If you've been following along the fantastic conversation with John Reed Stark and Mark Cuban, Cuban's main points are that; a) the crypto industry has tried to get clarification on the rules but the SEC won't help them, and, b) it's too hard for crypto entrepreneurs to get registered with the SEC and this is stifling an otherwise legit and growing industry.
Then all along Cuban is ignoring what has in fact taken place in crypto since at least 2.22.20 since I've been in crypto all day every day. Which is, that everyone (investors) bought the tokens (NFTs or otherwise) with the expectation they'd go up in value. The tokens did in fact go up in value (until they crashed), all due to the help of others - influencers and to some degree, project founders. Anon's who were at best, shady. At worst, criminals. And then all the rug pulls.
Cuban seems to ignore that what went down was a sham and the very definition of the Howey Test:
1. An investment of money
2. In a common enterprise
3. With the expectation of profit
4. be derived from the efforts of other
Cuban expects to Stark to ignore the obvious, as if to say, "Hey, give us another chance. Make it easy for crypto to get in compliance and everyone will do it". Stark is having none of it.
Stark points out, exactly, that if a crypto entrepreneur wants to understand what the rules are they need to hire a securities attorney. Well duh. And yes, it's hard to get registered - as it should be. He uses the heart surgeon analogy. Stark scores a 100 on both.
Stark knows what's been going on, because he's been watching it - as anyone could. It all went down on Crypto Twitter, in front of god and everyone. Stark calls it like it is, slaps crypto in the face:
"Let’s face it, the cryptoverse is a den of thieves and rife with fraud, manipulation and chicanery".
"To me, crypto is not innovation and never has been. Crypto is just another exemplar of “Predatory Inclusion” and affinity fraud, orchestrated shamelessly to dupe the disadvantaged and disaffected".
"Unable to displace legitimate currencies, crypto has also become a perilous and vacuous asset without critical and traditional guardrails, oversight and protections and has caused a crypto-crime wave of epic proportions, especially in the realm of ransomware, sanctions evasion, terrorism, human sex-trafficking and drug dealing".
Ouch.
Cuban keeps going back to defending what's indefensible.
But Cuban steps in it. In Cuban's own words - "90% of blockchain companies will go broke. 99% of tokens will go broke." To which Stark seems to say, rightfully, "If 90% of them are going broke and 99% of tokens are going broke, why should Congress even care about crypto. Why is this a thing"?
Crypto has been its own worst enemy. For at least as long as I've been here, crypto has closed its eyes to the problems. Their message was loud and clear. Regulations? Who needs 'em? People get screwed? That's their fault. You don't get it. This is Web3 - doing business blindfolded is how it is now. Deal with it.
Crypto is getting what crypto deserves.
Given the facts, it's hard to believe that a court or Congress will have a sympathetic ear. If crypto is to survive, it's going to have to reinvent itself. Right now I don't know how that happens. But I hope it does.
Here's the thread:
https://twitter.com/mcuban/status/1670131669096095744?s=20
Thanks for your Tweet Mark and Happy Father’s Day (!)
You make a range of excellent points that warrant serious discussion and consideration. You are absolutely right that the registration of an entity as an exchange, broker dealer, or clearing firm is incredibly, tedious, extraordinarily difficult, and requires that the firm must essentially consent to a 24-7 financial colonoscopy during the registration process and forever going forward.
And you are spot-on that a similar amount of time and effort is required for the registration of securities.
However, when securities become registered, for example in an IPO, there exists a reporting element going forward (in Forms 10-Q, 10-K, 8-K, etc.) but no inspection and examination requirements. Also, over the years, Congress and the SEC have granted a range of exemptions to registration, which under certain circumstances (e.g. when there is no general solicitation to people for potential investment) allow for an easing of restrictions and a supposedly less complicated and more expeditious process.
Exemptions generally include private offerings to a limited number of persons or institutions; offerings of limited size; intrastate offerings; and securities of municipal, state, and federal governments. By exempting many small offerings from the registration process, the SEC seeks to foster capital formation by lowering the cost of offering securities to investors.
Federalization of Securities Registration: Some History
In the US, every securities offering is either registered, exempt or unlawful.
Consider the Securities Act of 1933 (The ’33 Act), which governs SEC registration of securities and which you find confounding because (and you are 100% right) registration takes too much expertise, too much time and there is no clear path designated going forward for start-up firms.
The main goal of the ’33 Act was to introduce national disclosure requirements for companies selling stock or other securities. Prior to the ’33 Act, securities were only subject to state regulations, and brokers could promise extravagant returns while disclosing little relevant information.
The ’33 Act has two basic objectives:
-To require that investors receive financial and other key information about their property, economic health, and executives concerning securities being offered for public sale; and
-To prohibit deceit, misrepresentations, and other fraud in the sale of securities.
The SEC accomplishes these goals primarily by requiring that companies disclose important financial information through the registration of securities. This information enables investors to make informed judgments about whether to invest in a company's securities.
The registration forms a company files with the SEC provide significant information, including:
-A description of the company's properties and business;
-A description of the security to be offered for sale;
-Information about the management of the company; and
-Financial statements certified by independent accountants.
All companies, domestic and foreign, are required to file registration statements and other forms electronically. Investors can then access registration and other company filings using EDGAR.
