By Jay Fishman, J.D.
The SEC, as part of a settlement agreement with a New York based start-up blockchain company (BC), waived the federal Regulation D, Rule 506(d)(2)(ii) disqualification provisions, thereby allowing BC to sell its digital tokens in the future by either publicly registering them with the Commission or by claiming an applicable registration exemption such as the exemption under Rule 506 (In the Matter of Blockchain of Things, Inc., December 18, 2019, Release No. 10737).
The Commission agreed to the waiver and to also not sue BC’s directors and officers partly because BC’s misconduct occurred over a relatively short six-month period, after which BC immediately ceased digital coin sales. But the SEC primarily agreed to the waiver because BC submitted a waiver request letter to the SEC imploring the Commission to not apply the disqualifications because doing so would put the start-up out of business, as well as promising to consult with the SEC staff before ever again distributing digital coins. The waiver, while granted, was made contingent on BC’s "request letter promise" to consult with Commission staff before distributing digital assets except in accordance with a qualified registration or exemption.
BC’s violations. From December 2017 to July 2018, BC raised more than $12 million from digital token sales made to U.S. investors and resales made to investors in four Asian countries. BC began its New York operation in 2015 to develop blockchain technology integration solutions and sell digital tokens on its website, but violated Securities Act Sections 5(a) and 5(b) by not registering itself and the tokens with the SEC or, respecting the tokens, alternatively claiming a registration exemption for them. Moreover, declared the Commission, BC’s digital tokens were "securities" under the test in the 1946 U.S. Supreme Court SEC v. W.J. Howey case because a BC digital token purchaser would have a reasonable expectation of obtaining a future profit based on BC’s start-up efforts to spur development of an ecosystem on its platform, including BC’s use of its offering proceeds and steps to control and increase the value of BC’s tokens (In the Matter of Blockchain of Things, December 18, 2019, Release No. 10736).
Regarding the four Asian resellers, they were to serve as the exclusive sellers of BC’s digital tokens in their respective countries but were free to resell the tokens to U.S. investors, which violated federal securities laws. And regarding the information that U.S. investors received prior to the sales, a BC white paper and its website information told them that as purchasers they would be able to convert their tokens into certain credits, allowing them to access and use the credits platform and its services, but neither the white paper nor any other documentation available to the prospective purchasers provided information on the quantity of credit services they could use upon exchanging their token for credit. And other required important information surrounding their token purchases was not disclosed to them.
Settlement stipulations. The Commission’s settlement agreement mandated BC to: (1) cease and desist from violating the above-mentioned Securities Act registration provisions; (2) pay a $250,000 penalty; (3) undertake to return funds to the investors who bought tokens in the initial coin offering (ICO) and request a return of the funds; (4) register its tokens as securities under the Exchange Act; and (5) file required periodic reports with the SEC.
The SEC’s Enforcement Division’s Associate Director, Carolyn Welshhans, proclaimed that BC "did not provide ICO investors with the information they were entitled to receive in connection with a securities offering. We will continue to consider appropriate remedies, such as those in today’s order, to provide investors with compensation and required information and to provide companies who conducted unregistered offerings with an opportunity to move forward in compliance with the federal securities laws."
These Releases are Nos. 10736 and 10737.