Tuesday, March 18, 2008

Game Objects Are Unregulated Securities

Trading of in game objects is a controversial topic among MMO players. Some feel it degrades the game, others believe it levels the playing field. Regardless of your side of the debate, everyone can agree on the size of the object exchange market. It is massive and growing. It all seems sort of innocent, until you think about the nature of the objects being sold. Some kind of Darwinian aversion to incarceration led me to the conclusion we are trading unregulated securities.

My law degree made me think about it like a lawyer. Law degrees are kind of like herpes that way. I don't practice anymore, but it pops up at the most inconvenient moments and I start thinking like a lawyer. My corporations professor, Hugh Friedman taught us how difficult it is to actually spot a security, but gave us the definition contained in the United States Code. "SECURITIES - An investment in an enterprise with the expectation of profit from the efforts of other people." Here is another definition I found on line: "Securities are documents that merely represent an interest or a right in something else; they are not consumed or used in the same way as traditional consumer goods. Government regulation of consumer goods attempts to protect consumers from dangerous articles, misleading advertising, or illegal pricing practices. Securities laws, on the other hand, attempt to ensure that investors have an informed, accurate idea of the type of interest they are purchasing and its value." The definition is intentionally broad and is meant to apply to a lot of things, to protect a lot of people. Interests in condominiums, farm animals, land and oil rights, have all been determined to be securities. The definition is the foundation of the Securities Act of 1933, sometimes called the "truth in securities law" and the Securities and Exchange Act of 1934, which established the Securities and Exchange Commission and sets out filing requirements and trading regulation. Both were established in response to the events leading to the stock market collapse of 1929. Prior to these acts, anyone could sell stock to anyone and there were no reporting obligations or restrictions on insider trading or proxy solicitations. In other words, it was a lot like buying and selling game objects on today.

Like the things traded on the floor of the NYSE, game objects come in different flavors. They sell options, debentures, bonds, stock, derivatives and commodities, we sell land, characters, clothing, weapons, genitals and other stuff. Like most things analyzed through the legal prism, a spectrum emerges. At one end of the spectrum are games designed around ownership and exchange. In Second Life, people are encouraged to purchase "land" and build. Based on the information provided by Linden Labs, the purchaser can reasonably believe the plot purchased will be persistent and will have value. There is even plenty of PR addressing potential for appreciation in value. At the other end of the spectrum are games like WOW which purport to bar trading in objects. Some turn a blind eye, others take aggressive action, but trading happens in all of these games. These games have EULAs - those wordy things you button through at registration - explaining how in game objects are owned by the publisher, not the consumer. You can't sell what you don't own, so there is no real exposure. Right? Wrong. A security is a representation of an interest in a corporation or another object. A right to use. You are transferring your right to use the thing owned by the publisher. So even if the publisher is not creating the market, a market nonetheless exists and liability should lie with party creating the market. If value is being exchanged, consumers must have access to all the information relating to the value of the purchase. In these markets, we do not.

Placed in the best of light, with no implied wrong doing, I may buy a Sword of Fire on IGE, Live Gamer, Playspan, or one of the other exchange sites. In the worst of light, I may be someone completely unfamiliar with MMOs who bought real estate in an on line game because I read an interview with a company officer where he talked about all the money being made by speculators in his game. I make a value determination based on information available to me at the time. If there are no reporting requirements, we create fertile soil for fraud. Outside these markets, you will never find a more wretched hive of scum and villainy. We must be cautious.

If you think I am way off base here, ask yourself these questions. Would my purchasing decision be different if I knew every registrant, including me, would have the very object I am purchasing inserted in their inventory the next day? How about if a new armor was about to be introduced which would render my weapon impotent? What if the game was going to be shut down in six months? Three months? Would I have deposited my money in the Second LIfe bank if I knew regulation was coming down? What if the guy who sold me the object knew these things and I didn't? What if the exchange, who has a financial interest in each transaction knows? Is it really any different than 1929?

My modest proposal to all those politicians who feel the compulsion to legislatively attempt to restrict what has been proven over and over again to be protected first amendment speech is to forget about the hopeless crusade and make a name for yourself by doing something useful. Take a look at on line object exchange and be the person who cleaned up the market. Let's establish and enforce reporting and listing requirements on the publishers and the exchanges. It's time.

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