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Gaming Company Settles SEC Charges for Sales of Unregistered Tokens's picture
Commentary by Steven Lofchie

A company operating an online eSports gaming and gambling platform settled SEC charges for conducting an unregistered initial coin offering ("ICO").

In a cease-and-desist order, the SEC stated that the company pursued an offering for a digital coin intended to be used for products and services on its platform, as well as for developing the platform itself. The SEC alleged that the company promoted the coin as one that would increase in value, advertising it broadly to "digital token investors and enthusiasts" instead of promoting it to the platform's expected users. The SEC found that the company hired a blockchain marketing firm to advertise the ICO in digital asset investment forums as a "good long-term hold" that could "get a good return." After the offering, the SEC stated, participants were not required by the company to use the coins on the company's platform prior to selling them on the secondary market.

The SEC found that the company violated Section 5 ("Prohibitions Relating to Interstate Commerce and the Mails") of the Securities Act as a result of the company's incorrect claim for a registration exemption under SA Rule 506(c) ("Exemption for Limited Offers and Sales without Regard to Dollar Amount of Offering") and the company's failure to register the token before its offering.

To settle the charges, the company agreed to (i) cease and desist from future violations, (ii) comply with the undertakings outlined in the order, including permanently disabling its coin, and (iii) pay a $6.1 million civil money penalty.

In a statement, Commissioner Hester Peirce disapproved of the enforcement action for "enervat[ing] innovation." Ms. Peirce explained that this enforcement action does not provide clear guidance to entrepreneurs. Rather, Ms. Peirce stated, entrepreneurs may be forced to choose between expending their capital on expensive legal consultation and forgoing their endeavors in order to avoid potential enforcement action. Alternatively, Ms. Peirce pointed to her recent proposal for a "narrowly tailored regulatory safe harbor," which would give entrepreneurs the opportunity to refine their platforms in a defined regulatory window while still being subject to antifraud regulations (see previous coverage).


Commissioner Peirce's prior proposal, as to how the SEC should treat ICOs that have a potential dual use (as objects that can be used on a platform and as investment assets that may appreciate in value), deserves attention. Hopefully, that attention may come in forms other than sidebars to enforcement actions. While it may be difficult to come up with a set of regulations that can deal with a product that can be both a use asset and an investment asset, the development of blockchain now seems sufficiently far along that the attempt is worthwhile.

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