Unregulated stock exchanges in Second Life

A variety of unregulated economic activity has been occurring in the virtual world Second Life. In-world banks sprang up a few years ago and have experienced considerable volatility, mostly closing and reorganizing, for example the high profile collapse of Brazil-based Ginko Financial in September 2007. Some banks have extended their activities into in-world securities. Though eventually repealed in real life, Glass-Steagall provisions could be helpful in preventing conflicts in developing virtual world economies.

There are at least three stock exchanges currently operating in Second Life, the SL Capital Exchange (physically based in Syracuse NY, USA) with 20 listed companies, the World Stock Exchange (physically based in Australia) with 15 listed companies and the recently launched Ancapex (physically based in New Hampshire, USA) with three listed companies. There is even a Second Life Exchange Commission to provide standards of performance, operations and ethics for in-world market participants.

Listed companies have not provided detailed financial statements (much less third-party audited financial statements), have not indicated a dividend policy and do not have RL (real life) professional CFO/CPA personnel. A prospectus is sometimes provided (example) and the RL's CEO name and location may be optionally provided.

Nonexempt issuance
Considering offering and purchasing activity in the U.S., the stocks do not appear to qualify for any U.S. securities registration exemptions. The only nod to RL securities laws is a disclosure at SL Capex, claiming that the securities are a fictitious simulation, however given the easy conversion of Linden$ to USD and legal precedent in this situation, it is likely that the Second Life activity would be deemed securities issuance.

Are the SEC in the U.S. and other corresponding national securities regulators likely to take an interest or is the issuance too small, the venue too novel and the cross border challenges too great? If there is enough $ value of harm incurred by investors, an investor could file a complaint. But to whom? To securities authorities in their country, to Linden Lab, to the securities regulator of the exchange or listed company, to the Second Life Business Bureau or other in-world adjudication bodies?

While creating virtual world analogs to those in the physical world is to some degree laudable, the attempts might be ultimately more successful by incorporating a greater balance of physical world regulation and protection mechanisms to build a sustainable ecosystem.