Tag Archives: tokens

Facebook’s Cryptocurrency

Facebook just announced a Facebook cryptocurrency called Libra.

To me, the timing seems poor. Over the last year or so, Facebook has suffered one public relations black eye after another regarding its privacy policies, it compliance with an order of the Federal Trade Commission, its role in disseminating conspiracy theories and election interference, and its dominance in the social media industry. A Facebook cryptocurrency will, by definition, give Facebook even more private information and even more financial power. Already, regulators and members of the public are shouting “No!”

A few thoughts about what this means:

  • Not long ago, some predicted that cryptocurrencies would lead to a better world, a world that would be more free, more decentralized, where consumers could interact with one another without middlemen. Libra, a cryptocurrency created by one of the most powerful companies in the world, seems to promise exactly the opposite.
  • It didn’t take long to get from idealism to disappointment, but the arc itself is typical of technologies, from radio to automobiles to the internet. We expect technologies to save us, then they don’t.
  • Are tokens securities? Does Howey apply? Facebook’s announcement shows that those questions are small potatoes in the scheme of how cryptocurrencies may re-shape the financial world.
  • Undoubtedly, Facebook is in this for the data. Will consumers care? Probably not.
  • Facebook might be first, but how long can it be before Google and Amazon — especially Amazon — issue their own cryptocurrencies?
  • Regardless of political persuasion, governments aren’t going to allow Facebook or anybody else to compete with their national currencies. We are already seeing opposition from Democrats and Republicans alike, and we can expect more.
  • And the next step: How long can it be before the U.S. dollar itself is given the features of a cryptocurrency, in effect competing with Facebook?
  • The price of bitcoin increased on the announcement, but I think that’s exactly wrong. The announcement shows that bitcoin and other cryptocurrencies will be left behind as big companies take over, just as a few big companies now monetize the once-egalitarian internet.
  • In the same way, I expect the announcement to stifle innovation in the cryptocurrency industry generally, just as the existence of Facebook already stifles innovation in social media and Microsoft once stifled innovation in software. Nobody wants to compete with the giant.

As all six readers of this blog know, I’m a believer in Crowdfunding from a capitalist, ideological perspective. I believe in making capital available to entrepreneurs everywhere, no matter where you grew up, no matter who your parents are, and in making great investments available to ordinary Americans, helping to narrow the wealth and income gaps that do so much harm to our society.

Frankly, Facebook and Libra feel like a step in the opposite direction, toward a world where knowledge and wealth and power are more concentrated and ordinary Americans are so many data points to be monetized. I’m certainly interested in hearing a different point of view.

Questions? Let me know.

Mark Roderick is one of the leading Crowdfunding lawyers in the United States. He represents platforms, portals, issuers, and others throughout the industry. For more information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business, follow Mark’s blog, or his twitter handle: @CrowdfundAttny. He can also be reached at 856.661.2265 or mark.roderick@flastergreenberg.com

What’s an Investment Adviser in Crowdfunding?

 

investment adviser.jpgAs Crowdfunding grows and investment advisers migrate into the space, we’re going to devote a few blog posts to investment adviser basics:

  • Federal vs. State regulation of investment advisers
  • Advisers to private funds
  • Venture capital advisers
  • Duties of investment advisers
  • Registration of investment advisers

Today we start with the most basic question:  What is an investment adviser?

Here’s the definition from the Investment Adviser Act of 1940:

“[A]ny person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. . . .”

The term “securities” is very broad, covering obvious things like stock, bonds, and interests in limited liability companies, but less obviously things like (1) mortgages, and (2) blockchain tokens that are treated as securities under Howey.

EXAMPLE #1:  Molly Smith operates a Crowdfunding site that allows investors to participate in specific mortgage loans made to real estate fix-and-flippers. Because investors choose their own mortgage loans, Molly probably isn’t an investment adviser.

EXAMPLE #2:  Samantha O’Hara creates a fund that buys and sells mortgage loans made to real estate fix-and-flippers. If Samantha is deciding which loans the fund will buy and sell, she’s probably an investment adviser.

EXAMPLE #3:  John Kelly, software engineer, reads the Wall Street Journal and often gives investment tips to his friends. Because he’s not in business and not being compensated, John isn’t an investment adviser.

EXAMPLE #4:  Craig Toricelli creates a fund that buys and sells apartment buildings. Because a fee simple interest in real estate isn’t a “security,” Craig isn’t an investment adviser.

EXAMPLE #5:  Gregg Wright creates a fund that buys and sells bitcoin (buy on the dip!). Because bitcoin isn’t a “security,” Gregg isn’t an investment adviser.

A few common exceptions:

  • Lawyers, accountants, engineers, and teachers aren’t investment advisers if their performance of advisory services is solely incidental to their professions.
  • Brokers and dealers aren’t investment advisers if their performance of advisory services is solely incidental to the conduct of their business as brokers and dealers, and they do not receive any special compensation for advisory services.
  • Publishers of bona fide newspapers, newsletters, and business or financial publications of general and regular circulation aren’t investment advisers if their publications meet three requirements:
    • The publication must offer only impersonal advice, e., advice not tailored to the individual needs of a specific client, group of clients, or portfolio.
    • The publication must contain disinterested commentary and analysis rather than promotional material disseminated by someone touting particular securities.
    • The publication must be of general and regular circulation rather than issued from time to time in response to episodic market activity or events affecting the securities industry.

EXAMPLE:  Each time Cindy Liu, Esquire finishes work on an ICO, she post on her Facebook page:  “Take a look!” Even If her clients think they’re paying for the publicity as well the legal work, Cindy’s not an investment adviser, because she’s not being paid by her Facebook friends.

In that list, you don’t see “advisers to private funds” or “advisers to family offices.” That’s because while these and other common species of investment advisers are exempt from registering with the SEC, they are still investment advisers, which means (1) they are still subject to certain legal obligations, and (2) they still might have to register with a state. More on all that later.

Questions? Let me know.

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