If you already own this coin, dump it as soon as you can: this platform is going nowhere; its grandiose claims are total BS; they don’t understand the regulatory environment at all; their experience in the various areas where their tokens will become “essential” is little-to-none; their business model doesn’t make basic sense; it’s being pumped up artificially; their team doesn’t respond to questions; they delete bad press from their channels; they’re going to dump their stock as soon as trading goes live. Sell / don’t buy.
Unfortunately, I have to spend a decent amount of time going over securities. This is becoming very important, and you need a basic understanding of how investment regulations might apply to initial coin offerings. Do not skip this section. Here’s an incentive: if you invest in any ICO, and that ICO completes, you start speculating, and then the SEC drops the hammer, you will lose all of your investment. You will not get a refund of any kind. So you need to be very aware of how any given cryptocurrency interacts with SEC regulations. Fortunately, Coinbase released a very helpful spreadsheet1 that helps you determine the probability that a coin might be subject to SEC rules. This is something I will be using every time now, so if you don’t understand it, that’s fine. But you do need to know what kind of risk you’re taking. So please, continue to the next section, titled:
STUPID GOVERNMENT BULLSHIT
Right now, it’s not possible to move some types of physical assets onto blockchains until statutory changes enable digital transfers. Selling a fractional interest in an asset to the public (without permission from the government) is often prohibited by securities laws.2 For the moment, ICOs provide a great way to bootstrap a project without giving up equity for the funds raised.3 That means that, unlike an IPO on the Nasdaq or NYSE, you may be buying something that functions like stock, but it doesn’t entitle you to ownership in any sense of the word.
Just over a month ago, the SEC ruled that some “coins” for sale are actually securities subject to their regulation.4 Acting on this ruling, they contacted Protostarr and asked them to volunteer information about their business model.5 By offering dividends and profit-sharing, Protostarr (and The DAO) were offering “investment contracts,” which they were not legally allowed to do.
If this seems silly to you, that’s okay. The fact that you have to seek permission from the government in order to sell a fraction of a product (one that appreciates and may even oblige the property-holder to compensate you for your investment) is absurd. But it becomes important
when you realize that the government has a monopoly on force, and the SEC can, has, and will shut down any company it deems in violation of its own rules. This could mean that your ETH gets refunded (like Protostarr, who shut down in the middle of their ICO), or worst case, that the value of the coin tanks and you lose everything you invested. This makes one question essential: is this coin/ICO a security subject to SEC regulation, and if so, is it SEC compliant?
When regulations are ambiguous they necessitate judicial litmus tests via abductive inference. For example, if the law says you aren’t allowed to own a “duck,” and you are argue that what you have is not a duck, it is a Bucephala albeola of the Anatidae Family, the judge might have to come up with a test to determine what constitutes a “duck.” We can go back to James Whitcomb Riley (famous poet) for the original: “When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.”6 If this shocks and appalls you, again, it should. But this is often what happens. And in this case, cryptocurrencies need to pass the “Howey Test” for determining whether certain transactions qualify as “investment contracts.”
