On January 17, 2018, the Massachusetts Securities Division filed an administrative complaint against Kirill Bensonoff and his company Caviar, a Cayman Islands entity, charging them with violations of Massachusetts securities laws arising from Caviar's initial coin offering, or "ICO," of its "caviar" token. Bensonoff is a resident of Brookline, Massachusetts, and Caviar operated out of Massachusetts.
The complaint alleges that the offer and sale of the token constituted the offer and sale of a security, without such security being registered or exempt from registration under Massachusetts securities laws. The complaint also alleges that Bensonoff attempted to effectuate the sale of a security (i.e., the token) without registering as an issuer agent.
Is the Caviar Token a "Security"?
Critical to the Division's position is its determination that the caviar token is a security. In the complaint, the Division notes that the marketing materials for the ICO stated that the "proceeds from the ICO will be pooled and used to finance the acquisition of a portfolio of various cryptocurrencies, and to finance short-term 'flips' of residential real estate properties", and that token holders "will receive quarterly dividends equal to their pro rata share of [a portion] of the combined profits from this pooled investment fund of cryptocurrencies and real estate debt." In essence, this amounted to the creation of "a hedge fund [that would] offer freely transferable shares to investors in the form of Caviar tokens." The Division alleges that these features, which involved the investment of money in a common enterprise with the expectation of profits from the efforts of others, made the tokens "a textbook example of a conventional security, required to be registered or exempt from registration in the Commonwealth."
In his defense, Bensonoff raised the fact that the tokens are not available for sale to U.S. citizens and that screening procedures had been established to ensure that sales would not be made to U.S. residents. However, the Division found that the screening procedures were inadequate to prevent the sale of Caviar tokens to U.S. residents, noting that at least two U.S. residents were approved to participate in the ICO. The complaint further describes the types of general solicitation Bensonoff and Caviar used to promote the ICO, including websites and other social media platforms (including those of third party promoters) that are accessible by investors in the United States.
Division Says Caviar Should Disgorge ICO Profits; Seeks Further Relief in "the Public Interest"
Pre-sales of the token commenced in December 2017, and approximately $3.1 million had been raised as of the date of the complaint.
The complaint seeks, among other things, that Bensonoff and Caviar refrain from further violations of applicable securities laws, offer rescission to all investors in the ICO, disgorge all profits from the ICO and be subject to administrative fines.
The filing of the complaint serves as a reminder to all participants in the ICO marketplace that ICOs remain in the crosshairs of a growing number of regulators worldwide. It also serves as a reminder that, when planning an ICO that originates from or involves investors that are residents of any state in the United States, participants should work with experienced counsel to ensure that offerings are conducted in compliance with all pertinent U.S. Securities and Exchange Commission regulations, as well as those of each applicable State.
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