Commentary: Virtual Law Firm Hired by Virtual Company in “IPO” Stage; Congrats and Concerns
January 5th, 2008 by Benjamin Duranske
A new Second Life-based broadcasting company, “MetaNetwork Media, Inc.” recent announced that it has hired a Second Life-based law firm, “The MetaLegal Firm” as “primary counsel.”
I’ve had this in my in-box for a few days, and I just haven’t been able to figure out what to do with it. On one hand, the core of the announcement is pretty cool: a real life lawyer from Mexico City, Jorge Martinez Silva (as Second Life avatar ‘Deco Straff’) has been hired by a Second Life media company that looks like it has real potential. On the other hand hand, the release highlights a troubling issue that attorneys may want to watch out for when practicing in virtual worlds.
From the press release:
MetaNetwork Media, Inc., (symbol: MNM) announced the hiring of its legal counsel, The MetaLegal Firm, which is the Second Life practice of Deco Straff of the Mexican legal firm Rodriguez Davalos Associados, S.C. of Mexico City. Deco Straaf (Jorge Martinez Silva in real life) will serve as the primary counsel for the Second Life broadcasting company.
“This is an important step for MNM because of our long-term goals as a company, which includes growing our company into real life,” said Cadence Juran, MNM CEO. “Deco and his U.S. colleagues provide us guidance on our incorporation, our IPO and protection of our intellectual property in both SL and RL,” Juran said.
As an initial matter, I want to congratulate Silva for this neat bit of representation. MetaNetwork Media looks like an interesting project, and it is great to see virtual world-based companies starting to seek the help of attorneys with virtual world experience.
Unfortunately, much of the rest of the press release is devoted to other aspects of MetaNetwork Media, Inc.’s business dealings — including the aforementioned “IPO” in Second Life — and that causes some concern.
The sale of securities in Second Life raises the same issues for me that it always does. This particular “stock” trades on the “Second Life Capital Exchange.” This virtual stock exchange, like most others, strongly disclaims any real world implications, and claims, basically, to be “only a game.” However, the stock is available as part of an “Initial Public Offering” at $5L per share (roughly $0.02) and Lindens are readily convertible to real-world cash. As such, there are — as there are with every in-world company purporting to offer securities — serious questions regarding the legality of the offering.
This happens all the time in Second Life, of course; there are dozens, if not hundreds, of virtual world-based companies who have offered or are currently offering stock. Here, however, the press release comes with at least the appearance of approval of Silva’s firm, and that gives me some pause.
VB encourages attorneys who are practicing in this fascinating new area to keep in mind that while independent actions taken by in-world clients will not generally expose you to professional liability or raise ethics concerns, in situations where press releases are involved, it may be a good idea to take steps to avoid being depicted as endorsing legally questionable activity.
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19 Responses to “Commentary: Virtual Law Firm Hired by Virtual Company in “IPO” Stage; Congrats and Concerns”
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Thanks to ‘Julynn Lilliehook’ for forwarding the link to the press release.
Is MetaMedia Netowrk Inc. also based in Mexico, and, if so, does what they are doing violate Mexican law?
They don’t say where they are, but they do refer to getting advice from the firm’s U.S. colleagues in the press release.
Update – I talked to the “CEO” ‘Cadence Juren’ — it’s a New York company. So yes, they have to comply with U.S. securities law.
They just put on a little presentation for me in Second Life, actually. Voice, no less. Very nice virtual corporate facility (dozens of comfy looking chairs, a big screen with a giant imposing blue M on it watching over us like an iridescent god) and, really, they came across as much more “adult” people than you sometimes find at these things. ‘Juren’ herself is extremely corporate (“business suit” with beyond-the-navel plunging neckline aside… after all, it is Second Life) and she gives a good presentation. No joke – it sounds like the company is lined up for a potentially big launch with some cool partnerships.
That doesn’t change the fact that I’m fairly comfortable saying that selling unregistered securities to the public in exchange for something of value is illegal, and that Lindens are “something of value,” but it’s no more illegal for them than it is for any other company doing it. ‘Juren’ and the lawyer both avoided the questions along those lines, preferring to talk about their product.
With a company like this, with as slick a presentation as they managed to put together on the fly for me, I actually think they’d be better off ditching the in-world IPO and following the rules. They talk about wanting to move into the mainstream and it looks like they’ve got a better chance than many. How much money can you raise selling $.02 stock anyway?
It’s also not actually incorporated, so the whole “Inc.” thing is a little odd.
Ben, do you think starting off with this sort of securities roleplaying/fantasy is going to poison any real venture they make later? Is it as bad as, for example, thinking you can break into legitimate fashion modeling by doing naked photographs for magazines?
