SEC settlements amid token troubles - another USD$29.3 million ordered to be paid
With all the excitement from the Telegram case, leading to their SEC settlement and agreement to pay a civil penalty of USD$18,500,000 for its ICO plus disgorgement of USD$1.22 billion, another ICO issuer BitClave had a settlement announced in late May for the sale of their Consumer Activity Token (CAT). Bitclave agreed to disgorgement of USD$25,500,000, prejudgment interest of USD$3,444,197 and a penalty of USD$400,000.
The SEC's order found that by selling CAT, which the SEC says constituted securities, to approximately 9,500 investors and raising USD$25 million in the process BitClave violated the registration provisions of US federal securities laws.
BitClave advertised that they would use the proceeds to develop, administer, and market a blockchain-based search platform for targeted consumer advertising but also (per the SEC):
emphasised its expectation that the tokens would increase in value and took steps to make the tokens available for trading on third-party digital currency exchanges after the ICO.
Kristina Littman, Chief of the SEC Enforcement Division's Cyber Unit said that:
Issuers of securities, traditional or digital, must comply with the registration requirements of the federal securities laws... The remedies ordered by the Commission will provide meaningful relief to investors in this unregistered offering.
BitClave did not admit or deny SEC's findings but agreed to a number of new requests of the SEC which included:
not to restructure their Singapore entity until all the payments ordered had occurred;
to transfer all remaining CAT in its control to a fund administrator to be "permanently disabled" (aka burned)
publishing the notice of the order; and
to request the removal of CAT from all digital asset trading platforms.
The order here and fine contrasts with the Gladius Network order, where no penalty was imposed due to that offering self-reported their issuance to the SEC pro-actively.
This enforcement stands as a further reminder that it is essential to obtain carefully considered legal advice when engaging in digital currency offerings given the firm view of the US regulators that these offerings constitute securities. While Australia has not had any regulatory litigation or decisions surrounding an initial coin offering, ASIC's regulatory guidance is filled with references to crypto-asset's potentially constituting a financial product under Australian law and a number of offerings which clearly connected financial returns with the purchase of tokens were shut down in 2018-2019.