alerts & publications
Regulators Take Action Against Crypto Businesses9월 14, 2018
SEC charges crypto promoter and secondary trading facilitator for failing to register as a broker-dealer; FINRA files first disciplinary charges in connection with cryptocurrency offering
On September 11, 2018, the Securities and Exchange Commission (SEC) announced cease-and-desist proceedings against TokenLot LLC, a digital cryptographic token promoter and secondary trading platform, and its owners for (i) failing to register as broker-dealers under the Securities Exchange Act of 1934 and (ii) facilitating the unregistered sale of securities in violation of Section 5 of the Securities Act of 1933. The TokenLot settlement is the first recent SEC enforcement action charging violations of the broker-dealer registration provisions in the context of digital tokens and may be a bellwether for further enforcement of the federal securities laws in the context of digital and cryptographic assets. The SEC’s cease-and-desist order is available here.
Also on September 11, 2018, the Financial Regulatory Authority (FINRA), the self-regulatory organization overseeing registered broker-dealers, charged Timothy Tilton Ayre, who allegedly has been associated with FINRA and SEC-registered broker-dealers, with violating FINRA Rules 2010 and 3280 in connection with offers and sales of a digital token backed by “worthless” shares of the defendant’s public company. The FINRA complaint is available here.
The TokenLot action follows numerous public statements by the SEC, Chairman Jay Clayton, Commissioners, and senior staff regarding the status of cryptographic digital tokens as “securities” subject to regulation under the federal securities laws. Indeed, the SEC press release announcing the TokenLot settlement expressly cited the staff’s July 2017 Report of Investigation of The DAO, a digital token issuer, which concluded that the DAO tokens were securities. Our analysis of the DAO report and the recent public statements by the SEC, the SEC staff, and Chairman Clayton are available in our prior client alerts.
The TokenLot action is particularly notable because it does not include any allegations of fraudulent conduct by the defendants; the enforcement action and settlement relate solely to securities and broker-dealer registration violations.
Section 15(a) of the Exchange Act makes it unlawful for any “broker” or “dealer” to effect transactions in or induce the purchase or sale of any security unless the broker or dealer is registered with the SEC. The Exchange Act defines a broker to mean any person engaged in the business of effecting transactions in securities for the account of others and defines a dealer to mean any person engaged in the business of buying and selling securities for the person’s own account. The SEC order noted the following broker-dealer activities by TokenLot after the release of the DAO report:
- advertising and selling tokens to retail investors on a website platform;
- soliciting retail investors and processing thousands of orders for tokens;
- handling more than 200 different tokens in connection with initial coin offerings conducted by other entities;
- facilitating secondary market trading of approximately 145 tokens, resulting in the execution of more than 1,650 orders; and
- promoting the sale of 40 tokens in exchange for marketing fees paid by token issuers.
The press release and the SEC order also make clear that the SEC’s published statements regarding the status of digital tokens as securities were not limited to registration under the Securities Act. For example, Stephanie Avakian, Co-Director of the Division of Enforcement, states in the press release that “U.S. securities laws protect investors by subjecting broker-dealers and other gatekeepers to SEC oversight, including those offering ICOs and secondary trading in digital tokens.”
TokenLot and its owners, without admitting or denying the SEC’s findings, consented to the SEC’s order, agreed to pay $471,000 in disgorgement plus $7,929 in interest, and also agreed to retain an independent third party to destroy TokenLot’s remaining inventory of digital assets. TokenLot’s owners also agreed to pay penalties of $45,000 each and agreed to industry and penny stock bars and an investment company prohibition, with the right to reapply after three years.
The FINRA disciplinary action appears to be its first concerning digital asset transactions. The complaint alleges that Mr. Ayre attempted to lure retail investors to his “worthless” public company, Rocky Mountain Ayre, Inc., by issuing and selling digital tokens purportedly backed by marketable securities. The complaint alleges that Mr. Ayre violated FINRA Rules 2010 and 3280 by making fraudulent positive statements about the company’s business and finances, and by unlawfully distributing unregistered securities.
Both actions serve as a reminder of increased regulatory focus on blockchain-based businesses and the need to evaluate business models against a developing regulatory landscape.
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