The Blockchain of Things agreed to resolve charges brought by the Securities and Exchange Commission that its sale of digital assets from December 2017 through December 2018 – labeled as a pre-sale and initial coin offering (collectively, the “ICO”) – constituted an illegal offering of securities that were neither registered nor lawfully exempt.
To resolve the SEC’s allegations, BCOT agreed to pay a fine of US $250,000; register its digital tokens as securities; offer refunds to all persons who purchased BCOT digital tokens during the ICO; and refund relevant amounts to all qualified persons who request payment.
According to the SEC, BCOT sought to raise funds through its ICO to help further develop a bitcoin blockchain-encoded platform – the Catenis platform – to enhance the blockchain's security and ease of use. At the time of its ICO, BCOT claimed that its Catenis Enterprise technology was a “live network (in beta) with several active corporate clients”; however, at the time of the ICO, claimed the SEC, “there was no ‘ecosystem’ of third party applications developed” for the platform. The SEC said that BCOT contracted with four resellers in Asia and the Middle East to sell its digital tokens in their geographic regions; however, it did not preclude the resellers from dealing with US purchasers. (Clock here to access the BCOT white paper.)
The SEC argued that purchasers of BCOT tokens “would have reasonably viewed the [ICO] as an opportunity to profit if BCOT were successful in its entrepreneurial and managerial efforts to develop its business and ecosystem.” As a result, the ICO constituted the illicit sale of an investment contract, contrary to guidance previously issued by the SEC in its July 2017 “The DAO” 21A Order. (Click here for background in the article “SEC Declines to Prosecute Issuer of Digital Tokens That It Deems Securities Not Issued in Accordance with US Securities Laws” in the July 26, 2017 edition of Between Bridges.)
The SEC claimed that BCOT raised US $13 million from investors in the United States and Asia. The Commission did not allege that BCOT committed any fraudulent acts or deception in connection with its offering. The SEC acknowledged BCOT’s remedial acts and cooperation in accepting its offer of settlement.
Legal Weeds: The SEC’s settlement against BCOT is consistent with settlements by the SEC in November 2018 in connection with ICOs by CarrierEQ Inc. d/b/a AirFox and Paragon Coin, Inc.
In its enforcement action against AirFox, the SEC alleged that the company issued digital tokens – termed “AirTokens” – to raise funds to develop a “new, international business and ecosystem” that would permit holders to transfer AirTokens to each other, engage in peer-to-peer lending, and to buy and sell goods and services, as well as take advantage of existing company functionality.
In its enforcement proceeding against Paragon, the SEC claimed that the company initiated an ICO to raise funds to bring blockchain technology to the cannabis industry and promote the legalization of cannabis.
Both companies promoted their ICOs as an opportunity to profit through appreciation in the price of their tokens, said the SEC. Neither AirFox’s nor Paragon’s blockchain-based business models were up and running at the time of their ICOs, which were marketed, noted the SEC, to the general public. Each company said they would take steps to list their tokens on secondary markets.
To settle allegations by the SEC, both AirFox and Paragon also agreed to pay fines of US $250,000 and to offer to refund and to remit to requesting investors the full amount of their investments in the relevant ICO.
(Click here for further details in the article “SEC Assesses Penalties for Non-Fraudulent Initial Coin Offerings and Requires Registration; Issues Advisory on Issuance and Trading of Cryptosecurities” in the November 18, 2018 edition of Bridging the Week.)
More recently, Block.one, a technology corporation and developer of the EOSIO software, settled allegations brought by the SEC that it engaged in an unlawful securities offering to US persons when it conducted an ICO between June 2017 and June 2018. The SEC claimed that, during the relevant time, the company offered and sole 900 million ERC-20 EOS digital tokens in exchange for ether valued in excess of “several billion dollars.” To resolve the SEC’s charges, Block.one agreed to pay a fine of US $24 million but was not required to offer any refunds to investors in its ICO. (Click here for background in the article “Blockchain Technology Company Agrees to Pay US $24 Million to Resolve SEC Allegations of an Unlawful Initial Coin Offering” in the October 6, 2019 edition of Bridging the Week.)
Earlier this year, the SEC’s Strategic Hub for Innovation and Financial Technology issued guidance on what characteristics a cryptoasset might have that could make it more likely to be deemed an investment contract, and thus a security, under US securities laws. FinHub noted that these characteristics pertain not solely to the “form and terms” of the digital asset itself, but also “the means in which it is offered, sold or resold (which includes secondary market sales).” (Click here for background in the article “SEC Staff Outlines Characteristics of Cryptoassets That Could Cause Them to Be Regarded as Securities” in the April 7, 2019 edition of Bridging the Week.)