The Howey Test is old. 1946-old. 70 years old. But it’s still used today because the banking industry is remarkably effective at stalling regulatory efforts, especially since it’s perfectly legal to trade in your Goldman Sachs tie for an SEC one. There are even certain former-regulators who are on the payroll of giant hedge funds, paid for “past services”—meaning they don’t do any work now, they’re getting paid for what they’ve done already. In this case, those past services were probably things like regulations that created artificial barriers to entry in the financial marketplace. But I digress. According to LAToken, they pass the Howey Test.7 This is because their tokens are “used to pay for the LAT platform services, such as assets tokenization…and [don’t] grant their holders ownership in the company or any dividends.” But I’m not so sure. They want to link the value of LAT to real assets, and allow investors to “diversify their portfolio” thereby.8 This sounds very similar to a security to me. If we go back to the 1946 case SEC v. Howey Co., this becomes even more obvious. The Howey Company, a Floridian citrus farm, decided to lease half of its property to “finance additional development.”9 This attracted businessmen because of the expectation of substantial profits, beginning a specific enterprise between two entities: one party that provides work (farming), while the other supplies the capital (via a lease contract). The purchases effectively became speculators—the land was the vehicle for investment—because the expectation was that they would earn a profit solely through the efforts of the farmer. According to Justice Murphy, writing the Opinion of the Court: “it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value”—the test of whether there is an “investment contract” is “whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others”.10
There is one key difference between LAT and Howey: investing in LAT is not the same as investing in real assets. Regardless of what you might’ve heard, right now it is impossible to transfer ownership of something via the blockchain. Let’s say you want to sell your car to
someone. You could use a smart contract on Ethereum…but it wouldn’t hold up in court. The court would ask for the title transfer form, and all you would be able to produce is a token that you both claim was somehow linked to ownership of the car. Just like the wolf-kin are nuts for believing they’re wolves on “all levels except physical,” you’d be nuts for believing that you sold your car “in all terms except legal.” (Though it may work out just fine for you, you get digital currency in exchange for an asset token that turns out to be worth nothing!) The point being, since you’re not actually acquiring legal ownership or shareholder status, it’s possible that SEC regulations don’t apply. Even though this is expressly what LAToken wants to do: “own fractions of assets”.11 (Also…apparently only the utility-version of the LAT is available to US citizens. Asset-backed tokens aren’t available to U.S. citizens, which makes sense, given that I couldn’t find any SEC filings for LAToken.)
This is something I would watch carefully going forward. If you haven’t already, you should check out this blog post12 (including the attached PDF file—leave the Spreadsheet to me) that talks about the relationship of cryptocurrencies to securities. And if you ever find yourself hoping too hard that an ICO doesn’t constitute a security, just remember how blindsided Protostarr was, convinced that their model “where users invest in up-and-coming content creators”13 was not an investment contract.
Let’s move on to the company itself.
TRAFFIC, HYPE, AND FUNDAMENTALS
This jump in website traffic (relative rating) is pretty sharp. Something else that went high real fast: LAToken raised $8.5 million within the first day of their crowdsale,14 $9.54 million in 3 days, and was valued at $330mil after Round 1.15 That’s sharp, too. For a company’s share (coin) prices to appreciate (or at least, be appreciable) they have to have hype and good fundamentals. In this case, it looks like a few large investors bought in early, either in expectation that their sound fundamentals will pay off, or as a pump-and-dump. That suggests the stock is overvalued, and probably won’t stay this high, especially since their dream of legal ownership via blockchain is, right now, a total fantasy. Oh and also, they have a 73+% bounce rate.16 This is high—a lot
higher than other ICO websites I’ve looked at. To me, that adds credibility to the notion that this is a pumped-up stock. Also their domain name is only 2 months old.17 I’m worried that this is a scam, but I can’t find anyone saying they haven’t received their tokens yet. They used to go by the name AIBanks,18 but that domain has only been around FIVE months.
As for the technology, I wouldn’t be surprised if, long-term, this caught on. Last summer (2016), the Swedish Land Registry Lantmäteriet announced a partnership with blockchain startup ChromaWay, consultancy group Kairos Future, and banks SBAB and Landshypotek19 to trial blockchain technology for recording property deals. Under the proposed system, a buyer and seller would open a contract where banks and the land registry can view the workflow of the deal, such as due dates for payments. It can also be used to verify identity, preventing a certain kind of property-fraud that, apparently, plagues Sweden. As of March this year, they are in their second phase of trials, and have successfully tested the tech by selling a modest house (a shack, really). As for the man behind the curtain, CEO Valentin Preobrazhenskiy, he’s (allegedly) built the LAToken platform on an already existing home equity marketplace (AIB Zalogo) created by…him. In the past six months, according to LATokens, Zalogo marketplace facilitated 12,000 mortgage offers and >1,000 deals from 7 banks and 25 investors.20 Using U.S. aggregate data from the Home Mortgage Disclosure Act, it looks like Zalogo’s mortgage lending represents ~0.4% of the market: in 2014, 5,979,766 mortgages were closed from 11,875,464 applications (50.35% success rate).21 That may seem small, but compare 12,000 in six months to Freedom Mortgage Corp. (the mortgage lender with the top overall volume of 2016) who had 246,140 closed loans in one year.22 That means Zalogo is (allegedly) ~9.7% as big, easily placing them in the Top 50 mortgage lenders (in terms of overall volume).