@5 – Hadn’t thought about that cyn, but it’s a great point. I think that most real-life angels and venture guys would be really turned off by it. The right person might think it’s cool, but no cooler than they’d think just being involved and creating a product in a virtual world was in the first place (without the baggage of having already “sold” the company). The problem with moving to the mainstream after playing “business” is that most serious early investors do not expect the company to come with 3,000-4,000 “shareholders” who each paid two or three dollars for their part of the company. That’s one of the (many) reasons that public offerings in the real world come after a company is somewhat established, not as an initial cash-raising option.
“’3,000 – 4,000 ‘shareholders’ who each paid two or three dollars.”
At the upper edge of those ranges you are talking about a capital raising of $12,000. If a real lawyer is involved even a half-assed inworld prospectus outline of what you get for your money is going to cost most of this isn’t it?
It is not a lot of money, and even if rather than shares they issue some form of legit debt instrument, and even if the 3,000 – 4,000 are more about establishing some kind of inworld base / credibility, it seems a lot of work for very little advantage.
Unless it is about PR rather than finance, in which case all the points you make above seem triply damning to the long term future of the business.
Unless the real value (IP or otherwise) is in a company that remains fully controlled and the brilliance is licenced to the ‘floated’ inworld company – but again legals and corporate structures would cost a hell of a lot more than the raising potential.
Finally if there is no actual company, ie it is just an individual issuing scrip / notes / debt as a sole trader / partnership whatever can it possibly be a security? Isn’t the IPO a fiction (issue of securities) based on a fiction (non-existent company)?
Jasmine is exactly right. Here’s the offering, if you want to run the numbers. It’s around $11-12k, if they sell out, depending on the exchange rate you use.
http://slcapex.com/ipo
This will undoubtedly disappear in the near future, but right now it looks like this: 578,167 shares offered at L$5 (around $.02).
I think this analysis is nonsense, as is most of the “illegal illegal!!11!!eleven!!” shouting with respect to so called financial markets in Second Life.
Could somebody remind me: In a simulation environment like Second Life, why would role playing a stock exchange, role playing being a company, role playing being a CEO or role playing pursuing an IPO on this stock exchange with toymoney be illegal?
Also, why would it be any problem for a person that is a lawyer in real life to role play an advisor in Second Life?
VB: “That doesn’t change the fact that I’m fairly comfortable saying that selling unregistered securities to the public in exchange for something of value is illegal, and that Lindens are “something of value”.
This comment implies that securities are actually sold here, which simply is not the case. Nobody is selling any “securities” here. Even if I sound like a broken record, this is only a virutal simulation in which people participate for entertainment purposes.
With the same kind of arguments you could sue actors for murder after seeing them killing somebody in a movie.
@9 – I should probably run a separate post on this one of these days, but here’s my basic analysis. I think it’s more like if an actor in a movie loaded his gun with bullets instead of blanks, and then tried to say it was “just a movie” when he shot a fellow actor.
The fact is that Second Life doesn’t really feature “toymoney” at all (unlike, say, your home Monopoly game) but is explicitly advertised as a place where you can “earn real money, that’s right, real money” (emphasis in original). And via the official LindeX, users can, of course, convert Linden Dollars to “real money.”
Moreover, the law is incredibly inclusive in its definition of “securities.”
“The term “security” means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” 15 U.S.C. § 77b (a)(1)
One commentator, Caroline Bradley, notes that “[t]hese definitions include both specific terms, and terms which are more general. It should not be possible to avoid the application of the statutes by calling something which is really a security by a different name. So, for example, calling something which is really a security a “game token” would not exclude the application of the statutes.” See Bradley, Caroline M., Gaming the System: Virtual Worlds and the Securities Markets (October 2007) p. 23. University of Miami Legal Studies Research Paper No. 2007-10 Available at: SSRN: http://ssrn.com/abstract=1022441.
Basically, I can’t get around the rules by calling my offering a “magic stockie” and selling it for “Benbucks” if my “magic stockie” fits the legal definition of a “security,” and if people can freely exchange “Benbucks” for dollars.
Notably, in the case of most of the stock exchanges in virtual worlds, there is no question that the products offered are at least referred to by the people selling them as “securities.” The World Stock Exchange, for example, say quite openly that it “offers a market for trading in securities.”
The current test for whether an offering is a “security” comes from the Supreme Court’s decision in SEC v. Howey, which I’ll get into in greater detail on when I run a post directly on this topic, but the issue basically comes down to whether the disclaimers on the stock exchanges’ websites saying “it’s just a game” and “there’s no value” are enough to get them past the facts, which are that you can make or lose real money buying and selling these, and that businesses are doing it to try to raise real capital (albeit typically “only” in the $10,000 range). I don’t think the disclaimers override the facts.
Note that that there’s no formal holding finding anybody in violation of any law, or any statement from the SEC on this yet. I’m just saying how I think it’ll go when there is one, and tossing up a caution flag for people who are playing in these markets, or advising companies who are.
What about Linden Labs, in addition to these “Stock Exchanges”, are they not complicit for their participation in the process?
