The basic legal rule is that you can't issue "equity" in any venture unless (a) it's registered with the SEC (and certain state authorities) or (b) you fall within exemptions (accredited investors only, etc.)

Swarm obviously doesn't fall under either category, so what they're basically trying to do is claim that they're not actually issuing equity in the traditional sense. Best guess as to what they're arguing is that by making the cryptotokens redeemable for a service (as opposed to actual cash), they're really issuing something closer to gift cards than traditional equity. Gift cards have their own legal issues, but it's not equity. That said, gift cards have limited upside relative to real equity. When the next Oculus is purchased by Facebook, I might be able to redeem by crypto-shares for a free Rift headset, but that's not the same thing as getting X% of the proceeds from the sale of the company.

Here's the take-away though: The reason these laws exist is to prevent con artists from selling shares in some fly-by-night operation and disappearing with the money. There's nothing about crypto-equity that makes fraud any less likely than traditional equity. So if you're the SEC, and you see someone selling something that acts like equity, looks like equity, is actually described as equity, and poses the same risks for the buyer that regular equity does, the fact that it might not fit neatly in the traditional definition of equity isn't going to deter you from putting a stop to this.

That's not quite correct. Our model includes a "Decentralized due diligence" aspect (https://bitcointalk.org/index.php?topic=664071.0;topicseen) that we believe greatly reduces fraud potential. Our full plan consists of a variety of fairly novel features, including crowdsourced project screening and fund-locking such raised funds are programmatically unlocked as founders achieve certain milestones.

> including crowdsourced project screening and fund-locking such raised funds are programmatically unlocked as founders achieve certain milestones.

Both great ideas to get something into production, but how does this provide equity?

Specifically, when I hear equity, I think two things: dividends and shareholder voting rights.

Both can be coded in on a bitcoin 2.0 DAO platform of your choice, but there's the (unsolved, afaik) question of physical-world enforcement. I've unlocked all my protocol-escrow'd milestone funds, shipped a product, but I now choose to ignore the dividend or voting feature of all the token holders. See you later!

One of the benefits of operating within the legal system rather than outside is the investors have a last-resort: they know who you are and can sue. If you operate outside the system in DAO-land, what recourse do I have when facebook buys my cryptoequity-funded CryptoRift Co. and says, "sorry, crypto-tokens aren't equity under US security laws, you get nothing"?

Trustless consensus-unlocking escrow for project milestones is a great game-theory trick to get to ship, but it stops short of true equity. To honestly call it equity (guarantee of dividends and shareholder voting rights under threat of legal action), you need to operate within the law, not find loopholes. Or at least have the law legally recognize the voting will of the cryptotokens, which I haven't seen mentioned either.

I agree. It's on our roadmap to build the appropriate tie-ins to the existing legal system to provide benefits that are not only pledged but also enforceable.

Among other things we are actively attempting to hire a lawyer (ideally a brilliant younger one) to help figure out how to integrate these cryptoassets with the existing legal system.

I doubt the SEC would buy that argument. Due diligence is orthogonal to equity structure. That is, you could have ventures built around traditional equity structures but with crowd-sourced due diligence, and you could have ventures built around crypto-equity but without any due diligence requirement at all.

Put another way, the fact that a publicly traded company permits any shareholder to inspect its books at any time does not eliminate the company's obligation to make regular filings with the SEC.

Completely agree with what you say, so not sure what argument you think I'm making. I'm only pointing out that our system does have fraud prevention mechanisms that do not exist with standard cryptotoken offerings.

Point is the same one made two posts ago: High probability that SEC will try to shut this down.

I don't think Kickstarter was clear-cut legal, either, was it? I think they needed to have a law passed that essentially legalized "crowdfunding".

The law you're referring to (JOBS Act) didn't legalize crowdfunding, but the process of selling equity via crowdfunding. The Kickstarter model is very clear-cut: it's either a donation or you're buying something (rewards or product), as opposed to buying equity.

kickstarter doesn't allow you to offer equity, but the JOBS act + the SEC did change this year to allow non-accredited investors (people with less than $1M in assets) to buy into a company directly; and for a company to market equity in the style of kickstarter.

Here are the new rules: For income below $100,000, invest a max of $2,000 or 5% of income or net worth For income over $100,000, invest a max of 10% of income or net worth Investments made in a Title III crowdfunding transaction can’t be resold for a period of one year

Note people, these laws are not yet in effect and are still liable to change. Equity Crowdfunding for the public (non-accredited investors) is ILLEGAL, unless done through a intrastate crowdfunding exemption.

Kickstarter's "perks" model was not clear cut in the beginning. It became clear cut over time as the legal space was established. We are probably one step further than Kickstarter in that we offer things like programatic voting, but it's quite infeasible for us to offer "equity" at present and attempting to offer something like this is not even in our roadmap.

when joining a kickstarter campaign, you're donating money or paying for (the pre launch of) some product, not taking some form of equity in a company

There are existing laws covering pre-orders in order to prevent the kinds of scams we've seen on Kickstarter. It's not entirely clear that Kickstarter is actually compliant with them.

Indeed. "We believe" is a shaky legal foundation. In the best case scenario they've found a loophole. Exploited loopholes have a nasty tendency to get closed.