Some are plain fraud. Investors will lose, scammers will profit and/or go to jail.
Some are promising startups, that will raise far more money than is healthy for their stage, and will die from too much money. If you don't have enough money (true for nearly everyone) it might be hard to imagine, but I've seen it when VCs give a startup too much. It makes them grow before they've found product-market fit, and when they realize their fit isn't quite right they're too large to change course quickly.
The second is more sad, because not only will investors lose their money but the world will lose an otherwise promising startup.
The key difference is that the companies raising money via ICOs are co-ops, not startups.
The reason startups go bankrupt when they have too much money though is because they're forced to spend money before they have product-market fit. And in the same way that the value created by good software scales exponentially as more dollars are invested, the costs of bad software scale exponentially as more dollars are invested.
Whereas money raised by co-ops is more akin to having money in your personal bank account, and it's not often that individuals go bankrupt as the direct result of having too much money. Sometimes they do, like with lottery winners, and I suspect we'll see that a bunch in the short term. But once we have better rules and norms, I think it's going to be less often that we see excess money killing co-ops.
I know you didn’t mean it this way, but that sounds like the economy as a whole
Just replace “investors” with workers, and scammers with “moneyed special interests.” Some go to jail to satisfy the proles, but otherwise nothing really changes to help the workers
And we keep talking about the pattern within itself, at a lower abstraction, ignoring the level where it matters to most
The idea of accredited investors horrifies me. The only way to get rich by investing is to get in early when the valuation is very low. These type of rules guarantee that only people already rich will be able to get in early.
The reason cryptocurrencies & ICOs are popular is they let anyone speculate and day trade.
I think the idea of accredited investors is that those investments are very risky, and it limits them to people who can "afford" the risk. An accredited investor may be able to bear the brunt of 9 investments being a total loss, to get to the 10th that hits it out of the park, while a non-accredited investor may have her/his life savings (or a substantial enough part of it) wiped out on the first 1 or 2 deals. I'm not saying it's perfect - there's certainly an element of "the rich get/stay richer" too - but just that there's some kind of rationale for the rules (as I understand it anyway).
I agree there should be a competency exemption to the SEC's "accredited investor" requirement [1]. FINRA already loves administering exams [2].
That said, contrast the S&L crisis [3] with Bernie Madoff's fraud [4]. The former lost $160 billion of regular Joes' money (along with wealthy investors'). $132 billion of taxpayer money had to be spent, alongside countless hours of regulators', judges' and lawmakers' time, again, on the public dime. A minor political crisis started (and subsided).
With the latter, $70 billion was lost (though it might have been as "small" as $20 billion). Prosecutors and judges still got involved, but fines repaid their efforts. Systemic effects were largely contained.
TL; DR We restrict the masses from illiquid investments procured through irregular channels because (1) the legal costs of diligence preclude small investments, meaning small investors either invest at a material disadvantage or invest too much (relative to their worth) and (2) the lower your worth, the higher the probability that a busted investment will lose you your shirt. That turns a financial problem into a de-stabilising political problem.
Side note: early-stage investing isn't as profitable, on a risk-adjusted basis, as it might seem if one only counts the winners.
Disclaimer: I am not a lawyer. This is not legal, nor any other kind, of advice. Consult an investment adviser and a securities lawyer before making risky investments.
An accredited investor is just a term for someone allowed to invest in things not regulated by the SEC. If you think that EVERYONE should be able to invest in things not regulated by the SEC, you are basically saying that being regulated by the SEC should be completely voluntary (i.e. a company can choose to be regulated or not).
You can argue that it should work like that, but we intentionally decided to make SEC regulation the rule, and only grant exceptions for investors who have demonstrated they can handle the risk.
There is nothing saying that a non-accredited investor can't invest when a valuation is low. The investment just has to be regulated by the SEC.
Anyone could speculate and day trade before just as long as there was enough information available for retail investors to do so safely. That is, on the public markets.
Private markets introduce much higher degrees of information asymmetry. Maybe you'll get rich, but your odds of losing your money are also much higher. The basic theory of accredited investors is, "Unsophisticated players aren't allowed to gamble unless they can afford to lose."
I'm fine with that. I don't want to pay for the retirement of somebody who got talked into sinking their retirement funds into something that was fucked from the start. If we want to give people a cut of the proceeds of innovation, let them put their money in funds that in turn invest a reasonable proportion of the money in high-risk areas like VC. There the asymmetries are drastically reduced.
Whatever small effect it has on upward mobility is outweighed by protecting ignorant[1] investors from getting scammed out of their meager life savings.
