“Securities are sold and not bought.”

“We are a nation of consumers, not investors.”

Put these two aphorisms together and it becomes clear that the key to making the online alternative investment market take off is to make securities products into consumables. And how better to do that by offering actual consumables, in the form of delicious chocolate? Let me explain. A few years back, the UK chocolate company, Hotel Chocolat (which makes truly excellent choccy, btw), started to issue “chocolate bonds.” You lend the company a certain amount and they pay interest in the form of chocolate.* Mmm, chocolate… Sorry, got carried away for a moment there. It’s all a brilliant marketing idea, they get to pay interest in kind, and as a young company they presumably have more chocolate on hand than they do cash. And what a great gift! How better to introduce youngsters to the principles of sound investing and weight management?

You can also now buy Chilango’s “burrito bonds” on CrowdCube, the preeminent UK crowdfunding site. Same principle,* different part of the food pyramid.

And of course when something is done on a UK crowdfunding site, we can probably expect it to happen in the US at some point. But both issuers and investors must take into account the heavier (intentional pun) regulatory load that applies in the US. First, we have to remember that these bonds are regulated as securities in the US, which is not generally the case in the UK, so there’s the issue of an exemption from registration under the Securities Act, and the disclosure that goes with some of the applicable exemptions (Section 4(a)(6), for example). Second, accounting. If you are making payments in kind as your interest payments on bonds or dividends on preferred stock, the (fully-loaded) costs of those payments need to be reflected as interest or dividends, and not turn up in costs of goods sold. And finally, tax. The IRS requires investors to pay taxes on interest received in chocolate in cold hard cash. And don’t forget to issue 1099-DIVs or 1099-INTs to all your happy consumers!

* Technically both companies issue gift cards as opposed to sending chocolate bars and burritos in the mail. But the principle is the same and investors will have to pay taxes even on the unused balance of the card. In some cases, issuers might be able to structure their deals as promotional discounts of some kind, but not without weighty professional assistance.

Posted in Arts and Culture, Markets, Securities Regulation | Leave a comment


LendingClub just filed its S-1 for its IPO and everyone is talking about disintermediation. I believe that LC is one of the most important companies of this century, and that people like Sheila Bair, who is awesome in other respects, are misguided in criticizing the fact that LC lets people lend money to people who refuse to document their income. [And yeah, I do know the structure isn't strictly me lending on LC's platform to Joe X but me lending to LC, who buys Joe's note from the bank and all that, but the overall economic result is if it were really "peer-to-peer".]

Here’s the proposition for investors in old-style asset-backed securities backed by consumer debt: “We are going to collect the consumer debt of a whole bunch of folks generated by a whole bunch of different intermediaries. We will collect them into pools according to some complicated formula and someone will check (at least the contract says they will check) to make sure that specific debt is in the right pool and that if something goes wrong the debt is substituted according to another complex formula. You will own a very small piece of that very large pool and you will be paid according to this other complex formula. Here’s a 200-page prospectus that lays it all out for you.”

Here’s the proposition for investors on LC: “You can invest in a note that will only get paid back if Joe X pays his debts. Joe’s credit score is 750 and he says he’s a teacher but he has not proved what his income is. Click here if you want to lend money [in effect] to Joe.”

The LC model is a lot more efficient in many ways. The reason we used to need traditional ABS (and traditional banks, for that matter) is that it was so difficult to match people’s specific needs with respect to maturities and risk with what was available in the markets. Banks functioned as massive maturity alchemists and risk distributors. But now, financial technology has made it so easy to match a consumer’s needs that the bank’s role as intermediator is becoming superfluous.

Part of the reason for this is the ability to make tailored investments in very small denominations — to get granular, as it were. I’ve been watching U-Haul’s “Investors Club” with interest. The U-Haul parent company is offering notes in amounts as little as $100, secured by things like a specific identified truck or a pile of wrapping cloths. No bank, no investment bank, just a direct loan to U-Haul’s parent.

