Blockchain Firm Settles Unregistered ICO with the SEC

SimplyVital Health, Inc. – a healthcare- based blockchain firm – has settled with the United States Securities and Exchange Commission (SEC) over an allegedly unregistered $6.3 million initial coin offering (ICO).

According to SEC, the New England-based SimplyVital Health, Inc. planned to create a healthcare-related blockchain ecosystem, dubbed Health Nexus. The firm publicly announced plans to build its platform through the sale of its Health Cash (HLTH) token in 2017. Based on the charges brought by SEC, the commission alleges that the company raised more than $6 million through a pre-sale of its token.

Notably, the pre-sale was offered under a simple agreement for future tokens (SAFTs) arrangement – a model which is designed to simplify the ICO process and reduce the risk of enforcement actions by offering investment contracts rather than tokens. Following the pre-sale, which closed in April 2018, the firm did not move forward with the planned public offering.

Respectively, SimplyVital made use of the SAFT arrangement that stipulated tokens would not be dispersed to investors until SimplyVital created its platform. However, following the pre-sale, which closed in April 2018, the firm did not move forward with the planned public offering.

Subsequently, SEC concluded that the blockchain healthcare company had violated provisions of the Securities Act of 1933 and “did not file a registration statement with the Commission or qualify for an exemption from registration before offering and selling HLTH to the public through the SAFTs.”

Following this, SimplyVital, whilst neither admitting nor denying the SEC’s charges, has agreed to comply with SEC’s cease and desist order and will face no further penalty, as the firm had already returned to investors “substantially all of the funds raised during its pre-sale” by April 19th 2019.

According to industry sources, many had reported in 2018 that the SEC was most likely going after SAFT sales. An unnamed source stated at the time:

“The SEC is targeting SAFTs. The new approach of the SEC is to consider tokens as both utility and security at the same time, meaning a token can bring utility to a platform but at the same time can be considered as a security if you sold it to parties that mainly looked for profit on its increase in value.”

After releasing its July 2017 DAO Report of Investigation, which introduced the crypto industry to the Howey Test, the SEC has efficiently followed a consistent pattern of enforcement, which has been laid out over the last two years, and picked off one ICO after another over the unregistered sale of securities.

In public statements, Chairman Jay Clayton has stated that the SEC believes virtually every ICO ever conducted in the United States has violated federal securities laws.

Most recently, it had been reported that a U.S. District Court authorized an emergency freeze to lock up $8 million raised in an ICO by a New York citizen alongside with two of his entities. Seemingly, the SEC claimed that Reginald Middleton, Veritaseum Inc. and Veritaseum LLC had raised the funds in an ICO that was a fraudulent, unregistered securities offering.

Blockstack is the First SEC-Approved Token Offering Under Reg A+

The United States Securities and Exchange Commission (SEC) has granted blockchain-based startup Blockstack clearance to run a $28 million public token offering under Regulation A+, according to an official blog post from Blockstack.

According to news, Blockstack will launch its token offering online on Thursday, July 11th.  It will be open to any purchaser in the U.S. and globally, who would like to take part in the Blockstack next-generation computing network.

Blockstack is a blockchain builder that has raised $47 million through a previous token offering under Regulation D, which is a different provision that does not require SEC approval but is only limited to accredited investors. In comparison, Regulation A+ is open to all companies and individuals and serves as an initial public offering (IPO) alternative for smaller companies to publicly raise money with less strenuous accounting and disclosure standards than a regular IPO requires.

Although previously companies have taken advantage of Regulation A+ funding, this marks the first time that investors will receive a token, rather than shares in the company. This development has the potential to be a game-changer for other crypto startups that are looking to sell tokens but not equity in their companies whilst also remaining SEC-compliant.

Blockstack founder Muneeb Ali has shared his enthusiasm, however stated that the process has very long and costly since the SEC had to devise a brand new protocol for token offerings under Reg A+, something the regulator had never done before.

Accordingly, the startup has spent 10 months and approx. $2 million to gain approval from the SEC. Ali apparently said that Blockstack had to develop a protocol for running what is essentially a regulated ICO through Regulation A+ from the ground up.

This is possibly a precedent-setting moment for the crypto space, according to reports. Initial coin offerings (ICOs) have lost much of their appeal ever since they became the target of an SEC crackdown. According to WSJ data, ICOs attracted less than $120 million to their coffers in Q1 2019 in comparison nearly $7 billion in the year-ago period.

Meanwhile, recent poor performances and fraud concerns surrounding some of the Reg A+ IPOs have discouraged Nasdaq and the New York Stock Exchange from Reg A+ listings. Against this backdrop, having the SEC’s approval on a Reg A+ token offering may shed light on a new path for blockchain companies to raise funds under regulation, according to the startup.

Now that Blockstack has successfully created this new path for blockchain companies to raise funds, certainly more companies will now be encouraged to seek SEC approval for their token offerings rather than argue with the regulator that their tokens are not securities.

Telegram to Hold a Partial Public Sale via Liquid Crypto Exchange

Messaging app giant Telegram’s gram token, previously sold to accredited investors in one of the bigger ICOs of 2018, is finally going on public sale, a press release confirmed on June 11th.

According to the news, a limited sale of the gram token will be hosted by cryptocurrency exchange Liquid from July 10th.

The offering comes before a full public sale planned for October. However no further details about the sale have been disclosed to the public. The sale will ensue via Gram Asia, which claims to be the largest holder of gram tokens.

Prior to this, grams have been sold only to accredited investors in Telegram’s massive two-phase private initial coin offering (ICO) back in February and March of 2018, which subsequently raised  around $1.7 billion for its Telegram Open Network (TON) project and was by far the largest fundraise made via a crypto token offering.

