Many have likened the world of blockchain and cryptocurrencies to the ‘wild west’. The Securities and Exchange Commission (SEC), however, is doing its best to civilize the sector by holding everyone to task. While the regulatory body is often vilified for its stances towards many digital assets, it plays an important role in upholding accountability among market participants.
This past week was a busy one for the SEC and blockchain. The SEC won its case against Kik, issued clarification for non-custodial ATS services, fined Salt, and filed a complaint against a Swedish national for promoting and selling unregistered securities.
SEC Triumphs over Kik
In an ongoing court battle, stemming from an ICO held in 2017 by Kik, the SEC’s claims of securities violations have been vindicated. The highly anticipated ruling by presiding U.S. District Judge, Alvin Kellerstein, saw the court rule in favor of the SEC.
Roughly $55M of the $100M raised during Kik’s ICO was from U.S. based investors, subsequently, the event fell under the purview of the SEC. The SEC believes that the ‘Howey Test’ applies to the Kik ICO, resulting in the tokens being considered securities. With the SEC now emerging victorious, a settlement will likely be reached in the coming weeks.
While many companies have been targeted by the SEC for securities regulation violations, messaging app Kik, is one of the few to have fought back. The result was a court battle that began in 2019.
This decision against Kik represents the second high-profile win in court by the SEC this year, against past ICOs. The first was a landmark case against Telegram, which we previously covered HERE.
Not every action taken by the SEC is punitive in nature. In this instance, the SEC provided written clarification to the Financial Industry Regulatory Authority (FINRA) regarding the alternative trading system’s (ATS) non-custodial role in the settlement of digital asset security trades. The letter is a clarification of the Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities issued by the SEC on July 8, 2019.
Broker-dealers that are seeking to operate an ATS have made it known that they wish to follow a “three-step process” as opposed to the “four-step process” for the non-custodial service of matching orders of buyers and sellers; they assert that the four-step process “increases operational and settlement risks”. The SEC recommended no enforcement action against ATS broker-dealers using the three-step process as long as the following is also satisfied:
- The broker-dealer operator maintains a minimum of $250,000 in net capital;
- The agreements between the broker-dealer operator and its customers clearly state that the broker-dealer operator does not guarantee or otherwise have responsibility for settling the trades;
- The broker-dealer operator has established and maintains reasonably designed procedures to assess whether a digital asset security was offered and sold initially pursuant to an effective registration statement or an available exemption from registration, and whether any secondary transactions of the digital asset security on or through the ATS are made pursuant to an effective registration statement or an available exemption from registration;
- The transactions in digital asset securities otherwise comply with the federal securities laws.
With the digital securities sector rapidly growing, this is a welcome piece of clarification by the SEC.
Salt Fined by SEC
In a recurring theme among ICOs completed in 2017, the heart of the purported violations stem from communications between Salt and investors. More specifically, Salt indicated that investors could expect to profit on their investment.
“…Salt Tokens were offered and sold as investment contracts, and therefore securities, pursuant to the test laid out in SEC v. W. J. Howey Co., 328 U.S. 293 (1946) and subsequent cases discussing that test…A purchaser in the offering of Salt Tokens would have had a reasonable expectation of obtaining a future profit based upon Salt’s efforts, including Salt’s development of the lending business using the proceeds from the sale of Salt Tokens.”
“Salt violated Sections 5(a) and 5(c) of the Securities Act by offering and selling these securities without having a registration statement filed or in effect with the Commission or qualifying for an exemption from registration with the Commission. “
As a result, the SEC has imposed various fines and steps for Salt moving forward, with the following being just a few examples of these.
- $250,000 civil penalty
- SALT Tokens must be registered as securities
- Offer ICO participants refunds on their investments
Leading up to the release of these findings by the SEC, Salt submitted an ‘Offer of Settlement’. As such, it is expected that Salt will adhere to these impositions, putting this saga in the rearview mirror.
It would appear as though the conclusion of this saga was a welcome development by investors, as both, the marketcap and price of SALT tokens have skyrocketed in the hours following the announcement.
In a case that is only beginning, the SEC has just filed with the Eastern District Court of New York, to hold Roger Nils-Jonas Karlsson accountable for past actions of offering and selling unregistered securities to investors, as well as misappropriating a large chunk of those funds. The SEC described the case as “a massive global online offering fraud targeting thousands of retail investors”.
Karlsson defrauded thousands of investors to the tune of roughly $3.5M worth of digital assets. Participants believed they were investing in a high-potential company called Eastern Metal Securities (EMS). Not only did Karlsson promise unrealistic returns on investment, but he also misappropriated funds, purchasing personal real estate in countries such as Thailand.
In its filing, the SEC is hoping for Karlsson to be held accountable through a trial by jury.
Securities and Exchange Commission
The SEC is a U.S. based regulatory body. It is tasked with ensuring fair and transparent capital markets, through the creation and enforcement of securities based regulations.
Chairman, Jay Clayton, currently oversees company operations.