>The reason cryptocurrencies & ICOs are popular is they let anyone speculate and day trade
Even assuming this was good, you can trade as a non-accredited investor.
[1] no disrespect intended, almost everyone is including me
This is right on the mark. Remove accredited investor requirements, and all that money will go to better options, like for example, YC startups. Nothing could do more damage to the investor monopolies of the world than opening this funding venue.
Accredited investor regulations horrifies me too. People should be free to do what they want with their money, and teaching people how to be a responsible investor makes more sense than removing their freedom to invest =\
I'd be in favor of needing to take a course on investment in order to be accredited, but having income requirements is bullshit and absolutely lends to making the rich richer and keeping the poor poor.
The funny thing about ICOs is that anyone in the world can invest anonymously AND GET PAID BACK anonymously even if they have no money, don't have a bank account, are a fugitive, in Iran or North Korea, are in prison, have unpaid child support obligations, have large unpaid IRS tax liabilities, or government fines and penalties or are using stolen funds. All the little knobs and levers that governments use to financially control people are rendered useless. The guys taking the money don't know who their investors are, so they can't discriminate. This is probably why they are so popular even though the risks are ludicrous.
The best case scenario is that any regular person with an internet connection and a small initial amount of capital can experience venture capital style returns. Since the most recent trend is for growing startups to delay longer and longer before going public, this is potentially a way to level the playing field, since very few people can actually invest in pre-IPO companies.
This is a great example of how costly regulation actually is. I am horrified at the SEC, not at ICO's. Figure how all that moeny could be going, for example, to YC startups, for a fraction of what they give investors.
Founder of the first ICO platform here (April '14, SWARM) and early contributor to the Ethereum project.
I half-left the industry for a few reasons:
(1) Current crypto-markets highly favor "smoke and mirror" hype-driven approach to product as opposed to a user and product centric approach.
(2) Most "businesses" in the space are basically about skimming money off the top of a frothy market and effectively encouraging the scammy parts of the system. I suppose I could be making a lot of money this way right now but would highly violate my personal ethics to do so.
(3) It is exceedingly difficult to tie any sort of standard value to a blockchain-issued token, partially because of the complex regulatory framework around such offerings
(4) The libertarian bias of the industry effectively forces a massive head on collision between the incumbents (e.g. the SEC) and folks trying to circumvent their control, also effectively guaranteeing some version of "blood on the streets."
That said, as someone who founded the first platform dedicated to these topics I obviously think there are a lot of positive elements that are possible. Including:
(1) Streamlining and adding efficiency to capital markets by removing middlemen
(2) Funding novel highly sophisticated technological projects that would be difficult to get funding for in the VC world (Ethereum, DASH)
(3) Creating broader incentivization than exists in traditional funding models such that users of a product are directly incentivized by its success
(4) Allowing for novel forms of governance and organizations that are not bound by the legal system of any specific legal jurisdiction (e.g. DAOs)
All of these ultimately have high value. However, I think what we are likely to see is a major phase of consolidation after the current hype cycle wears off (much as what happened with "the DAO").
The reality is that ICOs are mostly scammy and useless projects at the moment with a few shining examples.
DISCLOSURE: I don't mean to critique any particular political philosophy in this post. If I have criticism it is more directed to tactics and strategy.
No shit, right? SEC Regulator is intrinsically a position that exists in human controlled, centralized trust networks, so of course it violates their archaic human contracts. Precisely what blockchains aim at reforming.
Yet Kickstarter, with all of the same risks of never getting what you paid for, and none of the potential benefits of becoming a stakeholder, is still perfectly fine.
I don't get why regulation is needed. The whole thing is by definition very high risk investment, and I think it'd be silly for any "scam-victim" to claim he didn't know he's entering a high risk, and also high chance of scam, deal.
In the end of the day, why is it the government's job to protect idiot people's money? And that's coming from the country where gambling is legal? The whole thing is based upon get-out-of-our-way-government exactly because of these ridiculous regulations.
If someone got money to waste, and decided to bet on some ICO horse, I wish him luck. If he doesn't have money to waste, it doesn't stop him from gambling on a real horse (which is still legal, and yet has 0 meaning whatsoever), so why are we so bothered about him gambling on this new virtual horse?
Sure, arrest those ICOs that are actually 100% clear scam because they left misleading expectations which they never had an intent of fulfilling.
>I.C.O.s represent the most pervasive, open and notorious violation of federal securities laws since the Code of Hammurabi
Can someone explain this statement to me? Is he saying I.C.O.s are the most flagrant violations occurring since the Code of Hammurabi was written, or is the Code of Hammurabi itself a violation?
I believe the intention is the former; the Code of Hammurabi is one of the oldest known sets of written laws, and almost half of it deals with contracts.
