Is SECs Order to Block.one to Pay $24 Million Penalty for Unregistered ICO legitimate?
On September 30, the U.S. Securities and Exchange Commission (SEC) released a statement where it declared that Block.One must pay $24 million in penalties for conducting an unregistered securities sale of the digital tokens. Block.One agreed to settle the charges whilst neither admitting nor denying the SEC’s findings. Based on what I've learned from the documents released by the SEC, I wanted to make some percisations to the SEC's documents that, to my knowledge, are not entirely correct.
Here are the documents relevant to this case:
The SEC’s order finds that Block.one violated the registration provisions of the federal securities laws. It maintains that Block.one should have registered the ICO because what was being sold was a security asset.
It must be clarified that, to my knowledge, Block.one did not offer a security asset. The EOS ERC-20 token which existed on the Ethereum platform and was an ERC-20 token was never a security because it didn’t have a semblance of a security asset. EOS ERC-20 didn’t give purchasers any voting rights and more importantly, it didn’t give the rights to a share in the profits of Block.one nor to decide on the composition of the members of the Block.one's board of directors. In other words, it was never an investment into Block.one. Moreover Block.one made it very clear on the token offering page that what was offered wasn't an investment in Block.one and the tokens had no value. And, effectively, these EOS ERC-20 tokens had no value because they were just a placeholder in the accounting book, the blockchain. They were also freezed and can't be transferred anymore what strips them of their fungibility. The buyers knew that what they were buying was without any value and not an investment in the company. Block.one was clear. They wanted to take this risk anyway.
This clarification is essential in establishing the jurisdiction under which falls Block.one. If EOS ERC-20 wasn't a security then Block.one is not under the jurisdiction of the SEC.
The word "SALE" is crucial to know if what was sold was a security. The Securities Act of 1933(“Securities Act”) defines the word "sale" as follows:
"The term ‘‘sale’’ or ‘‘sell’’ shall include every contract of sale or disposition of a security or interest in a security, for value."
The "VALUE" is another keyword here because Block.one stated clearly that what is being sold has no value. It's a fact that EOS ERC-20 tokens have no value. They can't be transferred, used or sold. There was no product and what was being offered was merely an idea. The ideas have no value until they're being realized.
Cooley wrote on behalf of Block.one:
"As described in the Proposed Order, Block.one‘s activities violated Sections 5(a) and 5(c) of the Securities Act by offering and selling these securities to U.S.-based persons, among others, without a registration statement filed or in effect with the Commission and without qualifying for exemption from registration. All securities offered and sold in the United States must be registered with the Commission or must qualify for an exemption from the registration requirements."
Block.one had no reason to register with the Commission because it wasn't offering a security.
Another important point to make is the use of the phrase "must be registered with the Commission" used in the Proposed Order.
According to section 6 (a) of the Securities Act.
"Any security may be registered with the Commission under the terms and conditions hereinafter provided.."
"MAY BE" is perhaps the most important keyword here. The use of this word suggests that Block.one had no obligation to register with the Commission.
In the Securities Act there's also no mention of any obligation to ask the Commission for an exemption from the registration.
If what I wrote above is correct, this means that the SEC asking Block.one for a $24 million settlement was not legitimate. $24 million is a big sum of money which could be used to pay for several years of the salaries of the whole Block.one team. They could be used to employ new talent and build new headquarters or to produce new exciting products for the U.S and global market. They could be used to pay for the influencers so Block.one can expand the adoption of their products.