Cayman-registered Sparkster Ltd and its UK-based CEO Sajjad Daya have agreed to pay US$35 million to settle charges brought by the US Securities and Exchange Commission over the software company’s 2018 crypto token offering.
The money will be used to compensate investors that were “harmed” by “the unregistered offer and sale of crypto asset securities” between April and July 2018, the SEC said.
At the time, Sparkster raised $30 million from 4,000 investors by offering and selling crypto asset securities called SPRK tokens to raise money to further develop the company’s “no-code” software platform.
According to the company’s white paper, the software-programming application would allow building software without having to write code and was designed to teach coding to children.
An SEC cease-and-desist order, published 19 Sept., finds that the SPRK tokens were securities, were not registered with the SEC, and were not applicable for a registration exemption.
Investors were told that SPRK tokens would increase in value and that Sparkster management would continue to improve the software and list the tokens on trading platforms, the SEC said.
However, the tokens were only listed a year after the offering and removed shortly after over concerns related to certain aspects of Sparkster’s smart contract. When the smart contract was replaced three months later, the value of re-listed SPRK tokens dropped precipitously, the SEC order said.
Without admitting or denying the findings, the company has agreed to destroy its SPRK tokens and issue requests to trading platforms to have the tokens removed. Daya has agreed to refrain from participating in offerings of crypto asset securities for a period of five years.
The SEC has brought more than 100 enforcement actions in relation to crypto assets since 2013. The majority involves token sales the SEC deems unregistered securities offerings to US investors. In many cases, the actions included fraud charges and largely stem from a wave of more than 2,000 initial coin offerings in 2017 and 2018.
Charges against crypto promoter
The commission has also charged crypto influencer Ian Balina for failing to disclose compensation he received from Sparkster for publicly promoting its tokens, and failing to file a registration statement with the SEC for Sparkster tokens that he resold.
A complaint against Balina filed in the US District Court for the Western District of Texas, stated he purchased $5 million worth of SPRK tokens and promoted SPRK tokens on YouTube, Telegram and other social media platforms.
Balina allegedly failed to disclose that Sparkster had agreed to provide him a 30% bonus on the tokens that he purchased, as consideration for his promotional efforts.
In addition, Balina allegedly sold SPRK tokens to a pool of at least 50 investors, without registering the offering with the SEC.
Balina denies the charges.
US jurisdiction over Ethereum transactions
One statement in the SEC lawsuit against Balina has raised a furor in the digital asset industry, because the commission appears to suggest that it has jurisdiction over all transactions on Ethereum, the second largest decentralised blockchain after bitcoin.
The SEC stated that US-based investors irrevocably committed to the SPRK token purchase, which were issued on the Ethereum blockchain, when they sent their ETH contributions to Balina’s investment pool.
“At that point,” the SEC argued, “their ETH contributions were validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country. As a result, those transactions took place in the United States.”
A node on the Ethereum network is any instance an Ethereum client software is connected to another computer running the Ethereum software. The network of nodes is used to perform tasks, including validation and running smart contracts.
Currently, 46.2% of nodes are located in the US, followed by Germany with 18.7%, according to Etherscan.
The claim that a preponderance of nodes in the US would mean the SEC has potentially jurisdiction over all transactions on Ethereum has no legal weight. It is also unlikely that the court will express an opinion on the matter.
But the throwaway remark has nonetheless turned heads among digital asset advocates. It follows a report in the Wall Street Journal in which SEC chairman Gary Gensler suggested that proof-of-stake cryptocurrencies might potentially be considered securities.
Ethereum switched from a proof-of-work validation process that involves energy-intensive mining to proof-of-stake last week.
In proof-of-stake, validators commit capital in the form of Ethereum’s native coin ETH to a smart contract and are rewarded for their work.
In Gensler’s opinion, staking – pledging assets to a crypto network in exchange for rewards – could indicate that an asset meets the definition of an ‘investment contract’ subject to US securities laws under the so-called Howey test.
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