When Rosa Parks refused to give up her bus seat to a white man on December the 1st 1955, she was breaking the law.
When Alan Turing fell in love with a man, he too was breaking the law and was prosecuted for it in 1952.
It took a generation to change these discriminatory statutes. Now, our parents might want to continue re-living those days when they worked to change these discriminatory laws by continuing identity politics, but when America has elected twice a black man to the highest office and when Britain as well as Germany are ruled by a woman, the young no longer see discrimination, not as far as the law is concerned in any event.
Yet there is a different sort of discrimination which does not know race, gender, sexual orientation, or indeed anything, but wealth.
Around 20 years before Parks’ defiant act and Turing’s tragedy, the Securities Act was passed in 1933 to prohibit all from investing in start-ups except for the very rich, defined as anyone earning more than $200,000 a year, and except for banks.
Why banks specifically should be privileged, is difficult to say. Just as it is difficult to say why the rich should be privileged. But this law was written at a time of aristocracy, when women still were seen as good for only housewives, and had secured the right to vote only 13 years before this act.
The law was further written at a time when the public was effectively uneducated compared to our times, and when they were effectively uninformed compared to the current age when all knowledge is at our finger tips.
Still it is only recently that we, and by we, we mean this generation, learned that we can not spend our hard-earned money to fund some incredibly innovative ideas, which sometime go on to become global corporate giants.
Soon after Facebook started out, Peter Thiel invested $500,000 in return for 2.5% of the company at the time of its Initial Public Offering (IPO). That is now worth $3.6 billion.
In May 2005, Accel Partners invest $12.7 million, receiving 10% of Facebook in return. That is now worth $10 billion. Many other investments followed, returning billions for mere millions or less.
When Facebook IPO-ed in 2012, finally allowing everyone to take part in the opportunity, a $100 investment at that point would now be worth “only” $1,000 six years later.
All the upside growth had already been taken, only the crumbs were left for the public. The story repeats with pretty much every currently publicly traded company. The rich turned a few thousands into millions or billions, the rest were left with effectively nothing.
It is this utterly inequitable law that SEC is now trying to extend to this space. They, of course, have arguments to make and not without basis. There may be scammers, they argue, there may be fraud. Grandmas may be left penniless.
The grandmas that invested in Enron, we would ask, or those who had to collect their pension when the stock market crashed a decade ago thanks to banks which daily get a slap on the wrist for one scam or fraud or another.
“We’ve been doing this a long time, there’s no need to change the definition,” Jay Clayton, Trump appointed SEC chairman, went on TV to say.
That’s, of course, not something for him to say. Whether the definition should be changed or otherwise is not a matter for a former elite bankers’ lawyer, but for Congress.
What is for him to say is whether SEC considers eth to be a security, which of course he doesn’t say either way. He doesn’t because as a lawyer his main job is negotiation, and unless you hold something how do you negotiate.
Wink, wink, says a former SEC staffer. That’s how our laws are being made, by negotiations with bureaucrats and wink winks in closed door meetings.
But although we like to pick on Clayton because he looks very much an embodiment of the swamp Trump kept talking about during the campaign and now seems to have reneged, Clayton in a way effectively has no power for it is congress that passed this law and only congress can change it.
That’s at a technical level. Practically, of course, SEC has extended its jurisdiction in a do first then figure it out later method, and they’ve done so because of course they’d like a lot more money from Congress to pay themselves even higher salaries than the more than $200,000 the commissioners receive which makes them accredited investors and thus unaffected by this attempt to close the doors on our faces.
So with that introduction, to answer the title question as far as we see it, isn’t easy. First, addressing the matter of fraud. It’s true. Fraud happens. In politics more than anywhere else you would say for they lie constantly, in the stock market, in the banking industry, in contractual agreements, in every area of life.
No one wants it, so there needs to be a way to address it. How? Proportionally. A fraud of $20 million is not as consequential as a fraud of $2 billion or in the banking industry an arguable fraud of $2 trillion or more in 2008.
Therefore a start-up that wants to raise $20 million should be treated differently from a company that wants to raise $2 billion.
That’s clearly not the approach SEC is taking. Without any public consultation, we must say, thus without any democratic input whatever, they have decided all ICOs are securities and thus should ask permission from them to undertake a civil, contractual, voluntary, endeavor.
“A token, a digital asset, where I give you my money and you go off and make a venture, and in return for giving you my money I say ‘you can get a return’ that is a security and we regulate that,” he said.
You can argue that for some ICOs, it would be unpleasant but they could just try and comply. However, there are some tokens which fundamentally can not comply.
Take Golem, that’s basically a decentralized computer processing project which has a token through which computer power can be bought. That can’t be a security because it’s a base layer in a tech stack.
Take filecoin, their aim is to create a decentralized storage which can be bought or sold with a token. Again that can’t possibly comply with the securities laws and perform its function.
To be fair to SEC, they do seem to say the ICO itself is a security. That is the initial buying of the tokens, like Thiel’s initial investment in Facebook. But that’s not saying much, if anything, because there is a big difference from just the ICO being a security and from the token itself being a security.
Clayton, apparently, is of the view that once it starts as a security, it remains a security. That’s a big problem and effectively makes the ICO capital raising method pretty much redundant because the point of the ICO is to create a token that has utility. If they are a security, they can’t quite perform the utility function.
But that limits capital formation and that’s a problem for this space in particular as if you are going to have the utility used, you want that public utility to be owned by as many as possible, rather than be concentrated in the hands of very few people, which would defeat the whole point of it.
So if some projects can’t comply, then would just ignoring the SEC be an answer? They obviously can’t send everyone to prison. They may try and make examples of some, and as long as those some are engaging in actual fraud, that’s their job.
If they’re going after a decent food app for solely being an unregistered security, however, public support for SEC would get lower and lower and calls for Congress to intervene would get louder and louder.
So is modern day Rosa Parks an answer? Well, the rule of law is one of human kind’s highest achievement and deserves respect where good law is concerned, but just ignoring bad law is a risky choice and we’d rather no entrepreneur has to face that position.
So congress has to intervene with an exemption of at least $20 million or where respected Self-Regulating Organizations (SRO) have undertaken due diligence.
Such SRO has not yet been formed in US as far as we are aware, but the industry was moving in that direction until SEC intervened without any consultation and without seeking any collaboration to this day.
So Congress will have to make a policy decision. Is SEC already too powerful for example with a plate more than full as it is? Can they really oversee the myriads of innovation in this space while at the same time being able to oversee the countless of fraud going on in the stock market? Would giving them oversight over tech make them in effect a government of its own without any real accountability?
Why not, Congress will have to think, why not have CFTC oversee this space? Their plate is a lot emptier and manageable. They’ve been open to working with this space. They can back an SRO. They would have enforcement rights where fraud is concerned. And tokens can perform fine their many innovative utilities as commodities.
That’s probably where it will go eventually as this generation starts moving up the ranks. Nor are we the only ones to face a situation where laws are completely outdated. Lest we forget, an individual had to walk in front of a car with a red flag back when cars were a brand new thing.
Of the silliness of outdated laws we read in elementary school, and they come about because the older generation, generally speaking, has no clue whatever what this new thing is.
Can entrepreneurs however wait for these grandpas to give way to the newer kids? Some probably can’t, with many already choosing jurisdictions other than US, and with some even boycotting US, at least on paper.
That exodus may continue, leaving America’s skyscrapers to grow dimmer and dimmer, but we trust the land of the free will learn how to be free once more, will learn how to trust their young ones, will learn how to embrace innovation, will learn how to have a proper free market again, will learn just how good it can feel to have the confidence of optimism that a new technological wave brings.