The end of the fiscal year for the U.S. Securities and Exchange Commission (SEC) has been cryptocurrency themed, as the financial watchdog closed the period with two high-profile cryptocurrency project settlements in as many days.
Less than 24 hours after news broke that the Commission had enforced a settlement to the tune of $24 million with EOS builders Block.one for an unregistered security offering, Nebulous — the company behind the Sia decentralized cloud storage network and its dual-token ecosystem — announced on October 1st that it had also entered a settlement with the SEC.
Why? The SEC claimed that the firm’s 2014 sale of Sianotes — which are distinct from the Siacoin (SC) cryptocurrency that is traded on cryptocurrency exchanges around the world — comprised an unregistered security offering too. The offering raised $120,000 at the time, with Sianotes later transitioning into so-called Siafunds.
Big news! We entered into a settlement with the SEC for our 2014 offering of Siafunds (our security token), and the SEC took no enforcement action against Siacoins or any current activity on the Sia network. Read the press release here. Thread incoming! https://t.co/XOWk9lmqG6 pic.twitter.com/oyCOMDwwfq
— Sia (@SiaTechHQ) October 1, 2019
Of course, that sale and ensuing security token conversion came before the SEC published its landmark 2017 DAO Report, wherein the Commission officially warned the cryptocurrency ecosystem that federal securities laws applied to token sales that were within reach of U.S. investors.
Notably, the watchdog made no enforcement actions against the actual Siacoin cryptocurrency, suggesting the regulators don’t similarly view the asset as a security.
“Without admitting to or denying the SEC’s allegations, Nebulous agreed to a settlement and will pay disgorgement of $120,000, prejudgment interest of $24,601.85, and a civil money penalty of $80,000, for a total of approximately $225,000,” the company said on the Sia network website.
Fresh Off the Block.one News
The Nebulous settlement comes on the immediate heels of Block.one’s settlement with the SEC, which was announced on September 30th and saw the firm agree to pay a civil penalty of $24 million.
The company held an ICO from the summer of 2017 to the summer of 2018, offering investors ERC20 Ethereum tokens that were later converted to tokens on the actual EOS network. Block.one allegedly raised as much as $4 billion in the sale.
As such, the SEC determined that Block.one didn’t register that preliminary token as a security. The company agreed to pay the $24 million penalty “without admitting or denying [the Commission’s] findings.”
Some in the cryptoverse hailed the flex as too harsh, while others were astonished at the Commission’s leniency. In any case, the settlement shows that using the “ICO” moniker and distancing yourself inadequately from U.S. investors isn’t going to cut it for the SEC.
“Companies that offer or sell securities to US investors must comply with the securities laws, irrespective of the industry they operate in or the labels they place on the investment products they offer,” Stephanie Avakian, co-director of the Commission’s Division of Enforcement, said.
Toward a Minimum Industry Standard?
There are a few key takeways from these two latest enforcement actions.
First, the Sia case shows that the SEC is willing to go after projects who offered unregistered securities even before the 2017 DAO Report. Secondly, the Block.one settlement indicates the SEC will consider whether a token was once a security but is no longer, e.g. how the Commission determined the EOS ERC20 “IOU” token was, in fact, a security but had nothing to say about the current EOS token that lives on the EOS mainnet.
Jake Chervinsky, General Counsel for lending dApp Compound Finance, mused in a related Twitter thread that the new actions could point to the decentralization threshold that token projects need to reach in order to not be hit with SEC enforcement actions.
“[T]hese tokens could represent minimum industry standards for … avoiding securities regulation,” Chervinsky said.
17/ What if the SEC really does believe EOS & Siacoins aren't securities?
Then these tokens could represent minimum industry standards for negating the Howey test & avoiding securities regulation — models against which other projects measure their "sufficient decentralization."
— Jake Chervinsky (@jchervinsky) October 1, 2019
Another point to consider?
The SEC did not utterly demolish these companies with enforcement actions, suggesting the watchdog will be lenient where possible for projects that collaborate with the regulator. Surely the same can’t be said for those that would rather than go to war with the SEC, like in the case of Kin.