Part of the story in both these investment alternatives, of course, is disintermediation. The lending is direct and you skip the traditional intermediaries, because of the ability to connect lender and borrower online. But I think the more important aspect of the story is granularity: the ability to make micro-investments in specifically identified risks, which was only recently made possible by modern processing power.

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Michael Lewis’s books are short, well-written and easily understandable. That means they can be read even by Congresscritters so we can expect EVEN MORE hearings on HFT soon. Did they listen to the Zombie Bears? No they did not. Do they pay attention to the postings on Zero Hedge, where people who are quite funny and clever but also scary post doom and gloom every day and where they have been going on about HFT for lo, these four years and more? No. Do they pay any attention to Eric Scott Hunsader from Nanex who knows about these things (and whose Twitter feed I have been enlightened by for some time)? Nope. Did they read any of the other books about HFT? Nah. It’s not news on the Hill until Michael writes about it. And thus, Mr. Lewis moves markets.

It’s a really good book. I mean, he’s written a cliffhanger about a bunch of Asberger-y guys and Canadians and introduced more human interest than would probably be apparent if you met them in person. He’s explained some really complex stuff in a way you can get totally into, and mostly understand.

One question though: at what point did Michael Lewis become the story? This is all super-recent stuff. It’s not something he heard about and then went back and recreated. The book reads like from some point he was actually there in the room and along for the ride with the IEX guys (alternatively, someone with total recall described what everyone said and what t-shirt they were wearing and I’m not ruling that out because hey, on the spectrum, right?). And that wouldn’t matter if he wasn’t him, writing this book. Because now, Heisenberg-style, his book is going to influence where this industry goes.

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I raised this before: see the bit about cross-border custody when I started the ZBI. It’s not inconceivable that Russia will respond to financial sanctions by more or less specious attacks on Western financial institutions that operate in Russia. Like acting as custodians of equity securities. It would not be the first time that Russian authorities have taken such actions and if I were holding Russian ADRs . . .   well, I wouldn’t be holding Russian ADRs.

Posted in Securities Regulation, Zombie Bear Index | Leave a comment


Because seriously, no comment is possible when crazy meets crazy. I came to this page because of the Beck/Freeman interview. But I stayed because it has Illuminati, Freemasons, Gold and Bitcoins! And suicided bankers and random Capitalization and apostrophe’s. And the world ending on March 4. And gold and Bitcoins! Gold Bitcoins! But hide them in the ground because the Freemasons will be starting WW3 shortly (although they’d better get it done soon on account of said end-of-the-world thing).

Ah, teh intertubes. Bless.

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WHO WON 2013?


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A continuing theme in this blog is that there is a huge need for financial literacy in the United States. After reading some of the comments on the SEC’s newly-proposed Regulation Crowdfunding I’m beginning to think that the need is just for regular literacy. Possibly also a need for some folks to repeat junior high civics classes.

Here’s the thing. The JOBS Act set some very specific constraints around securities crowdfunding and instructed the SEC to implement that legislative mandate. THE SEC CANNOT CHANGE THE LEGISLATION. If we did let an unelected government agency do that, it wouldn’t be very democratic, would it? So the legislators make the law, and the SEC has to implement it. That means when Congress imposes a $1 million limit on a crowdfunding raise, the SEC has to follow that. The SEC says so in its Proposing Release; people should read it.

So let’s be clear:

1. The $1 million limit on a crowdfunding raise was imposed by Congress, so anyone with problems with that should take it up with their Representative or Senators. In fact, the SEC is doing the best it can to expand that $1 million limit by saying that you can do an unlimited accredited-only raise at the same time as your crowdfunding raise, which I think is going to become standard practice.

2. Investor limits: also Congress’s idea, not the SEC’s.

3. No-one is planning to touch donation and rewards crowdfunding. If you’re not offering securities, the SEC is not planning to impose any regulations on you at all. You and your zombie movie are the FTC’s problem, not the SEC’s.

