Wireline settles unregistered token sale charges with SEC

Commissioner criticizes the post-sale treatment of tokens as securities

Blockchain microservices startup Wireline will pay US$650,000 to settle charges filed by the US Securities and Exchange Commission over a $16.3 million crypto token sale in late 2018.

The SEC asserted that Wireline did not register its offering which took the form of a simple agreement for future token (SAFT) sale.

Purchasers of the SAFT would have received the tokens as soon as the Wireline microservices platform had gone live. The tokens were never issued because the platform is still in development.

Under the terms of the settlement, Wireline must notify investors that it is not allowed to issue the tokens.

The SEC argued that the SAFTs were explicitly sold as part of a securities transaction, but Wireline did not register the offer and sale as such, nor did the company qualify for an exemption, because it offered and sold the investment contracts through a general solicitation.

The Delaware company, which has its principal business in New York, created a subsidiary in the Cayman Islands, the Wireline Developer Fund, to distribute the Wireline tokens and encourage their use on its platform.

The SEC alleged that in its marketing materials Wireline had made false and misleading statements, giving the impression that it had developed a functioning, feature-complete prototype on which numerous third-party developers were actively testing and utilising all aspects of the platform, and that tokens would be issued in 2018.

The SEC said Wireline has changed its original plan and has since implemented a disclosure process to ensure that its statements or other disclosures are accurate and not misleading.

Post-sale treatment of tokens as securities

SEC Commissioner Hester Peirce

Commissioner Hester Peirce, a crypto advocate within the SEC, supported the enforcement action.

However, she criticised the SEC’s post-sale treatment of tokens as securities and noted that not allowing the company to pay out the tokens could be damaging to innovation.

Peirce said, “By including a provision whereby Wireline will not distribute the tokens pursuant to the SAFTs, this settlement perpetuates an approach that suggests that tokens themselves are securities and thus complicates the development of crypto networks.”

Both the SEC and courts have treated the token as inseparable from the SAFT by regarding the pre-sale and public distribution of tokens as one event.

While the token sale itself can be treated as a security transaction, it is not obvious why the object of the fundraising itself would be considered a security.

Citing seminal case law, SEC v. W.J. Howey Co, which defined an investment contract for the purposes of the SEC, Peirce said treating a token as a security was akin to treating oranges as securities in a case where investors are entitled to a share of the profits of a citrus orchard.

She said preventing the SAFT investors from directly profiting from the token launch, as the settlement requires, does not seem to be the best outcome.

“As long as we are permitting Wireline to move forward with the project, we should allow the SAFT investors to profit from the issuance of tokens once the network is ready to go live,” the commissioner said.

“A better course would be for us to treat the original capital-raising event for an unlaunched network as a sale of securities, but not to stretch the securities analysis to include subsequent sales of tokens for use on a launched network,” she added.

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