Howard Marks

@howardmarks

Animal Farm Goes to DC

How prescient George Orwell was with the thesis of his seminal work Animal Farm. The pigs, Orwell writes, are more equal than others, and in our country today VCs feel the same way.

You may have read the news last week that some of the top VCs from Silicon Valley descended in force to visit the SEC and plead their case that blockchain tokens are not securities, and, if they are, they want absolution or amnesty for the companies that illegally sold unregistered securities, companies that also happened to have received investments from the very VCs pleading the case.

So these VCs want the SEC to hold their big dogs back and give them a pass. Why? It turns out VCs have invested billions in blockchain companies, including Coindesk, and they do not want the SEC messing up their investments (i.e. toys and profits).

We all live in a country of laws, where we can safely vote and elect government officials and legislators to make decisions on our behalf. But some VCs live in a different world where they pick which regulation fits them best, regardless of what the officials, and the public through those officials, decide.

If we take it down to basics, this different world that the VCs live in is a two-class society, a real form of plutocracy, in which wealthy VCs do not have to abide by the same rules as everyone else. It’s also worth pointing out that most venture capital investments go to white men who graduated from Stanford.

We can describe this, perhaps, as wealth given to the wealthy. Talk about equality, but let’s get back to the other side of plutocracy, the side that involves balance of power.

So which venture capitalists went to Washington to descend upon the SEC? None other than the West Coast king maker and the East Coast VC with the midas touch. Andreessen Horowitz and Union Square Ventures.

This must have been a very intimidating meeting. For whom is less clear. The purpose of the meeting for the VCs was simple: stay out of our way, and do not regulate our businesses. They want a free pass for their companies that did not register their tokens with the SEC or seek an exemption from the Securities Act of 1933. This wishful thinking is not new for VCs who usually get their way against other regulations. Think of Uber and Airbnb, who ignored laws and regulations in their respective industries but managed to come out on top anyway.

However, this time it’s different. These VCs have a real problem. The SEC is no patsy. It is in fact the second most powerful regulator in the US after the Treasury (which is next on the visit list, believe me), whose immutable IRS is not amused with the lack of cryptocurrency gains reporting. Plus, the ever powerful FINCEN is trying very hard to eliminate money laundering and terrorism, and cryptocurrencies have a lot of potential for money laundering in their unregulated state.

The VCs have a very simple view. The SEC should enforce their rules against fraudsters, but if the company is made of good guys, then the SEC should let them sell utility tokens to investors without seeking an exemption from registration and running the required AML or KYC (buzz word alert) tests. This simplistic view of the world is offensive because they are advocating for a non-level playing field. They are suggesting that their investments get a pass from strictly following laws and for others, just throw the book at them.

The basis of our economy and the competitive landscape of capitalism is that we should all follow the same laws, which creates a level playing field for everyone — not just the rich and the powerful. How can VCs expect the SEC to accomodate their wishes? I think people are not that dumb, and neither is the SEC. The SEC saw this coming, and I hope they throw the book at the VCs and remind them that if they want to play, then they should play by the rules like everyone else.

The marketplace is carefully watching every move by the SEC and trying to adjust accordingly. The VCs should be responsible and make investments that are in compliance to the degree that it is in their control. If the investments are in companies that are not compliant, there are consequences.

The solution is not to sit down with regulators and ask for an exception just because they can. The SEC needs to enforce and teach those who violate the laws the hard lessons or anyone will think they can just simply cheat and let their law-abiding competitors fall behind in the dust of their wake.

The next big bang in the crypto world is coming when the SEC shuts down the current crypto “exchanges” and makes sure that only Broker Dealers with Alternative Trading Systems trade security tokens. The marketplace says it is not ready for this. However, new services from tZERO, Templum and StartEngine (disclosure: I am StartEngine’s CEO) are getting ready to offer these service in compliance with all of the rules.

The next time VCs descend on Washington it should be to learn about the law instead of asking for forgiveness.

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