going to be negatively impacted by the enforcement action, however necessary it may be.)
rosser 11y ago
Only pursuing large-scale financial crime because "opportunity cost" just tells the crooks to play disposable, small-scale games.
anigbrowl 11y ago
I'm guessing it cost $19,995, incidentally.

refurb 11y ago

This blog has more details: https://medium.com/@eiaine/how-startup-growth-hacks-resulted-in-a-formal-investigation-from-the-sec-cd04598fe58 https://medium.com/@eiaine/how-startup-growth-hacks-resulted... It's a funny read.... Another thing I learned: If you’re gonna try to make yourself look like a legitimate financial institution, you’ll be prosecuted like a legitimate financial institution. And when that happens, you sure as shit better have the legal resources of a legitimate financial institution. The Commission accused us of acting as unregistered broker-dealers, selling security-based swaps, offering swaps on an unregistered securities exchange.

dalek2point3 11y ago
+1 this was also quite funny: http://sandhill.exchange/blog/sec-analysis http://sandhill.exchange/blog/sec-analysis
- MichaelGG 11y ago
  Takes a certain amount of arrogance or cluelessness to see a bunch of visits from the SEC and decide they're looking for jobs or otherwise impressed with your "engagement".
  - mhluongo 11y ago
    Pretty sure that's the joke...
  - spiffyman 11y ago
    That article was published today. I'm guessing this is just a cheeky swat back at the SEC. Especially since the original article prefaces the link with "Your tax dollars at work."
    - MichaelGG 11y ago
      Oh, wow. Takes a lot of cluelessness to not notice it was a joke.
11y ago

ivanplenty 11y ago

I don't understand: "Sand Hill Exchange" accepted items of real value (USD and BC) that could be used to "purchase" (or bet on) things named after real securities that trade (or are expected to trade) on public markets for a profit. I would be surprised if a regulatory body didn't come after this setup. There is a very bright regulatory line around gambling and investing in most countries that a typical person should have known about. What am I missing? Why should I sympathize with Sand Hill Exchange?

jboy55 11y ago
Indeed, a quick Google for "Prediction Markets" popped up, http://en.wikipedia.org/wiki/Prediction_market#Legality http://en.wikipedia.org/wiki/Prediction_market#Legality But then, tie that to real Securities ... its a miracle they got off with only $20,000 in fines.
firasd 11y ago
Well I think sending subpoenas to everyone behind the site and their mentors, and then fining them, is a bit disproportionate as a first step. I think (from the Medium writeup) part of the issue was that the site broadcast itself as more professional-looking and “in business” than it really was. I personally hadn’t realized when I’d seen the site earlier that most of the ‘users’ engaged in ‘trading’ were actually bots for example. Accepting Bitcoin without figuring out regulatory issues was an unwise step for sure.
wpietri 11y ago
This is specifically why when we set up http://longbets.org/ http://longbets.org/ we made is so the money always goes to charity. It's also why the Iowa Election Markets got a special waiver to operate. Either they're a market or a gambling operation, and both are heavily regulated in the US. As far as I'm concerned you should have no more sympathy for them than anybody else. Even if this risk really never crossed their minds, their lawyer should have warned them of how problematic this was during their first five minutes in the law office.
refurb 11y ago
I didn't know this, but you can write the SEC and request a "no action letter" if you aren't sure about the legality of what you are doing. http://www.sec.gov/answers/noaction.htm http://www.sec.gov/answers/noaction.htm These guys could have started there.

foobarqux 11y ago

On Twitter several months ago, the financial columnist Matt Levine said something along the lines of "Sand Hill Exchange can't possibly be legal" and one of the founders replied saying "You've got it all wrong, you just don't understand what we are doing". Some things really are as simple as they seem on their face.

cjensen 11y ago
After reading Levine's column [1] and Sand Hill Exchange's response [2], I'd have to say they were amazingly clueless. [1] http://www.bloombergview.com/articles/2015-03-11/how-should-a-bank-be- http://www.bloombergview.com/articles/2015-03-11/how-should-... [2] https://twitter.com/sandhillx/status/575659746507649024 https://twitter.com/sandhillx/status/575659746507649024
- foobarqux 11y ago
  I can't imagine how that call went.
- sfrechtling 11y ago
  Especially interesting in light of this, their analysis of traffic from the sec: http://sandhill.exchange/blog/sec-analysis http://sandhill.exchange/blog/sec-analysis
evanpw 11y ago
bloombergview.com is 4th on that list of referrers from Google analytics (here: http://sandhill.exchange/blog/sec-analysis http://sandhill.exchange/blog/sec-analysis). I wonder if some guys at the SEC read his article and said "Hey yeah, that does seem illegal!".
- caminante 11y ago
  ...and the SEC reads his blog so they make waves to GET on his blog ;-).

