ShipChain was a company engaged in developing a logistics tracking and management platform using the Ethereum blockchain technology. During the height of the ICO craze in late 2017, ShipChain raised more than $27 million in an ICO. On December 22, 2020, the U.S. Securities and Exchange Commission ordered ShipChain to cease and desist and to pay a $2.05 million penalty.
As the Order explained, ShipChain first launched its ICO in October 2017, and the ICO continued through January 3, 2018. In what ShipChain referred to as the “Pre-Sale” portion of its offering, ShipChain sold SHIP tokens in exchange for U.S. dollars, Bitcoin, or Ether through purchase agreements ShipChain called either (1) a “Simple Agreement for Future Tokens” or “SAFT,” (2) a Token Agreement, or (3) a Token Purchase Agreement. These SHIP tokens were sold at discounts – up to a 100% bonus – relative to the “Regular cost per token.” The SHIP tokens sold through these agreements were sold to members of the general public. In total, ShipChain sold approximately 145 million SHIP tokens to over 200 people or groups of people, including U.S. persons, for approximately $27.6 million.
As has been the case with all SEC actions concerning ICOs, the SEC applied the Howey test to determine if the SHIP tokens qualified as securities. Under Howey, a contract constitutes an investment contract that meets the definition of security if there is (i) an investment of money; (ii) in a common enterprise; (iii) with an expectation of profits; (iv) solely from the efforts of others (e.g., a promoter or third party), “regardless of whether the shares in the enterprise are evidenced by formal certificates or by nominal interest in the physical assets used by the enterprise.”
The relevant part of that test the SEC focused on in the Order was that token purchaser in the offering of SHIP tokens would have had a reasonable expectation of obtaining a future profit based on ShipChain’ s representations and efforts to build its business, including through its use of the ICO fund proceeds to develop its platform.
ShipChain’s offer and sale of SHIP tokens was not registered with the Commission, nor did ShipChain’s offer and sale of SHIP tokens satisfy any valid exemption from registration. Thus, according to the SEC, ShipChain violated Section 5(a) and 5(c) of the Securities Act.
ShipChain agreed to Transfer all SHIP tokens in its possession or control to a Fund Administrator. It also agreed to pay a fine of $2.05 million, which the Fund Administrator will use to set up a statutorily-mandated Fair Fund to be used to compensate harmed investors for losses resulting from the securities laws violations. The SEC explained that, in accepting this result, it considered these undertakings, ShipChain’s financial condition, the fact that ShipChain has decided to cease all operations, and that the penalty represents substantially all of ShipChain’s net assets.