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.

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?

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.

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.

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.

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.

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.