Topic: Are bitcoin based securities illegal? (Read 2294 times)

Maybe bfl should let you rent minirigs 

I once was on a investment club board, and under US security law there can only be 100 partners of the investment club.  Also, there cannot be any 'public' requests for investments.

I also like the idea of just renting mining power.  People rent server space all the time for a fee and make money off their websites.  I don't see why people can't rent something that mines bitcoins.

I consider the people who joined the particular venture to be friends, and still are. One could argue that if you reach a certain post count level you are no loner an unknown entity you are in fact a "community" or "tribe".

One could argue further about this since all the people involved are on bitcoin-otc so are not "the public" per se but already known individuals.

At least in my country things are considered hobbies untill you get more than $75 000 a year turnover.

There seems to be a fuzzy area though.

People can only not be strangers if their existence has somehow been advertised/transmitted to each other, whether by birth contractions to their mother, by their mother or by the photons or noises they emit or by their tactile properties if encountered in the dark silently to their father, and on throughout life.

So one fuzziness is at what point can one put aside the original advertisement of the presence/existence of another human being and the subsequent process of getting to know each other as "water under the bridge" and move onward to "now we all know each other, has anyone any suggestions as to anything that might be fun or interesting or profitable to do together" followed by "why yes as a matter of fact, I was thinking we could all pool our resources and accomplish such and such a thing" ?

...Followed by "but here are lots of other things" ...Followed by "okay so how about some of us pool resources to accomplish one thing and others of us pool our resources to accomplish another thing and so on for many things" ...Followed by "Hey can I pool some of my resources into one thing and some into another thing and if so over how many things, such as can I put some into each and every thing we come up with to pool resources into"...

-MarkM-

I'll take that as a no.

In the United States Investment club partnerships must file Form 1065 and Schedule K-1s with the IRS each year, and with states that require partnership filings.  In the United Kingdom investment clubs and their members are required to submit form 185(new) to HMRC each year.  Investment club accounting software can facilitate the management of a club's books and the preparation of tax filings.

Yeah in the UK there's also a requirement that they have to have significant financial experience (work in finance or already done X investments in the last Y years - can't be bothered to look it up).  Think the asset requirement is lower though (like £250k excluding pensions funds or similar).  There's different exclusions for owning shares in a private company though - but one of the requirements (from memory, which may be faulty) is no advertisement of it: i.e. you can't solicit strangers to invest.

Posting on a public forum would 100% be considered advertising - that was, after all, the whole purpose of it

It all depends, again, on the specific rules of your own country.  Certainly in the UK the single biggest op-out from having to be regulated is that you are not doing it "by way of business".  Even if the intent is to make profit that is not, of itself, sufficent to mean you have to be regulated.  If nefario was working full-time on GLBSE then claiming it wasn't being run "by way of a business" pretty much went out of the window.

If anyone's concerned about a specific situation then they really need to seek expert legal advice.  I have some knowledge and experience of specific areas (in particular, of relevance to GLBSE at present, compliance with the Data Protection Act - having been compliance officer for it for a company in the past) but am by no means an expert on securities.  In the UK if you do something as a hobby with only friends/acquaintances involved then you're generally fine (even if it's technically against some rule noone really gives a shit).  Once you start tryng to do it full-time (for a living) you'd best get everything right.  GLBSE went from hobby to full-time without (apparently) bothering to find out from a solicitor or the FSA or even the internet how things are actually supposed to be done.

There's some cut-off point (in terms of size of "crypto company") below which any LE are going to laugh at anyone who reports you, above which they may start to take a complaint seriously.  If you're not going to run a "proper" company then my best advice is to stay small enough that no LE/regulators will take a complaint against you seriously.  And make sure any "investors" clearly understand whatever risks there are in "investing" - as there's no minimum size for fraud (where you deliberately leave out information causing them to suffer an unexpected loss).

Well look how well it worked for the utubes and file-download sites of the world.

New laws got passed that basically assume guilt until proven innocent or some such weirdness, in the sense that nowadays you might not anymore be able to just say you will remove any copyright-violating or intellectual-property violating or illegal material upon receipt of a court order? Instead now folks can just demand you remove it without even first having a judge ascertain they are within their rights to have it removed?

Or are the new "takedown notice" things actual real court orders?

Because allowing OTdemo Open Transactions server to demo the ability of anyone to issue any asset at any time seems likely to lead to some pornographic, hate-literature, racist, unregulated, illegal, intellectual property violating, copyright-infringing, rights of publicity infringing, etc etc etc assets, I am trying taking the position that as I am not a lawyer, and trolls making false accusations are extremely common and likely, it makes little sense for me to do a takedown that isn't court-ordered unless I am moved by some whim or mood or quirk of fate or act of deity or force majeure etc to do so.

I really am not educated enough in all the laws of this planet's various jurisdictions to determine which exactly among numerous pseudonymous identities are or are not permitted to play ruler of a nation or CEO of a corporation or interplanetary securities dealer or whatever their game is in which games where when and how.

However I do know that DeVCoins are intended to help raise money for software development so I don't really see yet any good reason why they should not be used to encourage playtesting of the Open Transactions platform by having them be used to reward players for playing, such as buying and selling various virtual articles with them. If people come up with interesting and potentially useful new free open source contracts for example are they not contributing thereby to free open source development?

Bitcoins though, hmm, are bitcoins really so very different that they ought not be permitted?

