A privately owned company and two individuals settled SEC charges of conducting unregistered securities transactions and acting as unregistered broker-dealers in digital securities. As reported by the SEC, this is the first enforcement action related to digital securities since the agency released The DAO Report in 2017, which cautioned that those who sell digital securities must abide by securities laws.
According to the SEC Order, TokenLot LLC ("TokenLot") and its two owner-operators advertised and sold securities in the form of digital tokens to retail investors using TokenLot's website platform. The SEC alleged that the self-described "ICO Superstore" took thousands of customer orders for digital tokens and dealt with more than 200 different digital tokens in connection with both initial coin offerings carried out by other entities and TokenLot's secondary market initiatives.
As part of the settlement agreement, the individuals will retain an independent third party to destroy TokenLot's remaining inventory of digital tokens.
Separately, the SEC announced a settlement with Crypto Asset Management LP, whose underlying hedge fund invests in digital assets. According to the SEC, the underlying hedge fund, which engaged in the business of investing, holding, and trading cryptocurrency that constituted securities, failed to register as an investment company under the Investment Company Act. Crypto Asset Management LP had represented to investors that the fund was the "first regulated crypto asset fund in the United States."
Commentary / Steven Lofchie
As part of the settlement agreement, an independent third party will be hired to destroy the remaining inventory of digital tokens. How exactly does one destroy digital tokens? What does the destruction accomplish? Can they be recycled? Are there any zoning issues?
Commentary / Joseph V. Moreno
In a big day for first-of-its-kind crypto-related enforcement actions, both the SEC and FINRA made significant announcements regarding three unrelated cases. However, none should come as a surprise. In bringing its first-ever disciplinary action against a broker for selling " HempCoin," FINRA followed through on months of warnings that it viewed the cryptocurrency industry as rife with potential danger. At the same time, the SEC's action against TokenLot and its proprietors is the latest in that agency's efforts to police the world of initial coin offerings and continue the ongoing debate regarding utility tokens versus securities subject to registration and regulation. The SEC's separate announcement of a settlement with an unregistered hedge fund indicates a continued effort to scrutinize the cryptocurrency industry on multiple levels, all with an eye toward protecting investors from fraud and abuse.
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