On September 15, 2020, the U.S. Securities and Exchange Commission announced charges against Unikrn Inc., an operator of an online eSports gaming and gambling platform for conducting an unregistered initial coin offering (ICO) of digital asset securities.  Unikrn agreed to settle the charges by paying a $6.1 million penalty, substantially all of the company’s assets, to be distributed to investors through a Fair Fund.

According to the SEC’s order, between June and October 2017, Unikrn raised approximately $31 million through its offering of the UnikoinGold (UKG) token. The order finds that Unikrn planned to use the offering proceeds to make more features available on the gaming platform and to develop additional applications for the UKG tokens. Unikrn promised investors that it would facilitate a secondary trading market for the tokens and that its efforts to increase the usages for the UKG token would increase demand for and in turn, the value of, the tokens. The order finds that Unikrn offered and sold UKG as investment contracts, which constituted securities, yet failed to register the offering or qualify for an exemption.

The more interesting part of the matter was the Dissent Statement of Commissioner Hester M. Peirce, known popularly as Crypto Mom for her enthusiastic support of cryptocurrency.  She noted that many of the SEC enforcement actions relating to ICOs include allegations of fraud.  However, in her view, when, as is the case with Unikrn, the charge is only a violation of Section 5 of the Securities Act — that is, offering and selling  tokens in an unregistered offering and in a manner that did not qualify for an exemption — while certainly serious, should merit a different remedy.

She noted that he Commission was effectively forcing the company to cease operations because of an allegedly improper offering of supposed securities. While not concurring in the opinion that Unikrn’s token offering constituted a securities offering, Pierce explained that the determination of that issue will always be subjective, which, does not produce clear guideposts for entrepreneurs and others to follow. She described the following challenge:

The challenge of discerning a clear legal line is especially difficult with respect to new forms of business and novel technologies. Entrepreneurs may be forced to choose between unpalatable options: expending their limited capital on costly legal consultation and compliance or forgoing their pursuit of innovation due to fear of becoming subject to an enforcement action

Commissioner Pierce took the opportunity to promote the safe-harbor suggestion she made earlier this year:

As I proposed earlier this year, a well-designed, narrowly tailored regulatory safe harbor would efficiently and effectively combine the Commission’s interest in protecting investors with developers’ ambition to experiment. Affording a company like Unikrn a three-year regulatory window within which to further develop and refine its platform—while still subjecting it to the antifraud laws—would provide benefits to token purchasers, token issuers, and the Commission.

Imagine if such a regulatory safe harbor had been available to Unikrn. Instead of permanently disabling its tokens as a result of today’s settled enforcement action, Unikrn, in concert with its tokenholders, might be devoting its time and resources to identifying new uses for the token and expanding its user base.

As Pierce admitted, looking only at the Unikrn situation might not seem like the loss of great innovation,  but “posterity will feel the cumulative loss to society of innovation forgone because of such actions. Indeed, we will never know the full magnitude of such losses because some would-be entrepreneurs, having seen one too many Unikrns, may decide it wiser to shelve their most transformative ideas.”

In August, Commissioner Pierce was sworn in for a second term that runs through June 2025.

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David Zaslowsky has a degree in computer science and, before going to Yale Law School, was a computer programmer. He is currently the Chairman of the Litigation Department of the firm’s New York office. His practice focuses on international litigation and arbitration. He has been involved in cases in trial and appellate courts across the United States and before arbitral institutions around the world. Many of David’s cases, including some patent cases, have related to technology. Since 2008, David has been included in Chambers for his expertise in international arbitration.