On September 15, 2020, the Securities and Exchange Commission issued a cease‑and‑desist order against Unikrn, Inc. concerning its 2017 initial coin offering  of UnikoinGold .  The SEC found that the Unikrn ICO violated the prohibition in Section 5 of the Securities Act of 1933 against the unregistered public offer or sale of securities.  The SEC imposed several remedies, including requiring Unikrn to permanently disable the UnikoinGold token and a civil money penalty of $6.1 million.

Since the release of its DAO Report in July 2017, the SEC has brought enforcement actions against several ICO token issuers.  Many of these actions alleged both violations of the Section 5 registration requirement, and also fraud on the part of the token issuers.  But in some instances, as in Unikrn, the SEC has issued cease-and-desist orders solely for violations of Section 5.

Although the underlying conduct leading to the Unikrn order is not particularly novel in the context of past ICO actions, the order is noteworthy for a couple of reasons:

  1. A rare public dissent. SEC Commissioner Hester Peirce issued a rare public dissent to the Commission’s decision to issue the Unikrn  In her dissent, Commissioner Peirce indicated she did not agree that the UnikoinGold ICO was an offering of securities, but did not explain her rationale for the view (which is notable considering many factual similarities between this case and others the SEC has brought in this area).  Commissioner Peirce also expressed concern for the scope of remedies the SEC imposed in the context of a non-fraud resolution.  She noted the draconian requirement that Unikrn permanently disable its token and imposition of a hefty civil money penalty that would cover almost all of the company’s assets.  In Commissioner Peirce’s view, this penalty was too severe, and she lamented the potential chilling effect such enforcement actions might have on financial innovation.Commissioner Peirce also took the opportunity in her dissent to advocate again for her proposed regulatory safe harbor for ICO token issuers from Section 5’s requirements.[1]   Under Commissioner Peirce’s proposal, token issuers who satisfy the terms of the safe harbor would be afforded a three year window to develop their platform and tokens without needing to satisfy the public offer and sale registration requirements of Section 5.  Such issuers would still remain subject to all antifraud prohibitions under U.S. securities laws. Absent the somewhat unlikely adoption of such a safe harbor, companies seeking to conduct an ICO should see Unikrn as evidence that the SEC is willing to impose significant, and potentially even business disabling penalties, even where no fraud is found.
  2. The required disablement of UnikoinGold tokens. While the SEC has brought a number of enforcement actions against ICO issuers for Section 5 violations absent any allegation of fraud, this is only the second time the Commission has required already issued tokens to be disabled.[2]  Instead, the SEC has frequently required issuers to register their already issued tokens, and make all required periodic disclosures thereafter.[3]The Commission’s decision to require that UnikoinGold tokens be disabled may be explained by the SEC’s lack of indication in the settlement order that credit would be given to Unikrn for its cooperation during the investigation.  In each prior settlement order where the SEC required only the subsequent registration of already issued ICO tokens, the SEC made a point of noting that it had considered the issuer’s cooperation during its investigation when deciding upon required remedies.  In contrast, in Unikrn and the only other instance where token disablement was required, In the Matter of BitClave PTE Ltd., the SEC acknowledged no cooperation on the part of respondents.  Going forward, token issuers under investigation by the SEC should look to this disparity in penalties as a warning of the potentially severe consequences of not actively cooperating with the Commission during this process.

[1] The terms of Commissioner Peirce’s proposed safe harbor would require a token’s development team to (1) intend for its network to reach maturity, and to become either fully decentralized or functional by enabling the use of tokens for the transmission and storage of value within three years of the first token sale; (2) make a series of disclosures concerning both the token and its blockchain network; (3) offer and sell the token for the purpose of facilitating access to, participation on, or development of the network; (4) intend and undertake good faith efforts to create liquidity for users; and (5) file a notice of reliance on this exemption with the SEC.

[2] See In the Matter of BitClave PTE Ltd., SEC. Rel. No. 33-10788 (2020).

[3] See In the Matter of Enigma MPC, SEC Rel. No. 33-10755 (2020); In the Matter of Blockchain of Things, Inc., SEC Rel. No. 33-10736 (2019); In the Matter of Gladius Network LLC, SEC Rel. No. 22-10608 (2019); In the Matter of Paragon Coin, Inc., SEC Rel. No. 33-10574 (2018); and In the Matter of CarrierEQ, Inc., d/b/a Airfox, SEC Rel. No. 33-10575 (2018).