Swarm gets cease and desist notice for tokenising Coinbase shares

Posted: 15 June 2018 5:29 pm

Coinbase never went public, but that hasn't stopped a dubious secondary market from cropping up.

Swarm had the bright and legally interesting idea of tokenising shares in companies, fractionalising and then reselling them on secondary markets for mainstreet and institutional investors.

It's a neat answer for the retail investors who feel increasingly divorced from the best opportunities provided by hot startups, which are increasingly turning away from public offerings in favour of private funding from venture capital firms.

"I don't like it from a public policy perspective that we’re increasing the market for the privileged and decreasing it for ordinary investors," said SEC chairman Jay Clayton of this trend recently.

A similar trend is seen in many other investment types, such as artworks, real estate and other items that have typically had a very high barrier for entry. Asset tokenisation and fractionalisation is increasingly regarded as a solution, and companies like Swarm are cropping up to make it happen.

"Our goal is to democratise investing, and introducing tokens that represent equity is a major step forward in this mission," said Philipp Pieper, CEO and co-founder of Swarm. "Now, any Swarm investor can hold equity in some of today’s most prominent tech startups."

Just one problem...

The equity in these companies, which is tokenised and sold by Swarm, is obtained through secondary channels rather than the companies themselves. Swarm goes through brokers who obtain the equity from various places, acquiring vested employee shares or buying from venture capitalists who directly acquired equity.

Coinbase might be the first company to take legal umbrage at Swarm's nerve, and has fired off a cease and desist letter at Swarm, insisting that it stop tokenising and selling Coinbase shares.

"As a private company, Coinbase does not allow trading of stock on secondary markets for a variety of reasons, including the fact that there is not full and equal information available to the market. We will take appropriate action if we find people have sold Coinbase shares in violation of our agreements not to do so," it said in a statement.

But Swarm maintains that the equity was obtained appropriately with the help of brokers, and that the method used to obtain it did not violate the purchase agreements signed by the investors who sold it on.

As for selling it along itself, Swarm says the company will not be violating securities regulations since it will only be selling the tokenised shares to AML/KYC verified individuals who are accredited investors. It's worth noting that being an accredited investor in the USA is a fairly high bar for most individuals, and generally refers to professional investment managers or suitably wealthy individuals. So much for "democratising investing".

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VET, XLM, BTC, NANO

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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