-MarkM-

The issue here is the requirement for sophisticated investors. In the US that means a net worth of >$2.5 million  $1M excluding your residence:
http://www.sec.gov/answers/accred.htm
You wont find too many of those on these forums.

I used to be in a mining company that did just that. In fact it was the first ever mining co op 

What do you consider advertising ?  Posting on the forum to get expressions of interest ?

This wasnt a registered investment group by any means just a way to pool our resources.

Yes you can - provided you mean certain criteria (which may vary depending on your country).

Typically those criteria include some of the following:

1.  Personally knowing the investors (and not advertising the investment).
2.  Only using Accredited investors (definiton of which varies from country to country - think US is based only on net-worth/income, UK/EU it also means they have significant financial knowledge/experience).
3.  A max invetsment size,
4.  A max number of investors.

This makes some sense. Unfortunately that is virtually impossible to work and pretty soon it would be a complete cesspool.

Well it certainly wouldn't have helped - as requesting real life Identity information makes it rather plain they weren't running some game, simulation or educational tool.  Plus by closing down assets for investigation they also removed any possible of claiming they were something like an automated forum or just a publisher - where people dealt directly with one another: instead GLBSE arguably tried to fulfil a regulatory and/or intermediary role AND acted as an introducer (by choosing which applicants for IPOs got to be advertised on their site - rather than allowing all).

If there's ANY hope for BTC exchange to work without being regulated it has to be strictly hands-off.  Zero verification, zero restrictions (unless something is blatantly illegal) and argue that their role is simply one of a publisher/forum - where sellers and buyers (of whatever) do their own thing unsupervised (like the securities/loans section of this very board).  That would still leave the question of taking deposits - but the argument there would be that BTC isn't actually a currency so there's no requirement to be regulated as a deposit-taker.  I'm by no means convinced even that approach is bullet-proof - but it's far better than where GLBSE ended up.  As soon as you start taking ANY ID you open a huge can of worms - as taking that ID is an admission or claim that what YOU do requires ID.  Similarly by doing ANY investigation of the product of sellers you lose deniability over what's being sold - and expose yourself to claims of bad faith/lack of due diligence from buyers.

Cant you setup an investment club then pool your money in hardware ?

As long as you appoint officers and hold meetings etc I dont see an issue.

If you offer securities to US residents you fall under the jurisdiction of the SEC.  Also while everyone focuses on the SEC be aware that every other "first world" nation has similar laws and regulatory agencies.  So while as a foreigner offering securities to a Canadian the SEC wouldn't apply, the canadian equivelent of the SEC would.  Now you may say "who cares I don't live in the US" however that is a naive view to take.   When the DOJ began the "war on poker" it seized (with the help of host nations) assets, bank accounts, and individuals in 28 countries.   Many countries have treaty and working relationships with the US.

So really you have three options:
a) Silk Road model. Accept it is unlawful and break the law but do it in a way which make legal action difficult or impossible. 

b) Online Poker model. Setup shop in some offshore locations which doesn't care what the SEC thinks and offer securities from there. The risk here is that what is "safe" today may not be "safe" in the future.  You may need to exclude players investors from the most unfriendly countries to keep the risk acceptable.

c) MtGox model.  If you can't beat them, join them.  Work with the SEC (especially the upcoming Jobs Act "crowd funding" regulation).  Become regulated and licensed.  The largest risk here is the cost involved.  True compliance is likely significant and your offerings are going to be more limited than competitors going the a & b route.  You are risking a lot not only on Bitcoin but your ability to compete with "one hand tied behind your back".

Lastly (and I will repeat this because I think it helps to have a better high level view of the law) ....
The law isn't a video game you can beat with a combo-breaker or clever game rule exploit ("zerg rush").   A security is a security if a judge says it is.  Period.  I know it kinda a let down from all these lofty ideals but ultimately it comes down to what the guy in the robe thinks.  At best you and your legal counsel can sway his opinion but it is his opinion that matters. The law (both statute and case law) is simply a mechanism to make judicial decisions more expected.  You can hire legal counsel and their skill combined with knowledge from prior rulings can allow you to quantify the risk that a ruling will go against you.  Nothing is every 100% certain.  DC believed for 30 years their gun ban was constitutional and it was until one day it wasn't.  Ultimately it comes down to what a judge thinks.  You can't trick a judge through clever wordplay (all this "it isn't a security because .... bitcoin" nonsense).  If a judge feels the law applies then it applies (at least until you win an appeal).

Yet somehow I doubt defining robbing banks as a valid way of playing an Alternate Reality game would fly.

-MarkM-

I have a sneaking suspicion that the verification stuff was what affected glbse the most.

None I'd assume - scamming and cheating are (or certainly used to be) defined by the game's creators as a valid way of playing the game.

I'm afraid you can't just get around laws by defining things as legal in your TOS.  Saying something "has no value" doesn't make it true - nor would it fool any regulators.  The key is intent - and all the time people whine about how many USD worth of BTC they've been scammed out of it's a totally meritless argument - as very clearly all involved understand the securities to have real convertible value.  It COULD be that an exchange like GLBSE could insulate itself sufficiently far from "value" as to be fine in itself - but then it would have to totally stay out of such areas as verifying identities, locking down scammers assets etc.  And it would also have to avoid any asset issuer making any mention of BTC raised being used to purchase stuff with USD (e.g. mining gear) in which asset purchasers would have an interest.

You may also be at risk of confusing "isn't against the law/rules" with "the rules/laws aren't yet being enforced on minor players".