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9 Comments

  1. The underlying problem is the problem of Second Life itself. What do you really "own" in SL?

    Not the L$, because you only have limited licence to use this token currency, which you can buy or sell to real cash, but just as long as SL operates its service and your account is valid.

    Not the land, even if you bought it, you pay on regularly tier, so it's rather renting some server space because the land only exists virtually.

    You might really own some intellectual property, but that might be very restricted when depending on SL environment or Linden Scripting Language.

  2. Personally I don't agree with the simple "It's all a game"-statement from Skip Oceanlane (Carmen Dubaldi), but the analysis of the exchange is just too simple.

    There are companies which define investors' rights differently and actually grant them a share of the company and there are measures by some companies to prevent fraud.

    So in the first line the exchange is the trading platform, which actually has not many means to control companies, except setting rules and enforcing them. On a sidenote CAPEX exchange has improved its service and stability under Skip's management,

    Basically the companies "exist" independently from the exchange and several of them have survived various exchanges.

    Just to give one example have a look at a company like FED and what they did to improve company structure and guarantee rights to shreholders.

  3. Author

    Oh, and a post-script. Here’s what I would do if I wanted to scam folks out of a lot of money (see if any of this sounds familiar — if it does, you may be in for a ride):

    * I’d buy a small, unprofitable SL business with an okay reputation from someone who was tired of it and wanted to get out of SL. I’d get the avatar, as well, so that I’d have “creator” rights to their objects.
    * I’d make a big publicity splash for the company, get folks jazzed up about it and my plans for expansion. They don’t have to be good plans, just plausible.
    * I’d make up financial returns to show that the company has turned around and is growing.
    * I’d list the company, and get the money from the IPO.
    * Now I’d use some of the IPO money to pay out dividends, and pocket the rest. Meanwhile, I’d put out a steady stream of press releases about new developments, new products, income improvements, etc… Before each new positive announcement, I’d sell more stock.
    * I might play with this for a while. Put out a negative announcement, buy up some cheap stock, then have a miraculous turnaround and sell stock again when it goes up. Easy to do, with no checks against insider trading. And I’d keep paying out big dividends to keep everyone happy.
    * Use alts to post happy customer reviews, shill for the stock, keep prices pumped up.
    * Then: oh, no! Market downturn! New competitors! Customers fleeing in droves! Can’t make our dividends this month. Maybe next month things will turn around.
    * Financials looking even worse, have to sell off assets, close down sims, all that money we invested in technology and staff and marketing — all lost! (Not that there was any such investment.)
    * The alts now pile in, blaming the owner for his incompetence — or defending him, because it wasn’t his fault the market turned against him, he tried his best.
    * Eventually, the company shuts down and is delisted — or is “sold” to another “CEO” who has a new strategic vision, and a great new plan for turning it around.

    1. fdoubledees@aol.com'

      Hello
      First I would like to thank you for this post. I am a student studying International business and uses of IT is the area of studies, as of the moment. A question posed to the class :

      What are challenges are likely to occur in business and politics, as Information Technology transforms from a support role to a partner role in business?

      In the chapter of the book we were to study the case, and answer 1-3 of the discussion questions. I read the case and most of all the chapter and I found no reference as to guide me on how to answer this question fully especially the impact or challenges on politics. I could imply my on opinion about this topic, such as creation of jobs, how to regulate "the virtual company, however in upper level class , opinions alone don't count. Don't worry this is not an exam questions, and I know that my book is not the only source of research on the topic. As so far in my reading I have to do all the thinking anyways and my head hurts. OK! back to the topic. I am wanting to ask your ideas on the challenges political challenges, that an organization who is full speed on exploiting the uses of IT to their advantage, competitive strategies etc. Please what is your concept of the question at the top. In the political sense what challenges do you believe political challenges may occur with the Virtual Company. I read your post here and thought it to be insightful and would like your opinion on what is being discussed here.
      Thank you

  4. Author

    Lea —

    Yes, it's risky for a company to rely on just one platform. Similarly, it's risky for an app developer to, say, just rely on Apple. But that's a known risk. Investors can plan for it (by valuing the company at a lower amount). And there are ways to hedge those risks — design your company so that it can work in mutliple platforms, for example, (Utherverse, OpenSim, etc…) or make sure all your intellectual property is backed up off-line, and you have real-world contacts for your top customers in case you lose connection to them in-world.

