I will discuss the current state of play in ICOs. In my posts, I will demonstrate categorically that no token sale is new, and that this myth and lie of “decentralisation” is completely unrelated to an ICO. The reason is that an ICO is just a means to engage in a securities offering that bypasses the law and regulations ILLEGALLY and fraudulently.
A promoter or issuer sells to a purchaser. That is all that matters — not the settlement method; and in this, the sale is no more than any securities sale and issue throughout history.
ICOs as they are currently promoted or, more correctly, “scalped” are old frauds and shams in new bottles. The use of a computer token to represent a security goes back to the 60’s. What the people selling you the ICO frauds want to tell you is that a blockchain makes this anything new; that the sham of a misleadingly named security token, a “utility token”, is anything other than a sham. To be a utility token means that it is not going to be traded on an exchange. A bus ticket is a case of something that can be a “utility token”. A movie ticket is a “utility token”.
A “utility token” is not something that you trade on exchanges seeking a profit. I will cover this more later as I wish to discuss the concept of scalping.
A claim for scalping is generally one involving promoters of securities. In the US, this would be prosecuted under the Advisers Act.
The case, SEC v. Capital Gains Research Bureau Inc., involved the U.S. Supreme Court in considering the defendant’s failure to disclose scalping. This was considered in light of whether this act was one that fell under the fraud or deceit requirement of Section 206 of the act.
Mr. Justice Goldberg delivered the opinion of the Court.
We are called upon in this case to decide whether under the Investment Advisers Act of 1940(1) the Securities and Exchange Commission may obtain an injunction compelling a registered investment adviser to disclose to his clients a practice of purchasing shares of a security for his own account shortly before recommending that security for long-term investment and then immediately selling the shares at a profit upon the rise in the market price following the recommendation. The answer to this question turns on whether the practice — known in the trade as “scalping” — “operates as a fraud or deceit upon any client or prospective client” within the meaning of the Act.(2) We hold that it does and that the Commission may “enforce compliance” with the Act by obtaining an injunction requiring the adviser to make full disclosure of the practice to his clients.(3)
The Court interpreted the meaning of the Act very widely. It considered the remedial purposes of the Advisers Act — fostering full disclosure and raising the level of business ethics in the securities industry — as well as the legislative history’s characterisation of investment as one of trust and confidence requiring strict limitations on the rights of advisers to engage in securities transactions that could conflict with their clients’ interests.
The decision of the Court leaves us with the position that even inadequate disclosure of scalping establishes fraud. This was held to be true where no material misstatements had been issued by the promoter.
What is scalping?
So, what is scalping? It is firstly a form of fraud that the U.S. SEC seeks to “wipe out”. In its widest sense, scalping incorporates the practice of purchasing a security (this includes tokens, alt-coins, and any ICO offerings) prior to recommending that security for long-term investment.
In the Bitcoin world, this is known as promoting to HODL. This would have an “adviser” buy “the dip” and then tell others to buy after they have already invested with the aim to sell at a profit (note: this is an aim to sell at a profit, and not actually making a profit that matters).
The image above is an example of scalping. This is fraud under the law. Many love to try and tell you what fraud is, that others who point these things out are scammers — the difference: I am not trying to get any of you money.
This is not new: in the 90’s, Internet-based fraud proliferated. Now, you are told it is an ICO, it’s “DECENTRALISED”; well, the truth is, fraud is fraud, and no ICO is decentralised.
Bitcoin is an exchange from one party to another. The settlement method, the blockchain, is distributed. An exchange is not decentralised, it is one peer exchanging with another. That is not any different from a share being sold from a promoter to a purchaser in the 18th century.
Courts do not care about how you exchange, they do not care what method is used for settlement. When party A sells to Party B, that is a sale and that is not decentralised. It is those wishing to gain a small window, to complete the frauds they are running that will try and say blockchain makes it different.
The reality, ICO scalping, promotion, and shams are OLD frauds in new bottles.
Digital security tokens can be created. They are bonds, equities, and other securities, and they do not deceive the purchaser into selling the security as anything other than a security.
Point — 1– 54 Stat. 847, as amended, 15 U. S. C. § 80b-1 et seq.
Point — 2 — 54 Stat. 852, as amended, 15 U. S. C. (Supp. IV) § 80b-6, provides in relevant part that: “It shall be unlawful for any investment adviser, by use of the mails or any means or instrumentality of interstate commerce, directly or indirectly — “(1) to employ any device, scheme, or artifice to defraud any client or prospective client; “(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client; “(3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction […].”
Point — 3 54 Stat. 853, as amended, 15 U. S. C. (Supp. IV) § 80b-9, provides in relevant part that: “(e) Whenever it shall appear to the Commission that any person has engaged, is engaged, or is about to engage in any act or practice constituting a violation of any provision of this subchapter, or of any rule, regulation, or order hereunder, or that any person has aided, abetted, counseled, commanded, induced, or procured, is aiding, abetting, counseling, commanding, inducing, or procuring, or is about to aid, abet, counsel, command, induce, or procure such a violation, it may in its discretion bring an action in the proper district court of the United States, or the proper United States court of any Territory or other place subject to the jurisdiction of the United States, to enjoin such acts or practices and to enforce compliance with this subchapter of any rule, regulation, or order hereunder. Upon a showing that such person has engaged, is engaged, or is about to engage in any such act or practice, or in aiding, abetting, counseling, commanding, inducing, or procuring any such act or practice, a permanent or temporary injunction or decree or restraining order shall be granted without bond.”
As a side note:
Bitcoin is not based on encryption; it uses ECDSA, a digital-signature algorithm that sends data as plain text — this is unencrypted. Now, this does not matter for what I am writing about.