Until September 30, 2019, Securities and Exchange Commission ("SEC") enforcement actions in the crypto industry conveyed a consistent message: most crypto is a security, and if a token issuer does not follow the registration requirements of the Securities Act of 1933 ("1933 Act"), the issuer would face significant consequences in the form of substantial penalties, a mandated rescission offer to US investors, a requirement to register the tokens under Section 12(g) of the Securities Exchange Act of 1934 (the "1934 Act"), and bad actor disqualifications preventing the issuer from future Regulation A and Regulation D offerings.1
On September 30, the SEC announced a settlement with Block.one that did none of these things.2 Despite finding that Block.one issued tokens that were securities in the United States without complying with registration requirements of the 1933 Act, the SEC: imposed a financial penalty on Despite finding that Block.one issued tokens that were securities in the United States without complying with registration requirements of the 1933 Act, the SEC: imposed a financial penalty on Block.one that was minor in the context of the total size of Block.one's capital raise; did not require Block.one to make a rescission offer to investors; did not require capital raise; did not require Block.one to make a rescission offer to investors; did not require Block.one to register its tokens under the 1934 Act; and did not impose bad actor disqualifications under Regulation A and Regulation D. And, as discussed below, the capital raise; did not require Block.one to make a rescission offer to investors; did not require Block.one to register its tokens under the 1934 Act; and did not impose bad actor disqualifications under Regulation A and Regulation D. And, as discussed below, the Block.one Settlement Order omitted any mention of key factual information necessary to support the SEC's conclusion that the tokens were in fact securities. Equally surprising, the SEC did not address, in any respect, whether new tokens issued being used on a blockchain supported by Block.one are securities, and the SEC took no action (and offered no discussion) with respect to the issuance of those tokens.
Block.one is by far the largest crypto issuer (measured by proceeds from the size of the token offering and by the market capitalization of tokens) sued by the SEC to date.3 In light of the size and prominence of Block.one, and the significantly more lenient treatment the SEC afforded to In light of the size and prominence of Block.one, and the significantly more lenient treatment the SEC afforded to Block.one than it has afforded to other crypto issuers it has sued, the markets reasonably expected a detailed explanation from the SEC of its thinking and the bases for the various novel approaches it took in the In light of the size and prominence of Block.one, and the significantly more lenient treatment the SEC afforded to Block.one than it has afforded to other crypto issuers it has sued, the markets reasonably expected a detailed explanation from the SEC of its thinking and the bases for the various novel approaches it took in the Block.one Settlement Order. In fact, the SEC was silent on these issues.
Despite the surface appearance of a significant settlement amount of $24 million, the totality of the SEC's settlement with Block.one has confused crypto issuers, it has confused the crypto markets, and it has confused crypto lawyers and other crypto gatekeepers. It is important for the SEC and its staff (the "Staff") to explain, promptly, publicly and comprehensively, why the SEC took such a different and lenient approach in the Block.one Settlement Order, and what this suggests for the SEC's future approach to regulation of the crypto industry. This article discusses a number of questions and considerations arising from the Block.one Settlement Order that the SEC should address.
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* This article was prepared by Robert Rosenblum, Amy Caiazza, Taylor Evenson, and Katherine Mann. Mr. Rosenblum is a shareholder, Ms. Caiazza and Mr. Evenson are associates, and Ms. Mann is a law clerk, in the Washington, DC office of Wilson Sonsini Goodrich & Rosati ("WSGR"). The views expressed in this article do not necessarily represent the views of the WSGR, the authors' colleagues at WSGR or the clients of WSGR.
Footnotes
1. In the Matter of CarrierEQ, Inc., d/b/a AirFox, Securities Act Release No. 10575 (Nov. 16, 2018), https://www.sec.gov/litigation/admin/2018/33-10575.pdf; In the Matter of Paragon Coin, Inc., Securities Act Release No. 10574 (Nov. 16, 2018), https://www.sec.gov/litigation/admin/2018/33-10574.pdf; In the Matter of Gladius Network LLC, Securities Act Release No. 10608 (Feb. 12, 2019), https://www.sec.gov/litigation/admin/2019/33-10608.pdf.
2 In the Matter of Block.one, Securities Act Release No. 10714 (Sept. 30, 2019), https://www.sec.gov/litigation/admin/2019/33-10714.pdf (Order imposing a cease and desist order and fining Block.one $24 million) (the "C&D Order"), and In The Matter of Block.one, Securities Act Release No. 10717 (Sept. 30, 2019) (Granting a waiver of Regulation A and Regulation D disqualification provisions) (the "Waiver Order" and together with the C&D Order, the "Block.one Settlement Order").
3 As noted in the C&D Order at 2-3, Block.one raised "several billion dollars" of Ether through the sale of ERC-20 tokens. Further, as of October 7, 2019, EOS tokens are seventh in cryptocurrency market capitalization. See https://coinmarketcap.com/.
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