zhoujianfu 11y ago

Oi! But, that's why http://exchangel.co/ http://exchangel.co/ never deals in real money, and only gives out bitcoin as prizes (no purchase necessary).

chernevik 11y ago

The SEC should have said "Very clever, kids, but, ah, no. Knock it off." A fine here is ridiculous -- the participation was capped at $250, this clearly wasn't intended to take in serious amounts of money. The SEC can't let something like this go on, but it can be less hamfisted in its handling. Really the right thing here would have been a visit by SEC staff, asking a lot of questions and pointing out some security law violations, at which point the operators go "umm, didn't think about that, we'll be good". But that approach doesn't let the bureaucrats justify 100 hours of browsing on their time sheets, does it? The injunction to obey security laws going forward does make sense, it gives the SEC leverage if these same people actually do pop up later as scammers. Some journalism on what they were doing: http://www.bloombergview.com/articles/2015-03-11/how-should-a-bank-be- http://www.bloombergview.com/articles/2015-03-11/how-should-... http://ftalphaville.ft.com/2015/03/10/2121090/sand-hill-is-the-new-wall-street/ http://ftalphaville.ft.com/2015/03/10/2121090/sand-hill-is-t...

deleted 11y ago
[deleted]
rhino369 11y ago
20k fine is nothing. They were let off with a slap on the wrist, probably because they were willing to cooperate.
- elaineo 11y ago
  We understand that we did some unacceptable things. We get it. As individuals, we don't have $20k. The fine is not just a slap on the wrist, it's financially ruinous.
  - anigbrowl 11y ago
    No it isn't, people leave college with many times that amount of debt. Split it up between you, ask to get into a payment that's capped at a % of your income, work it off over a year or two. Make copies of your bank statements and your tax returns to confirm that you are in fact poor. You could probably make the money back in speaking fees or writing an e-book about your experience and what you learned (rather than how pissed off you are). Yeah, it's a lot of cash, but I've been billed more than that for a night in the ER when I didn't have insurance. And seriously, it was up to you to think about the fact that this was bound to attract regulators' attention and that the time they spent on you is currently being picked up by taxpayers. I know you want to compare yourselves with bucket Shops, which you think played an important role in democratizing/disrupting finance a century ago, but this whole idea of 'a chance for regular folk to get in on the action!' is unfortunately the same sort of psychology that con artists use to qualify their marks. Honestly, if one of you had done an ask HN about whether this was a viable thing people here would have told you why not and what you needed to do to be legit. Edit: come to think of it, I'm surprised your mentors int he Accelerator didn't point out this very obvious pitfall to you.

yueq 11y ago

You shouldn't have tried to add any monetization like IAP. This is simply a prediction market with startups. Didn't you know what happened to Intrade.com? Another example of 'early monetization is dangerous'.

jakejake 11y ago

On the other hand, $20,000 for national publicity is probably a deal. It looks like the site is running again using only fantasy money. An interesting thought is that the site itself wasn't making any money on the trades when there was real currency - which was illegal. But as a purely fantasy VC game they can make money on subscriptions, advertising, etc - which is legal.

MaysonL 11y ago
As well as potentially attract some capital…
- ghall 11y ago
  Have you ever tried fundraising with four Silicon Valley VCs subpoenaed in an SEC case against you? It's a bit like advertising you have an STD on your Tinder profile.

shawnee_ 11y ago

... where people could throw pocket change on valuation wagers. We never had any intention of operating in a regulated industry, nor do we have the resources required to do so. "Oh, it was just for shits and giggles" ... when there's real money involved? A peek at archive.org shows the sales pitch at the time of the SEC traffic / tracked visits. I'm not seeing anything about "for entertainment purposes only" here: The mission of Sand Hill Exchange is to democratize startup investment.We believe the startup ecosystem benefits when everybody can participate in startup growth. Our vision is to extend the power of public markets to private companies. [source: https://web.archive.org/web/20150315015146/http://sandhill.exchange/ https://web.archive.org/web/20150315015146/http://sandhill.e...]

