On September 30, 2019, the Securities and Exchange Commission (“SEC”) announced a settlement with Block.one, a blockchain technology company with operations in Virginia and Hong Kong, for conducting an unregistered initial coin offering (“ICO”) that raised several billion dollars’ worth of Ether from June 2017 through June 2018.
The SEC alleged that Block.one, a Cayman Islands-registered company, offered and sold 900 million digital assets (the “Tokens”) to the general public. The Tokens were sold in Dutch-style auctions on the EOS.IO website, a website launched by Block.one, and also distributed through a smart contract. There were no transfer restrictions on the Tokens, which began trading through online trading platforms soon after the initial distribution. Block.one intended to use the proceeds from the ICO for general operating expenses and to develop EOSIO software aimed at increasing blockchain transaction efficiency. The Tokens were not the same tokens that would eventually be used on any EOSIO-based blockchains. Block.one described on its website and in other public statements that the Tokens would become non-transferable and the smart contract would have no further functionality after the close of the ICO.
Block.one intended to exclude US purchasers from buying Tokens, and the EOS.IO website included certain measures to block such US purchasers. For example, a purchaser with a US-based IP address could not access the token sale page on the EOS.IO website. The Token Purchase Agreement also included provisions stating that any purchase by a US person was unlawful and would render the purchase agreement null and void.
However, Block.one did not take steps to verify whether purchasers were in fact US-based persons, and numerous US-based persons acquired Tokens directly through the EOS.IO website. In addition, the SEC alleges that Block.one primed the US market to the sale of the Tokens by taking various actions, including:
- Attendance and participation of Block.one representatives at blockchain conferences in the US to promote Block.one and its ICO, in addition to hosting informal informational sessions and a post-conference reception;
- Advertising EOS.IO software on a large billboard in Times Square during a prominent May 2017 blockchain conference in New York City;
- Promoting the proposed business and ICO to US-based investors on the EOS.IO website and through various social media platforms;
- Allowing US investors to access promotional materials on the EOS.IO website; and
- Taking no steps to prevent the resale of Tokens to US-based purchasers via secondary markets.
The SEC alleged Block.one should have reasonably expected US investors to participate in the ICO based on the actions it took to publicize the ICO to the US market, and its lack of controls to prevent such US investors from purchasing Tokens.
Block.one neither registered the Tokens with the SEC, nor successfully complied with all of the applicable requirements for an exemption to the registration requirements. Accordingly, Block.one agreed to pay a $24 million civil penalty to the SEC.