January 13, 2025 | Read Online

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"Play fair. Don't hit people. Say you're sorry when you hurt somebody."

— Robert Fulghum, All I Really Need to Know I Learned in Kindergarten

Crypto has a fairness problem

If you didn't happen to be trading equities in August of 1995, you probably can't appreciate the shock waves that buffeted Wall Street when shares of Netscape finished their first day of trading at $58.25 — 108% above the IPO price.

That type of first-day "pop" soon became commonplace, but at the time it was the proverbial shot heard 'round the financial world.

Before Netscape, initial public offerings were a relatively staid process in which investment banks acted as mediators to find a price for newly issued shares that both investors and the issuing company were happy with.

Usually, the shares would be a little underpriced to make sure the deal got done and shareholders had a small paper profit to feel good about.

After Netscape, IPOs became a media and financial circus — new issues made newspaper headlines, attracted breathless coverage on CNBC and induced frenzied activity on trading desks.

They also became important marketing events.

Technology companies would deliberately underprice their IPOs to create valuable buzz in the overlapping worlds of media, technology and investing — a new dotcom whose shares didn't trade up at least 50% from IPO price would be perceived as a failure, making it difficult for the company to raise additional money, attract employees or draw attention to their product.

It was pretty effective: I no longer remember what theGlobe.com did, but I do remember that its shares were up 700% on their first day of trading in 1998.

That large of a pop I think was accidental — companies would sometimes overdo the discount, leaving a lot of money on the table, or their investment bankers would misjudge demand.

In the case of theGlobe.com, probably both happened, making it the poster child for an out-of-control IPO process.

As outrageous as that seemed, however, no IPO was ever as egregiously mispriced as the new AICC crypto token, which immediately traded 100,000% higher when it started trading this weekend.

100,000%!!!

On Friday, Aiccelerate DAO, a newly formed investment company focused on crypto AI agents, raised capital in an invite-only "party round" for its AICC token — effectively a pre-IPO allocation of new shares to investors.

This was a nice party to be invited to: An investment of five SOL (about $900) was worth well over $1 million just a few hours after the token began trading.

People who were not invited to the party are understandably unhappy about this.

AICC tokens seemed to be mostly issued to "key opinion leaders" (KOLs), which, superficially at least, has the look of being a quid pro quo: Make your token go up by gifting it to people who will promote it on social media.

This may not have been the intention — AICC tokens were sold at something like 1x NAV, so maybe it's just the market's fault for wildly overpaying for it after launch.

But even with the best of intentions, a "party round" full of KOLs for what was obviously going to be a hot token feels like a betrayal of crypto's early promise.

In 2010, anyone could mine bitcoin effectively for free; in 2014 investors had weeks to subscribe to the Ethereum ICO and everyone got as much as they wanted; and when Solana launched in 2020, we all had about three months to buy it under $1.

Now, by contrast, memecoins are launched by shadowy "cabals," "sniper" bots buy all the good token launches before any normal human even knows they're launched, VC-backed altcoins begin trading at insanely high valuations, and KOLs get gifted outrageously cheap tokens in invite-only party rounds.

Not many people are happy with this state of affairs — including many of the KOLs that were invited to the AICC party.

That's partly because they were named and shamed this weekend by a dashboard that makes it easy to see who participated in the party round and what they've done with the tokens since.

The buyers don't appear to have done anything wrong (I haven't seen any accusations of impropriety), it's just that a 100,000% one-day gain simply seems unfair.

Buyers who realized that gain by selling on the first day have received the harshest criticism, although I don't think that's fair, either — someone has to sell on the first day or else there wouldn't be a market.

But it's not a good look for crypto.

This, I think, is another reason many of the KOLs that benefited from the AICC mispricing appear to regret it: They recognize that the perception of unfairness will discourage people from investing in crypto.

Wall Street learned this same lesson in the dotcom boom and bust that followed Netscape's IPO.

In 2003, a joint NYSE/Nasdaq commission found that investment banks' practice of allocating underpriced new issues to a "few, favored investors" had led to "the loss of confidence in our IPO process."

The most egregious example was known as "spinning" — the allocation of underpriced IPO shares to customers who tacitly agreed to return some of the profits to banks via trading commissions.

In 2002, CSFB agreed to pay a $100 million fine after an SEC investigation found that the bank had been allocating IPO shares to customers "who, in return, were forced to funnel between 33 percent and 65% of their profits back to CSFB by paying excessive brokerage commissions on other transactions."

This was a problem for the business of Wall Street because, as the SEC chair at the time told the Senate Committee on Banking, "Spinning increases the public perception that IPO allocations are an insiders' game."

Investment banks recognized that this public perception was a threat to their businesses and quickly enacted rules to correct it, as they've been doing for decades.

The primary purpose of the SEC, stock market regulations and laws against insider trading is to create a perception of fairness that will encourage people to invest.

As Robert R. Glauber, then chair and CEO of NASD, said, "Cleaning up research and IPO practices is not just good ethics, it's good business."

No one's going to play a game they think is unfair — we learn this in kindergarten.

And now we're seeing it in crypto prices: The social-media uproar over AICC's underpriced party round accelerated a selloff in AI-related tokens over the weekend, possibly crippling crypto's hottest sector.

I think that's an important lesson to learn.

If retail investors feel like they're not being invited to the party, the party won't last much longer.

— Byron Gilliam

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