Why dont we regulate everything like that.
Why do we allow people to spend 2M$ on a Car or 6k$ on a bag?
Why do we allow people to buy unlimited lottery tickets or gamble everything away in the casino?
Those examples have cleary less benefit for society then the dumbest investment strategy.
Let people invest, sure tons if people will lose their shirt but they will learn from it and stay away. Everyone else in the society gets to Enjoy the increased liquidity in the society. Why does anyone think that its ok that we created this random gatekeeps in the society that block ordinary people from investing beciase they are to “stupid”.
The accredited investors sheme is a fraud, the arbitrary number on 1m$ networth to be an accredited investor is a joke. Thats means that even a Business Prof. Can’t invest because the SEC deems him to be to stupid.
There will be enough marketplaces in the world that will provide a solid legal structure for ICOs. The US certainly wont be a part if them.
Switzerland, Singapore and Japan already moved ahead with the legal structure.
Not as much as you'd think. The US stock market is 39% of all publicly traded stocks. The US market is bigger than the next 8 countries put together. [1] This is in part due to the US's stringent regulations on stock market listings and accounting for publicly held firms. The more transparent and effective the market, the safer it is for investors to put their money in.
It's a subjective judgement, and not really useful. Some more useful questions are: which are illegal, and which will fail? The answer to both of these questions is "almost all of them".
Even so, it might take a long time before they start failing in large numbers and law enforcement starts taking action. Until then, a lot of money will be won and lost.
The same can be said for a lot of investments, there's nothing about ICOs that makes this unique aside from the fact that most people don't understand computers.
The interesting unasked question here is why he seems to like FileCoin (the reference to decentralised storage markets) - what does he think that FileCoin gets right that others are getting wrong?
> what does he think that FileCoin gets right that others are getting wrong?
FileCoin retained a reputable law firm [1], restricted their applicable marketing to accredited investors [2] and used a template agreement designed by lawyers to comply with the law [3].
File coin requires you to be an accredited investor.
Grandmas and Joe smoes are not being scammed. You can only lose money from file coin if you are in the top 1% already, and therefore probably don't need the government to protect you.
If you don't trust ICOs to provide the desired effect, don't participate in them. An ICOs has the same trust dynamic as a Kickstarter, and as long as somebody is okay with that, then I don't see why they should be protected from themselves preemptively.
No shit - by the time a company hits a public market, accredited investors are the ones who cash out. ICOs, invested in with some research and diligence can finally spread the wealth to the rest of us.
> But Mr. Grundfest said it was clear that almost everyone buying tokens at this point was buying them with the hope that their value would go up, not because the buyer wanted to use them on some future computer network.
So beanie babies were securities too?
This is just silly. Surely there's some better definition of what a securities are.
In some countries security is either equity or fixed income instrument. As I understand ICO-s are neither.
[+] [-] tlb|8 years ago|reply
Some are plain fraud. Investors will lose, scammers will profit and/or go to jail.
Some are promising startups, that will raise far more money than is healthy for their stage, and will die from too much money. If you don't have enough money (true for nearly everyone) it might be hard to imagine, but I've seen it when VCs give a startup too much. It makes them grow before they've found product-market fit, and when they realize their fit isn't quite right they're too large to change course quickly.
The second is more sad, because not only will investors lose their money but the world will lose an otherwise promising startup.
[+] [-] Alex3917|8 years ago|reply
The reason startups go bankrupt when they have too much money though is because they're forced to spend money before they have product-market fit. And in the same way that the value created by good software scales exponentially as more dollars are invested, the costs of bad software scale exponentially as more dollars are invested.
Whereas money raised by co-ops is more akin to having money in your personal bank account, and it's not often that individuals go bankrupt as the direct result of having too much money. Sometimes they do, like with lottery winners, and I suspect we'll see that a bunch in the short term. But once we have better rules and norms, I think it's going to be less often that we see excess money killing co-ops.
[+] [-] LeoPanthera|8 years ago|reply
[+] [-] jririri82838|8 years ago|reply
Just replace “investors” with workers, and scammers with “moneyed special interests.” Some go to jail to satisfy the proles, but otherwise nothing really changes to help the workers
And we keep talking about the pattern within itself, at a lower abstraction, ignoring the level where it matters to most
[+] [-] ataturk|8 years ago|reply
[deleted]
[+] [-] unabridged|8 years ago|reply
The reason cryptocurrencies & ICOs are popular is they let anyone speculate and day trade.
