- within Intellectual Property, International Law, Litigation and Mediation & Arbitration topic(s)
A digital token issuer settled SEC charges for offering and selling securities without registering with the SEC and for making materially false and misleading statements regarding "the viability of its platform and the timetable for the issuance of the tokens."
In its Order, the SEC stated that the issuer offered digital tokens through simple agreements for future tokens ("SAFTs"), which guaranteed that the tokens would be distributed to counterparties upon the public release of the issuer's marketplace. The SEC determined that, because the tokens offered through the SAFTs were offered and sold as investment contracts, they are therefore considered securities, as defined under SEC v. W.J. Howey Co. As it failed to register the securities, and did not comply with the requirements applicable to a private placement, the SEC found that the issuer violated Section 5(a) and 5(c) ("Prohibitions relating to interstate commerce and the mails") of the Securities Act. Additionally, the SEC found that the issuer violated Securities Act Sections 17(a)(2) and 17(a)(3) ("Fraudulent Interstate Transactions") because it falsely claimed that (i) over 100 developers were publishing applications within its marketplace, (ii) its platform was operating for over nine months in "private beta" and (iii) distribution of the token was pending.
To settle the charges, the issuer agreed to (i) cease and desist from future violations, (ii) a $650,000 civil money penalty and (iii) an undertaking to, among other things, notify its investors that it will not distribute tokens pursuant to the SAFTs.
In a statement regarding the enforcement action, SEC Commissioner Hester Pierce disapproved of specific language of the SEC's enforcement action. She argued that the "security" that was improperly sold was not the tokens themselves, but rather the agreement under which the tokens were sold. She also criticized the SEC's enforcement action for prohibiting the issuer from distributing the tokens to the investors. She noted that doing so prevented the investors from realizing any return, which could be a real loss to investors if the issuer were in fact to successfully develop the platform.
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