While the blockchain industry comes to terms with the settlement between Block.one and the SEC, crypto lawyers are explaining the implications for token projects.
EOS raised $4 billion in a year long token offering that began in June 2017, but was then placed under investigation by the US Securities and Exchange Commission (SEC) for violating U.S. securities laws. On September 30th, Block.one reached a settlement with the SEC, agreeing to pay a penalty of $24 million for conducting an unregistered securities offering.
“Block.one did not register its ICO as a securities offering pursuant to the federal securities laws, nor did it qualify for or seek an exemption from the registration requirements,” stated the SEC in a press release.
Is EOS a security?
Several other token projects including Ripple’s XRP, and Kik’s Kin, have been embroiled in high-profile lawsuits relating to their status as securities, and will now be looking to EOS for ideas on how to present a case to the SEC.
Marco Santori, President and Chief Legal Officer at Blockchain, said the SEC has decided the original EOS tokens were sold with an "expectation of profit from the efforts of others" in what was effectively an unregistered securities sale, but the EOS token in its present state can’t be considered a security.
"Remember, there were two tokens. An ERC-20 sold in the sale, and then the native EOS token on the blockchain ultimately launched," tweeted Santori. "According to the SEC, the intermediary ERC-20 token was a security. The Order does not take a position on whether the EOS token is a security."
Attorney Jake Chervsinky agrees, claiming the SEC verdict supports "the prevailing view among crypto lawyers that tokens aren’t automatically securities just because they’re sold in a securities transaction."
‘Work with us or perish’
But just because the SEC doesn’t appear to consider EOS a security, ICOs have not been given a free ride. Blockchain attorney Stephen Palley was quick to step in on Twitter and warn token projects against jumping to conclusions. "If you think it’s a sign that ICOs are green-lit in the U.S. you’re wrong."
"The only precedent that the EOS settlement sets is that you might get a better deal if you don’t kick the SEC in the shins, start to a settlement fund online and say ‘sue me’"tweeted Palley.
The small size of the penalty — which represents only 0.58 percent of the funds raised in the token sale and is less than Block.one paid for a domain name in June — has led some to suggest that the blockchain firm has got off lightly, and that other offending token projects could also receive favourable treatment.
The SEC’s leniency on Block.one however, suggests Palley, is likely to be motivated by the firms attempts to cooperate.
From the outset, Block.one made efforts to be compliant with American regulators. U.S. investors were explicitly excluded from buying tokens, and careful wording ensured that no promises were made about the token increasing in value.
As the SEC order states, "Block.one prohibited U.S. persons from taking part in the offering and took measures to prevent their participation, including blocking U.S. IP addresses." Despite the fact that an unknown number of U.S. investors were still able to purchase tokens, this effort might have helped Block.one win favour with the SEC.
Others however, speculate that the lenient treatment is more likely to be related to timing, as the EOS token sale commenced a few weeks before the seminal DAO report was released — this asserted for the first time that the sale of blockchain-based tokens constituted an illegal sale of unregistered securities.
Moving forward, the SEC might not be as lenient on ICOs conducted after the release of the DAO report, like Kik’s Kin project, which raised $100 million in an Initial Coin Offering in September 2017 and is now withering against a prolonged lawsuit instigated by the SEC.
The contrast between these two cases, suggests Chervinsky, "perfectly illustrates the SEC’s consistent message" to the cryptocurrency industry — "work with us or perish."