“The man who never make enny blunders seldum makes enny good hits.”

- Josh Billings (1874)

It’s Time to Bring Back ICOs.

At least 5,500 US stocks trade at less than $0.01 per share, according to OTCMarkets.

Some of these are quite comical, as Dave Waters of Alluvial Capital recently noted, including “companies looking for Bigfoot (Bigfoot Project Investments, now Lord Global Corporation) attempting to revive the American Basketball Association (American Basketball Association, Inc.), seek treasure in sunken Spanish galleons (Treasure & Shipwreck Recovery, Inc.), or even prospect for gold in mines abandoned a century ago (Original 16-1).”

None of these worthy ventures have gone well for investors. The first two appear to have recently folded.

The second and third are still available to US investors via SEC-registered broker-dealers that deal in over-the-counter markets, but shares in both are down more than 99% from their highs.

The last company, Original 16-1, appears to still be operational, but its securities registration has been revoked.

Not, mind you, for being a ridiculous business that no one in their right mind would invest in, but for the grievous sin of failing to file regular updates with the SEC.

This, essentially, is the bright red line that separates penny stocks from crypto tokens: Because token issuers are not willing (or able) to file regular reports with the SEC, they are not permitted to sell tokens to US retail investors.

By contrast, the SEC is fine with US investors funding the search for Bigfoot — just so long as they receive quarterly updates on how the search is progressing.

I can’t imagine those updates have saved much money for investors — if you’re the type of person who would consider investing in the search for Bigfoot, you’re probably not the type of person who would be dismayed by anything that might be found in the risk-disclosure section of a 10-K.

(No more so than the type to believe in Bigfoot would turn back at the sight of a Bigfoot crossing sign.)

Notably, there appear to be more of these adventurous types than ever — trading volumes in penny stocks are booming:

This surge in trading volumes has allowed issuers to flood the market with new shares, nearly all of which end up being worthless.

Why does the SEC allow this?

Because their mandate is only to ensure that trading remains orderly and that companies keep investors informed — the SEC has nothing to say about the quality of the companies using penny stocks to raise capital.

The SEC’s rules “are designed to protect investors, ensure our market operates with optimal liquidity and transparency and allow capital formation,” a Nasdaq spokesperson told the FT.

Those rules are basically just disclosures, so US investors are free to invest in any scheme — no matter how crackpot — as long as the schemers keep the SEC posted on how the scheme is going.

US investors are investing in more of those schemes than ever.

I will lose my money however I want!

Capital formation is happening in crypto too, but with “liquidity and transparency” that is far from optimal — most crypto capital is raised in opaque venture deals and haphazard airdrops.

The SEC would say this is why they block US investors from participating.

But, to a large degree, it’s the SEC itself that’s to blame for these issues.

After the 2017 craze for ICOs (which admittedly did not end well), issuers have effectively been banned from selling tokens to retail investors.

Instead, issuers raise capital by selling tokens to VCs at depressed valuations that the VCs subsequently sell to retail at inflated valuations.

The SEC’s ban on ICOs is therefore “protecting” US investors from buying directly from protocols at low prices while doing nothing to stop them from buying from VCs at high prices.

Even worse: Projects like Jupiter effectively raise capital by airdropping tokens to users for free — but not US users, because the SEC doesn’t allow that either.

So we’re being “protected” from receiving free tokens in an airdrop, but not from buying expensive ones afterwards.

As investors, we can't do any worse than that and issuers can’t do much worse, either — and not just in the US.

A ban on US investors participating in ICOs is effectively a ban on anyone participating in ICOs, because no reputable issuer is going to incur the legal risk of inadvertently selling tokens to a US investor.

So the paternalistic SEC is effectively telling the entire world what they’re allowed to do with their money.

The result is that capital formation in crypto is being impaired simply because the SEC wants to stop US citizens from using a VPN to buy a new token with cryptocurrency.

Anyone capable enough to figure out the myriad steps that entails is capable enough to make their own investment decisions, with or without the types of disclosures they’d get with a penny stock.

Yes, we made a lot of mistakes in 2017, but we can’t have the hits without the blunders.

The SEC lets us make all the blunders we want in penny stocks, so they should allow it in crypto, too.

With or without their permission, it’s time to bring back ICOs.

― Byron Gilliam

We're Watching

Illia Polosukhin joins us to discuss how NEAR is building the blockchain operating system. NEAR first came to prominence in 2020 as an alternative Layer One that is laser-focused on abstracting the complexities of onchain infrastructure.

Watch or listen to Lightspeed on Youtube, Spotify or Apple.

We’re Hosting

Digital Assets in the Mainstream: The Path to Institutional Integration

How are institutions integrating distributed ledger technology (DLT)? How is adoption of blockchain enhancing liquidity, efficiency, and speed? This webinar will dive into the latest developments in institutional adoption of cryptocurrencies and tokenized assets.

Daily Insights