Thinking about speculation, markets, securities and laws…

Fascinating post by Elaine which talks about multiple things forcing one to think.

First she points how the Metro train in Boston decided to increase price of its ticket/token. The hike was effective next month. This led to hoarding of the older tickets to sell them for a cool profit later. Unfortunately, she was not the only ne thinking on those lines. This led to many buying the old tokens to sell later. However, as there was no market for the same the profit remained just a dream:

In 2003, I had the best business idea ever. The MBTA had recently announced an upcoming increase in the price of Boston transit tokens, from a dollar to $1.25. The change would not be effective until the following January, which meant that any T tokens acquired before then would be guaranteed a 25% return. I had just over a month to hoard as many tokens as possible.

I wasn’t the only one with this strategy; many of my classmates did the same. But after a month-long buying spree, it became clear that realizing those profits would be a pain in the ass.

We could never use all those tokens ourselves, and there was no secondary market because all our friends had made the same brilliant investment. If only T tokens were tradeable on the blockchain!

She then wonders why we don’t fund projects using similar tokens. The answer is the tokens could be used as security to finance something else. After all these tokenshave been issued against some value. This is how financial instruments like shares and bonds work as well. But then as law permits only few things as securities, these tokens remain unused:

Why don’t we finance all our infrastructure projects with token sales? Is Trump still looking for ways to pay for that wall? Issue a Wall Token and put it on the blockchain! Each Wall Token confers the right to one border crossing.

But it turns out such Tokens might constitute a security.

Here’s a 1977 paper about property developers who finance their facilities by selling usage licenses before construction. Two fun examples:

In the case of Holloway v. Thompson , a landowner raised money for a cemetery by selling certificates entitling the holder to a future burial spot. After the cemetery was constructed, an elderly couple sued the developer because they were unable to resell their unused spots. They had purchased 31 spaces, hoping to flip ‘em for a quick profit. The court determined that the burial rights were  unregistered securities , and buyers were refunded.

In Forman v. Community Services, Inc, a property developer sold “shares” of a low-income housing project, which could be exchanged for a three-year lease on a future apartment. After construction, the lease agreements were less valuable than expected, and the shareholders sued. The Supreme Court determined that the housing shares, despite being explicitly sold as “shares”, were not securities. The case was dismissed. It helped that the defendant was a non-profit housing co-op trying to do a civic good.

There are many more cases, and every shade of grey in between. In the 1970s, a spate of country clubs raised money through initial membership offerings, at which point the SEC directed its staff to stop issuing no-action letters in this area and advised that past letters should not be relied upon: “The Commission is concerned that inferences may be drawn from the issuance of no-action letters in this rapidly-evolving area.”

Simple post but worth many ideas.

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3 Responses to “Thinking about speculation, markets, securities and laws…”

  1. Pratik Datta Says:

    Interesting post! The definition of “securities” has been one of the most tricky issues in securities law. For the current Indian definition, see section 2(h) of the Securities Contract (Regulation) Act, 1956. Since this is not a principle based definition, in clause 2(145) of the Indian Financial Code a hybrid principle and rule definition was inserted. The first part reads: `”security” means a transferable and marketable financial interest which is not a negotiable instrument…”. What do you think of this new definition? Unfortunately, none of these interesting aspects of IFC ever got debated in the media!

    • Amol Agrawal Says:

      Hi Pratik. Thanks for this insight. We discuss all the noisy least valued things in the media. IFC discussion was only about whether RBI Governor has veto powers in MPC or not! Nothing else mattered…This new definition is interesting with each word having a meaning which has to be understood well.

  2. Autumn Cote Says:

    Would it be OK if I cross-posted this article to WriterBeat.com? I’ll be sure to give you complete credit as the author. There is no fee, I’m simply trying to add more content diversity for our commu5nity and I liked what you wrote. If “OK” please let me know via email.

    Autumn
    AutumnCote@WriterBeat.com

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