Blockchain of Things (“BCOT”), a technology company, has agreed to settle charges with the Securities and Exchange Commission (“SEC”) for conducting an initial coin offering (ICO) without registering it as a securities offering or qualifying for any registration exemptions. The settlement requires BCOT to agree to a cease and desist order, pay a $250,000 civil fine, return funds to any investors who file a request, and register the tokens as securities.
Blockchain of Things’ ICO Details
In July 2017, the SEC published its DAO Report of Investigation, which gave notice to companies that their ICOs may be regulated as securities offerings. BCOT began its ICO presale in December 2017, months after this warning had been issued, without registering the digital tokens.
The ICO raised money to develop BCOT’s blockchain-based technology on its Catenis platform, which planned to allow third-party developers to build applications for message transmission and logging, digital asset generation, and digital asset transfers. Tokens were marketed as prepaid access to its technology.
The presale offering raised over $600,000 between December 2017 and April 2018 to U.S. citizens, and raised over $12 million more selling to foreign resellers between January and May 2018.
Investor Reasonable Expectation of Profits
Though the company did require that purchasers sign a contract stating that they were not purchasing BCOT Tokens for “future appreciation” or “investment or speculative purposes,” token purchasers had a reasonable expectation that they would profit from their tokens based upon the following:
- BCOT’s White Paper and other marketing materials described its intention to increase the value of its tokens and develop on ecosystem on its Catenis platform.
- The company highlighted its management team and their credentials, citing relevant experience in cryptocurrencies, operations, business development, software development, and social media.
- BCOT shared its plans to cap the number of tokens distributed, which would create an appreciation of value as demand for the tokens increased.
- Its Token Sale Economics document set forth a pricing schedule to incrementally increase prices based on the number of tokens sole to date.
Expanded SEC Enforcement Activities in Digital Asset Space
This case is one of the most recent in a growing number of actions brought by the SEC in the digital asset space, exercising oversight over the booming ICO market. The first ICO was offered in 2013, with several offerings in the following years; but the offerings have dramatically increased in recent years, with several hundred occurring in each of the past three years.
To protect investors from fraud and manipulation, the SEC is interpreting its securities laws broadly, increasing the number of actions brought against unregistered blockchain offerings. The SEC’s Division of Enforcement 2019 Annual Report described two significant developments in its oversight of this area over the past year:
- Some of its recent settlements with issuers have provided “a path to compliance with registration requirements,” including “an opportunity for investors to seek rescission of their investments as well as registration of the offered “tokens” under the Securities Exchange Act of 1934.”
- It filed its first litigated charges “against a digital asset issuer solely for violating registration provisions.”
Let Our Experience Work for You
If your firm invests client assets in cryptocurrencies, it is critical to carefully review all materials and conduct thorough due diligence prior to investing. Another practice that may reduce risk is to only invest in tokens that have been properly registered with the SEC as securities.
If these types of investments are likely to be part of your firm’s investment strategy, consider developing internal due diligence policies and procedures that align with guidance provided by the SEC. To avoid liability and regulatory scrutiny or action in the event of significant client losses, firms should additionally draft risk disclosures related to cryptocurrencies in their Form ADV, client agreement, and other client facing documents to ensure that risks are properly disclosed prior to an investment
Jacko Law Group can assist in developing due diligence policies and procedures and risk disclosure language in order to protect your firm.
Contact our team of attorneys today at 619-298-2880.
Add a comment
- New SEC Climate Change and ESG Task Force to Enhance Investor Protection by Red Flagging Examples of Corporate Greenwashing
- What Investment Advisers Must do to Qualify for the DOL’s Prohibited Transaction Exemption for IRA Rollovers
- SEC Division of Examinations Cites Enhanced Focus on Business Continuity Processes, Protection of Retail Investors and ESG-Related Risks Among its 2021 Priorities
- FINRA Report Suggests Growing Need for Enhanced Risk Management in Cybersecurity and Outside Business Activities
- Deadline Approaching: Considerations for Your Form ADV
- Leveraging JLG's Latest Service: Real Estate
- Safeguarding Your Firm Against Fraudulent or Improper Recognition of Revenue
- New Advisers Act Advertising Rule to Undergo Further Review
- Investors, Advisers Must be Mindful to Comply with New U.S. Ban on Estimated $1 Trillion of Chinese Securities
- Your First Meeting on the SEC’s New Investment Adviser Marketing Rule Should Address These Topics
- Securities and Exchange Commission (SEC)
- Investment Advisers
- Regulatory Examinations
- Policies and Procedures
- Social Media Marketing
- Due Diligence
- Transition Services
- California Consumer Privacy Act (CCPA)
- Aging Clients
- Advisers Act
- Virtual Currency
- Dodd-Frank Act
- Ponzi Scheme
- Office of Compliance Inspections and Examinations (OCIE)
- Broker Protocol
- Securities Law
- Form U5
- Private Equity
- Private Funds
- Hedge Funds
- Regulation Best Interest
- Personally Identifiable Information (PII)
- Government Shutdown
- Risk Alert
- Exchange-Traded Funds (ETFs)
- Investment Company Act
- Rule 6c
- Wells Fargo