SoP Panel: Stock Markets in Virtual Worlds

Full Webcast Available At: Stock Markets in Virtual Worlds

As the creator and founder of the Second Life Stock Exchange, which was pretty much the focal point of this Virtual World industry panel, I'd love to take a little time to discuss it in land/economy. It isn't every day, after all, that the CEO of Linden Lab presents and discusses a resident pioneered service at length at an industry conference. I feel that this event marks a VERY important milestone in our early development!

I’ve had a chance to watch the above linked webcast in its entirety, and overall I was highly impressed by this panel. I think that it would be a good thing for all land/economy followers to watch this webcast and learn more about what a virtual equity-trading platform could potentially do for you. Whether you’re looking at this State of Play conference panel from the point of view of a current Cyberland investor, a potential investor, someone who feels that they would be a good fit for the SLSE board of directors, someone who is interested in taking their own virtual company public, or even someone who up until this point has downright hated the idea of publicly owned and traded virtual companies, please take the time to watch this.

I hope that we can get some good discussion going in this thread. I’d love to talk with ALL of you about what you feel I’m doing right, what I could do better, and/or what I’m NOT currently doing but SHOULD be doing in order to make this platform more useful and attractive to you. My number one goal is to make this platform useful to EVERYONE in the Second Life community as it grows out of its earliest post-launch stage to become a premiere virtual financial services platform! Also, if you are interested in the possibility of becomming a director of the stock exchange or taking your own company public, please drop me an IM AS WELL AS A NOTECARD (my IMs regularly get capped) in-world. I'd love to learn about what you have to offer to Second Life residents!

If you’ve not yet been exposed to this platform and need more background information, please visit the Second Life Stock Exchange website!

I have a few questions. What requirements do you have of a company that wishes to issue stocks for their company on your exchange? What information will need to be made available to the people who buy the stock, and do you have any ideas of how the information can be verified? Will the person need to give out real life contact information? Will company assets, revenue, costs, and dividends need to be posted publicly? Are you under the impression that Linden Labs will begin making policy that effects the way stocks are traded for companies run in Second Life? Do you have any idea if the laws applying to real life companies issuing stocks effect the practices of a virtual company issuing stock?

You have identified some excellent issues here that the exchange must confront. I do have some ideas along these lines, and I would like to get a corporate governance manual/listed companies manual completed and published on the website soon. However, as I intend my market to be a bastion of the people, I don’t want to unilaterally "dictate" these terms.

Instead, my intention is to form a broad and diverse board of directors for the stock exchange, who can sit down and decide on administration, policies and enforcement as a group. So I guess that with this in mind, my question would be, do YOU have any good ideas that pertain to these issues? If so, and if working to build a high quality virtual securities market for the good of all Second Life residents is something that might appeal to you, I’d love to chat with you about your thoughts either here or in-world!

By the way, the same goes for anyone else reading this! If you’re an innovative thinker and a "can do" person, desiring to be on the bleeding edge of economic change, I’d love to sit down with you and discuss what you could bring to the table as a stock exchange director!




I’m not sure. I’m inclined to think no, however.



Again, I’m not sure, but I’m inclined to think no. All SLSE accounting is handled in L$, and by using SL you acknowledge that L$ is play money. I expand upon this a bit in the SLSE disclaimer, which you also agree to by using the website. That said, I wouldn’t be opposed to these companies becoming real companies if and when we arrive at a point where it makes good sense. In fact, I think that’s a good goal to shoot for!

Shaun is very strict on taking companies public. I tried taking my retail business public and was turned down.

It is true that I have been VERY cautious up until now. Perhaps too cautious. I just couldn't gamble on anything going wrong in the first few months.

There is a bright side though! Perhaps when formed, the stock exchange board won't be as strict when defining the formal equity listing criteria as I have been with my informal criteria!

I'd also like to open up trading in other types of securities soon...

