Mark Cuban is promoting an ICO — Should the SEC step in ?
Yes it is true., The shark himself is now in the ICO game in full force. The company he is endorsing is has a new blockchain app called Mercury Protocol. They are going to replace Facebook and Mark wants in. The only problem is this: The deal is another ERC-20 utility token that is sold to investors without any regulation.
If you read Mercury Protocol’s purchase agreement, you will quickly find a lot of explaining about how this is permitted as long as it is legal in your own country. The only places the company excludes are China and New York. I can understand China because they recently banned all ICOs and asked for the money to be returned, but why New York? What makes New York different than the rest of the country? After all, Mark Cuban’s Mavericks play the Knicks every once in a while in NY. It turns out, this is another company trying to escape regulation and probably found a lawyer who was not just that comfortable selling to New York investors.
Now, back to the company. It is raising $24M in a token sale with the classic 1 billion tokens issued (Why bother changing the secret sauce?):
I can understand why Mark Cuban is very excited by this company that already has an app on the market under the name Radical App LLC . The app is called “Dust” and calls itself “a safer place to text”. With Dust’s small 20,000 user base, is this company who should get $24M in cash for no equity dilution ? The real is question is this: Are investors buying the GMT tokens because they want to use Dust or are they buying them with the expectation of profit?
ICOs in the last four months have raised over $2B and there is no stopping them. Mercury Protocol (or Radical App LLC) is the classic example of a company jumping on the bandwagon and issuing utility tokens to investors. The Howey test, which is a 71-year-old test used to decide if an investment is a security, has been long over used by ICOs. I introduced the Howard Six Point Test in frustration and also as smiley wink to those who might use it. Instead the simple test is this: The Smell Test. You know it if you smell it. The SEC is not lost on using this type of test to catch the bad guys.
If the 20,000 users of Dust are the buyers of the utility token and plan to use the tokens to pay for content or communication, then it is clear that the GMT is a utility token. But if that’s the case, then why limit it to one billion tokens? Imagine if Mark Zuckerberg ordered his Facebook Messenger to issue 1 billion tokens and no more, ever. The value of that application would be limited and his shareholders would revolt, claiming he gave away the store. A company that issues a limited number of tokens is playing a game of scarcity, which is exactly what the investors are looking for. A limited number of tokens to purchase must and should go up in value.
So how did Mark Cuban with his army of lawyers put his name and reputation as an advisor on the white paper? Maybe they have allocated to him some of those super valuable GMT tokens he can use on Dust? I hope his allocation will be donated to his favorite charity and expunge him from any wrongdoing such being compensated for promoting securities without a license.
You have seen Paris Hilton and Floyd Mayweather jump into the ICO game, but Mark Cuban, who is a sophisticated and smart investor? This is a real surprise. I thought given the ICO game — with its ongoing Tezos scandal and the first SEC indictment lawyers would cry UNCLE!
I did a little more digging and went on the iTunes store and found only 20 ratings for Dust. Checking AppAnnie, which ranks all apps, Dust has no ranking and it is raising $24M for no equity. This must be one of the most amazing cases of selling into the ICO bubble. Compare this to Telegram, another messaging app that is also about safety, Telegram has become a top 100 iTunes store app with millions of users.
The SEC recently announced a new Cyber Unit to fight cryptocurrency fraud. I think they are going to be very busy. The number of ICOs offering utility tokens is exploding and unsuspecting investors are putting their hard earned Bitcoin and Ether to work. These are investors who are expecting to resell the tokens for a profit down the road. An overwhelming number of them are not potential users of the service which in most cases does not exist. The real test will come when the SEC lines up those companies who issued unregistered securities and asks for the money to be returned to the investors, among other remedies.
To learn more about how to regulate ICOs in the United States, come to The StartEngine ICO 2.0 Summit on November 10 in Santa Monica. The top lawyers and pundits will be there to discuss how to best regulate ICOs using the JOBS Act.
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