On March 27, 2018, Massachusetts Secretary of State William Galvin announced that the state had ordered five firms to halt initial coin offerings (“ICOs”) on the grounds that the ICOs constituted unregistered offerings of securities but made no allegations of fraud. These orders follow a growing line of state enforcement actions aimed at ICOs.
This was not Massachusetts’s first foray into regulating ICOs. On January 17, 2018 the state filed a complaint alleging violations of securities and broker-dealer registration requirements against the company Caviar and its founder for an ICO that sought to create a “pooled investment fund with hedged exposure to crypto-assets and real estate debt.”
These most recent five orders cover a variety of industries and forms of ICOs:
- 18moons: 18moons is a company that produces and distributes children’s programming to 1.5 million monthly users. The company sought to issue coins on the Ethereum blockchain “to fuel the development and maintenance of the platform.” The value of the coins would then be based on the price traded on a cryptocurrency exchange.
- Across Platforms: Across Platforms is an advertising and analytics social television firm. Across Platforms sought to issue coins that were backed by an advertising platform built on blockchain technology. The coins were issued on the Ethereum blockchain, and the price of the coin was pegged to the price of Ethereum. The funds from the coins were to be used to build a platform that “will turn commercials on certain mediums into clickable ads where the viewer can purchase products using” the coins.
- Mattervest: Mattervest is an unincorporated entity that maintained a website for the purpose of listing ICOs. Mattervest itself did not directly issue coins but rather sought “to enable people who wanted to purchase cryptocurrency to pool their resources to enable them to participate in offerings or achieve bonuses that would otherwise . . . not be available to the smaller purchaser.”
- Pink Ribbon: Pink Ribbon purported to be a publicly traded company on the blockchain that supports women and families facing financial burdens from cancer. The founder proposed to issue 26 million coins with the following distribution: 8 million would be kept by the founder, the proceeds on 8 million would go to families in need, 5 million would be used in mining to advance the value of the fund, and 5 million would be traded in the open market which would “increase the market cap” and therefore “increases [sic] the value of each individual coin.”
- Sparkco: Sparkco operated a freelance platform with multiple freelance workers. The company sought to presell its services through an initial coin offering of 1 billion coins. These coins would be sold to the general public outside the United States and to accredited investors within the United States, and a system had been set up to verify the identity of buyers. The coins would exist on the Ethereum blockchain and the price was pegged to $1 of Ethereum equivalents. Sparkco intended to use the funds “to improve [its] agent reward ecosystem, build out a micro-payment system, and onboard additional digital partners.”
Prior to these orders, Secretary Galvin said that Massachusetts was investigating two dozen unregistered ICOs. Other states are also being vigilant on related fronts. For example, Utah’s Division of Securities Director Keith Woodwell has described cryptocurrency as a “top” priority and said that there are 11 investigators and examiners working on such cases. The actions brought by Massachusetts and those brought by other states make clear that many states intend to strictly enforce registration requirements as they focus on regulating ICOs. As the Massachusetts orders applying to a variety of business models make clear, state regulators, just like federal regulators, will not necessarily accept claims of utility for the coins being issued, and both potential issuers and investors should carefully consider the applicability of securities registration requirements for ICOs.