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You guys, this is so sad. We all know that sometimes it’s hard to be a rockstar engineer or coder in the Valley. Long nights, stale pizza, smelly t-shirts, worthless options. It’s hard to find friends of the opposite sex. But it’s even worse than we thought! Even the guys at Twitter don’t know any lady people! We know this because they didn’t find any to put on their board, despite the fact that it is 2013 and there are OODLES of qualified wimminz just ready to corporate governance the !^%$ out of TWTR’s audit committee. The problem might have been that the TWTRs didn’t go more than a Segway ride away from the cafeteria, but EVEN IN THE VALLEY there are qualified women. (Although why they don’t run away screaming I do not know.)

So let’s not call Twitter management lame, blinkered misogynists. Let’s do them all a huge favor and introduce them to some nice ladies who know all about finance, and tech, and corporate governance and risk management, and who they might be able to have a nice non-threatening relationship with.

Encourage them gently with the hashtag #TWTRXX.

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See here for the introduction to the ZBI.

Just when I thought I might retire the ZBI, Congress decided to push us to the edge of the cliff/abyss/insanity again. So yay for that, I guess. I’m promoting Ignorance to the number one spot as the biggest factor in driving us all to living on roadkill and bathtub gin.

1.  Populist rage and financial illiteracy amongst the populace, the populace’s representatives and the fourth estate. This is truly driving me nuts right now. The people, the people’s representatives and the people who explain stuff to the two former groups are (a) pig ignorant (b) wrong and (c) influencing other people. Oh lord. So let’s start with the People. Here’s how badly-informed the people are. (Actually the comments to that story are actually more depressing than the Stupid the data reports, which is remarkable. Oh, the apostrophe’s!) And then we have Congress, where some folks seem to think that you can say something isn’t a default and then it isn’t, on account of they are qualified large animal veterinarians or dentists and thus understand something about the international financial markets. I am a size 00 supermodel. (Damn, just saying it didn’t make it so, how does that not work?) See, Congressman CowDoctor, it is not you what decides whether something is a default, nor what will cause the markets to value Treasurys at some different price, nor what will determine whether or not said Treasurys continue to remain adequate collateral for major investment banks’ repo contracts which will determine whether we are going to have cascading margin calls all across the markets. What determines whether something is a default, in point of fact, is often a matter of contract law, made between private parties, and I’d think that you would respect that. But enough, you are qualified to pull baby cows out of mommy cows’ whatsits so who am I to judge? And then we have financial illiteracy promoted by the press. Oh, this is sad. I work in an area where legal research often consists of a Google search by some entrepreneur’s brother-in-law who is an immigration lawyer, so it is actually important that the financial press get it right now and then. But the NYT so totally mushed up a story on the JOBS Act that it was unrecognizable [even the correction to that one is wrong], and the WSJ published an interview on the JOBS Act that misstated the law without any factual corrections, so can the small biz folk trust the established media?  And online, here’s a couple of right doozies, from the same source. In what is supposed to be “analysis,” a commentator counts the words in the Risk Factor section on the Twitter IPO S-1 and asks whether Twitter is more risky than Facebook’s IPO because it has more words in it. But it’s a good comparison because he has taken extraneous words like page numbers out! Where to start? Actually, that’s easy. Reading the words rather than counting them, that might be a really good place to start. And the same source asserts that Microsoft’s hidden problem is its “ancient board“: how can old farts understand how to sell to youngsters? Let’s ignore for the moment that the board is there for reasons of corporate governance, not sales, and that the people who do the selling are in the sales department. Let’s just ask “Yeah, and with only two women on the board, how can they hope to sell to lady people, either?” [Actually, good question...] Current rating for financial illiteracy as the biggest threat to life as we know it: eleven out of ten zombie cows and rising by the minute.

2. Bank provisioning. So the banks are  recording humongous numbers for settlements, legal costs and oversight costs. But I STILL do not understand why some of the seemingly easiest lawsuits have never been brought. If you have an agreement that says Party A is responsible for making sure that Asset Pool X consists only of assets with the following attributes and it turns out that much of the stuff in the asset pool does not have anything like the attributes it’s supposed to have, there’s a cause of action against Party A, right? Right? [Sound of crickets...]  Current rating: 10 zombie bears, 5 years out.