[+] [-] Chirael|8 years ago|reply
[+] [-] JumpCrisscross|8 years ago|reply
That said, contrast the S&L crisis [3] with Bernie Madoff's fraud [4]. The former lost $160 billion of regular Joes' money (along with wealthy investors'). $132 billion of taxpayer money had to be spent, alongside countless hours of regulators', judges' and lawmakers' time, again, on the public dime. A minor political crisis started (and subsided).
With the latter, $70 billion was lost (though it might have been as "small" as $20 billion). Prosecutors and judges still got involved, but fines repaid their efforts. Systemic effects were largely contained.
TL; DR We restrict the masses from illiquid investments procured through irregular channels because (1) the legal costs of diligence preclude small investments, meaning small investors either invest at a material disadvantage or invest too much (relative to their worth) and (2) the lower your worth, the higher the probability that a busted investment will lose you your shirt. That turns a financial problem into a de-stabilising political problem.
Side note: early-stage investing isn't as profitable, on a risk-adjusted basis, as it might seem if one only counts the winners.
[1] https://www.sec.gov/fast-answers/answers-accredhtm.html
[2] http://www.finra.org/industry/qualification-exams
[3] https://en.wikipedia.org/wiki/Savings_and_loan_crisis
[4] https://en.wikipedia.org/wiki/Bernard_Madoff#Size_of_loss_to...
Disclaimer: I am not a lawyer. This is not legal, nor any other kind, of advice. Consult an investment adviser and a securities lawyer before making risky investments.
[+] [-] cortesoft|8 years ago|reply
You can argue that it should work like that, but we intentionally decided to make SEC regulation the rule, and only grant exceptions for investors who have demonstrated they can handle the risk.
There is nothing saying that a non-accredited investor can't invest when a valuation is low. The investment just has to be regulated by the SEC.
[+] [-] wpietri|8 years ago|reply
Private markets introduce much higher degrees of information asymmetry. Maybe you'll get rich, but your odds of losing your money are also much higher. The basic theory of accredited investors is, "Unsophisticated players aren't allowed to gamble unless they can afford to lose."
I'm fine with that. I don't want to pay for the retirement of somebody who got talked into sinking their retirement funds into something that was fucked from the start. If we want to give people a cut of the proceeds of innovation, let them put their money in funds that in turn invest a reasonable proportion of the money in high-risk areas like VC. There the asymmetries are drastically reduced.
[+] [-] jstewartmobile|8 years ago|reply
[+] [-] rhino369|8 years ago|reply
>The reason cryptocurrencies & ICOs are popular is they let anyone speculate and day trade
Even assuming this was good, you can trade as a non-accredited investor.
[1] no disrespect intended, almost everyone is including me
[+] [-] conanbatt|8 years ago|reply
This is right on the mark. Remove accredited investor requirements, and all that money will go to better options, like for example, YC startups. Nothing could do more damage to the investor monopolies of the world than opening this funding venue.
[+] [-] billylindeman|8 years ago|reply
I'd be in favor of needing to take a course on investment in order to be accredited, but having income requirements is bullshit and absolutely lends to making the rich richer and keeping the poor poor.
[+] [-] narrator|8 years ago|reply
[+] [-] emodendroket|8 years ago|reply
I'm thinking a lot of investors don't care about this and just have dollar signs in their eyes.
[+] [-] patrickk|8 years ago|reply
[+] [-] xadhominemx|8 years ago|reply
[+] [-] conanbatt|8 years ago|reply
This is a great example of how costly regulation actually is. I am horrified at the SEC, not at ICO's. Figure how all that moeny could be going, for example, to YC startups, for a fraction of what they give investors.
[+] [-] leereeves|8 years ago|reply
[+] [-] ataturk|8 years ago|reply
[deleted]
[+] [-] Jd|8 years ago|reply
I half-left the industry for a few reasons:
(1) Current crypto-markets highly favor "smoke and mirror" hype-driven approach to product as opposed to a user and product centric approach.
(2) Most "businesses" in the space are basically about skimming money off the top of a frothy market and effectively encouraging the scammy parts of the system. I suppose I could be making a lot of money this way right now but would highly violate my personal ethics to do so.
(3) It is exceedingly difficult to tie any sort of standard value to a blockchain-issued token, partially because of the complex regulatory framework around such offerings
(4) The libertarian bias of the industry effectively forces a massive head on collision between the incumbents (e.g. the SEC) and folks trying to circumvent their control, also effectively guaranteeing some version of "blood on the streets."
