One of the hottest topics in the cryptocurrency ecosystem lately has been Richard Heart’s recently launched Hex token, which has been roundly rebuked by many industry stakeholders as a brazenly scammy “get rich” scheme.
The grand question, however, is whether Hex’s backers have actually engaged in illegal behavior.
The token’s proponents say nay due to the project’s structuring, while skeptics have argued that in the least the Hex token sale was likely an unregistered securities offering, if not worse. “There are enough red flags there to equip a Chinese military parade,” blockchain scholar Andreas Antonopoulos recently noted of Hex.
Ultimately though, the Hex “legality” question will be decided by major financial regulators like the U.S. Securities and Exchange Commission (SEC). And a new SEC development this week shows the kind of attention that Hex can expect if the Commission does decide to move against the project.
SEC Swoops on Yet Another Unregistered ICO
Blockchain has made it easier to permissionlessly create new assets via software. But this technological stride forward has also allowed naive projects to more easily run afoul of mainstream securities laws, too.
That reality was driven home once more for onlookers this week, as the SEC announced on December 18th that it had reached a settlement with the New York firm Blockchain of Things Inc. (BCOT) over an unregistered initial coin offering, or ICO, that it launched in December 2017.
BCOT’s ICO went on to raise more than $13 million USD from investors, but it did so in flouting U.S. federal securities laws since the firm sold its tokens to American investors but did not register with the SEC or qualify for a registration exemption.
The firm also notably conducted its token sale after the SEC had issued guidance in the summer of 2017 cautioning that these sales could be securities offerings and thus subject to unregistered securities legislation.
“BCOT did not provide ICO investors with the information they were entitled to receive in connection with a securities offering,” said Carolyn M. Welshhans, an associate director in the Commission’s enforcement division.
As part of BCOT’s SEC settlement, the firm did not admit to guilt bud did agree to pay a $250,000 penalty and to “return funds to those investors who purchased tokens in the ICO and request a return of the funds.” Moreover, BCOT agreed to avoid further violating U.S. securities laws and to register its token with the SEC.
Of course, no two SEC settlements are exactly alike, but the BCOT case is more or less a general taste of what could be in store for the Hex project if the Commission comes calling.
Under a Hex
The creators of Hex characterize the project as “the first high interest blockchain certificate of deposit,” but enough analysis has already been done in the crypto sector — not least of which was from attorney and The Block contributor Stephen Palley — to more than seriously problematize that CD description.
For his part, Palley has argued that while the Hex project isn’t structured like a Ponzi scheme as some critics have suggested, a case could be made that it is an “investment contract” that could thus put it in the SEC’s crosshairs as an unregistered securities offering.
On the flip side, Hex’s makers have maintained the opposite.
“There is no common enterprise, there shall be no expectation of efforts of a promoter or third party,” the Hex team has offered as part of its disclaimer.
But the aforementioned Palley noted the matter won’t come down to what Hex’s backers say, but rather down to actual transactions. And in that light, you have to wonder if the fresh BCOT reminder has those backers slightly more nervous than before.