- The SEC goes after another cryptocurrency project for illegal securities sale.
- The regulator applies the Howey Test to the cryptocurrency projects.
The US regulator is hunting for ICOs of cryptocurrency and blockchain projects that qualify as an illegal securities sale. The FXStreet already reported that the Securities and Exchange Commission (SEC) won a case against Kik Iinteractive Inc. And here comes a new lawsuit against Salt lending.
SALT Blockchain, the company behind SALT Lending service, launched an initial public offering (ICO) and raised over $47 million by selling tokens from June 2017 to December 2018.
The platform created by the SALT Blockchain team allowed cryptocurrency owners to take loans and use their digital assets as collateral. The idea behind the service was to enable crypto holders to raise cash without selling their coins.
In February 2018, SALT Blockchain came to the SEC's attention that initiated an investigation, and served the company with the subpoena seeking records related to the ICO.
Based on the recent announcement, published on the regulator's official website, SALT Blockchain will have to return funds to the investors that participated in its ICO in 2017.
The regulator emphasized that the company carried out an unregistered securities sale and thus violated the existing legislation. The SEC explained that the tokens qualify as securities as the company promised investors a return on their investments.
Now SALT Blockchain has 14 days to notify the investors about the SEC's decision and arrange the refunding procedure. After that, investors will have three months to claim their money back. Apart from that, Salt has ten days to pay a civil penalty to the SEC in the amount of $250,000.
A long line of SEC's victims
The US regulator has stepped up its actions against ICOs that may qualify as an unregistered securities' sale. Kik and Salt are the latest cases.
Also, a couple of weeks ago, the SEC charged Unikrn, an operator of an online eSports gaming and gambling platform, for conducting an unregistered initial coin offering (ICO) of digital asset securities. The company has agreed to settle the claims by paying a civil fine in the amount of $6.1 million.
In May 2020, the SEC clamped down on BitClave Pte Ltd; the company raised over $25 million by selling its Consumer Activity Tokens (CAT) to approximately 9,500 investors from June to November 2017. The regulator concluded that the company actually sold securities as it emphasized the investment potential of the tokens. BitClave was ordered to return the funds raised during the ICO (over $25 million) and the interest and pay a civil fine in the amount of $400,000.
In February 2020, blockchain technology startup Enigma MPC was ordered to pay a $500,000 penalty for conducting an unregistered offering of securities in the form of an ICO. Enigma raised about $45 million by selling ENG Tokens in 2017.
Who is vulnerable
Above are the legit projects punished by the Securities and Exchange Commission in 2020. They were not scams or frauds, but their tokens qualified as securities, according to the regulator.
Consequently, all companies with the ICO that may be classified as securities are at risk. The SEC uses the Howey Test to define whether the token sale is a security.
However, the main criteria are the revenue expectations of the investors. If the project team led the participants to believe that their tokens would become more valuable over time, the chances are that the SEC will go after them.
Also, the regulator pays attention to whether or not the investors' potential profits are entirely dependent upon a third party's work.
If the SEC determines that a cryptocurrency token is classified as a security, it may take legal actions against the company that sold it without prior registration in compliance with the Securities law.