That said, as someone who founded the first platform dedicated to these topics I obviously think there are a lot of positive elements that are possible. Including:
(1) Streamlining and adding efficiency to capital markets by removing middlemen
(2) Funding novel highly sophisticated technological projects that would be difficult to get funding for in the VC world (Ethereum, DASH)
(3) Creating broader incentivization than exists in traditional funding models such that users of a product are directly incentivized by its success
(4) Allowing for novel forms of governance and organizations that are not bound by the legal system of any specific legal jurisdiction (e.g. DAOs)
All of these ultimately have high value. However, I think what we are likely to see is a major phase of consolidation after the current hype cycle wears off (much as what happened with "the DAO").
The reality is that ICOs are mostly scammy and useless projects at the moment with a few shining examples.
DISCLOSURE: I don't mean to critique any particular political philosophy in this post. If I have criticism it is more directed to tactics and strategy.
[+] [-] proc0|8 years ago|reply
[+] [-] jerkstate|8 years ago|reply
[+] [-] aeternus|8 years ago|reply
[+] [-] age_bronze|8 years ago|reply
In the end of the day, why is it the government's job to protect idiot people's money? And that's coming from the country where gambling is legal? The whole thing is based upon get-out-of-our-way-government exactly because of these ridiculous regulations.
If someone got money to waste, and decided to bet on some ICO horse, I wish him luck. If he doesn't have money to waste, it doesn't stop him from gambling on a real horse (which is still legal, and yet has 0 meaning whatsoever), so why are we so bothered about him gambling on this new virtual horse?
Sure, arrest those ICOs that are actually 100% clear scam because they left misleading expectations which they never had an intent of fulfilling.
[+] [-] regulation_d|8 years ago|reply
We need regulation because regulation promotes confidence in the market which increases participation in the market.
Security regulation is among the easiest government regulation to justify from a market perspective.
[+] [-] lanius|8 years ago|reply
Can someone explain this statement to me? Is he saying I.C.O.s are the most flagrant violations occurring since the Code of Hammurabi was written, or is the Code of Hammurabi itself a violation?
[+] [-] alextheparrot|8 years ago|reply
[+] [-] dpiers|8 years ago|reply
[+] [-] unknown|8 years ago|reply
[deleted]
[+] [-] gxs|8 years ago|reply
People were losing their shirts investing in shady companies so the government stepped in to protect people from themselves.
For this reason it won't be surprising at all when we start seeing some attempts to enact regulation.
[+] [-] mrwong|8 years ago|reply
Those examples have cleary less benefit for society then the dumbest investment strategy. Let people invest, sure tons if people will lose their shirt but they will learn from it and stay away. Everyone else in the society gets to Enjoy the increased liquidity in the society. Why does anyone think that its ok that we created this random gatekeeps in the society that block ordinary people from investing beciase they are to “stupid”. The accredited investors sheme is a fraud, the arbitrary number on 1m$ networth to be an accredited investor is a joke. Thats means that even a Business Prof. Can’t invest because the SEC deems him to be to stupid.
[+] [-] mrwong|8 years ago|reply
The world is global, money is global.
[+] [-] wpietri|8 years ago|reply
[1] https://www.indexmundi.com/facts/indicators/CM.MKT.LCAP.CD/r...
[+] [-] giacaglia|8 years ago|reply
[+] [-] modeless|8 years ago|reply
Even so, it might take a long time before they start failing in large numbers and law enforcement starts taking action. Until then, a lot of money will be won and lost.
[+] [-] lowglow|8 years ago|reply
[+] [-] brndnmtthws|8 years ago|reply
[+] [-] rjknight|8 years ago|reply
[+] [-] JumpCrisscross|8 years ago|reply
FileCoin retained a reputable law firm [1], restricted their applicable marketing to accredited investors [2] and used a template agreement designed by lawyers to comply with the law [3].
[1] https://www.nytimes.com/2017/08/07/business/dealbook/initial...
[2] https://techcrunch.com/2017/08/10/filecoins-ico-opens-today-...
[3] https://saftproject.com
Disclaimer: I am not a lawyer. This is not legal nor securities advice.
[+] [-] stale2002|8 years ago|reply
Grandmas and Joe smoes are not being scammed. You can only lose money from file coin if you are in the top 1% already, and therefore probably don't need the government to protect you.
[+] [-] Breefield|8 years ago|reply
[+] [-] andreygrehov|8 years ago|reply
[+] [-] sschueller|8 years ago|reply
[+] [-] microcolonel|8 years ago|reply
[+] [-] googletazer|8 years ago|reply
[+] [-] chinathrow|8 years ago|reply
This will not end well.
[+] [-] scotty79|8 years ago|reply
So beanie babies were securities too?
This is just silly. Surely there's some better definition of what a securities are.
In some countries security is either equity or fixed income instrument. As I understand ICO-s are neither.
[+] [-] basicplus2|8 years ago|reply