ICO Regulations are seemingly non-existent so far; the pump and dump penny stock promoters who were long-banished from regulated securities markets have planted their flags in the virtual world of Initial Coin Offerings-and that’s not a good thing for anyone-other than them. ICO Regulations are akin to kryptonite for the supermen of the crypto world, but if the cool kids in bitcoin haven want the blockchain powered market to morph, self-regulation is the only logical step. Yes, the mere notion of this new OTC industry establishing a standardized protocol for ICO regulations that comport with the standards long-established in the real world of private placements and securities offerings is perhaps counter-intuitive for the community of crypto kids. But, unless the operators of bitcoin exchanges, token and coin issuers, and the array of ‘consultants’ guiding startups seeking to raise money in crypto land ‘get the joke’ and come back to earth fast, the Initial Coin Offering marketplace will be pushed back to the future by the global community of securities regulators who have the bats and balls and nets. It will likely happen well before a virtual world riot is led by an onslaught of investors who ‘didn’t understand what they were doing’ when they passed bitcoin bucks into the ethernet with misguided expectations.
When advising blocktech entrepreneurs seeking assistance for white paper preparation and investor offering document best practices, thought leaders from PPM have long advocated that clients embrace the “Three Duck Rule” before setting out to solicit investors for startup capital. Within the framework of capital formation for a new entity or enterprise, any knowledgeable securities lawyer, any seasoned investment banker and certainly, every right-minded capital formation consultant in every corner of the globe will caution: “If it looks like a duck, walks like a duck and quacks like a duck, it is a duck.” That infers that if you are seeking to raise capital from investors, whether you are a private company with no operating history or an established business, you would be well-advised to operate within society’s norms. Claiming that what you are offering is not a security, but a “store of value” is a cute interpretation of securities regulations courtesy of a cadre of new age lawyers who would like to believe their liberal interpretation of the “Howey Test” is worth the bitcoins you are paying them. This isn’t to suggest they are completely wrong; the Howey Test (SEC v. Howey) is the much-discussed 1946 US Supreme Court ruling favoring two Florida-based real estate developers who were chased by the SEC for inappropriately selling securities that the Court since determined were really not securities, and hence not subject to securities laws governing the sale of securities to non-accredited investors.
‘…The best way forward would be to issue guidelines for ICO disclosures and documentation that include all the important components of registered equity offerings. This means, at a minimum, that ICOs should be forced to disclose risk characteristics, distinguish between developed/working software and future plans, identify what, if any, revenue accrues to the token, specify the potential for future issuance of the tokens as part of a scarcity analysis, and describe the governance structures which influence the value of the token. That said, there are issues with the current equity rules, many of which date back more than 70 years, and the first one is that many ICOs are quite different than equities…’
While current day promoters might want to rest their laurels on that court decision and try to ignore the threat of real world regulators, the fact is they are quickly killing a potential golden goose industry. Yes, it is entirely reasonable to assume that securities regulators are greatly influenced by established investment banks, broker-dealers, investment industry utilities–all of which have been watching the blockchain bus move into bitcoin world–and have left them holding an empty bag. Those folks are not happy that an alternative industry has been growing like wild tulips and none of them have made a penny from transaction fees, commissions, market data, licensing fees or anything else. Shame on them for not being in front of the bus instead of being rolled over it by it. But, the crypto world is overlooking a critical, time-tested fact: the vibrancy (not volatility), the longevity and success of any marketplace is directly correlated to the degree of self-regulation established by the market participants. Without any semblance of market regulation, the inevitable outcome is chaos. Unchecked chaos leads to calamity. One need not be an Ayn Rand follower or have a Phd in Economics to understand this basic precept.
For the select group of Bitcoin and Blockchain industry pioneers who position themselves as counter-revolutionaries or libertarians that have no need for established rules of order, you are leading your sheep to slaughter. The good news is many blocktech pioneers understand this and those who will later be viewed as Founding Fathers include a fellow by the name of David Weisberger, a financial industry grey beard and senior principal of ViablMkts, who made the move to the new world with eyes wide open and a proper view towards how regulation can work within the crypto world. Below is the opening extract of a 17 Jan 2018 column Weisberger wrote for financial industry think tank TABBForum..
ICO Regulations? Sure, But Please Avoid Using Outdated Rules
It seems like every day we hear more from the SEC about the perils of crypto-investing, and yet get more proof of how futile some of the regulatorās efforts will be. The SEC should crack down on fraud and should require full disclosures of risks and governance structures to investors. But while there would be significant benefits to some regulation and the establishment of standards for the ICO market, the SEC should not force ICOs into decades-old equity regulations that do not apply.
Last week, we learned about the launch of KodakCoin, which promptly sent the stock of Kodak up 44% and it continued to go higher. The question, therefore, is whether equity rules would provide protection to ICO investors, when the simple announcement of an upcoming ICO can add more than $300 million in market cap to a stock in the highly regulated, national market system. Of course, it doesnāt even take an ICO, as evidenced by the shares of Long Island Ice Tea, which more than doubled by changing its name to Long Blockchain ā¦ To be clear, we at CoinRoutes believe that there would be significant benefits to some regulation and the establishment of standards for the ICO market, and welcome some of what the SEC is reportedly considering.
For example, we believe that Bitcoin Magazineās report on the SEC crackdown against Initial Coin Offerings and cryptocurrencies could be good news for those of us in the crypto business that have launched or are planning a legitimate ICO. The SEC should crack down on fraud and should require full disclosures of risks and governance structures to investors. The SEC, however, should not force ICOs into decades-old equity regulations that do not apply. Unfortunately, however, the current rules, without exemptions, would create barriers to legitimate business opportunities that utilize blockchain technology and modern network concepts.
Case in point is the Gordian knot that Matt Levine described in his money watch column. He points out that, in order to issue a potentially useful token, Kodak utilized an exemption under Regulation D, which only supports selling tokens to accredited investors. The tokens, however, are designed to be used by anyone with photographic content, so they would need to be freely transferable for use. That, unfortunately, means that the post-ICO market for those tokens would need to be open to all, which would, in all likelihood, be deemed as violating securities laws.
While we can disagree on whether this coin might be useful, there are certainly coins that will provide value to their owners. Unfortunately, if the SEC insists that all tokens whose value is at least partially dependent on the āmanagerial or entrepreneurial effortsā of their founders are securities, then those emerging business concepts will be seriously impeded. This would essentially force the businesses developing these tokens either to potentially violate securities rules or to ignore the US market altogether. That would be a very bad outcome for our economy, so we should work toward a better solution.
The best way forward would be to issue guidelines for ICO disclosures and documentation that include all the important components of registered equity offerings. This means, at a minimum, that ICOs should be forced to disclose risk characteristics, distinguish between developed/working software and future plans, identify what, if any, revenue accrues to the token, specify the potential for future issuance of the tokens as part of a scarcity analysis, and describe the governance structures which influence the value of the token. That said, there are issues with the current equity rules, many of which date back more than 70 years, and the first one is that many ICOs are quite different than equities.
To continue reading the TABBForum article by David Weisberger, click hereĀ