The Telegram Open Network (TON) was an ambitious blockchain project with the goal to decentralize multiple facets of digital communication, varying from file sharing to browsing to transactions.

According to the gram sale page on Liquid’s official website:

TON brings speed and scalability to a multi-blockchain architecture that addresses the need for minimal transaction times and airtight security.”

Liquid CEO Mike Kayamori has stated in the press release that:

“We share the vision for a more secure and open value transfer system in order to enable the mainstream adoption of cryptocurrencies.”

He further added that the TON blockchain infrastructure could help boost Telegram’s current capacity as well as efficiency as a peer to peer network of value, with the launch of their cryptocurrency light wallets for Telegram’s highly engaged user base.

Meanwhile, the sale is open to all investors globally; however it excludes several nations including the U.S. and its territories as well as Japan, most likely due to regulatory reasons that the token could be considered a security within those jurisdictions.

Investors interested in participating in the sale on the Liquid platform can purchase grams with either U.S. dollars or the USDC stablecoin. According to the official website, a full token launch is expected at the end of October.

Notably, any gram tokens sold in the upcoming offering will not be immediately tradeable.

“The tokens being sold will not be released until after TON goes live (mainnet release), in accordance with the delivery schedule. Purchasers will not be able to transfer, withdraw, or trade the Grams before they are released.”

This news comes roughly two weeks after Telegram released a testnet version of the TON client, which itself follows an extensive development process and the Q3 launch date.

As of press time, Telegram has not released any official comments regarding the news.

SEC Sues Kik Over Its 2017 Token Sale

The U.S. Securities and Exchange Commission (SEC) sued Kik Interactive Inc. for illegally raising $100 million during a 2017 token sale, making this one of its highest profile cases targeting a company for not registering an offering with the regulator.

In a filing submitted Tuesday in the Southern District of New York, the SEC said Kik violated Section 5 of the Securities Act of 1933, which requires offerings to be registered.

The current law states that all those selling financial instruments deemed securities to US investors must first register their offering with the SEC. Since Kik did not, the firm is now being sued.

Kik, whose product is an online messaging application, raised more than $55 million from U.S. investors by selling a digital token called Kin without the proper disclosures, the SEC said in a Tuesday court filing. The agency is seeking undisclosed monetary penalties.

Steven Peikin, co-head of the SEC’s enforcement division stated:

“Companies do not face a binary choice between innovation and compliance with the federal securities laws,”

The SEC has been looking with skepticism at ICOs for years, arguing that the sales are likely securities that must follow federal rules. The regulator has publicly advised investors of the risks in buying tokens during an ICO, cautioning that scammers might be using them to lure investors into frauds.

In late 2016 and early 2017, Kik faced a crisis, according to the SEC filing.

Fewer and fewer people were using Kik Messenger. The company expected to run out of cash to fund its operations by the end of 2017, but its revenues were insignificant.”

Then the company decided to do an ICO, in what a board member called “a hail Mary pass,” according to the filing.

Kik was among the biggest initial coin offerings in the past two years and had prominent backers.

Kin recently launched a crowdfunding site called DefendCrypto.org to raise money to fight back against an SEC investigation into the firm, and the agency’s broader crackdown on ICOs.

Kik argues that it has attempted to work with the SEC over the past 18 months and has spent over $5 million in the process. Many in the cryptocurrency community believe the case could help clarify when a token will be considered a security and subject to SEC regulations.

SEC Publishes Regulatory Framework for Digital Assets

On April 3rd, the U.S. Securities and Exchange Commission (SEC) has published new regulatory guidance for token issuers, under the title “Framework for ‘Investment Contract’ Analysis of Digital Assets.”

This regulatory guidance for crypto tokens has been in the works since last November, as stated by SEC Director of Corporation Finance William Hinman. Other members of the agency, including FinHub head Valerie Szczepanik and Commissioner Hester Peirce, have repeatedly stated that SEC staff was working on the document.

According to the published document, a framework issued by FinHub will be employed to analyze if digital assets fall under the securities category under the US federal security laws depending on the nature of the digital asset.

Speaking at New York University in March, FinHub Commissioner Peirce explained:

“Now staff guidance is staff guidance. The Commission can go ahead and bring enforcement actions anyway but staff guidance does carry a bit of weight, but I would like to do something more formal at the Commission level so people have a little bit more certainty.”

Apart from analyzing the nature of digital assets, this framework is intent to provide assistance to anyone who seeks to comply with the U.S. securities laws. However, the agency cautions the public to use this framework as a guideline or a tool that helps market participants recognize which digital asset offer or sale falls under the federal security laws.

Therefore, the regulatory guidance is merely a representation of the staff’s view and not a rule or an official statement made by the commission; meaning the framework is not legally binding on the divisions or the commission.

The new document outlines a number of factors that token issuers must take into consideration when analyzing whether or not their offerings qualify as securities, which includes an expectation of profit, whether a single or at least central group of entities are responsible for specific tasks within the network, and whether a group is creating or supporting a market for a digital asset.

It is also emphasized that token issuers should look at tokens previously sold: to check if previous tokens should have been registered as securities or if a digital asset previously sold as a security should be reevaluated.

The criteria for reevaluation include whether:

  • the distributed ledger network and digital asset are fully developed and operational (meaning individuals can immediately use the token for some function);
  • the token is focused on a specific use case rather than speculation;
  • Prospects for appreciation in the token’s value are limited; and if billed as a currency, the token actually operates as a store of value.

Meanwhile, the SEC has issued as well its first-ever no-action letter, which has highlighted reasons not to consider some digital assets as security. The no-action letter is not binding on courts but rather is only applicable to the recipients.