I believe you first called out this example because of the implied blessing of a legal attorney in these activities, but how can other companies get involved as “cool partnerships” without mucking themselves up as well? It seems a non-starter from the beginning.
That’s right. And notably, they just completely banned the “banking” (e.g. ponzi scheme) industry.
http://virtuallyblind.com/2008/01/08/linden-lab-kills-banking/
This makes me suspect (though I have no knowledge of this) that one more significant “stock market” scandal will do in the exchanges too, unless Linden Lab decides to move proactively on that front.
There is one query about the analysis that Ben puts forward here, and that is this: as far as I can discern, all of the versions of the definition of “security” quoted above imply agreement or indebtedness. Is there not an argument to say that the agreement or indebtedness required for each of the items has as a prerequisite the intention of the parties to create legal relations; in other words, that “agreement” be an agreement that the parties intend to be legally binding, that the indebtedness mean a debt enforcable at law? If, therefore, the parties to the transactions in a virtual world specifically intend not to create such a relationship, and not to create what any national jurisdiction would recognise as a debt or a contract though want of intention to create legal relations, instead intending any enforcement of their arrangement to be exclusively by in-world means, if any, can it not be said that no true “security” in the sense described above is traded?
Linden Labs have a truckload of reasons for trying to pretend they are a game ‘created and run by residents’ while at the same time having legal / contractual rights for example to unilaterally ban all banks. Our learned friend and host has picked up already on the ‘real money’ aspect of the marketing.
It did occur to me while scanning the IPO stuff last night that if the ‘offer’ documents had been reviewed and approved by their RL lawyer, they had deliberately gone for a look and feel that was exactly like all the other pretend fun roleplay IPO’s.
I don’t think it will work and I have no cases to cite but just a quick story. I had the opportunity, before the ban, to sit in on a staff meeting at a now defunct casino. It had had an IPO. I was thinking of the employment law issues, because casino staff were talking about leaving real world jobs, which surprised me a lot. They were trying to make it clear they needed long consistent shifts, and were factoring in not paying tax.
I am sure Ben is right between the linden for real money switch and human nature this is not a game. It is not a game to LL’s it is a business, the IPO’s don’t market as a game, they market as a business.
On the other hand while taking valuable lindens the investors might be able to argue total failure / absence of consideration in the offer.
@13 – The parties could absolutely agree to use in-world dispute resolutions mechanism to settle disputes between each other, which I think is a great idea. They just can’t privately agree to override legislation and case law by inserting a term in a contract.
For example, if Adam hires Bill to run Charlie over with his car, and Adam and Bill privately agree that “if Charlie dies, the act will not be considered murder,” the agreement doesn’t make a bit of difference — they can still be charged with murder. Similarly, two people formally agreeing that Linden Dollars aren’t really worth anything when buying and selling stock in a company running an IPO doesn’t mean that is how a judge has to interpret the act. If the facts reveal that buying and selling stock with “Linden Dollars” really is the exchange of a security for something of value under existing securities legislation and case law, then legally, that is what happened, no matter what terms were included in the private agreement.
Ahh, Ben, I think that you misunderstand me: I was not imagining people attempting to contract out of legislation, which, of course, is always futile, but querying whether the definitions in the legislation require the parties to the putative security to have some sort of legal relations between them (or, at least, something that, but for any illegality created by the Act itself, would constitute formal legal relations) such as would (or would but for the legislation) create a relation of contract or debt. In other words, I was not imagining people entering into a contract a term of which was that the legislation not apply, but people agreeing that their transaction is not a legally binding contract at all.
I do not know whether US law has the concept of intention to create legal relations, but, in the UK, such an intention is a prerequisite to the existence of a contract. It means that many informal, social and domestic agreements do not result in legal obligations.
The questions therefore is (1) whether the legislation is intended to cover such informal arrangements; and (2) whether business transactions conducted purely in virtual worlds are sufficiently informal to meet the criterion in (1), if there is one. In other words, does it become illegal to play the banker in a game of Monopoly the moment that any of the players becomes willing to accept real-world money in exchange for Monopoly money in order to advance in the game, and the other players do not consider it cheating?
In addition to virtual attorneys advising on IPOs, virtual worlds need independent validation of the financial statements by virtual auditors.
..and the end of that story: It was a well planned FRAUD
FYI – Sportsbet Writer’s comment above refers to this:
http://www.slcapex.com/forums/topic/MNM/2203
It seemed pretty fishy to me from day one, as noted above. They put on a really slick show, so it seemed really weird they were raising money this way. If the allegations in that thread are to be believed, apparently they and the money from the “IPO” have basically disappeared.
I don’t usually cover this stuff; there are so many allegations of fraud in these markets that I’d be writing about nothing else. I started looking into this one due the presence of a lawyer and my concern that he might be hitching his wagon to the wrong star. No mention of him in the forum posts (though some other lawyers names come up) so the guy in the story above may well not have been working with them when this went bad.