SEC Registration is Hard
Whether registering securities with the SEC or registering as a securities intermediary, registration is challenging, onerous and so complex that engaging a lawyer (and other consultants like accountants and financial analysts) is almost always required – which is costly and is frustrating for people.
But this complexity and convolution is not an unfortunate accident; it’s wholly intentional. SEC registration is what makes US markets the most trusted, respected, admired and sought after in the world – so it’s not easy.
SEC registration was not meant to be as simple as incorporating (which can be quite straight-forward and cheap); getting a Tax ID or EIN (which can take minutes and costs nothing); or even registering as a payroll firm (which I am told has become standardized and inexpensive).
Heart Surgery and Investing
Getting a license to perform heart surgery is incredibly difficult; is not for everyone; requires an extraordinary level of dedication and expertise; and is subject to tedious oversight and a litany of continuing training requirements. Why? Because performing heart surgery is a matter of life and death. Since 1933, the same goes for selling securities.
In fact, investors should be as rigorous and careful when choosing an investment as they would when choosing a physician for heart surgery.
While I can appreciate a company wanting specific instructions from the government as to what they need to do to meet compliance requirements, the reality is that securities law is a principal spaced framework, and it takes a securities lawyer to guide an entity through that registration or exemption process.
I wish the process were easier and perhaps laws can be written so that the registration process is made simpler, more efficient, etc. But for now, the law is what it is and not liking legal requirements is not a legal defense.
As for SEC guidance, the SEC does not provide legal advice and can't do so for obvious reasons. But you make a good point - perhaps the SEC should create an ombudsman office of some sort to at least provide some forum of communication for companies struggling to do the right thing and register properly. Right now, the SEC meeting process seems a bit haphazard and fragmented and should become more formalized and user-friendly.
But having said the above, in the crypto verse, communication from the SEC has been carried out ad nauseam. https://sites.duke.edu/thefinregblog/2022/11/28/big-cryptos-bogus-demands-for-regulatory-clarity-2/
For example, with respect to crypto, companies like Coinbase and Binance have been given the benefit of multiple SEC meetings and interactions. These companies just don't want to register the way the SEC wants them to. And Not liking the message is not the same thing as not receiving it.
A Balancing Act
I get your policy argument: It’s a balancing act.
On the one hand, like seatbelt laws, investment laws like the ’33 Act protect people from themselves. On the other hand, the US does not want to cripple entrepreneurship and the ’33 Act exemptions, which are supposedly less burdensome and allow easier, faster and simpler capital formation, are not doing working.
You are arguing for more exemptions, larger exemptions and more straight-forward exemptions, which might make sense but will also undoubtedly invite more fraud into the financial marketplace. You are also arguing for a simpler process overall, a process that would not require so much legal assistance. I could not agree with you more.
Looking Ahead
I can appreciate that getting a license to perform heart surgery does not typically require engaging a law firm but registration of securities or securities intermediaries pretty much always does. That’s most of all because securities regulation has primarily evolved via common law and while SEC regulation has certainly grown, so have litigation and class actions. A good lawyer is a must – especially in the cryptoverse.
Let’s face it, the cryptoverse is a den of thieves and rife with fraud, manipulation and chicanery. You said it yourself: "90% of blockchain companies will go broke. 99% of tokens will go broke." To me, crypto is not innovation and never has been. Crypto is just another exemplar of “Predatory Inclusion” and affinity fraud, orchestrated shamelessly to dupe the disadvantaged and disaffected. https://brookings.edu/research/debunking-the-narratives-about-cryptocurrency-and-financial-inclusion/ and https://washingtonpost.com/business/2023/04/26/cryptocurrency-black-generational-wealth/
Unable to displace legitimate currencies, crypto has also become a perilous and vacuous asset without critical and traditional guardrails, oversight and protections and has caused a crypto-crime wave of epic proportions, especially in the realm of ransomware, sanctions evasion, terrorism, human sex-trafficking and drug dealing. https://linkedin.com/pulse/crypto-traceability-dont-believe-hype-john-reed-stark/?trackingId=xlT8JHIwS36cjERJzCo1Gw%3D%3D
My take, and I know you disagree, is that a mere record on a glorified limited-writer, append-only database linked to the solution of a very complex yet entirely meaningless and irrelevant mathematical problem is not, and will never be, a financial and societal panacea. It's nothing more than mathematical computative blather. https://concerned.tech
Moreover, because the cult of crypto turns victims into victimizers, vulnerable and desperate investors stand little chance against the relentless barrage of crypto flam-flam and hocus-pocus. P.T. Barnum was dead right when he declared that there's a sucker born every minute. This is why, from tulips to tokens, Ponzi schemes like crypto have thrived for centuries. https://linkedin.com/pulse/fraudulent-design-language-cryptocurrency-john-reed-stark/?published=t
Crypto-tokens are not akin to laundromat tokens. Promoters are marketing them and the investing public is buying them, touting or anticipating profits based on the efforts of others.
Hence, when it comes to a start-up firm that wants to create crypto tokens, I cannot think of a better case for heightened and robust SEC scrutiny.
Indeed, I look back and thank FDR for his foresight and pertinacity in enacting the ’33 Act, which is a Godsend, especially when it comes to the 20,000+ perilous crypto tokens circulating in the world.
Enjoy your kids today Mark, and I promise to do the same -- and thanks again for the polite and respectful dialogue.