That is…if they really existed.
It’s not surprising that I can’t find any evidence anywhere that shows they have any mortgage holdings or financial records (even behind a paywall) because Zalogo.ru is in Russia. But it is surprising that I can’t find anyone to validate the (somewhat modest) claims they’re making. In fact, the only allegedly first-hand account I can find is negative!
“[The man who interviewed with LAT] told me that LAT was a rebranding of aibanks.com which was a rebrand of Zalogo.ru, a high end lending service. His first impression of the company was that it was “just way to recycle Russian cash that has been sanctioned.” During his interview with CEO Valentin Preobrazhnisky he asked about several detailed questions about how the contracts would work, because he didn’t fully understand it. What happened next though, he told me was that “when I asked him
to specify, he moved on.” Additionally, the team was happy because they had hit their targets and they said “we are all getting bonuses.”
Ultimately, he was turned away from the interview, however, his final impression was “it looks like the guy had a great idea, built an idea, realized it didn’t work in Russia, blew his cash, thought about what he could do, looked abroad, took his basic (possibly real and functioning – but maybe not) idea, souped it up with a few current buzzwords, convinced a few people that there is gold in dem dar hills, and —-.“ More so, he said “they are building the current LAToken platform upon the Zalogo platform, and highlighting the successes of Zalogo, calling it profitable and highlighting the already, ongoing partnerships with banks which would suggest that it is still operational and working.” He continued saying “in the interview, the guys specifically told me they need a native speaker because they don’t want investors to know it is Russian.”23
Also, their fee structure is so outlandish as to make their company financially insolvent. That is, unless this is a pump-and-dump scheme. Which I think it is: 1 billion LAT will be issued, which represents 20% of the total number of coins (that’s 5 billion coins). The remaining 80% will be “frozen.”24 Based on all the data I’ve collected, I highly suspect there to be a massive drop in price shortly after trading goes live. Valentin et al no doubt will dump their coins for a hefty profit, on top of the at least $10 million they’re going to generate in their initial coin offerings.
On top of this, they fail to explain how their vision will actually be achieved. While LAToken says their equity assets will be backed by real shares, the equity token are just IOUs for LAT redemption. There is no possibility to actually trade your equity tokens for equity shares. Token holders will not receive dividends and they will not have voting rights. The value of the tokens will be dependent on the value of their separate “equity fund,” which will (somehow) prop up the price of their “tied-to-real-assets” stocks. But where is all that capital coming from? How the hell can they possibly maintain enough liquidity to tie their coins to, say, Apple stock? And wouldn’t they need as many cryptocurrencies as they have real assets to back? (I was thinking this before but I didn’t want to ruin the GOTCHA moment)
As for their media, they’ve been deleting all negative messages from their various channels, and wouldn’t you know it, their major forum threads are for advertising their token, answering easy questions (mostly just redirecting people to their whitepaper), and shill after shill talking about how amazing their platform is going to be. Smells fake to me.
If you’ve read their whitepaper, you can see that they are well-researched. That may lend them credence in your eyes, but remember that literally anyone can throw together some facts about the real estate or art market and what kindof problems they have, and highlight hypothetical solutions. That’s literally what I’m doing here, except I’m not trying to sell you on a new product (or stock), I’m advising how you should (not) spend your money. And while it does take a fair amount of creativity and knowledge to know what to look for (like the Howey Test or the Home Mortgage Disclosure Act) and how to find it, everyone responds to profit incentives, and if I could get people to fund my project for $10 million just by being good at creative researching, I’d do it too…only mine would be real.