    The bigger problem is, unless you sign real contracts with a real legal entity, is that your investment doesn't actually exist. So your risk is 100 percent. That's the case with the "virtual companies" on the CapEx. There are no legally binding contracts with legal entities because no legal entities are involved.

    Does FED have a legal entity behind it? Do its investors get real legal contracts with the owners — say, partnership stakes? That's the only way to guarantee rights to shareholders. You could also issue options to investors (the way dot-com startups used to do for employees they couldn't afford to pay). Either way, you need real lawyers to draw up real agreements, and get them signed by real people.

    There are plenty of companies operating in Second Life that are run that way — with real partnerships between real people. Yes, those companies can still go under, but their partners are dealing with actual business risks, risks they can plan for, and get the rights to review real financial documents — the kind of documents that you go to jail for falsifying.

    With anything else, there's too much opportunity for abuse. Or, if not actual abuse, then wishful thinking. A "virtual company" may fully intent to share profits with "virtual investors" but then, once money starts rolling in, can suddenly realize that there are no actual legal obligations for it to do so. Or it may be acquired by new owners, who simply ignore all the previous promises made, since they weren't legally binding. Or any number of other things could happen that cause the actual company owners to change their minds. (Doctor bills. College tuition.)

  5. Author

    Dubaldi just told me that the CapEx has systems in place to catch just the kind of scams I spelled out above.

    That might well be the case, but my original point stays the same.

    All disbursements and dividends, board meetings, financial statements, etc… are completely voluntary. At any point, the CEO of a “virtual company” can decide that they’re tired of playing the CapEx stock market simulation game and go home. And they’re perfectly in their rights to do so – the exchange clearly labels itself as a game. None of the companies listed on it are real companies. The financial reports they’re submitting, the news releases, everything — they aren’t real. They’re all part of the game.

    I’m not saying that anyone is particular is lying in their financial statements. I’m not saying that Dubaldi himself is lying in his financial statement.

    I’m saying that the financial statements ARE PART OF THE There are no “real” financial statements inside Second Life. There are no accounting standards. No audit firms. No securities regulators. Nothing.

    Of course, a company inside Second Life can have ACTUAL financial statements — the statements that they file with the IRS (or the tax authorities of their country). The IRS randomly audits these returns, and there are penalties for providing incorrect information. Other countries have their own safeguards.

    Even a company that loses money can file a Schedule C – Profit or Loss from Business. These are real statements. Denominated in real currencies. Backed by actual financial statements from bank accounts, PayPal transactions, and Linden dollar conversions, as well as receipts and invoices from vendors and suppliers.

    So if you want to invest in a company doing business inside Second Life — go out and invest in that company. Buy a partnership stake, or shares, depending on its corporate structure.

    If you just want to learn how the stock market works, there are a lot of free-to-play fantasy stock trading games online. You can follow real companies, and learn to read real, audited financial reports.

    If you want to gamble, go to Vegas or anywhere else that has gambling commissions, so at least you’ll know your odds of winning before you put your money down.

    With CapEx, there are no odds of winning. There is no exit strategy. A listed company could, in theory, get big, incorporate and, out of the goodness of its heart, hand out real stock certificates to its virtual investors. But it’s under no obligation to do anything of the sort — and does anyone really believe that this would happen?

    The only other exit strategy for an investor is to try to sell his shares to someone else. And, at the end of the day, someone is going to be stuck holding the worthless shares — and be reminded that it was all a game, that they shouldn’t have expected anything different.

  6. Angmalu@aol.com'

    Thank you so very much for doing this article, Maria. I've tried explaining this in SL soo many times much to no avail. It's great you took the time to clear this all up. This is now on a notecard in my SL Inventory, I hope I own. ~ Angèlle Marquette in SL-Angèle Lubin in RL

  7. iliveisl@yahoo.com'

    ditto on what Maria said! (nice post btw) =)

  8. smoovious@yahoo.com'

    > There is one way for the CapEx to
    > become fully, 100 percent legal and
    > compliant with the Second Life terms
    > of service — if the Linden dollars
    > traded on the exchange are purely
    > fictional.

    The Linden dollars, according to SL’s own ToS, are already purely fictional.

    — Smoov

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