3. Europe.  So Europe’s still essentially bust. In its chocolate-and-lace soaked heart, Europe still wants to impose the FTT. But it won’t work, also illegal, so at some point won’t they just give up and focus on proper banking union instead? Current rating: 5 zombie bears.

4. Actuaries and pensions.  Current rating: 5 zombie bears.

5. Math/Algorithms.   Current rating: somewhere between one and an infinite number of zombie bears; variable.

6. Hackers.  Still the greatest threat to markets, according to DTCC. Current rating: 8 sleeping (?) zombie bears; stable.

7. Cross-border equity custody. Current rating: one lonely zombie bear.

8. Bitcoin or something like it. Haha, my friends at SecondMarket made an ETF in bitcoins, so bitcoins are now mainstream among the FinTech crowd. I am still not buying any. If you buy gold, you like to know where the gold mines are and have some idea of the metallurgic likelihood of gold in various areas.  I am not qualified to know whether it is true that there is a limit on the number of bitcoins “mined” and I do not trust a fiat currency fiat-ed by someone who may or may not exist, or who may have a serial identity like the Dread Pirate Roberts. Plus, I do not need any drugs today, thank you. I am sticking to SPY like always. Current rating: two zombie bears; increased on account of now hipsters are going to invest in this thing.

9. Megabank’s Boring Transactions Division. Current rating: no zombie bears for now.

10. Commercial Real Estate. Current rating: no zombie bears; we are still pretending they aren’t there. And maybe they aren’t, but if that were the case, why is so much office space in my neck of the woods still vacant?

Posted in Zombie Bear Index | Leave a comment


So the SEC adopted the rules that will (when effective in mid-September) permit offerings made in reliance on Regulation D to “generally solicit” providing all sales are made to accredited investors. Huzzah! I run a company that provides services to people doing the kind of online offering that will now be permitted, so I’m happy.

But we now need to face the fact that the ingenuity of the average American entrepreneur is limitless when it comes to promoting his or her company’s products, and now its securities offerings. Expect billboards, skywriting, ads on t-shirts, ads on t-shirts for dogs, songs about the offering, Vine clips, social media posts and when someone figures out how to do it, details of offerings singed into catbeards.

Offerings that are intermediated by broker-dealers will at least have the discipline of a FINRA-regulated entity that is subject to advertising and social media rules. But only 11% or so of Regulation D offerings use an intermediary. So independent issuers may be out there doing their solicitation completely unaware (and in a few cases aware but uncaring) that Rule 10b-5 applies to their solicitations and how ridiculously easy it is to violate 10b-5 when you make the kind of statements I see every day on the major crowdfunding donation/reward sites. So there’s chaos battlefield #1. An SEC statement along the lines of “when we said in the release that anti-fraud rules still applied, this is what we meant” would be an excellent idea.

The other type of chaos derives from the SEC’s proposal that issuers submit their general solicitation materials to the SEC for a couple of years so the SEC knows more about the market it has to deal with and the way in which issuers are communicating. Good idea in principle, but the manner in which it’s proposing to acquire this knowledge won’t work. There’s going to be an “intake page” on the SEC’s website whereby issuers can upload all their solicitation materials. Those materials are going to include all the various documents I mentioned above, in all the possible formats that can be used to create files. The processing system and database are going to have to be truly robust (and expensive) to be able to do that without crashing (and I speak as one who is writing very large checks for the development of a robust database). And is that money worth it for a temporary program? Especially in light of the fact that people don’t like the idea of giving the SEC offering information that is not otherwise required. (They think the SEC might use it for purposes other than its own education.) I predict that people will try to break the intake page by uploading catbeards as soon as it’s launched. The SEC would be much better off forming a subcommittee of one of its small business advisory groups to keep the Commission informed of market practices.

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