On July 14, 2021, the U.S. Securities and Exchange Commission announced that it had settled charges against United Kingdom-based Blotics Ltd., the operator of Coinschedule.com, a once-popular website that profiled offerings of digital asset securities. The SEC’s order found that Blotics violated the anti-touting provisions of the federal securities laws by failing to disclose the compensation it received from issuers of the digital asset securities it profiled.
Visitors to Coinschedule.com were presented with details about each profiled digital token offering in so-called “listing” profiles, which also included links to the token issuers’ own websites and a “trust score” that Coinschedule claimed reflected its evaluation of the “credibility” and “operational risk” for each digital token offering based on a “proprietary algorithm.” In reality, the token issuers paid Coinschedule to profile their token offerings on Coinschedule.com, a fact that Coinschedule failed to disclose to visitors.
Without admitting or denying the SEC’s findings, Blotics agreed to cease and desist from committing or causing any future violations of the anti-touting provisions of the federal securities laws, and to pay $43,000 in disgorgement, plus prejudgment interest, and a penalty of $154,434.
Without doubt, however, the most interesting part of the settlement was the separate Statement issued by Commissioners Hester M. Pierce and Elad L. Roisman. They readily agreed with their colleagues that touting securities without disclosing the fact that you are getting paid, and how much, violates Section 17(b) of the Securities Act. But they expressed disappointment that the Commission did not explain which digital assets touted by Coinschedule were securities, an omission which they described as symptomatic of the SEC’s reluctance to provide additional guidance about how to determine whether a token is being sold as part of a securities offering or which tokens are securities.
The requests they each receive for clarity and the consistent outreach to the Commission staff for no-action and other relief evidences the lack of clarity for market participants. They described the Howey test for determining if a token offering is a security as “helpful” but not “crystal clear” as applied to digital assets. “Market participants have difficulty getting a lawyer to sign off that something is not a securities offering or does not implicate the securities laws; they also cannot get a clear answer, backed by a clear Commission-level statement, that something is a securities offering.”
The go-to source for guidance has been litigated and settled Commission enforcement actions. But this is less than ideal in the view of Commissioners Pierce and Roisman:
People can study the specifics of token offerings that become the subject of enforcement actions and take clues from particular cases; however, applying those clues to the facts of a completely different token offering does not necessarily produce clear answers. Providing guidance piecemeal through enforcement actions is not the best way to move forward; if the Commission intends to continue to do so, then we should at least be clear about which tokens we have identified to have been sold pursuant to securities offerings.
The Coinschedule Order tells us only that some unspecified quantity of the 2,500 tokens profiled on Coinschedule’s website were offered or sold as securities. The Order therefore provides no useful information to market participants either about which or how many of the 2,500 listed token offerings the Commission has determined to be securities offerings or about the reasoning underlying those determinations.
They also believe that because the “only certainty” is that people have questions about how to comply with the applicable laws and regulations, it is incumbent on the SEC to start providing clear and timely answers. One possible solution they mentioned was the safe harbor proposal previously put forward by Commissioner Pierce, which provides a three-year grace period within which, under certain conditions, network developers can facilitate participation in and the development of a functional or decentralized network, exempted from the registration provisions of the federal securities laws. At the end of the three-year grace period, there would be an exit report requirement that would include either an analysis by outside counsel explaining why the network is decentralized or functional, or an announcement that the tokens will be registered under the Securities Exchange Act of 1934. Commissioner Pierce made this proposal originally in February 2020 and then updated it in April 2021.