Interestingly, Cyberland's cutoff date for their first divident payment is today. I just bought a few shares, am quite curious how this will all work.

The quarter will close at midnight, and dividends will post shortly after. You'll see your dividend reflected in your account balance and shown on your "my account" page. This is assuming that you qualify for a dividend. I think it only takes around 5 or 6 shares to qualify this quarter though.

Since fractional Linden dollars is not possible, it takes a certain number of shares @ x cents per share to get L$1, which is the range that Shaun quoted for this particular quarter.

Part of the decision tree when company listings are proposed is our concern that the listing of a company will be a win/win for the company and the investors. Listing on the exchange will generate revenue for the company by reason of selling shares. But...
there should be a clear and convincing purpose for raising that cash. For example, if you are making and selling clothing, there is essentially no need for cash to expand that effort. One might ask, what then, will that money be used for? Additionally, one might ask, is the listing company's officer(s) prepared to a) share the profits being generated, and 2) maintain an accounting system to record all revenue and expenses that would be necessary to maintain credibility with the investors.

I hope that helps in framing the primary issues in stock exchange listing.

Buck

Seems there are some people with enough brain cells to form a thought on this thread and that's a very good thing! I think you are so right Shaun about the SL Stock Exchange being on the bleeding edge. In fact with the recent and upcoming changes effecting SL economy I believe we are on the bleeding edge of something really tremendous that will explode very soon. I think this will go beyond the SL Stock Exchange though. LL's BRILLIANT decision to give away the first basic account AND the press coverage SL is getting we can expect a huge increase of residents. What I hope will result from that expected growth of the community, are improvements in economy, opportunity and just plain fun! I'd love to be involved in an inworld discussion even at a preliminary level of policy setting, etc. There has been so little real structure in this area that it's a blank canvas waiting for a work of art. Let's get on this and form a masterpiece.

Shaun and I have had a few long discussions on the RL regulatory issues here, but the fact is that this is fairly new ground and so there is a lot of grey. Still, it would be wise to learn some of the lessons that led to RL securities law and design them into the system from the start.

A few things would be useful:
1. for starters, a clear separation of cyberland and the stock exchange to prevent any conflict of interest.

2. clear information disclosure by virtual companies thinking about raising L$ capital. Now I am hardly expecting an S1 (the IPO document required in the United States), but SL entrepreneurs can use an S1 as a model. It is more demanding than other countries, but I think the bar should be raised high here, especially given the blind trust factors involved.

An example of an S1 is here. (I just picked JAMDAT out of the hat because it's in gaming and high-risk, lol)

The key sections:
- what are our risk factors? (competition, legal, market, technology, stock price, financial/capital, etc)
- what are our planned uses of proceeds?
- are the shares being sold primary (created and sold by company) or secondary (existing shares sold by current shareholders)?
- what is our financial track record to date?
- who is behind the company (both management and major investors)
- what is our strategy going forward?
- and finally, what is our business?

Now one of the things that reinforces the process in RL is that underwriters have to take due diligence seriously, because they carry liability risk. In SL, you're simply taking the word of the company, but information disclosure on the above topics (even in concise fashion) would make this whole thing a lot more professional.

3. a requirement that listed companies file an operational and financial overview report once every 3 months. Europe is much more flexible on this, but again I say with the risks here, why not keep the bar high. The exchange website can store these reports and links to listed-company websites.

4. open information on important market activity beyond price/volume, such as insider trades (large shareholders or management/directors)

ok, out of time for now lol

I've been following SLSE for a few awhile now. I'm very excited about the potential of such a service in the SL community. I understand your concern for allowing companies to go IPO on your exchange. Even one high profile scam could cause your entire company, and others associated with it, a lot of "bad press" and loss of in-world reputation. I've thought a lot about ways to screen potential companies and setup the exchange to handle issues.

