Updates on Regulation, Trading, and Market Reforms for the Alternative Investment Community

Block.one, Creator of EOS, Settles with the SEC. Was it a Slap on the Wrist? Did EOS Get a Pass from the Feds?

Earlier this week it was announced by the Securities and Exchange Commission (SEC) that it had settled with Block.one, creator of EOS, regarding allegations of issuing unregistered securities during an initial coin offering (ICO) that raised a record-breaking $4 billion. The fine assessed by the SEC was a mere $24 million. Chump change in comparison to the billions collected in the ICO.

Block.one publicly lauded the settlement with the Feds stating they were “excited” to see the issue resolved. Simultaneously, Block.one pointed to the fact that EOS would not need to be registered as a security. That’s big, in the world of crypto.

So what is going on?  Has EOS become sufficiently decentralized, having morphed from a security into something else, similar to Bitcoin?  Did the SEC skip the battle because it was leery of a multi-year legal challenge of a company with a multi-billion dollar war chest?  Or was it the fact that Block.one had some of the best legal counsel available? Crowdfund Insider asked some legal experts for their opinion on the Block.one settlement.

Phil Liu, once a lawyer at a big law firm and now co-founder of Arca, an institutional-grade financial services firm building products utilizing and investing in digital assets, had this to say:

“We don’t know the extent to which the SEC fined Block.one based on how much they raised from US persons. If you look at it just from a fine ($24 million) vs. amount raised ($4 billion) perspective, this is a relatively small amount.”
“However, if it turns out $24 million was close to, or more than what was raised from US persons, then that is a significant penalty for violating US securities laws. I’d say that, overall, the SEC has now started to force action on prominent projects such as Block.one, Sia Coin, and Kik/Kin, whereas until recently they seemed to target smaller projects that weren’t as well funded.”

Lewis Cohen, founder of blockchain-focused DLx Law – the firm that pushed through a no-action letter for a token issuance by Pocketful of Quarters, was more esoteric in his opinion of the Block.one settlement.

“To me, more than anything, the Block.one order demonstrates the challenges of trying to regulate through enforcement.  It is impossible for market observers to draw definitive conclusions from what was undoubtedly a very unique set of enforcement circumstances that were boiled down to a barely seven-page order.   We simply don’t have access to the kind of information needed to extrapolate intelligently from this order to other circumstances.”
“Instead, I would like to see a recognition that,  like any other type of asset, digital assets may or may not be securities, but that assessment must be made through evaluation of the asset itself and not through extrinsic circumstances which are subjective in nature and which may change over time.  These extrinsic circumstances (like the way in which funds used to purchase the asset were solicited) are relevant to determining whether there was an “investment contract” that should be considered a securities offering under the Howey test, but they are not relevant – in my view – to an assessment of the nature of the acid itself.“

About the author

Dror Futter, who frequently comments on the emerging digital asset sector and a partner at Rimon Law, told Crowdfund Insider that the headlines of the Block.one settlement will focus on the seemingly trivial amount of the fine relative to the amount raised and the fact that the settlement allows the token to circulate without further restriction. Dror Futter focuses his practice on startup companies and their investors, and has worked with a wide range of technology companies. His experience as in-house counsel includes positions with Vidyo, Inc., a venture-backed videoconferencing company, and New Venture Partners, a venture fund focused on corporate spinouts. Prior to that, Mr. Futter was Counsel to the CIO of Lucent Technologies, as well as supporting parts of its sourcing organization.

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Updates on Regulation, Trading, and Market Reforms for the Alternative Investment Community