The US top regulator has stepped in to stop yet another crypto-related fundraising after its operators failed to register their tokens as a security. The principals of blockchain-based file-sharing and payment network, LBRY were hit by charges brought by the US Securities and Exchange Commission (SEC), which found that their conduct was that of unregistered broker-dealers.
LBRY powers decentralized platforms, primarily social networks and video platforms, were touting its offering as a decentralized alternative to YouTube.
As explained in the order, the company raised $11 million through selling ‘LBRY Credits’ to help further develop its file-sharing network built using blockchain and BitTorrent technology.
The SEC was careful to note that they had not accused LBRY of fraud, but rather of failing to register their tokens as securities. If the company agrees to settle the charges with the agency, the agreement would typically require LBRY to return funds to investors via a compensation fund, halt the offering and pay back all fees it had already collected.
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In other crypto-related settlements, the SEC uses different mechanisms to compensate investors who participated in an initial coin offering. Namely, the ICO issuer has either voluntarily returned all proceeds of the token sale or has been required to go through a claims process.
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LBRY promised investors that it would facilitate a secondary trading market for the tokens which would offer them an exit strategy to cash out their holdings just as demand increases and in turn, the value of the tokens.
As such, the SEC determined that LBRY Credits amounted to selling securities without filing a registration or qualifying for a registration exemption, even if it self-reported its product to the watchdog.
Reacting to the case, the SEC stated: “From at least July 2016 to February 2021, LBRY sold digital asset securities to numerous investors, including investors based in the US. The complaint alleges that LBRY did not file a registration statement for the offering and that the offering failed to satisfy any exemption from registration.”
The regulatory status of cryptocurrency offerings generally, remains somewhat murky. However, the SEC warned that securities law might apply to some virtual tokens depending on their specific characteristics. In those cases, securities registration, disclosure and other requirements apply. Although, putting cryptocurrency companies and their advisers on notice failed to chill the booming market.