I feel very strongly that the exchange must mandate corporate structure in as much to ensure proper and rational leadership to remain in management. Basically, the Exchange would have to require that a Board of Directors be elected by shareholders for each public company. This could eliminate most "Pump and Dump" schemes.

Another feature I think would be very important is for the exchange to hold on to a portion of the companies stock. Use a 20% interest in the companies unsold stock to offer stock options to Board members and acting CEO's. This on-going secondary income source for management would act as a motivating force to keep their company strong and stock price rising.

On the extreme end of security...if you truly want to ensure confidence in the shareholders... you could require all public companies to create an ALT account to handle all of their financial transactions. All ALT information and passwords would be shared with the Financial Record Keeper for the exchange, and a Licensed SLSE member could log onto all the ALT accounts once per week to download all financial records. This information could be logged into a database on the web site for public viewing...and the CEO/CFO could add explanations and/or other RL charges incurred. This would allow for a more reliable way to track company success and catch fraud early.

Just my few thoughts.

I was watching this exchange for a while. It seems that the dividends are going to be $L0.15 - $L0.20 per share. With each share costing about $L10 each.

Am I the only one that sees that as a miniscule return on the investment? I wonder how much money the officers of this company have made.

if he can swing out four of those in 1 year, that would be 10% dividend return. if he can also grow the business by 5% annually as well, then you can add the dividend + growth as your annual return, which could be about 15%

Given the risk, it's not an investment I would make. But it's not a terrible return either.

He's beating out my S&P investment by like 12% at that rate. And if you can beat the S&P consistently, you are a golden child.

10% return in 1 year? In the real world that may be ok but in SL that return seems crazy low. If he can keep up the current rate, the L$ doesnt devalue, SL stays open, cyberland stays open, the president doesnt run off.....you can get $10 for every $100 invested? wooohooo

Actually, 10% a year is not so good once you factor in trading fees. I think it's 5% to buy, and another 5% to sell, if you invest in small quantities.

I agree, having fees on both ends seems like the market is double dipping. 5% for EACH at the lower levers seems really high. When the returns are 1-2% every 3 months, you will lose almost all your profit in fees alone. I would love to invest, but not with those fees.

I never really thougt of that. thats kin of screwed up, I decided to do some math and it seems the owner is the one making all the money. lol.

Because there is nowhere to see the financial data these are all just rough estimites but I bet they are pretty close:

Profits from stock trades:
Shares Traded: 494,474 - assuming the average share was L$10 thats L$4,944,740 - assuming average teir trader is 2.5% (x2 buy and sell) - That is a L$197,789.6 profit at L$260 per us dollar that is $760.72 - that is in one 1/4 of a year so x4 = $3042.88 US dollar for CEO in 1 year.

Profits from management fees:
These numbers I had to really dig deep to get at so I will explain-if the 1st 1/4 dividend is $L 0.20 per share that should be about 2% of gross revenue (1st month they paid 1%, 2nd 2%, 3rd 3%). So first payout should be about L$93,950. Manager fees are a flat 5% - so CEO should have made $L 234,875 the 1st 1/4 -thats $903.37 us dollar per 1/4 x 4 quaters is $3613.46 US dollar for CEO in year 1.

So in 1 year the CEO makes $6656.34 USD.
In 1 year an investor who bought $10,000 USD worth of Cyberland stock would make $1000 USD. (assuming they paid no fees LMAO!!!)

woohoo

What do a company's dividend returns have to do with trading profit or loss on the exchange? Quite a few people made money buying and selling the stock during the first couple of months. For example, I was obviously one of the Cyberland IPO buyers, and I bought some of my stock for as low as L$2ish. Had I not been so restrictive on what directors can do for now, I'd be a LOT happer than I will be with just the first quarterly dividends that will be posting to every shareholder's account at around midnight tonight.