reagency 11y ago
If you squint you can see that they may have felt it was legal to host investo-gambling if they weren't making and profit directly tied to trade activity.
jboy55 11y ago
I love this bit, "Sand Hill Exchange is backed by notable Silicon Valley investors, providing sufficient capital to guarantee deposits." Yet, in a comment in this thread, a $20,000 fine was financially ruinous. I hope they immediately refunded everyone their BTC, this is how 'innocent' people end up running Ponzi schemes.
- alextgordon 11y ago
  They said that they had $10k in the bank; $1.5k had been 'invested'; and the fine is $20k. So... yes?
  - jboy55 11y ago
    $10k in the bank is hardly "Sand Hill Exchange is backed by notable Silicon Valley investors, providing sufficient capital to guarantee deposits." Because they got fined $20k, and now they have no backing for the $1.5k of deposits they have taken.

randomname2 11y ago

Tangentially related: Former SEC Officials Demand SEC Chief: Stop Protecting Corporate Cronyism http://www.nakedcapitalism.com/2015/05/three-former-sec-commissioners-urge-mary-jo-white-to-stop-protecting-corporate-cronyism-via-inaction-on-disclosure-of-political-spending.html http://www.nakedcapitalism.com/2015/05/three-former-sec-comm...

zekevermillion 11y ago

they're lucky that the only interaction was with the SEC for running an exchange, and not with a prosecutor for operating a gambling website.

zaidf 11y ago

The real growth hack here is getting investigated by the SEC resulting in more traffic than $20K would otherwise buy you.

ghall 11y ago

SHX founding team member here. It's been great to read everybody's comments. I'm not going waste my time weighing in on whether we were clever hackers or bozos -- the truth, as always, lies somewhere in the middle. I did want to share some additional facts, which will come to light when the statement of facts gets published. (1) We had exactly 55 paying users, who had deposited $1550 and 15.6 BTC. (2) All but 5 of these users were friends, family, or members of our accelerator. (3) Our private beta test had been in operation for 7 weeks.

logicallee 11y ago
I'm sorry you've been given a hard time here, but with good reason. :) Securities law is really important for startups - they're the thing that enables your accelerator to exist, they allow you to exist and raise money and have protected investors for the next thing you do. So a lot of people here care a lot about it. Keeping it fun is one thing, but moving into monetization with fake trading histories - well, clearly you've learned that's another. Good luck with your next project.
zyxley 11y ago
> the truth, as always, lies somewhere in the middle. Not really, in this case. Securities laws aren't the kind of thing you up and ignore just because you feel like it.
srdev 11y ago
> I'm not going waste my time weighing in on whether we were clever hackers or bozos -- the truth, as always, lies somewhere in the middle. No, it doesn't always. The truth is not in the middle here; you guys were being breathtakingly clueless. Trying to pass it off as cleverness is just self-delusion, and none of the excuses your team has written are justifiable. You should probably do some honest introspection before taking your next pass on starting up a business. Not doing so is a disservice to yourself.

namecast 11y ago

Something I just realized - why is this being handled by the SEC and not the CFTC? Don't prediction markets fall under the CFTC's jurisdiction, e.g. Intrade? I guess given the nature of the prediction market they could have flipped a coin to see who fined them first....

akg_67 11y ago

Looks like both the links to Sand Hill Exchange blog post and Founders blog post are dead with just a mention of "censored". I wonder what SEC rules did they violate now, may be not disclosing publicly the terms of settlements.

jboy55 11y ago
Their lawyers managed to read it the posts. With statements like, "Nobody wants to play in a market with zero users, we realized. So we gave participants the illusion of liquidity." "We created bots to trade against incoming orders. They were like my friends. I even named them! My favorite was the “Jesse Livermore” bot. Opportunistic to a fault." "The bots would run every day and place orders against each other so the market looked like it was exhibiting lots of price movement and volume. For added credibility, we randomly generated trading histories for each company going all the way back to last year." Their lawyers realized they were admitting to creating a scheme to defraud investors to the safety of their market. Or maybe the SEC read it, and realized that perhaps this wasn't just a simple trading platform, but had a lot of fraudulent data on it and criminal charges were better.
davidgerard 11y ago
Sandhill blog post: https://archive.is/qVNUQ https://archive.is/qVNUQ Medium blog post: https://archive.is/DOVJZ https://archive.is/DOVJZ