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I was researching a bit and brainstorming all the risks that I could think of that are specific to P2P capital markets like NXT's Asset Exchange. Here are a few:

  • Less sophisticated investors
  • Less sophisticated businesspeople
  • Limited or fraudulent information
  • Non-existent regulatory oversight
  • Inability to recover lost funds
  • No protection of ideas through non-disclosure and non-circumvention

I think the first three points are vital and actionable. The fourth and fifth go hand in hand, and are at this point somewhat assumed in this space so are not as actionable at this point in time. The sixth is worth mentioning but again is an assumed risk.

What I believe we currently have in this space is a dark hole of uninformed investors that have little or no financial/economic background, unsophisticated/unproven/seedy businesspeople, and a lack of information in an unregulated environment. The question then becomes how do we self-regulate?

A few ideas:
  • Ricky James-type enforcement
  • Math based regulation
  • Making disclosure simple, understandable and accessible in a highly visible location

The first is an "We are Legion" type of internet justice which I imagine is possible but not exactly implementable on any level. With regards to math based regulation, my thoughts are raw but something I can think of is automatic ratio analysis for certain financial ratios in company-issued disclosures that sort of tip people off on strange relationships between their numbers. The third in my opinion is the most actionable, at least on my part. The two key factors here are making disclosure as low cost as possible for issuers but with a high standard, and making them as understandable as possible for investors. I think taking educational standpoint on disclosure for both investors and issuers would benefit the market greatly. Something perhaps as little as explaining what revenues, P/E ratios, etc. are and including that in their disclosures to the public, and putting these disclosures in highly visible places like within the exchange or client itself. Again, I don't know how that would be implemented on the blockchain or if that would create too much bloat, but some basic ideas.

Thoughts?

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Nxt Asset Exchange / Issued Asset Record
« on: June 03, 2014, 12:50:04 pm »
Do asset issuers have a perpetual record of everyone who owns the asset?

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What is the nature of the service?
I am considering starting a fee-based service for the compilation of financial statements for NXT asset issuers on a quarterly, bi-annual or annual basis. The purpose of a compilation is to produce financial information for investors and the general public. I will also perform a review service, which is more involved and provides limited assurance as to whether or not the financial information provided by the asset issuer is misleading.

A compilation engagement will produce a basic set of financial statements: balance sheet, income statement, cash flow statement.
A review engagement will produce a report with limited but independent assurance as to the reliability of financial information produced by the company. For independence reasons, I cannot provide a review if I compile your financial information because that would threaten the integrity of the review.

Why is this important?
If you are investing any form of money that has value, whether it be fiat currency in the NYSE or NXT in the AE, you want to have as much high quality information as possible before entrusting it to someone over the internet. Everything on the AE is extremely risky because most of these asset issuers are providing the community with little more than a forum post and a virtual promise. Not to mention, many of these IPOs are issuing virtual shares at arbitrary prices that give them million dollar valuations (yes, in real money)!

Now think about this for a second: Would you invest money in a person who contacted you over the internet and said "Hey, buy some of these virtual thingies in my company, they're going to be worth millions one day" and who has no proof of any type of business operation whatsoever? Maybe if you treat NXT like a virtual thingy too; but if you're like me, you believe your NXT will be valuable one day and want to be careful about where you put it.

Some are trying to solve this issue by creating indexes with ratings for different assets. But how can you rate something that doesn't provide any information other than a few periodic updates over a forum? Is reputation really enough to go on?

Who would be interested in a service like this?
Investors: The investing public should demand financial information from asset issuers before trusting them with your NXT! If a company is issuing 1 million shares at 20 NXT per share for 10% of their venture, don't you deserve to know what that $1M+ USD is being used for? And wouldn't you want to know if the issuer is investing their own 90% of the deal? As an investor, wouldn't you want to know what the maximum amount of shares the company will be allowed to issue? If the company keeps issuing shares just to raise money, your investment becomes diluted and is worth less! If they claim to pay dividends, wouldn't you want to know if you're getting your rightful share of the profits?

Asset Issuers: Surely there are many of you who are actually trying to start legitimate services and businesses on the AE. Producing financial statements for your operations is a time consuming job that requires a certain level of expertise to produce meaningful information. How can you differentiate your asset/company on the AE's ever growing list? Releasing representationally faithful financial information to your investors increases their confidence in your asset over time. Being transparent about your operations welcomes new investments into your asset/company. Additionally, the strength of your reputation grows proportionally to mine by association. If investors find my service useful, the value of your investment grows!

Why should you trust me?
Alas, a chicken and the egg problem. But this goes back to the last line of the preceding paragraph. The success of my service literally depends on the integrity of the service I provide. If I scam one person, there's no reason for anyone to trust what I'm doing and this whole experiment would be an ironic lesson in why it's hard to trust people on the internet. But if people find this useful even though at this stage it's imperfect, then the strength of the AE as a real option for investment grows, and NXT as a whole benefits. A win-win, so to speak. In the future, perhaps a full blown financial audit function will be required and this service will evolve along with it.

I am a recent accounting master's graduate studying for my CPA in the U.S., which I should have by August (fingers crossed). I've been following the NXT project since last November and this is really the first place where I can contribute in some small way.

Who pays for this service?
The asset issuer.

Any feedback would be greatly appreciated!

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Nxt Asset Exchange / Dividends
« on: May 13, 2014, 02:31:44 pm »
Hey all - been awhile since I've been around.

Was wondering how investors can expect dividends to be calculated properly on these assets? Will these companies be releasing financial statements? How can you know the dividend you receive is an equitable portion of the company's profits without periodic financial statements?

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