I suspect that we will see a lot more of this as more companies are listed and trading volume increases. You ARE right though, that the commission is too high for the coming system which will allow people to easily and fairly trade quantities as low as 10 shares. These fees were set up mostly to allow the mid-large Cyberland investors who bought the ~500,000 shares that have been sold by the company so far to do so without paying excessive stock exchange commissions once they demonstrated their seriousness. You'll notice that the commission starts dropping off at only 1,000 shares 30 day trading volume though, which is pretty simple for anyone to attain by trading only 100 shares back and forth 5 times.

I was going to wait until the new trading platform went online, but actually, I think I'll go ahead and slash trading commissions right now! By the time you read this, the highest commission level should be 3%. The 30 day volume to get to 2% and 1% will remain though, at least for now.

hahahaha - i just read something else.....CEO owns 51% of the shares soooo......
We forgot to add in the trading discounts and dividends he will get...my head is gonna explode!

Your numbers are a little off for several reasons. First it's important to remember that stock exchange fees have NOTHING to do with the companies traded on them. I happen to be running both the exchange and a company at the moment because, well, who else is going to do it? This won't be the case forever though. As for the rest of your numbers, well, they're just a little off.

However, guess who's doing the work at Cyberland? You guessed it, ME! And if you think that producing your returns is easy, guess again! You're simply investing money in acquiring a stake of the company that myself and the board of directors manage for you. You can think of the managment fee kind of like a salary. I think I'm pretty generous in tying this fee to revenue, frankly.

This means that if you have a bad month as an investor, I VOLUNTEER to ALSO have a bad income that month so the company doesn't take a worse hit to it's bottom line than nesicary! How many RL executives do you know of who are so generous? I challenge you to name one. I could have also just set this up as a huge flat managment fee which I would get even if the company took a bath in a perticular month. Don't you like this way better?

Thank you for your comments. As you know I've been following your financial services platform as well, and I'm very excited about it!. I would love to sit down and chat sometime and chat about stock exchange policy, and also maybe ways that our entities could work together to provide the highest quality financial services for all Second Life needs!

Yes, this is exactly what I hope to do when enough interested people come forward to join the stock exchange board with me.



long-term I definately agree with this.



I haven't had a chance to view this document in detail, but having skimmed it, I think I can already say that I love it! Having even taken the energy to compile a document like this in SL would go a long way in showing the seriousness of a potential public company to investors.



I'm actually putting Cyberland's first one out within the next couple of days at the latest. It is kind of high level, as one would expect in SL, but it does give a pretty good picture of exactly what's been going on in the last 3 months.



I agree and I'm already working on this. I thought I would have it out sooner, but it will likely become available with the new trading platform.

dude are you serious? you do not see the major conflict of interest there?


Simply investing MY money?? hahahaha Gee it's so nice of you to manage my money, thanks!


You really come across as an arrogant CEO thanks for the generosity LOL.


Are you serious here? You are asking other people to ALLOW you to manage their money and in return you won't take it anyway if you fuck up?

Awesome. I would love to discuss your thoughts at length. Could you shoot me an IM in-world?



The exchange is set up to allow two classifications of stock right now, which for simplicity's sake I have called common shares and voting shares. The voting shares are intended to allow EXACTLY that. I'm sure that whoever joins the exchange board will define some loose guidelines for voting shares. Overall though it will be the responsibility of each company to define what their voting shares can and cannot do. Probably the very LEAST that they'll be able to do, by stock exchange guidelines, is appoint a director/officer in certain scenerios and also remove a director/officer in certain scenerios.



It's up to each individual company to structure their company. However the exchange will retain the right to delist a company's securities in certain scenerios, to be defined by the stock exchange board. I feel that this is a MUCH better motivator than someone motivating a company by holding some of it's stock. This is especially true with no other exchange out there to list the securities on if a company were to do something nasty or otherwise fall below the continued listing criteria that will be established.



This is an interesting way to accomplish an external audit of sorts, but I'm not sure if it would mesh well with the LL TOS. I will have to give this some thought.