The company that launched the world’s largest initial coin offering from the Cayman Islands has to pay a civil penalty of US$24 million to settle charges with the Securities and Exchange Commission that the token sale was not registered in the United States.
Block.one did not register its ICO as a securities offering pursuant to the federal securities laws, nor did it qualify for or seek an exemption from the registration requirements, the SEC said.
“A number of US investors participated in Block.one’s ICO,” said Stephanie Avakian, co-director of the SEC’s Division of Enforcement in a press release. “Companies that offer or sell securities to US investors must comply with the securities laws, irrespective of the industry they operate in or the labels they place on the investment products they offer.”
Block.one, which is registered in Cayman and has operations in Virginia and Hong Kong, conducted the ICO between June 2017 and June 2018 and raised the equivalent of US$4.1 billion dollars from the sale of 900 million tokens globally.
Block.one, the maker of EOS.IO, a blockchain protocol powered by the native cryptocurrency EOS, raised the funds for general expenses and to develop software and promote blockchains based on that software.
The US securities regulator noted that Block.one’s token sale began shortly before the SEC released its DAO Report of Investigation “and continued for nearly a year after the report’s publication”.
The report clarified the US regulatory position with regard to initial coin offerings by applying the so-called Howey Test to determine whether a token sale is a securities offering that is subject to SEC registration.
The test defines investment contracts or securities as offerings that represent a monetary investment with an expectation of profit from a common enterprise in which the profit is derived solely from the efforts of the promoter or a third party.
The test effectively separated security tokens from utility tokens which do not fall under registration requirements in the US.
“Block.one did not provide ICO investors the information they were entitled to as participants in a securities offering,” said Steven Peikin, co-director of the SEC’s Division of Enforcement. “The SEC remains committed to bringing enforcement cases when investors are deprived of material information they need to make informed investment decisions.”
According to the SEC order, Block.one prohibited US individuals from taking part in the offering and took certain measures such as blocking US IP addresses. The token purchase agreement noted that any purchase by a US person was unlawful and rendered the purchase agreement null and void.
However, Block.one did not ascertain from purchasers whether they were in fact US-based individuals, and a number of US-based persons bought tokens directly through the EOS.IO website.
Block.one consented to the order without admitting or denying its findings.
In a statement, the company said the settlement relates only to the ERC-20 token sold on the Ethereum blockchain, which is no longer in circulation or traded. As such, the token would not have to be registered as a security with the SEC.
“The SEC has simultaneously granted Block.one an important waiver so that Block.one will not be subject to certain ongoing restrictions that would usually apply with settlements of this type,” the company said.