[In]Securities GUEST BLOG: Fantasy by Aegis Frumento Esq

September 26, 2019


It's an odd fact, though it shouldn't be a strange one, that many consumer technology advances were driven by porn. History is replete with examples. In the battle between Betamax and VHS, the fact that more adult videos were available on VHS tipped the balance. The first adopters of high definition television were the producers of adult videos. Porn blazed the trail from tape to DVD to Blu-ray. https://www.thrillist.com/vice/how-porn-influenced-technology-8-ways-porn-influenced-tech-supercompressor-com. And we're not even talking about animatronic sex toys. In this area of life, it really is true that if you build it, they will come.

So it also should be no surprise that there would be a pornographic angle to the blockchain world. Last week, the SEC filed a complaint against Jonathan Lucas, claiming he had engaged in an illegal securities offering by promoting a blockchain business called Fantasy Market, and selling Ethereum-based coins called the Fantasy Market Token, or FMT. As a securities frauds go, this was bush league. Jonathan only managed to scam $64,000 out of 100 investors. He gave the money back, and in settling with the SEC, agreed to pay a $15,000 fine. https://www.sec.gov/litigation/complaints/2019/comp24607.pdf.

Jonathan's Fantasy Market was advertised as a venue that, according to the SEC's complaint, "would allow participants to control live adult entertainment performances by paying for specific requested activities with the Fantasy Market digital token." An Internet search for Fantasy Market this week, after the SEC shut it down, came up with nothing. It still survives in an ICO tracking site, where the service is described like this:

Life is better when you are in control. Fantasy Market is an innovative marketplace for live, user-directed performances. Using our token, you control what the performers say and do during the show. This intimate level of user interaction will revolutionize the live entertainment industry. Our whitepaper is meant to give you a complete understanding of our approach, vision, and execution strategy.

I searched high and low for that whitepaper, but it is nowhere to be found. The links to it are all dead. And if you search for FMT, you will learn more than you'll ever want to know about fecal microbiota transplantation, which, it turns out, isn't really porn. See https://peerj.com/articles/4663.pdf. And so, I can't describe how these user-directed performances were going to happen. Unless Jonathan intended to have adult film stars on call to satisfy the needs of every FMT holder who ever happened to call up a show, I can't fantasize how the Fantasy Market would be any different from any other porn site.

Jonathan at least had the fantasy part down. According to the SEC's complaint, he passed himself off as a Frenchman who had relocated to Las Vegas. He's really a 27-year-old from New Jersey. He also passed himself off as quite the brainiac. He claimed to have a full scholarship, funded by the NSA, to Stevens Institute of Technology, where he majored in applied physics and minored in women's and gender studies -- yes, truly -- and earned a BS in "cyber warfare." The only truth in that was the BS - according to the SEC, Jonathan never graduated from college.  He also claimed to have an angel investor (he didn't); to have a development team in place (identified online as Chris, Rick, and Hank https://www.trackico.io/ico/fantasy-market/#team], but none of them real); to have a beta site up and running (not that the SEC could find, and I'm sure they looked); to have raised $4.5 million (not even close); and to have earmarked proceeds for development (he really spent it on promotion).

When you look at the totality of all of this, there's nothing high-tech about this fraud. In fact, there's very little high-tech about any of the ICO frauds that the SEC has brought. At the end of the day, most of these cases are simply promoters lying about the stuff they are selling, peddling interests in companies that don't exist. The Fantasy Market was only real if you took its name literally.

Coincidentally, just the week before the first ICO done right announced that it had raised $23 million through a fully registered offering. https://cointelegraph.com/news/first-ever-sec-qualified-token-offering-in-us-raises-23-million. Unlike Fantasy Market's cockamamie bullshit, Blockstack issued its Stack coins through a registration statement with the SEC. https://www.sec.gov/Archives/edgar/data/1693656/000110465919039908/a18-15736_1253g2.htm. In Blockstack's publicly available 216-page disclosure document, you will find practically everything you would ever want to know about the company and its coins. Blockstack and Fantasy Market are the models for what and what not to do when selling cryptosecurities.

Blockstack registered its ICO offering using SEC Regulation A+. The SEC wrote Reg A+ to implement some of the provisions of the JOBS Act. Congress passed the JOBS Act to help get new businesses off the ground. Congress intended those provisions to simplify and streamline public offerings for emerging companies, to allow them more easily to fund their growth by raising capital in the public markets. Stock markets were beginning to be dominated by huge corporations and abandoned by smaller companies, and Congress was looking to reverse that trend. Congress hoped the number of smaller issuers listed on the stock exchanges would grow.

Reg A+ has had its detractors since it was promulgated. https://medium.com/@MattSmithCEO/reg-a-has-failed-both-investors-and-startups-one-founders-experience-49924a4b988c. It hasn't been as successful as Congress had hoped, but it does seem well adapted to ICO's. Reg A+ was designed specifically for emerging companies, which virtually all blockchain businesses are. It permits direct offerings by issuers, sidestepping investment banks, and all blockchain companies do that through their whitepapers. And while Reg A+ has not done much to increase small issuer listings on the major stock exchanges, investors in blockchain businesses still benefit because cryptosecurities trade on less cumbersome coin exchanges.

All of that makes a Reg A+ filing relatively inexpensive to process. According to a report issued by the SEC in 2016, the average legal fee cost of a regular A+ filing was about $40,000. https://www.sec.gov/files/Knyazeva_RegulationA%20.pdf. Believe me, that is a lot less than what it would cost for a full-blown IPO. As Blockstack showed, a decent Reg A+ offering gives you control over a stack of regulatory risks, and as Jonathan Lucas so wisely pointed out, "Life is better when you are in control." Blockstack seems the model to follow for anyone who seriously wants to be compliant with the securities laws in promoting a cryptosecurity.

Unfortunately, the epidemic of fraudulent and unregistered ICO's continues apace. But if the pace has devolved down to the fantasy levels of Fantasy Market, then perhaps we are making progress. We still need regulation that is better adapted to cryptosecurities. Sure, our existing securities laws are plenty good enough to capture guys who lie like rugs, but the regulation of blockchain businesses and coin trading after the coins are in investors' hands is still up for discussion. Our existing regulations, born in the 1930s, will be inadequate to regulate 21st century blockchain Enterprises. To believe they would be is just a fantasy.


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog. 

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